Commercial Notes No. 7

No. 7
23 April 2003

Construction Guarantees – Safe as Houses?

Recourse to security under construction contracts

A principal under a construction contract takes comfort in
the performance security given by the contractor. Frequently,
this security is an unconditional bank bond or undertaking
(often called a 'bank guarantee'). The belief
is that such security gives easy recourse to compensate the
principal for an alleged breach of contract by the contractor.

This 'pulling' of the guarantee, or the
threat of doing so, is perceived to have the strategic advantage
of giving the contractor an incentive to negotiate and to continue
the work, as well as providing the principal with the financial
assurance that it will not be out-of-pocket for a claim it
has under the contract.

A recent case in the Supreme Court of Victoria1 has,
however, suggested that recourse to security provided by a
contractor might not be as readily available to an aggrieved
principal as believed.

The case has reinforced the principle that the circumstances
in which non-cash security may be converted, and recourse had
to that money by a principal, depends very much on the terms
of the contract.

Background

The proceedings involved a contract for the design and construction
of a multi-level medical centre in Melbourne. The contract
adopted the frequently used Standards Australia general conditions
of contract in AS4300-1995.

The parties became embroiled in a dispute about the scope
of the works under the contract. The principal asserted that
the tenancy areas were part of the works. The contractor asserted
that they were not.

Dispute notices were exchanged between the parties. The parties
met but were unable to resolve the dispute. Ultimately, both
parties purported to terminate the contract.

The principal then
wrote to the contractor advising that it proposed to have
recourse to the security given by the contractor in order to
compensate
it
for the losses incurred in having to engage another contractor to complete
the works.

The security took the form of two bank bonds, each for 2.5%
of the contract price. The contractor sought an injunction
restraining the principal from converting the bonds into cash.

The court granted the injunction to the contractor, preventing
the principal from having recourse to the security.

Terms of the contract

Clause 5.6 of AS4300-1995 provides:

A party may have recourse to security…and may convert
into money security that does not consist of money where:

(a) the party has become entitled to exercise a right under
the contract in respect of the security…;

(b) the party has given to the other party notice in writing,
for the period stated in Annexure Part A or, if no period
is stated, 5 days, of the party's intention to have
recourse to the security…; and

(c) the period stated in Annexure Part A or, if no period
is stated, 5 days, has or have elapsed since the notice was
given.

There was no dispute that the principal had complied with
paragraphs (b) and (c). The issue was whether the termination
of the contract and subsequent claim by the principal meant
that the principal had 'become entitled to exercise
a right under the contract in respect of the security'.

The court found that only two provisions in AS4300-1995 gave
rights in respect of the security.

First, clause 42.8 provided that the principal may deduct
from moneys due to the contractor any money due from the contractor
to the principal otherwise than under the contract. If those
moneys were insufficient the principal could, subject to clause
5.6, have recourse to any retention moneys and, if those were
insufficient, then to security under the contract. In other
words, the principal could exercise a right of set off for
moneys due to the principal by the contractor outside the contract
by way of having recourse to the bank bonds.

Secondly, clause 42.9 provided that where, within the time
provided by the contract, a party failed to pay the other party
an amount due and payable under the contract, the other party
may, subject to clause 5.6, have recourse to any retention
moneys and, if those were insufficient, then to security under
the contract.

The principal had essentially purported to terminate the contract
on two bases: the first being that the contractor had committed
a substantial breach of the contract by reason of, among other
things, exhibiting an intention not to carry out the tenancy
works and then failing to show cause why the principal should
not terminate the contract.

The second basis was an alleged common law repudiation of
the contract for much the same reasons. This repudiation was
purportedly accepted by the principal.

Was the principal entitled to exercise rights in respect
of the security?

The court considered whether either of these bases for termination
meant that the principal had become 'entitled to exercise
a right under the contract in respect of the security'.

It was held that the termination on the basis of the contractor's
alleged failure to show cause did not give the principal an 'immediate
unqualified right in respect of the security' as
was contemplated by clause 5.6(a). In other words, there was
no amount 'due and payable' within the meaning
of clause 42.9 which the contractor had failed to pay within
the time provided for by the building contract.

