Legal Briefing
Number 83
14 June 2007
GRANTS AND FUNDING PROGRAMS: LEGAL ISSUES
Commonwealth grant programs extend to a wide range
of funding activities. In this briefing we look at:
- different approaches to grant programs
- establishing funding relationships
- managing funding relationships
- issues that can arise when ending the funding relationship.
We use the terms ‘grant’ and ‘funding’ interchangeably.
There are many types of grants made by the Commonwealth.
For example:
- funding for communities (see the types of grants listed
on the GrantsLINK website <http://www.grantslink.gov.au>)
- payments to states and other government agencies
- payments to overseas aid organisations
- emergency payment programs
- grants under commercial industry development programs
(including funds to increase research and development
and assist exporters) or to trial new technologies
- grant programs specifically for educational institutions
and medical research institutions.
Different types of funding agreements
Many of the issues canvassed in this briefing relate to
the terms and conditions on which funding is provided.
In some cases legislation will impose terms and conditions
on the funding. However, in many cases the terms and conditions
will be set out in a document which is usually signed by
both the funding provider and the recipient.
The terms of that document will largely dictate the rights
and obligations of the parties. Sometimes the document
will be intended to take the form of a conditional gift
but most often it will take the form of a contract. In
either case the document may be executed as a deed.
In this briefing we use the term ‘funding agreement’ to
describe the document which records the terms and conditions
on which the grant is provided.
If the document is drafted so as to take the form of a
conditional gift, it is essentially a grant of money or
property subject to conditions. Those conditions may be
either precedent or subsequent. If a condition precedent
is not fulfilled, then typically the gift does not take
effect and the gift, whether money or property, does not
pass to the grantee. If a condition subsequent is not fulfilled,
then typically the grantee loses the gift and the property
reverts to the grantor, or, in the case of money, a right
of action to recover a similar amount arises. Although
these conditions might be recorded in an agreement under
which the grantee agrees to accept the conditional gift,
it is not usually enforceable under the law of contract,
due, primarily, to an absence of mutual consideration which
is typically required for the formation of a contract.
More recently, many agencies have sought to impose a range
of enforceable conditions in connection with grants, and
accordingly funding agreements are now often expressed
to be contracts, with the intention that all of the obligations
be enforceable. In some cases they are executed as deeds.
Ultimately the rights and obligations of the Commonwealth
and a funding recipient, and the extent to which those
rights and obligations are enforceable, will primarily
depend on the terms of the funding documentation itself.
This means that it is important for agencies to consider
what rights and obligations they require in developing
their funding documentation for a particular project or
activity.
Identity of the recipient may influence the terms and
conditions
The decision as to what funding mechanism will be used
and what rights and obligations might be appropriate will
be influenced by various factors including the identity
of the recipient, the type of obligations the government
is seeking to impose on the recipient, and the remedies
that the agency wishes to have in the event of non-compliance.
As examples:
- Grants to community groups now often take the form
of contracts (often called funding agreements) many of
which follow a standard form.
- Grants to the states or emergency payments sometimes
take the form of conditional gifts (although it is not
uncommon for agencies to enter into contractual funding
arrangements with states and territories, particularly
where project funding is being provided for pooling with
other states or third party funding). Commonwealth/state
funding arrangements are also sometimes recorded in memorandums
of understanding (MOUs) – whether these are intended
to be contractually binding in a particular case will
depend on their terms.
- Grants under commercial, industrial or research and
development programs, particularly where significant
amounts are involved are more likely to take the form
of individually negotiated contracts which may involve
third parties such as financiers.
Community funding
The use of standard forms of funding agreement (where
consistent policy positions are taken) by agencies for
use in providing grants to community organisations facilitates
whole-of-government funding and can greatly simplify the
funding process for the agency or agencies involved. It
can also help make administration of projects easier, as
agencies have a consistent position on the relevant issues.
From the funding recipient’s perspective, the use
of agreements by government agencies where consistent positions
are taken can be less confusing, and helps reduce administrative
and compliance costs. However, there is a limit to which
standardisation can and should be taken, and agencies should
consider the most appropriate agreement for the community
funding program which they are considering.
Grants to states
Section 96 of the Constitution provides that the Commonwealth
Parliament ‘may grant financial assistance to any
State on such terms and conditions as the Parliament thinks
fit’. This means that the Parliament can legislate
to provide for grants to states (and territories, under
s.122 of the Constitution) and can impose conditions of
its choosing on those grants. The Australian Government
has used this mechanism to achieve its policy objectives
in a range of areas (such as roads, housing, health and
education), including where it may not have direct legislative
power. Sometimes the Commonwealth makes grants to the states
and territories in legislation, imposing as a condition
of those grants that the states and territories themselves
make grants to other recipients.
It is not necessary for grants to states and territories
to be made under legislation; they can also be made by
means of an agreement.
Where an agreement is used, careful consideration is required
as to whether accountability mechanisms typically contained
in funding documentation with private or non-profit sector
organisations is appropriate. Where a state or territory
is taking on a management role for a third party project,
funding agencies should also consider the provisions necessary
to cover obligations and risks associated with that role.
