Posted on February 21, 2022 by James King and Megan Hawley 14

Reasonable Endeavours for Public Authorities

The decision of the Supreme Court in 123 259 932 Pty Ltd v Cessnock City Council (No 2) [2021] NSWSC 1329  is a reminder that public authorities should exercise caution when entering into contracts that require the authority to take reasonable action or exercise reasonable endeavours in its capacity as an owner of land.

Factual background

Cessnock City Council (Council) was proposing to develop Cessnock Airport (which it owned) by subdividing the land to facilitate some non-aviation uses. Council entered into an agreement for lease with 123 259 932 Pty Ltd (Company) in respect of a proposed lot, which provided that if a plan of subdivision of the land was registered by the sunset date the Council would grant a 30 year lease of the lot to the Company (the Deed).

Clause 4.2 of the Deed provided that the Council was required to take all reasonable action to apply for and obtain registration of the subdivision plan.

Council did not register the plan of subdivision by the sunset date. Council determined it could not afford to allocate funds to the works required to connect the subdivision to the sewage system (which was estimated to cost over $1 million), which were required by the development consent to be carried out before the subdivision plan could be registered.

There was evidence before the Court to the effect that Council had significant budgetary issues in the relevant period and was prioritising a program of works for resealing and rehabilitating priority roads. The evidence was that Council employees had tried to make the best case they could internally at Council for the subdivision to proceed. However, the Council gave the project low priority in comparison to other demands on its finances, including road and bridge maintenance. The Court also noted the constraints on councils borrowing money.

The contractual requirement to take reasonable action and the fettering doctrine

The Court accepted that the Council’s status as a public authority was a significant factor in interpreting the contract between the parties. Specifically, it would have been obvious to the Company that the Council could not act as a private developer would due to applicable laws and its structure. Structural matters included that Council is run by elected members who make resolutions by democratic vote and that its means of raising money are constrained.

Clause 2.2 of the Deed provided that “… nothing in this Agreement for Lease can, in any way, restrict or otherwise affect the Lessor’s unfettered discretion as to the use of the Lessor’s statutory powers as a public authority”.

The Council submitted that cl2.2 meant that the phrase ‘all reasonable action’ cl4.2 should be interpreted to mean that the action the Council was required to take was subject to any decisions made by the Council in exercise of its statutory powers, including regarding finance and expenditure and  matters of policy.

Outcome in this case

The Court found that to read cl4.2 in the manner contended by Council would deprive it of any real operative effect. The Court referred to the competing public interests of the fettering doctrine and the upholding of contractual bargains which arise in the context of contracts with public authorities.

However the Court noted that the contract was entered into in Council’s capacity as landowner. It was, nevertheless  possible that the requirement for Council not to unlawfully fetter its discretion could affect the obligation under cl4.2, for example, if Council determined to acquire the land for a public purpose. The disctinction was, however, that when doing so Council would not be acting in its capacity as landowner, whereas when deciding whether or not to spend funds to carry out the subdivision work, it was acting as a landowner.

Because the Court did not find that cl4.2 was to be read in the way Council intended, whether Council had breached the clause was to be determined by reference to its plain words. The Court found that the only reason advanced on behalf of the Council for not complying with condition 23 was that it lacked the funds and could not reasonably obtain them. In those circumstances, the Court was satisfied that the Council was in breach of its obligations under cl4.2 of the Deed, and cl2.2 did not affect the position.

The ambit of the fettering doctrine has been described in previous court decisions as ‘uncertain and ill-defined‘. This case confirms that a public authority in the position of a land owner cannot assume that the fettering doctrine, or a ‘no fetter’ provision in a contract will permit it to avoid its obligations as landowner under a contract for budgetary reasons.

You can read the case here.

If you wish to discuss the above, please contact Megan Hawley on 8235 9703 or James King on 8235 9722.