The reason for this was that clause 42.9 did not provide any
machinery for determining the amount of any sum due under the
building contract to the principal. The contract intended the
arbitration provisions in the dispute resolution clause to
determine the sum if the parties could not agree. Unless and
until this happened the amount claimed could not be said to
be either 'due and payable' or 'unpaid
within the time provided by the contract'.

The principal's alternative claim was that the contractor
had repudiated the contract and that the principal had accepted
that repudiation and terminated the contract at common law.
Since the contract was at an end, so the argument goes, the
entitlement of the principal could be said to arise 'otherwise
than under the contract' within the meaning of clause
42.8.

Again, the court refused to characterise the mere claim by
the principal that the contractor owed the principal money
to be money 'due and payable'. In doing
so the court went to some lengths to distinguish previous authority
which had 'treated with great respect' the
right of a beneficiary/principal to have recourse to security.

Reasons for refusing access to security

The Victorian Court of Appeal2 had previously considered
the operation of the security provisions in AS2124-1986 (an
earlier version of AS4300-1995). It had there been found that
the party claiming access to the security could have recourse
to the security where, according to a bona fide claim made
by the principal, moneys were due to it from the contractor
which exceeded any moneys due from the principal to the contractor.

The court refused to follow this analysis, on the basis that
these were two very different contracts under consideration
and that the words 'entitlement' in each
document did not necessarily bear the same meaning.

In doing so the court noted that the 1992 and 1996 versions
of the Australian Standard contract had introduced a procedure
under which the principal must give notice before converting
the security into money or having recourse to it. The intent
of this was to give the contractor the right to seek interlocutory
relief where the contractor disputes the principal's
right to have recourse to the security. The court considered
that this right would be 'illusory' if the principal's
entitlement to exercise the right depended only upon making
a bona fide claim for payment of money which was not specious
or fanciful.

The court also considered that the right to have recourse
to security in respect of unpaid moneys under the contract
had to be read subject to clause 42.1 of the contract. That
clause set out a comprehensive scheme for the assessment and
certification of payment claims made by the contractor under
the contract. Accordingly, money 'due and payable' under
the contract will ordinarily be subject to these certification
procedures. In this way the contract itself provides an authoritative
statement of liability, subject to review under the dispute
resolution clause. In these circumstances, the principal could
not use the right of set off under clause 42.9 to convert and
have recourse to the bank bonds to satisfy its claim under
the contract.

The court also considered that the use of the words 'has
become entitled' in the 1992 and 1996 versions
indicated that some determination of entitlement is required,
whether by certificate, agreement, arbitral award or otherwise.
A mere claim is not enough.

Implications for clients

The case is salutary in reinforcing the dangers of too readily
concluding that the rights conferred by performance guarantees 'should
depend upon the mere assertion by a disputing party of a right
to payment of a sum of money'.

The name and nature of unconditional undertakings suggest
a form of security readily accessible in a broad range of circumstances.
However, whether recourse may be had to this security depends
on the terms of the contract. If, as is the case with the 1992
and 1996 Australian Standards, the circumstances in which recourse
may be had are circumscribed, the courts will give effect to
that limitation by granting an injunction to prevent a principal
from converting non-cash security and having recourse to the
money unless the relevant 'entitlement' exists.

In determining the entitlement, the court will look to the
intention of the parties in construing the circumstances in
which recourse may be had to security. It will look to see
whether the parties intended the security to support a valid
claim for damages or whether it was intended the security deal
with the risk of a party being out-of-pocket pending resolution
or determination of a dispute.

In drafting construction contracts the parties must be clear
both about the real purpose of requiring the security and the
circumstances in which recourse may be had to it. If it is
intended that a party should be able to enforce an unconditional
undertaking on the basis of a mere claim then the contract
should make this abundantly clear.

Notes

1Rejan Constructions Pty Ltd v Manningham Medical
Centre Pty Ltd [2002] VSC 579
2Bachmann Pty Ltd v BHP Power New Zealand Ltd [1999] 1
VR 420

Contact for further information:

Andrew Miles
Senior Executive Lawyer

Tel: (02) 6253 7100
Fax: (02) 6253 7310
E-Mail: andrew.miles@ags.gov.au

Is Probity Advice Privileged?