In some cases, state instrumentalities will bid for funds
in funding processes where private sector entities are
also seeking funding. In those cases, state instrumentalities
would typically be expected to meet similar accountability
and reporting requirements to other participants in the
relevant program.
Industry development funding programs
In contrast to community funding programs, significant
one-off industry funding activities are less amenable to
standard funding agreements, and any standard agreement
is more likely to require tailoring to individual projects.
Typically, some of the key issues in these types of agreements
will be:
- which corporate entity within a corporate group, or
which entity within an unincorporated joint venture,
will be funded, and what its relationship is with the
group more generally
- timing and conditions for each milestone payment
- implications of failure to meet milestones or project
insolvency
- intellectual property issues, particularly where the
project is of a trial or ‘demonstration’ nature
- relationship between government funding, private equity
and private debt that may be involved in the project.
Increasingly, there are also situations where consortiums
involving state, local government and industry are funded.
In these cases, issues include how the agreement should
be structured, the level of control and responsibility
the lead proponent is willing to take for the activity
which is being funded, the extent to which individual consortium
members should also be required to comply with terms equivalent
to those in the funding agreement and the extent to which
individual consortium members should be required to report
on their use of the funding.
Establishing funding relationships
Agencies need to be aware of and manage the identified
risks when implementing funding programs and funding specific
projects under such programs. Agencies should assess funding
risks at the program and project level and seek legal advice
if they have any concerns regarding a funding program,
recipient, application or proposed project.
FMA Act obligations
FMA Act and Regulations apply to funding agreements
Many funding providers will be Financial Management
and Accountability Act 1997 (FMA Act) agencies that
are dealing with public money. For those agencies, no
matter what type of funding is being considered, the
FMA Act provides a framework for the proper management
of public money and public property (the term ‘public
money’ is defined to mean, among other things,
money in the custody or under the control of the Commonwealth).
However, the detailed procedures for the management of
public money are contained in the Financial Management
and Accountability Regulations 1997 (Regulations) and
Finance Minister’s Orders, made under the FMA Act.
Funding arrangements can also be affected by each agency’s ‘Chief
Executive’s Instructions’.
FMA regulation 13
The Regulations require certain categories of proposed
expenditures of public money to be approved in accordance
with regulation 9(1). Thus, regulation 13 provides:
13 Entering into contracts etc
A person must not enter into a contract, agreement or
arrangement under which public money is, or may become,
payable (including a notional payment within the meaning
of section 6 of the Act) unless a proposal to spend public
money for the proposed contract, agreement or arrangement
has been approved under regulation 9 and, if necessary,
in accordance with regulation 10.
Regulation 13 applies to grants and accordingly regulation
9 approval and if applicable, regulation 10 authorisation,
must be obtained prior to entering into the funding agreement.
FMA Regulation 9
FMA Regulation 9 provides:
(1) An approver must not approve a proposal to spend
public money (including a notional payment within the
meaning of section 6 of the Act) unless the approver
is satisfied, after making such inquiries as are reasonable,
that the proposed expenditure:
(a) is in accordance with the policies of the Commonwealth;
and
(b) will make efficient and effective use of the public
money; and
(c) if the proposal is one to spend special public
money, is consistent with the terms under which the
money is held by the Commonwealth.
(2) Subregulation (1) does not apply to a proposal by
an intelligence or security agency, or a prescribed law
enforcement agency, to spend operational money within
the meaning of section 5 of the Act as modified in accordance
with Schedule 2.
Accordingly, in approving the funding, the approver must
be satisfied that the arrangements will be an efficient
and effective use of public money. Relevant issues to consider
might be the selection of the project/recipient and the
terms of the funding agreement. Both of these are discussed
further below.
The approver must also be satisfied that the funding is
in accordance with the policies of the Commonwealth. A
number of general policies can also have application to
grants programs. For example, if a project involves construction
works then the terms of that funding may need to include
a requirement that the recipient comply with the National
Code of Practice for the Construction Industry in order
to comply with the Australian Government Implementation
Guidelines for the National Code of Practice for the Construction
Industry. An outline of some of the general policies
that may be relevant can be found in the Department of
Finance and Administration publication entitled Complying
with Legislation and Government Policy in Procurement – Financial
Management Guidance No. 10 available at <http://www.finance.gov.au/procurement/complying_with_legislation.html>.
While this publication is focused on procurement, some
of the policies also have the potential to apply to grants.
FMA Regulation 10
Grants provided under ‘administered items’ in
an agency’s appropriations will typically be made
available for one financial year, as administered items
are usually subject to a process to restrict them to expenses
related only to the relevant financial year. Some grants
are provided under appropriations that operate for longer
periods (e.g. under special appropriations in program-specific
legislation).
A grant should generally not provide for any payments
to be made by an FMA agency beyond the period for which
there is an existing appropriation (or an appropriation
in a bill before Parliament). If it is necessary to commit
to payments beyond that period, authorisation under FMA
regulation 10 will be required. It is important to check
whether the agency holds a delegation under FMA regulation
10 and whether the delegation extends to the proposed expenditure.
