Legal briefing No. 84

Number 84

24 September 2007

Glenn Owbridge

Brisbane
Glenn Owbridge Senior Executive Lawyer
T 07 3360 5654
F 07 3360 5795
glenn.owbridge@ags.gov.au

Lici Inge

Sydney
Dr Lici Inge Senior Lawyer
T 02 9581 7304
F 02 9581 7413
lici.inge@ags.gov.au

In Australian Competition and Consumer Commission
v Baxter Healthcare [2007] HCA 38 (29 August 2007)
(Baxter), the High Court found that the Trade
Practices Act 1974 (Cth) (TPA) applies to companies
conducting business with government entities, even
when those government entities are not bound by the
TPA because they are not themselves carrying on business.

The decision constrains the types of contracts that
government agencies may enter into and has important
implications for procurement by agencies, even when those
agencies are not subject to the TPA.

Introduction

Baxter concerned the negotiation of, and entry
into, contracts for supply of pharmaceutical products to
public hospitals. It involved negotiations and contracts
between Baxter Healthcare, a trading corporation, and various
state governments which were not carrying on a business
and were therefore not themselves subject to the TPA.1

In the 1979 decision in Bradken Consolidated Ltd v
BHP (1979) 145 CLR 107 (Bradken), the High
Court held that the TPA did not bind the Crown in right
of the states. Therefore, the TPA could not be enforced
against corporations otherwise bound by the TPA when
those corporations were dealing with the Crown if to
do so would be, in effect, to enforce the TPA against
the Crown.

The decision in Bradken was the basis for the respondents' arguments
in Baxter that, even if Baxter Healthcare had otherwise
contravened the TPA, it was immune from the TPA where its
breaches related to dealings with state entities that were
not carrying on business and thus not subject to the TPA.
This is often referred to as the concept of derivative
immunity.

At first instance before Allsop J in the Federal Court
(Australian Competition and Consumer Commission v Baxter
Healthcare Pty Ltd (2005) ATPR 42-066) and on appeal
before Mansfield, Dowsett and Gyles JJ in the Full Federal
Court (Australian Competition and Consumer Commission
v Baxter Healthcare Pty Ltd (2006) 153 FCR 574), the
case was decided on the basis that Baxter Healthcare had
the benefit of a derivative Crown immunity.

The High Court has now reversed the previous decisions
and remitted the remaining appeal points (relating to whether
or not the conduct of Baxter Healthcare contravened the
TPA) to the Full Federal Court for reconsideration.

In so doing, it has also signalled that Bradken no
longer accurately represents the law (Baxter at
[58]).

Factual background

In 2002, the Australian Competition and Consumer Commission
(ACCC) instituted proceedings in the Federal Court seeking
declarations that Baxter Healthcare had contravened ss
46 and 47 of the TPA. The ACCC also sought injunctions,
pecuniary penalties and an order that Baxter Healthcare
develop and implement a trade practices compliance program.

During the course of the proceedings, the states of Western
Australia, South Australia and New South Wales applied
to be joined as respondents. The ACCC then sought an additional
order that would ensure continuity of supply to hospitals
on terms at least as favourable as those in the impugned
contracts.

Some of the following findings by the trial judge are
under appeal and will now fall to be determined by the
Full Federal Court, following the High Court's decision
to remit the matter to the Full Federal Court. However,
in substance, the conduct of concern to the ACCC was an
offer strategy used by Baxter Healthcare in responding
to calls for tender for the supply of sterile fluids and
dialysis products to public hospitals.

Baxter Healthcare, which is part of a multinational pharmaceutical
company, was the only Australian manufacturer of certain
sterile fluids, such as intravenous solutions, which were
needed in high volumes by hospitals but were of relatively
low value. Baxter Healthcare therefore had a monopoly over
these products.

Baxter Healthcare also manufactured other products, notably
solutions used in peritoneal dialysis (PD), for which it
did have competitors. These were needed in lower volumes
but were of much higher value.