Lawyers are often engaged to act as probity adviser for clients
who are conducting a tender process. Usually in these circumstances
there is also a legal firm acting as the legal adviser to the
client. The probity adviser is typically tasked to establish
a probity regime; monitor procedural aspects of the tender
process; advise the client in relation to process and probity
issues; and report on compliance with probity requirements.
If the probity of a tender process is subsequently challenged
and the matter proceeds to litigation, then the question of
whether this work is protected by legal professional privilege
may become very important.

The nature of the privilege

Legal professional privilege applies to confidential communications
between a client and the client's legal adviser for the
dominant purpose of giving or receiving legal advice or for
use in anticipated litigation: Esso Australia Resources
Limited v Federal Commissioner of Taxation (1999) 201 CLR
49.

In addition, some jurisdictions provide for the privilege
by statute, notably the federal jurisdiction and in New South
Wales. Section 118 of the Evidence Act 1995 (Cth) provides
for the privilege, calling it 'client legal privilege'.
Section 118 applies only where privileged documents are sought
to be 'adduced' in evidence. The section does not
apply at other times (e.g., during the discovery process) although
the common law privilege does apply then.

To attract the privilege, the purpose must fall within the
privilege when the document was created: Barwick CJ in Grant
v Downs (1976) 135 CLR 674 at 678.

Documents created for the dual purpose of internal management
and legal advice are not privileged if the purposes are of
equal weight – a test 'intended to bring within
the scope of client legal privilege a document brought into
existence for the purpose of legal advice notwithstanding that
some ancillary use of the document was contemplated at that
time': Sparnon v Apand Pty Ltd (1996) 68 FCR 322
at 328 per Branson J.

Privilege only applies to a lawyer with appropriate qualifications
and independence. This raises particular issues for in-house
advisers.

For a more detailed account of legal professional privilege
and its implications for the Commonwealth context see Legal
Briefing Issue 65
(2 October 2002).

Application of the privilege to probity work

To date there is little case law dealing specifically with
the application of the privilege to probity work.

In Nederlandse Reassurantie Groep Holding NV v Bacon & Woodrow
(a firm) and others [1995] 1 All ER 976, Coleman J considered
whether commercial advice given by lawyers in the course
of a transaction was privileged.

The facts were as follows. In 1990 the plaintiff, a Dutch
company, entered into negotiations to purchase the share capital
of three insurance companies. The plaintiff assembled a team
of advisers comprising actuaries, accountants, banking and
corporate advisers, and lawyers. During the period leading
up to the purchase there were numerous written and oral communications
between the plaintiff and its advisers and also between advisers.
The shares were purchased and the plaintiff discovered that
the company was exposed to huge claims due to the inadequacy
of its insurance cover. The plaintiff sued its non-legal advisers
claiming it had not been properly advised. The defendants sought
discovery of documents provided by the legal advisers to the
plaintiff on the basis that these documents related to the
general commercial advisability of making the purchase.

Coleman J held that if a solicitor is instructed for the purpose
of providing legal advice in relation to a particular transaction,
then all communications between solicitor and client relating
to the transaction will be privileged, notwithstanding that
they do not contain legal advice, provided they are directly
related to the performance by the solicitor of their professional
duty as legal adviser to the client (Nederlandse Reassurantie at
page 982). A solicitor's professional duty is frequently
not exclusively related to providing legal advice, it may relate
to the commercial wisdom of entering into a given transaction
in relation to which legal advice is sought (Nederlandse
Reassurantie at page 983).

In National Tertiary Education Industry Union v Commonwealth
and D A Kemp [2002] FCA 441, Weinberg J considered the
application of the privilege to documents created during
a probity exercise. The applicant, the National Tertiary
Education Industry Union, sought the imposition of penalties
under section 170NF of the Workplace Relations Act 1996 on
the basis that the respondents had allegedly coerced certain
tertiary institutions engaged in negotiating certified agreements
by making the approval of funding contingent on the institutions
adopting a certain stance in the negotiations. The Court
found that the respondents' conduct could not amount
to coercion for the purposes of the relevant legislation.