If it does not, it will be necessary to refer the matter
to the Finance Minister for authorisation.
Commonwealth procurement guidelines do not apply to funding
agreements
Under FMA regulation 7, the Finance Minister may issue
guidelines (called Commonwealth Procurement Guidelines (CPGs))
about matters ‘relating to the procurement of property
and services’. The CPGs contain a wide definition
of procurement covering the acquisition of property or
services. However, the CPGs do not apply to grants, whether
conditional gifts or contracts:
While procurement relates to the acquisition of property
or services, including consultancy services, it does
not include grants (whether in the form of a contract
or conditional gift). [para 2.5]
In some cases, the distinction between a funding agreement
and a service contract may not be immediately obvious.
In those cases it is necessary to look at the wider picture,
including the purpose for which the funds were provided,
and the source of the funds, to determine the true nature
of the transaction.
Key indicators that might assist an agency to determine
whether to treat a project as a procurement or funding
project include:
- the extent of performance obligations imposed on the
other party
- the requirements for and manner of payment
- the extent of obligations relating to the holding,
use and recovery of funds paid
- the extent to which the payment represents a fee for
services rather than simply covering costs.
In some cases, where services are being provided, the
identity of the recipient or beneficiary of the services
(e.g. whether it is the Commonwealth or the community more
broadly) might also be a relevant consideration. As a rule
of thumb, if the major focus is delivery of property or
services for a payment, it should generally be treated
as procurement. This includes property or services provided
to a person on behalf of the Commonwealth. However, if
the prime focus is the enabling of an activity which is
of broader public benefit, without requiring some direct
return to the government (other than, say, an acquittal
report on the use of the funds), it can generally be treated
as grant funding.
In many cases agencies have some discretion as to how
they achieve their policy objectives and in some cases
similar objectives may be achieved either through a procurement
or funding. Agencies should give early and careful consideration
as to which approach they propose to take, because the
legal and policy requirements, particularly as to the process
for selecting the other party, are quite different between
procurements and grants. Legal advice can sometimes assist
in determining which approach will best meet the agency’s
objectives. This could well be particularly appropriate
if the arrangements are relatively novel or complex.
The Management Advisory Committee report entitled Reducing
red tape in the APS available at <http://www.finance.gov.au/gf/red_tape.html> and
the companion brochure issued by the Department of Finance
and Administration entitled Reducing Red Tape: Dispelling
some myths in Australian Government administration available
at <http://www.finance.gov.au/Media/28343_DOFA_Mythbook_Blue.pdf> contain
general guidance on matters to be considered when designing
a process.
Selecting funding recipients
The method of selecting funding recipients may differ
depending on the nature of the funding program. For example,
there is often no selection process involved in certain
grants to the states and territories, whereas careful attention
to the selection process may be required where it is intended
that applicants (including, potentially, state and territory
agencies) ‘compete’ for funding.
The process
While the CPGs do not apply to grants, it may be that
agencies choose to use a competitive process to select
funding recipients for reasons of transparency and accountability
in regard to expenditure of public money. In these circumstances,
reference to procurement terminology, such as ‘request
for tender’ should be avoided, as this creates confusion
with procurement. (The Department of Finance and Administration
also takes the view that the term ‘value for money’ has
a specific connection with procurement policy and accordingly
should be avoided.)
An agency’s principal consideration when selecting
funding recipients should be to use Commonwealth funds
in a way that is an efficient and effective use
of public money. In some circumstances it may be appropriate
for an agency to select a funding recipient without running
any sort of competitive application process. Where an agency
decides to use a competitive process for the provision
of funding, an appropriately competitive process should
be chosen for selecting the funding recipients, having
regard to the size and risk profile of the funding program,
the likely number and type of applicants, and the program’s
objectives and desired outcomes.
Similarly, it may be appropriate to conduct a targeted
and restricted selection process for a specific project,
where the agency has determined that only a small number
of organisations are capable of undertaking the project.
A direct or restricted selection process may be appropriate,
for instance, where the project to be funded is extremely
specialised or needs to be conducted in a remote geographic
region.
Generally, however, if a competitive process is to be
undertaken, it is prudent to conduct an open process, as
such processes are more likely to identify all interested
applicants and avoid allegations of potential unfairness
or inadvertent bias. However, in each case the agency should
determine whether the lower risk involved in conducting
an open, rather than direct or select, funding process
will outweigh the additional time and cost that might be
required for the open selection process.
If agencies choose to conduct an open and competitive
process, there is no requirement to comply with the Commonwealth
Procurement Guidelines. For example, under the mandatory
procurement procedures of the CPGs, it is mandatory to
exclude late tenders except in very limited circumstances.
This is not a requirement in relation to funding processes,
although agencies may consider it appropriate in particular
cases.
Where a competitive selection process is run, agencies
should ensure that they follow appropriate probity principles
(e.g. by following evaluation criteria determined prior
to receipt of applications) to lessen the risk of an unsuccessful
applicant making a claim against the agency in relation
to the conduct of the process. It may be appropriate to
have a probity adviser involved in these competitive selection
processes.