State purchasing authorities (SPAs) in Western Australia,
South Australia, New South Wales, the Australian Capital
Territory and Queensland administered contracts for supply
of sterile fluids and PD products to public hospitals.
Baxter Healthcare developed a practice of responding to
calls for tender by offering long-term contracts that required
exclusive, or almost exclusive, supply of PD products together
with substantial discounts on sterile fluids. These bundled
offers were typically made together with an alternative 'item-by-item' offer,
under which SPAs could choose to acquire only sterile fluids
from Baxter Healthcare but on much less attractive terms.

The ACCC alleged that, by negotiating and entering into
long-term supply contracts with SPAs in New South Wales,
the ACT, South Australia, Western Australia and Queensland
between 1998 and 2001, Baxter Healthcare had breached s
46 of the TPA, which prohibits taking advantage of market
power for certain anti-competitive purposes. It also alleged
that, by requiring SPAs not to acquire PD products (or
to acquire them only to a very limited extent) from competitors,
Baxter Healthcare had breached s 47, which prohibits exclusive
dealing.

First instance decision

At first instance, Allsop J found that, but for the application
of Crown immunity, he would have granted relief in respect
of one contravention of s 46 and several contraventions
of s 47 of the TPA.

His Honour's starting point was the principle of
statutory construction that a statute does not bind the
Crown unless expressly stated or by necessary implication
(Province of Bombay v Municipal Corporation of Bombay [1947]
AC 58). The High Court followed that principle in Bradken
and concluded that the TPA did not apply to the Crown in
right of the states. This included entities, instrumentalities,
emanations or agents of the Crown entitled to Crown immunity.2 In Bass
v Permanent Trustee Company Ltd (1999) 198 CLR 334
(Bass), the High Court said that Bradken stood
for the proposition that 'a statute is not to be
construed as divesting the Crown of its property, rights,
interests or prerogatives in the absence of express words
or necessary implication to that effect' (Bass at
[42]).

The High Court further considered Bradken in NT
Power Generation Pty Ltd v Power and Water Authority (2004)
210 ALR 312 (NT Power). In ACCC v Baxter Healthcare
Pty Ltd (2005) ATPR 42-066, Allsop J distilled four
principles from the reasons of the majority in NT
Power. These were (at [680]):

(1) Properly understood the authority of Bradken remains
unimpaired, though, of course, now within the framework
of s 2B of the Act.

(2) The principle applies to proprietary, contractual
and other legal rights and interests such that it can
be said that there is an impairment of the existing legal
situation of the Crown.

(3) The principle does not extend to circumstances in
which the legal situation of the Crown remains unaffected,
but its commercial interests are affected.

(4) If a State or Territory has a contract with a non-government
party, the Act is to be construed as not applying to
that contract such that the State or Territory and non-government
party is not bound by the terms of the Act in relation
to the entry into and performance of that contract.

Allsop J considered that the relief sought by the ACCC
against Baxter Healthcare would deny the states 'the
contractual and legal embodiment of [their] self-perceived
economic or political interests', and in this way
interfere with their legal rights (at [685]), which included
their lawful capacity to call for, negotiate and enter
into contracts with Baxter Healthcare (at [691]).

Full Federal Court decision

The ACCC appealed the findings as to derivative Crown
immunity as well as aspects of the findings on ss 46 and
47. Baxter Healthcare also contested several findings through
a Notice of Contention (although it did not formally cross-appeal).

Although these matters were fully argued in a four-day
hearing, the Full Federal Court (Mansfield, Dowsett and
Gyles JJ) confined themselves to deciding the case on grounds
of Crown immunity. The court noted (ACCC v Baxter Healthcare
Pty Ltd (2006) 153 FCR 574 at [100]):

… it is difficult to see why the circumstance
that the executive government is not bound by a statute
should lead to the conclusion that conduct in breach
of the statute by others is not prohibited, so permitting
unrestrained restrictive practices in connection with
the acquisition of goods and services on behalf of the
executive government or its instrumentalities by all
concerned. The interests affected are essentially commercial
in nature.