In the course of interlocutory proceedings Weinberg J made
rulings on 19 April 2001 regarding whether client legal privilege
attached to probity advice. (Written reasons for the rulings
were not handed down by the Court and do not appear in the
report of the case. However, the basis of the rulings can be
discerned from the transcript of the proceedings.) A law firm
had been retained as the probity adviser to the Commonwealth
in connection with the processing of applications for funds
by institutions. As from 5 January 2000 the law firm was retained
to 'scrutinise the assessments carried out by the Commonwealth,
to ensure fairness in the assessments and consistency in the
approach to assessment of applications'.

The respondents submitted that all of the probity advice was
protected by privilege. However, the Judge held that much of
the advice was not. This included documents relating to the
appointment of the law firm as probity adviser, advice relating
to the guidelines and process generally and documents to and
from the probity adviser about particular applications. However,
the Judge did find that documents after 1 May 2000 were privileged.
The reason was that from that date onwards the evidence showed
that applications for grants were submitted to the law firm
for 'legal advice as to consistency and defensibility'.

At page 29 of the transcript Weinberg J said that 'you
cannot achieve protection for documents by asking solicitors
to perform a task which equally well could have been performed
by other consultants or other experts...Does the evidence before
me –because that is what it comes back to – establish
what the Commonwealth was seeking…can properly be characterised
as legal advice…?'.

Loss of the privilege

Loss of the common law privilege has recently been considered
by the Victorian Court of Appeal in British American Tobacco
Australia Services Ltd v McCabe [2002] VSCA 197. Mrs McCabe
had made an application to strike out the defence. In the course
of this application a dispute arose as to legal advices that
had been provided by separate firms of solicitors to the defendant.
The defendant had filed an affidavit sworn by an in-house lawyer
in opposition to the application. Annexed to the affidavit
were letters of advice from one law firm in 1992 and another
law firm in 1998 as to the legal obligations of the defendant
with respect to the retention and destruction of documents.
The trial judge, Eames J found that the affidavit had been
tendered to establish that the defendant had a longstanding
document retention policy and that it had acted on legal advice
as to the propriety of past actions. The plaintiff submitted
that 'ordinary notions of fairness' dictate that
his client should have access to the balance of advices on
these topics. The Court held there had been a waiver of the
privilege in respect of all legal advices for the period
1990 to 1998 related to the reasons for the tender of the two
advices disclosed in the affidavit.

This finding was reversed on appeal. The Court of Appeal found
that there had not been a waiver and held that where there
has been waiver in relation to one piece (or part) of advice '…the
privilege is impliedly waived in relation to another (advice)
if – and only if – that other is necessary to a
proper understanding of the first…'. In this case
the Court of Appeal considered that the advices in question
were complete in themselves and could be understood without
reference to other documents: McCabe at paragraph 121.

Section 122 of the Evidence Act 1995 (Cth) deals with
loss of the statutory privilege. In particular subsections
122 (1) and (2) provide that the privilege is lost where the
client has 'knowingly and voluntarily' 'disclosed' to
another person the 'substance' of the evidence.
The test is a 'quantitative one', and the Court
asks whether there has been a sufficient disclosure to warrant
loss of privilege. The mere reference to the existence of legal
advice will not amount to a disclosure. A statement to shareholders
(made in the context of an advice to them to reject an offer
by a third party to purchase their shares) concerning existing
litigation about the ratio for convertible notes to ordinary
shares that: 'the company maintains the correct ratio
is 1:1 and has legal advice supporting this proposition' has
been held to disclose the 'substance' of the legal
advice: Ampolex Ltd v Perpetual Trustee Company (Canberra)
Ltd (1996) 40 NSW LR 12 at 15.