Funding guidelines
Publishing the guidelines for a funding program on the
relevant agency’s website, and advertising those
guidelines widely, can assist the agency to maximise the
number of suitable funding applications it receives.
The content of the guidelines will vary depending on the
size, scope and nature of the funding program. For example,
the guidelines should state the purpose and scope of the
program, any mandatory requirements for funding, the criteria
against which the agency will assess all funding applications
and a copy of the funding agreement for the program.
The inclusion of mandatory requirements for funding may
assist in identifying and excluding unsuitable applications,
thereby reducing agencies’ administration costs.
Where a large number of mandatory requirements are imposed
as part of a competitive funding process, it is common
for many applicants to submit ‘non compliant’ responses.
This can create unnecessary constraints on the funding
agency. Care should be taken to limit any mandatory requirements
to those absolutely necessary for the conduct of the activity
to ensure that otherwise suitable applicants do not have
to be excluded due to an oversight in completing their
application or where the agency subsequently realises that
its objectives could be met without compliance with the
mandatory requirements.
Recipients’ capacity to enter into contracts
It is recommended that agencies only contract with individuals,
incorporated entities (e.g. companies, incorporated associations
or indigenous corporations, bodies corporate established
under legislation) or governments. Particular risks are
involved where an agency enters into a funding agreement
with an unincorporated association or unincorporated joint
venture (sometimes called a consortium) as these types
of entities do not have the capacity to enter into contracts
(or even accept conditional gifts) as a separate entity.
As a result, any funding agreement entered into with an
unincorporated association or joint venture may be unenforceable,
or only enforceable against the individual who signed the
agreement. Implications from this can include significantly
limiting the agency’s ability to recover funds under
the agreement, although the extent to which this is a significant
consideration will be a matter for assessment on a case-by-case
basis.
If an agency receives a funding application from an unincorporated
association, it should consider making the incorporation
of the association (under one of the state or territory
Associations Incorporation Acts or the Commonwealth’s
indigenous corporations legislation) a precondition to
entering into a funding agreement. Incorporation under
such legislation is a relatively quick, inexpensive and
straightforward process, and agencies that regularly provide
funds to unincorporated associations may wish to consider
establishing a program to encourage those associations
to incorporate (subject to those organisations obtaining
their own legal advice about the process and implications).
Where the applicant is a joint venture, agencies may need
to consider strategies such as to contract with a lead
member of the venture with the legal capacity to enter
into contracts. It may also be prudent for agencies to
require satisfactory evidence of the relationship between
the venturers and their individual legal commitments to
the project. Similarly, if moneys are being paid to a subsidiary,
it may be important to establish the relationship between
the parent company and the subsidiary. It is sometimes
appropriate to obtain parent company guarantees.
Finally, because of the range of risk involved, the Commonwealth
should avoid paying funds to a recipient before the recipient
has signed the funding agreement.
Recipient and project risks
Sometimes problems will arise with a particular grantee’s
ability to finish a project. Agencies can seek to minimise
the risk of spending Commonwealth funds on incomplete or
potentially failed projects by asking the following types
of questions when evaluating applications:
- Is the project too ambitious?
- Is the total amount of project funding less than the
amount which the agency might consider necessary to complete
the project? If so, is there satisfactory evidence of
funding from other sources to enable the project to be
completed?
- Is the applicant financially viable?
- Does the project rely on a large number of participants
cooperating with the applicant? If so, have these participants
made legal or other reliable commitments to the project?
(If the recipient intends to subcontract the vast majority
of the funded project, it may be better for the agency
to directly fund the proposed subcontractor instead.)
- What experience does the applicant have in performing
these types of projects?
Managing funding relationships
Mechanisms to safeguard public money
Mechanisms to safeguard public money include providing
the funding progressively as milestones are reached, and
requiring regular reporting on activities.
Mechanisms in projects presenting greater risk include:
- taking security over assets
- the provision of guarantees by companies related to
or associated with the recipient
- in some cases the use of a trust mechanism in the
funding agreement (although as noted elsewhere, FMA Act
considerations may make trusts impractical).
The extent of the safeguard measures will depend on the
amount of the funding provided, the identified risks as
to whether or not it will be used for the purposes for
which it has been provided and the broader policy considerations
associated with the funding program.
Management of funds
Where the financial situation of the recipient permits,
it is often prudent to structure the funding so that funds
are paid in instalments and/or in arrears on satisfactory
completion of major project milestones. Each milestone
might include a requirement for the recipient to provide
a progress report to the agency. Funds can also be paid
on the recipient’s satisfactory completion of the
project and after the recipient has provided a satisfactory
final report (the proportion of funds that might be paid
at the end may vary significantly from project to project).
In community funding programs, a small portion (e.g. 5%)
might be payable on completion, whereas with larger-scale
industry funding programs the amount might be as large
as 50%.
Such a payment structure can help encourage the recipient
to provide the project reports and thereby assist the agency
to meet its accountability and reporting requirements.
However, a further report may still be required to acquit
the final payment unless other arrangements are made to
deal with acquittal of the final payment. Also, in circumstances
where the risks are greater (e.g. because a new entity
has been established specifically for the purposes of undertaking
the project being funded), more regular reporting at the
beginning of the project may be required to help ensure
that any problems in delivery of the project and management
of the funding are identified early.