Nevertheless, although the Full Federal Court doubted
the basis upon which Bradken had been decided, as
an intermediate appellate court it felt bound by the decision
(at [104]-[105]). The Full Federal Court therefore affirmed
the first instance decision.

The High Court's decision

The majority of the High Court allowed the appeal (Callinan
J dissenting). As Kirby J reached his conclusions for different
reasons from the remainder of the majority, this note focuses
on the joint judgment by Gleeson CJ and Gummow, Hayne,
Heydon and Crennan JJ.

The High Court noted that, since the Bradken decision,
the TPA had been relevantly amended in 1995 (by the insertion
of s 2B) to provide that state entities are bound by the
Act to the extent that they are carrying on business and
that the canons of statutory construction relied on in
1979 had been overtaken by subsequent High Court decisions – in
particular, the 1990 decision in Bropho v State of Western
Australia (1990) 171 CLR 1 (Bropho).

Bropho substantially modified the previous inflexible
rule of statutory construction that an Act was to be taken
as not intended to bind the Crown unless the Act either
expressly states that or the Act must on its terms, by
necessary implication, have been intended to bind the Crown.
The court now requires a more flexible approach, taking
into account the nature of the provisions, the legislative
scheme generally, and the activities that would be affected
if the Crown were bound (Baxter at [38]-[42]). It
now may be that some provisions of an Act will bind the
Crown or affect its interests while others do not.

Applying this to the TPA, the court said (at [62]):

… since the Act does not bind the Crown in right
of a State or Territory when it is not carrying on a
business, then, save to the extent to which a contrary
intention appears, the Act will not be read so as to
divest the Crown of proprietary, contractual or other legal rights
or interests. [Emphasis in original.]

Importantly, the court emphasised that, in applying this
rule of construction, there must be a focus on legal rather
than governmental, commercial or political interests of
the Crown. The joint judgment suggests that a legal right
is not to be confused with a mere freedom to do or not
do something. Specifically, freedom to contract is not
necessarily the same as a right to contract, especially
considering that any such freedom is already constrained
by the application of many laws, some of which bind the
Crown (at [60]).

Their Honours expressly held that protecting the legal
rights of the Crown does not make it necessary to extend
a general immunity to any non-government party negotiating
or contracting with the Crown (at [70]), noting that such
an immunity in favour of a non-government entity that was
carrying on business would in fact exceed the immunity
of the Crown itself when carrying on business (at [68]
and [74]).

It was further noted that reading the TPA so as not to
divest the Crown of its legal rights was a very different
thing to reading the TPA to grant to the executive Crown,
and all of its servants and agents, freedom from laws enacted
for the promotion of competition and fair trading in the
public interest (at [68]). This is particularly so in light
of s 51(1), which their Honours noted provided state legislatures
(as opposed to their executive) a means to exempt conduct
that would otherwise contravene the TPA (at [64], [68]
and [73]).

Implications of the Baxter decision

The TPA applies for all aspects of the tender process
and contract

The decision in Baxter means that the TPA applies
to companies doing business with government entities.

  • This applies even if those government entities are
    not themselves bound by the TPA.
  • All conduct by companies, including pre-contractual
    conduct and conduct (such as negotiations in the course
    of government tender processes) that does not ultimately
    result in entry into a contract (Baxter at [71]
    and [72]), is covered.
  • In the context of tendering processes, the TPA applies
    regardless of whether or not the contravening conduct
    was contemplated by the government entity calling for
    tenders (at [73]).