In SVI Systems Pty Ltd v Best & Less Pty Ltd [2000]
FCA 1507 Einfeld J again considered loss of the statutory privilege
in a case where legal advice had been merely mentioned. One
of the parties had received legal advice not to proceed with
the roll-out of its retail stores. It disclosed that it had
determined not to proceed on the basis of legal advice from
its solicitors. Einfeld J said that the case was to be decided
on the basis of the contract and that the legal advice was
not of relevance in this regard. He held that even though the
party disclosed the 'bottom line' of the advice,
this did not amount to a disclosure of the substance. He noted
that it would be a significant extension of the law if advice
had to be disclosed merely because a party mentioned that it
had received legal advice and acted on that advice.

Conclusion

Legal professional privilege is likely to apply to general
commercial advice where lawyers are engaged to provide legal
advice, and general commercial advice is also provided as part
of the provision of the legal advice. For example, if a legal
firm is acting in a sale transaction and provides advice about
the commercial wisdom of aspects of the transaction as part
of the legal advice, that advice is likely to be privileged.

Similarly, probity advice should be privileged if it is directly
related to legal advice.

The privilege may be lost in a variety of circumstances. The
common law provides for waiver of the privilege and the test
is whether it would be 'fair' to require that an
otherwise privileged communication be disclosed. Certainly,
where part of a legal advice has been selectively disclosed
it may be fair to require that the balance be disclosed.

Where the Evidence Act 1995 (Cth) applies, namely where
the evidence is being adduced in a federal or territory court,
section 122 provides that the privilege is lost where a party
has 'knowingly and voluntarily disclosed' to another
person the 'substance' of the advice. Just what
amounts to disclosure of the 'substance' of an
advice is a question of degree. To merely state one has obtained
legal advice and acted on it, is not a disclosure, but to disclose
conclusions of an advice is more likely to be.

Implications for clients

When lawyers are retained, the wording of the retainer is
important – clients should ensure that work has been
appropriately described. For example, the words 'to provide
legal services to ensure defensibility and consistency' is
more likely to attract legal professional privilege than if
lawyers were engaged to advise as to 'fairness and probity'.

Where the conclusions of the probity adviser are to be communicated
to a third party, clients should consider whether the privilege
may be lost. This is particularly so where the report of a
probity adviser is put forward to indicate that the process
has been fair or appropriate. It would be prudent to obtain
legal advice before making a disclosure.

Contact for further information:

Stephen Lucas
Senior Executive Lawyer

Tel: (03) 9242 1200
Fax: (03) 9242 1483
E-Mail: stephen.lucas@ags.gov.au


Defamation on the Web

Dow Jones & Company Inc v Gutnick
(2002) 194 ALR 433

The High Court's recent decision in Gutnick has
excited considerable media interest and comment as it is believed
to be the first time a nation's highest court has ruled
on the issue of where defamation occurs when it arises out
of a publication on the Internet.

Background

Mr Joseph Gutnick is a Melbourne businessman. Dow Jones is
a US corporation which publishes the Wall Street Journal newspaper
and Barron's magazine. Dow Jones also operates a web-based
subscription news site known as WSJ.com which includes an online
version of Barron's magazine – Barron's
Online.

The 28 October 2000 edition of Barron's Online contained
an article entitled 'Unholy Gains', containing
several references to Mr Gutnick, among other things associating
him with a convicted tax evader, and another person awaiting
trial for alleged stock manipulation in New York.

Mr Gutnick contended that part of the article defamed him
and brought an action in the Supreme Court of Victoria claiming
damages for defamation.
Dow Jones contended that the proceedings in the Supreme Court should be stayed
on the grounds that that Court was an inappropriate forum, as the alleged defamation
was published in New Jersey – not Victoria. Hedigan J of the Supreme
Court rejected this contention. Dow Jones was subsequently refused leave to
appeal to the Court of Appeal of Victoria, but granted special leave to appeal
to the High Court.

Issue

The issue was characterised starkly by Callinan J, whose judgment
(see p. 475) begins:

' The question which this case raises is whether the
development of the Internet calls for a radical shift in
the law of defamation'.

The majority described the principal question for determination
to be 'where was the material complained of published?'