By way of example, agencies often take the following positions
in funding documentation. These may or may not be appropriate
to a particular agency/project/funding recipient:
- The recipient is required to spend funds only on the
project (and in accordance with the project budget, if
one is specified).
- The recipient is required to obtain the agency’s
written approval before using the funds to acquire or
create any assets that cost more than a specified amount
unless those assets are specified in the agreement.
- At the end of a project, the agency has the right
to recover a proportion of the residual value in project
assets acquired with the funds. This helps prevent a
recipient obtaining, for example, an unintended windfall
gain when it uses the funds to acquire or create assets
and those assets have not fully depreciated over the
life of the project.
- The agency may withhold or suspend funds until the
recipient performs its obligations under the agreement.
- The agency may withhold or suspend funds to the extent
that the recipient has unspent funds or funds that have
not been properly acquitted under any Commonwealth funding
arrangement (including the agreement).
- The agency, the Auditor-General and the Privacy Commissioner
have the right to access a recipient’s premises,
accounts, records and assets, for example, to ascertain
the recipient’s use of the funds for the project.
Without this clause, the Australian National Audit Office
(ANAO) would not necessarily have such a right.
- Where a funding recipient spends funds in a manner
that is not expressly or impliedly permitted, the agency
may:
- require the recipient to repay an amount equal to
the misspent funds (with interest if the amount is
not paid by the due date)
- offset the misspent amount against future payments
of funds, or
- require the recipient to otherwise deal with the
misspent amount as directed by the agency.
The ANAO’s Administration of Grants: Better Practice
Guide (May 2002) is a reference point for officials
in agencies wishing to obtain more general information
about the management of funding arrangements.
If an agency is unsure of its rights in a particular case,
including the right to recover, withhold or suspend funds,
the agency should seek legal advice to determine what rights
the Commonwealth has and the agency’s options in
exercising those rights.
Security for the performance of funding obligations
One way to manage the relationship between the parties
and to safeguard public money, is for the funding provider
to obtain security from the recipient for the performance
of the recipient’s obligations. For example, in more
complex, sensitive or high-cost matters, it may be prudent
to ask the recipient to give the funding provider a mortgage
or charge over property owned by the recipient (such as
over property acquired with the funds) as security for
the performance of the recipient’s obligations.
The advantages of the funding provider having security,
particularly registered security, are that it can give
the provider the ability to exercise power of sale in the
event the recipient defaults, and to improve rights to
recover the funds advanced to the recipient. In the case
of registered security, it helps give the funding provider
priority over any subsequent mortgagees or chargees and
unsecured creditors, and may prevent unauthorised dealings
with the secured property by the funding recipient or third
parties.
Whether it is appropriate for the funding provider to
seek security will depend on the ability and willingness
of the recipient to grant security to the provider, the
value of the security available, the purpose of the funding
and any applicable policy considerations. When the funding
provider is considering whether to include the provision
of security as a condition of the funding, it should confirm
the legal capacity of the recipient to grant the security,
and whether the property to be secured is sufficiently
valuable for the purposes of securing the performance of
the recipient’s obligations.
Where the recipient is also receiving funding from other
sources, including financial institutions in particular,
it will be important to establish the priority of securities
to be taken by the various funding parties (e.g. who will
hold the first-ranking charge).
Trusts
In some cases, it may be important to guard against the
risk of insolvency. Establishing a trust mechanism may
be useful in these cases. This involves including provisions
in the funding agreement which provide for the recipient
to hold the money on trust for the funding provider, subject
to a power on the part of the recipient to apply the money
in a way consistent with the terms of the agreement. In
this way, if the recipient should experience financial
difficulties resulting in termination of the agreement,
the funds may be better protected from claims by other
creditors.
There have been several cases in Australia which show
that provisions creating a trust need to be carefully drafted
in order to be effective: Commonwealth v South Pacific
Cruise Lines Ltd (Federal Court of Australia, Foster
J, 22 April 1998), Jessup v Queensland Housing Commission [2001]
QCA 312 and Commonwealth v Booker International Pty
Ltd [2002] NSWSC 292.
In using a trust it is important to note that a question
arises relating to whether the money held on trust by the
funding recipient is public money for the purposes of the
FMA Act. There is a strong legal argument that it is not,
but if it is in a particular case, the trust may become
impractical because of the requirement for the trustee
(i.e. the funding recipient) to comply with certain provisions
of the FMA Act in relation to the funding. For this reason,
specific legal advice should always be sought on trust
provisions.
Other mechanisms
Where funding is provided to companies or other entities
which are owned or controlled by a larger entity, consideration
should be given to the provision of a guarantee for the
performance of the funding recipient’s obligations
in the funding agreement. In the event the funding recipient
fails to meet its obligations, the entity which provides
the guarantee might be required to perform those obligations
on behalf of the funding recipient, including any obligation
to repay the funding. The guarantee can be provided in
the funding agreement or in a separate agreement between
the guarantor and the Commonwealth. Again this is a potentially
complex area that requires legal advice and would only
tend to be relevant for more complex, risky or high-cost
matters.