Contracts in breach of the TPA may be unenforceable or
void

In Baxter, the court rejected arguments by the
respondents that granting relief (including injunctions
restraining Baxter Healthcare from giving effect to the
offending provisions of the contracts) would deny the Crown
in right of a state the right, power and capacity to enter
into any contract it wished. In doing so, the court rejected
the notion that the TPA gave the Crown any freedom to permit
corporations dealing with it to 'propose and make
any kind of contract, unfettered by any constraint under
the Act' (at [68]) on the basis that any purported
freedom of this kind was irreconcilable with the subject
matter and purpose of the TPA.

The joint judgment emphasised that, except for where the
legislative intent otherwise requires, the TPA will not
be read in a manner that will divest the Crown, when not
carrying on a business, of its legal rights. This suggests
that the Crown may be divested of contractual and other
legal rights where the TPA evinces an intention that this
should occur. While the issue did not squarely arise (as
the ACCC did not seek orders that would divest the states
of any of their legal rights), it may now be that a contract
between a government entity not carrying on business and
a non-government entity can be set aside if, for example,
its central provisions contravened the TPA and giving effect
to it would defeat the very purpose of the Act.

If a non-government party has breached the TPA in the
course of doing business with government, this will not
necessarily render any resulting contract entirely unenforceable
or void. This is reinforced by s 4L of the TPA, which requires
the severance of any offending provisions where this is
possible (at [17] and [70]).

What can be done

Be alert for warning signs of anti-competitive behaviour,
including price fixing, exclusive dealing, market sharing,
bid rigging and misuse of market power. If you have any
basis for being suspicious, consider seeking legal advice
or referring the matter to the ACCC. Your legal adviser
or the ACCC will be assisted if you retain and make available
documents including:

  • those recording any communications between your agency
    and tenderers
  • copies of pre-tender documents, including calls for
    expressions of interest and requests for tender
  • copies of all tenders received
  • logs of when and who delivered the tender
  • your records relating to any of the suspicious behaviour
    described below.

There are certain industries or circumstances where anti-competitive
behaviour can more easily occur. They may have characteristics
such as:

  • 'homogenous' products – that is,
    competing products which have broadly the same features,
    benefits, functions and purposes and are not readily
    differentiated and are not subject to significant technological
    change (for example, concrete blocks, cement or diesel
    fuel)
  • the industry is dominated by a small number of large
    companies with few new companies ever entering the market
  • the product or service is uncomplicated and does not
    permit suppliers to meaningfully differentiate their
    offer other than on price
  • the product has few or no close substitutes (for example,
    glass windows and aviation fuel)
  • the industry has an active trade association which
    facilitates meetings of competitors and may assist in
    coordinating activities among firms.

Indicia of possible collusion include the following:

  • tendered prices exceed published price lists or pre-tender
    estimates given by the same firms
  • the successful bidder subcontracts work to its competitors
    that submitted higher bids for the same contract
  • tender documents from competing companies are similar
    in form or contain the same irregularities, such as spelling
    or calculation errors
  • competitors submit tenders containing identical prices
    or other terms and conditions
  • a tenderer expresses to you some knowledge of the
    detail of a competitor's tender before the tender
    has been awarded
  • you are aware that only one bidder contacted wholesalers
    to obtain the prices logically required to prepare bids
  • tenders received from local companies contain the
    same transport price as competing companies that must
    transport the product further
  • bidders explain their prices by referring to industry
    suggested pricing or 'standard market prices'
  • discounts commensurate with efficiencies from supplying
    in volume are not offered or are offered only by one
    supplier.

Signs of possible misuse of market power include the following:

  • one tenderer has substantially lowered its prices
    below what you believe its costs are likely to be
  • the tenderer insists on 'bundling' its
    offer – that is, requiring the agency, in order
    to get a good price on a product for which there is no
    competition, to source other products from the tenderer
    as well
  • the tenderer requires that it be the exclusive supplier
    rather than simply requiring minimum quantities that
    fairly reflect available cost savings or necessary investment.