The issues raised by this question were summarised by Kirby
J (at p. 450) as:

  • the jurisdiction of the Australian court to decide the
    action
  • if jurisdiction does exist, what law to apply, and
  • whether the proceedings should be stayed on the grounds
    that an Australian court is nonetheless an inconvenient forum.

The presentation of these issues for the Court's determination
was driven, as Kirby J pointed out, by some important practical
considerations. The law of defamation in Victoria is more favourable
to plaintiffs, given that defamation laws in the United States
were greatly influenced by the First Amendment and freedom
of speech. It seems that the contest between the parties was
animated less by concerns over jurisdictional sovereignty or
the logistical challenges of an inconvenient forum, and more
by the simple truth that the action is quite likely to succeed
in Victoria but would almost certainly fail in New Jersey.

Arguments

The respondent, Mr Gutnick, argued that it was well established
law in Australia that for the purposes of the tort of defamation,
publication takes place where the allegedly defamatory material
is comprehended by its readers. It was also emphasised that
the article in question was disseminated via a subscription
service, and that those people in Victoria who read the article
were Dow Jones subscribers. The effect of this is that Dow
Jones must have intended the article for consumption in Victoria.
It was also argued that the appellant sought to impose upon
Australian residents for the purposes of this and many other
cases, an American legal hegemony in relation to Internet publications.
The appellant, Dow Jones, claimed that the article was published in New Jersey
at the time the article was uploaded to the web servers they operate in New
Jersey. Dow Jones advanced two distinct arguments in support of this assertion – one
technical and the other rooted in policy.

Dow Jones' technical argument for New Jersey as the
place of publication relied on an alleged distinction between
traditional print and broadcast 'publication',
and web-based 'publication". According to Dow Jones,
traditional publishing involved the publisher in a very active
way in the directing of their publications to a particular
place or places and allows the publisher a measure of effective
control. However, the Internet was said to be very different
in that the publisher is restricted to the more passive role
of simply loading information onto a web server. There was
no effective control over who then accesses the information
or where they choose to do so. The information was not actively
sent anywhere by the publisher. It was the would-be reader
who must actively seek information by downloading it to their
web browser.

This argument did not succeed. It seems likely that the subscription
nature of the publication was material to the High Court's
decision on this point.

Dow Jones' policy argument was that unless the place
of publication is fixed as the place of uploading to the web
server(s), publishers will be forced to take account of the
law of every country on earth as the publisher cannot control
the location of the web browsers of would-be readers. This
places publishers in an unacceptable position of global liability
risk.

High Court's decision

The High Court decided unanimously in Mr Gutnick's favour,
dismissing Dow Jones' appeal.

Gleeson CJ, McHugh, Gummow and Hayne JJ

In a joint judgment, these justices held that publication
is a bilateral act in which a publisher makes information available
and a third party has that information available for their
comprehension. The bilateral nature of publication makes it
misleading to focus on the publisher's location. Further,
it is an established principle of defamation law that (to quote
Dixon J in Lee v Wilson & Mackinnon (1934) 51 CLR
276, at 287):

' It is the publication, not the composition of a
libel, which is the actionable wrong.' (p. 440)

Defamation is to be located at the place where damage to reputation
occurs.

On the issue of potential 'global risk' for Internet
publishers, it was said that practical considerations such
as the requirement for claimants to have a reputation in the
place where they are defamed, and the reality that a favourable
judgment is only of value if it will be enforced in a jurisdiction
where the defendant has assets, will limit the scale of this
perceived problem (p. 447). It was further said that:

'identifying the person about whom material is to
be published will readily identify the relevant defamation
law to which that person may resort' (p. 447).

Gaudron J

Gaudron J agreed with the decision of the majority and with
their reasons, but made some additional points about the American 'single
publication' rule. She argued that Australian jurisprudence
can similarly empower a court to determine the whole of a legal
controversy, further undermining the appellant's contention
that allowing an Australian court to take jurisdiction created
a danger of multiple suits in different jurisdictions.

Kirby J

Kirby J agreed that the Internet is a unique technology and
that such a novel technological development may likewise require
a new legal paradigm. However, he stated that to ignore existing
law and precedent would exceed judicial authority. He described
the outcome in Gutnick as 'contrary to intuition' and
called for national legislative attention and international
discussion and agreement.