Documents required to properly manage the relationship
Reporting
To meet Commonwealth accountability requirements, agencies
will usually need to actively monitor the funding relationship,
especially the recipient’s use of Commonwealth funds.
For example, agencies will typically require that a funding
recipient provide the following reports to the agency:
- regular progress reports regarding the performance
of the project and the recipient’s compliance with
its obligations
- financial reports demonstrating that the recipient’s
use of the project funds are in accordance with the requirements,
which would usually be provided at least annually and
on completion of the project
- other reports as and when required by the agency.
In a more complex project, the reporting may take a more
complex form including requiring accounting and expert
reports for each milestone payment. The agency may require
the ability to verify or validate the contents of such
reports, including the ability to inspect the recipient’s
records and to access the recipient’s premises to
determine how the funding has been applied. Such rights
would generally only be sought where an agency believes
they constitute the proper use of Commonwealth resources
and it is expected that the agency will have the capacity
to monitor or use these rights if necessary.
Agency records
For the reasons outlined below, agencies should also maintain
detailed records regarding each project, which should include
comments on the recipient’s reports, performance
of the project and compliance with the funding requirements.
The records should also document any action taken by the
agency and any variations agreed between the parties (noting,
as set out below, that there may be inadvertent, unintended
variations made by a party’s conduct).
Such documentation can help agencies:
- meet their reporting and accountability obligations
- retain corporate knowledge regarding the recipient,
project or funding agreement
- provide a reference point when negotiating new funding
or varying existing arrangements.
Variations
The mechanism for variations needs to be considered for
all funding projects. In some cases the Commonwealth may
seek, where it is agreed to by a recipient, a right to
vary some aspects of the funding arrangements unilaterally.
For example, the Commonwealth might seek the unilateral
right to vary the terms to:
- alter the due dates for payment of funds if the recipient
has unspent funds or has not yet met a project milestone
that is a prerequisite for a payment of funds
- extend the term or reduce the scope of the project
(and the amount of funding) if the project is seriously
delayed.
More commonly, however, an agency and funding recipient
will mutually agree to vary the agreement to take account
of changed circumstances regarding the recipient or the
project. Typically, funding agreements will require that
any variation must be put in writing and signed by the
parties’ authorised representatives. However, notwithstanding
this clause, a funding agreement can inadvertently be varied
by other means. Commonwealth officials should therefore
be careful not to make statements (orally, in writing,
or in emails) to recipients that are inconsistent with
the Commonwealth’s rights in the agreement, since
an inconsistent statement may vary the agreement, prevent
(or ‘estop’) the Commonwealth relying on the
terms of the agreement, or constitute a waiver of its legal
rights under the agreement.
Common clauses in funding agreements
Community funding agreements
As a result of the development of standard funding agreements
by many agencies, consistent positions on key policy issues
have been reached between a number of agencies for similar
types of community grant programs. These positions do not
inhibit the flexibility of agencies to change the agreements
to suit particular programs.
As an illustration, many agencies have adopted the following
positions that provide an appropriate risk balance to the
Commonwealth in community funding programs:
- It is not mandatory for the funds to go into a separate
account of the recipient established solely for this
purpose and separate from its other operational accounts.
The emphasis is on identifying the receipt and expenditure
of the funds separately within the recipient’s
accounting records so that at all times the funds are
identifiable and ascertainable. However, this may be
an issue if agencies wish to create a trust to safeguard
the funds.
- Once approval is given to use the funds to acquire
an asset, the asset will be owned by the recipient (unless
it is leased) and subject only to use by the recipient
for the funded activity. There is also often a mechanism
to prevent a recipient from making a windfall gain on
an asset during the term of the agreement or when the
agreement expires or is terminated.
- There is provision for regular reporting during the
term of the agreement, and at the completion of the activity.
- Intellectual property created with the funding is
owned by the recipient, who gives a licence for its use
to the funding provider where the provider sees a benefit
in this occurring.
- There is no undertaking that any information concerning
the recipient, or the terms of the agreement, will be
treated as confidential. This is consistent with the
guidance contained in Confidentiality of Contractors’ Commercial
Information – Financial Management Guidance No.
3 (Department of Finance and Administration, February
2003, available through <http://www.finance.gov.au>),
which recommends that a starting point of disclosure
apply to contractual provisions (and related matters)
and that any information should be examined to see if
it is really confidential in nature.
All types of agreement
Regardless of the type of recipient, the following issues
also need to be considered:
- The arrangements for monitoring the recipient’s
use of the funding and mechanisms for repayment, including
interest (where appropriate), where funding has not been
applied for the agreed purposes.
- The taxation treatment of the funding in the hands
of the recipient, including specifying the party responsible
for payment of any GST or other taxes payable on the
provision of the funding.
- Where funding may be provided to the recipient by
another government agency or a third party for the same
or similar purpose, an obligation on the recipient to
report on the provision of such funding.