Tips for clients

  • Look for warning signs of anti-competitive behaviour
    in government procurement, including price fixing,
    exclusive dealing, market sharing, bid rigging
    and misuse of market power.
    • AGS Commercial Notes 14 3 provides
      more background about circumstances where anti-competitive
      behaviour may arise in government procurement.
    • The ACCC's website (www.accc.gov.au)
      also contains useful information about cartels
      in government procurement.
    • Consider training procurement staff in competition
      policy issues in government procurement. AGS
      is able to assist with training.
  • Ensure that your request for tender, statement
    of requirement and proposed contracts do not contain
    provisions that would require tenderers to breach
    the TPA to comply with your requirements.
  • If a tenderer makes an alternative offer, consider
    any anti-competitive elements that might attach
    to that offer.
  • Include in your tender a requirement that tenderers
    not engage in anti-competitive behaviour in relation
    to the tender process.
  • For larger or higher-risk procurements, it may
    be appropriate to require tenderers to demonstrate
    compliance with relevant regulatory regimes, including
    the TPA in appropriate cases.

AGS acted as solicitor for the ACCC in the Baxter matter.

Text of the decision is available at:
http://www.austlii.edu.au/au/cases/cth/HCA/2007/38.html

Glenn Owbridge practises exclusively in the
trade practices area and has been the leader of our trade
practices team in Brisbane since 1998. He is a member
of the Law Council of Australia's Trade Practices
Committee in its Business Law section and is the leader
of our national trade practices network.

Dr Lici Inge has advised extensively on administrative
decision making, procedural fairness and statutory interpretation
for a range of agencies. Most recently, she has worked
on large-scale trade practices matters in the Federal
Court and High Court. She assisted in preparation of
the Baxter matter for hearing at first instance in the
Federal Court, and subse-quently worked on the Full Federal
Court and High Court appeals.

Notes

  • In 1995, the TPA was amended by the insertion of s
    2B, which provides that the TPA applies to states and
    territories only so far as they are carrying on business.
    In Baxter, it had been conceded that the states
    dealing with Baxter Healthcare were not carrying on business.
  • The same position applies to the Crown in right of
    the Northern Territory (Burgundy Royale Investments
    Pty Ltd v Westpac (1987) 18 FCR 212).
  • http://www.ags.gov.au/clients/agspubs/legalpubs/commercialnotes/ComNote14.htm


AGS contacts

AGS has a large national team of lawyers specialising
in government procurement, including trade practices law.
For further information on this issue, or on other procurement
or competition issues, please contact John Scala (procurement)
or Glenn Owbridge (competition) or any of the lawyers listed
below.

Procurement

John Scala

John Scala

Chief Counsel, Commercial

T 03 9242 1321

F 03 9242 1481

john.scala@ags.gov.au

Harry Dunstall
Linda Richardson
Henry Addison
John Berg
Peter Blennerhassett
Lei-Sai Choo
Garth Cooke
Kenneth Eagle
Peter Kidd
Simon Konecny
Paul Lang
Lynette Lenaz
James Docherty

02 6253 7066
02 6253 7207
02 6253 7264
02 9581 7624
07 3360 5767
08 9268 1137
03 9242 1490
03 9242 1290
02 6253 7210
02 9581 7585
03 9242 1322
03 9242 1358
08 8943 1405

Competition

Glenn Owbridge

Glenn Owbridge

Senior Executive Lawyer

T 07 3360 5654

F 07 3360 5795

glenn.owbridge@ags.gov.au

Sarah Court
Matthew Blunn
Katrina Close
Sonja Marsic
Susan Pryde
Graham Thorley
James Docherty
Emma Gill
Fiona Humphries
Lici Inge

08 8205 4231
02 6253 7424
07 3360 5784
02 9581 7594
03 9242 1426
03 9242 1244
08 8943 1405
02 6253 7116
08 9268 1159
02 9581 7304

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

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