Callinan J

Callinan J explicitly rejected both the notion that the Internet
is a revolutionary phenomena, non-analogous to any previous
technology, and the appellant's argument that a web server
is essentially passive. His Honour affirmed the long line of
authority holding that the torts of libel and slander are committed
when and where comprehension of the defamatory matter occurs,
regardless of the medium of publication. He also expressed
his support for the contention that the appellant was attempting
to impose an 'American legal hegemony' on Australians
(see p.483).

Implications for clients

Gutnick is of obvious importance to clients engaged
in Internet publication. Legal liability for allegedly defamatory
publications clearly differs according to jurisdiction and
choice of law. If jurisdiction is established by a reader downloading
content, then Internet publishers will need to be mindful of
the potential for defamation in multiple jurisdictions.

The High Court's decision has already attracted some
criticism.1 The main criticism is that the decision
will inhibit Internet development and freedom of speech as
it exposes Internet publishers to global risk of legal action,
often in jurisdictions where legal and social norms are very
different. It may be equally valid to argue that claimants
are entitled to claim where the damage to their reputation
actually occurs, according to their own laws and social norms.
This perspective, obviously, will not appeal to the media.

The extent to which the courts in other countries will follow Gutnick is
unclear. The issue of jurisdiction and defamation through Internet
publication was recently canvassed in a UK Law Commission report Defamation
and the Internet: A Preliminary Investigation. The Law
Commission concluded the issue to be extremely challenging
and suggested that 'any solution would require an international
treaty, accompanied by greater harmonisation of the substantive
law of defamation'.

Less than a week after the High Court handed down its decision
in Gutnick, the US 4th Circuit Court of Appeals in a
similar case affirmed its view that the placing of information
on the Internet is not, in itself, enough to subject the publisher
to the jurisdiction of the state where the information is downloaded.
Something more than posting and accessibility is needed in
order to demonstrate that the publisher purposefully targeted
the forum state in a substantial way.2

The full text of the High Court's decision is available
online at http://www.austlii.edu.au/au/cases/cth/high_ct/2002/56.html.

Notes

1 See, for example, the editorial, 'A Dark
Day for the Internet', The Australian, 11 December
2002, p. 14.
2Young v New Haven Advocate, available
online at http:laws.lp.findlaw.com/4th/012340p.html

This note was prepared by Sarah Moylan, Lawyer,
AGS Canberra.

Contact for further information:

Philip Crisp
Special Counsel (Commercial)

Tel: (02) 6253 7159
Fax: (02) 6253 7306
E-Mail: philip.crisp@ags.gov.au

Private Financing in the Commonwealth

The Commonwealth has yet to undertake a major procurement
using private financing (PF).1

The proposed joint operational Headquarters Australian Theatre
(HQAST) for the Department of Defence, to be constructed south
of Bungendore in New South Wales, is being examined as a possible
PF procurement. The Government is expected to decide later
in the year whether to proceed by way of PF or by using a more
traditional procurement methodology.

The Australian Customs Service is also investigating the use
of PF for its Coastwatch Project.

During the assessment of the procurement method for the Navy's
patrol boats project it became apparent that there are perceived
accounting standard and taxation barriers to the greater use
of PF in Commonwealth procurement.

Current barriers

There is currently no Australian Accounting Standard (AAS)
which specifically deals with the accounting treatment of PF.
This gives rise to doubt as to whether PF schemes should appear
in the Government's 'balance sheet' or
not. In the UK the Treasury has issued guidelines (FRS5) to
account for PF transactions which allow most PF transactions
to be excluded from Government borrowing figures on the grounds
that they involve sufficient risk transfer to warrant the project
being declared as 'off balance sheet'.

In Australia, since there is no specific AAS to deal with
risk allocation issues associated with PF, AAS17 (which deals
with leases) is relied on to categorise PF arrangements. This
standard has not been designed to deal with PF risk allocations
and can lead to PF leases being characterised as finance leases
(which should be recognised on the lessee's balance sheet)
rather than operating leases (under which payments by the lessee
are an expense in the lessee's financial statements),
despite significant project risks being transferred to the
private sector contractor.