- If funding is payable on the achievement of milestones,
the consequences of a recipient failing to achieve the
milestone will generally benefit from being addressed
in specific terms. In certain circumstances, for example
where there is an element of uncertainty as to the ability
of the recipient to achieve a milestone by the specified
date, the provision of mechanisms to vary the milestone
date, if such circumstances arise, may be appropriate.
- In some cases, it will be appropriate to include warranties
from the recipient about itself and the project in the
funding agreement.
Ending the agreement
In the ordinary course of events a funding agreement expires
on the completion date set out in the agreement or on submission
by the funding recipient of the final report. However,
in some circumstances, it may become necessary (or desirable)
for the agreement to be terminated early. An agency contemplating
terminating a funding agreement needs to carefully consider
any alternatives to, and possible consequences of, deciding
to terminate the agreement, and seek legal advice on the
proposed termination. This advice may need to cover issues
such as using dispute resolution solutions before resorting
to litigation. The advice may also need to consider the Legal
Services Directions 2005 (made under the Judiciary
Act 1903).
Is it necessary to terminate the agreement?
An agency might consider terminating a funding agreement
for a range of different reasons including because:
- the funding recipient has not met relevant milestones
- the funding recipient has not met other key requirements
- there has been a change in government policy in relation
to the program to which the funding relates to such a
degree that termination is necessary.
In some cases, it may be necessary to terminate the agreement
but in other cases it may be sufficient to allow the agreement
to simply run its course. For example, if a funding agreement
provides for payments to be made on the achievement of
particular milestones, a failure to meet the milestones
would generally allow the Commonwealth to not make any
further payments under the agreement. It would not be necessary
to terminate the agreement to achieve this effect.
Options for termination
The agency’s rights to terminate the agreement will
usually be set out in the agreement. There may also be
some common law rights but it is preferable for termination
provisions to be explicitly set out in the agreement. A
funding agreement may be terminated in the following ways
depending on the circumstances and the terms of the agreement:
- termination with compensation or termination for convenience
- termination for default
- termination by mutual agreement.
Termination with compensation
Termination with compensation (otherwise called ‘termination
for convenience’) is a right related to the doctrine
of executive necessity. This doctrine encompasses the principle
that agreements and promises cannot be enforced on public
interest grounds to the extent that they limit the ability
of a minister or other officeholder to exercise their statutory
or executive discretions or powers. Many funding agreements
include such clauses. While the wording of termination
for convenience clauses may suggest this right can be exercised
at will by an agency, this may not always be the case,
and the practical use of this clause may be more limited.
For more details on termination for convenience clauses
see AGS Commercial Notes No. 6, 27 November 2002
(at <http://www.ags.gov.au/publications/index.htm>).
Termination for default
A wide range of events may permit an agency to terminate
a funding agreement for default by the recipient depending
on the terms of the agreement. It is common for specific
events of default to be contained in a funding agreement
(e.g. the recipient’s company winds up or it is subsequently
found that the original funding application was based on
false information). Other acts or omissions by the recipient
may also constitute default through the recipient’s
failure to perform obligations under the agreement (e.g.
failure to meet performance or reporting standards or not
using funding in accordance with the budget).
Where an agency identifies a breach that is not specifically
described as an event of default under the funding agreement,
a judgment needs to be made whether the breach is of a
nature that justifies termination for default. For example,
if the recipient breaches the agreement in a relatively
minor way, it may be appropriate to withhold payment until
the breach is remedied rather than terminate. The agency
will usually exhaust all other options (such as providing
the funding recipient with an opportunity to rectify the
default) before terminating. Where an agency decides to
terminate for default it must comply with any procedures
set out in the funding agreement relating to the exercise
of the right to terminate for default.
Wrongful termination
Agencies should take care in exercising either of the
termination rights described above. If an agency wrongfully
terminates an agreement this could amount to a repudiation
of the contract, so legal advice is important to consider
to help avoid this situation. Also, if this occurs, the
agency could be liable to pay damages to the recipient.
Termination by agreement
Of course, in some cases, the agency and the recipient
may simply agree to terminate the agreement, although that
would typically involve some consideration of the appropriateness
of this course and the implications for any payments made
by the Commonwealth and any work or materials produced
by the recipient under the agreement.
What happens after the agreement expires or is terminated?
Damages/compensation when agreement terminated
Prior to terminating for convenience, agencies need to
consider whether compensation is required to be paid to
the recipient and the amount of compensation that might
be payable.
If an agreement is terminated for default, agencies need
to consider whether to sue the recipient for damages, or
to recover costs, funding (including unspent funds), or
the funded assets from the recipient.
Agencies will also need to consider how to deal with final
acquittals and other reporting issues.
Final acquittals and reporting issues
Agencies commonly require funding recipients to provide
final reports and to retain records for an appropriate
period (sometimes linked to the Corporations Act 2001 which
requires ‘financial records’ to be kept for
seven years: section 286). It is also common for agencies
to consider including in funding agreements a requirement
for the funding recipient to provide a report to the agency
within a certain period (e.g. 60 business days) of the
completion of the project.
Unspent funds
Rights under the funding agreement
Where any termination right is exercised, the funding
agreement will normally provide the agency with the power
to recover funds where those funds have not been:
- legally committed for expenditure and therefore are
not payable as a current liability, or
- spent in accordance with the agreement.
Where this is the case, the funding agreement may provide
that these funds are recoverable as a debt due to the Commonwealth
without the requirement for further proof. Agencies should
note, however, that if the required final regular report
is not provided, or other reports have not been provided,
it may be difficult to ascertain the amount actually owing.
In this situation, the agency may need to ascertain, through
dispute resolution or a court process, the amount actually
owing.
Statutory responsibilities
Chief executives of FMA agencies are responsible under
section 47 of the FMA Act for pursuing recovery of debts
owing to their agency, unless they are satisfied that the
debt is not legally recoverable, or it is not economical
to pursue recovery of the debt or (less likely) it has
been written off, as authorised by an Act. In the absence
of a specific statutory power, in the majority of cases
a chief executive cannot waive a debt – this power
can generally only be exercised by the Finance Minister
under section 34 of the FMA Act, or, where the Finance
Minister has delegated that power, by certain officials
within the Department of Finance and Administration.
Can an agency spend recovered funds?
In the event that unspent money is recovered from the
recipient (including following termination of a funding
agreement) there may be scope to allocate this money to
another recipient or other agency activities.
Repayments to agencies are governed by section 30 of the
FMA Act. Finance Circular 2005/8 (available through <http://www.finance.gov.au>)
provides guidance on how moneys returned to an agency may
be credited to the original appropriation and paid into
the agency’s bank account (instead of being returned
to the Official Public Account). An agency considering
how best to deal with a repayment should involve its Chief
Financial Officer, who, if necessary, can involve the Department
of Finance and Administration.
Tips for clients
In summary:
- Agencies need to give careful consideration
to what rights and responsibilities they wish to
impose in relation to funding programs having regard
to the identity of the recipient and the nature
of the funding – this will dictate what type
of funding agreement is most appropriate.
- Grants require approvals under the FMA Regulations
but are not subject to the Commonwealth Procurement
Guidelines.
- It is important to have a defensible basis for
selecting funding recipients and where an open
selection process is used, it should be based on
predetermined selection criteria and a probity
adviser may be consulted.
- For some funding programs, a standard form agreement
will be appropriate but for others there may need
to be tailoring of the terms and conditions.
- Agencies need to consider how best to achieve
an efficient and effective outcome from the funding,
that accords with relevant Commonwealth policies,
including, where relevant, the use of milestone
payments and reporting arrangements.
- Care needs to be taken to avoid inadvertently
amending funding agreements, particularly through
email exchanges.
- A decision to terminate a funding agreement
needs careful consideration and, typically, should
only occur based on legal advice, having regard
to the relevant dispute resolution procedures in
the agreement.
|
This briefing was prepared by Leah West, Paul Lang
and Kathryn Graham with the assistance of AGS Senior
Lawyers Kathryn Grimes and Stuart Hilton. It builds on
the work of the authors of AGS Commercial Notes No.
19 (29 May 2006).
Leah West has six years’ experience providing
commercial legal advice to government and is a co-leader
of AGS’s public finance and spending network, which
encompasses the area of grants and funding. Leah has
advised various departments and agencies on the drafting
and management of a range of funding agreements – from
individual grants to small community organisations, to
major environment and technology development funding
programs.
Paul Lang heads the Commercial Group in AGS’s
Melbourne office and is a co-leader of AGS’s public
finance and spending network. Paul has advised on a range
of Commonwealth funding agreements in support of major
commercial projects and initiatives in the resources
and industrial sectors.
Kathryn Graham has particular expertise in Commonwealth
financial management, the requirements of the FMA Act
and appropriations legislation and is a co-leader of
AGS’s public finance and spending network. She
provides advice on constitutional issues; assists clients
in policy development, the development of drafting instructions
and review of draft legislation; and advises on the interpretation
and application of Commonwealth legislation.
AGS contacts
AGS has a national team of lawyers specialising in grants
and funding projects. For further information on the article
in this issue, or on other funding matters, please contact
John Scala, Robert Orr QC or our network leaders, Leah
West, Kathryn Graham and Paul Lang, or any of the lawyers
listed below.
Canberra
|
Leah West
John Snell
|
02 6253 7006
02 6253 7025
|
Sydney
|
Simon Konecny
John Berg
|
02 9581 7585
02 9581 7624
|
Melbourne
|
Paul Lang
Josephine Ziino
|
03 9242 1322
03 9242 1312
|
Brisbane
|
Peter Blennerhassett
Nathan Edwards
|
07 3360 5779
07 3360 5730
|
Perth
|
Lee-Sai Choo
|
08 9268 1137
|
Adelaide/Darwin
|
Andrew Schatz
|
08 8205 4201
|
Hobart
|
Peter Bowen
|
03 6210 2104
|
The material in this briefing is provided to AGS
clients for general information only and should not
be relied upon for the purpose of a particular matter.
Please contact AGS before any action or decision is
taken on the basis of any of the material in this briefing.© AGS
All rights reserved
© Australian
Government Solicitor
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