Classification of leases as finance leases is a disincentive
to both the private sector and government to use PF arrangements.
The Australian Accounting Standards Board (AASB) with representatives
from Treasury has established a working group to determine
how these PF projects should be treated in Government accounts.
The Heads of Treasury forum has recently recommended to the
AASB that a standard, similar to the UK's FRS5, be adopted
for PF and similar arrangements in Australia.

The so-called 'leasing provisions' of the Income
Tax Assessment Act 1936 (Section 51AD and Division 16D)
are also seen as disincentives to PF procurement. The effect
of these sections is to deny tax deductability for certain
payments by the private sector PF participant because of
the involvement of the tax-exempt public sector, while at
the same time making income associated with the property
taxable.

It is understood that the Government is proposing to abolish
section 51AD and amend Division 16D. If this happens it will
remove some of these perceived barriers to the use of PF project
structures, at least from the private sector's viewpoint.
However, it will have little impact at the Commonwealth level,
as a whole-of-government approach to 'value for money' is
taken, which incorporates into the PF model the cost of any
tax leakage arising as a result of passing tax benefits from
a tax exempt body to the private sector.

From the Government's viewpoint, the key question remains
whether project delivery by PF represents value for money.
The Department of Finance has indicated that it considers that
PF procurement can deliver value for money, even if the lease
is classified as an on-balance-sheet finance lease, if sufficient,
cost-effective risk transfer is achieved.2

Recent UK experience

The UK National Audit Office has recently released a report
on the construction performance under PF delivery.3 The
report examined 3 key areas of construction under all English
PF projects let by the central government:

  • price certainty
  • timing of delivery
  • quality of design and construction

The report showed that about 80% of projects had not experienced
any construction related price increase after the award of
contracts. Where there had been a price increase it was due
to variations sought by the procuring department rather than
the construction contractor. Historically, over 70% of public
sector construction projects had run over budget. In those
PF projects where there were cost overruns the price increases
were generally relatively small.

It also found that 28 of the 37 projects surveyed had been
delivered on time or earlier than specified in the contract.
Of those projects which were not delivered on time, two-thirds
were delayed by two months or less. Where projects have been
delivered late, departments have been able to defer payments
under the contract, make payment deductions or seek damages.

Finally, most public sector project managers surveyed were
satisfied with the design, construction and performance of
their buildings.

The report concluded that there was strong evidence that the
PF approach brings significant benefits to government in terms
of delivering built assets on-time and for the price expected
by the public sector.

The Department of Defence has traditionally experienced difficulties
in optimising value for money in these areas of its construction
projects.4 Typically, the obstacles have included
inaccurate cost estimates because of scoping errors and stakeholder
variations after contract, as well as difficulties reaching
appropriate risk allocation and management strategies.

Identifying the costs of and funding through-life operating
costs of Defence infrastructure assets has also been an issue.
It would be reasonable to infer that other Commonwealth departments
and agencies face similar issues in their construction procurement.

Based on recent UK experience there would seem to be opportunities
for PF procurement methods at the Commonwealth level provided
the right project is selected. However, if PF is to have a
future as a legitimate procurement method for the Commonwealth,
it needs a value for money success story upon which to build
momentum. Whether the Government believes HQAST can be that
story will be known later this year.

Notes

1 Webb, R and Pulle, B, Public Private Partnerships:
An Introduction, Economics, Commerce and Industrial Relations
Group, Department of the Parliamentary Library, Research
Paper No. 1, 2002–03
2 Lisa Rauter, Director, Private Financing Unit, Department
of Finance and Administration, Panel Debate, Defence Summit 2003, 25
February 2003
3 PFI: Construction Performance, Report by the Comptroller
and Auditor General, National Audit Office HC 371 Session 2002–2003,
5 February 2003
4 Mike Scrafton, Head of Infrastructure Division, Corporate
Services and Infrastructure Group, Department of Defence, Speech given
to Defence Summit 2003, 25 February 2003

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