Posted on January 22, 2025 by Fayette Vermeer and Megan Hawley

Use of public funds to support defamation litigation

By nature of their operations, local councils receive and control public funds for various purposes.

Under the Local Government Act 1993 (LG Act), councils are required to follow principles of sound financial management, and ensure that their spending of public funds is responsible, sustainable, and to the benefit of the local community. When funds are directed towards private purposes, or purposes not related to the exercise of a council’s functions, that spending may be inappropriate or illegal.

A recent decision in the Supreme Court of Tasmania considered this issue, and serves as a timely reminder for local councils to consider how they are resolving to spend public funds, and whether it is in accordance with the LG Act, good governance practices, and for the benefit of the community that they serve.

Background

In McCullagh v Northern Midlands Council, Knowles and Jennings [2024] TASSC 66 (McCullagh), the Supreme Court of Tasmania (Court) considered whether a Northern Midlands Council’s (Council) resolution to fund defamation proceedings brought by its Mayor and General Manager against another individual, who later became a councillor, was valid and legal in the circumstances.

In a closed session of the Council, it was resolved that Council would fund any defamation proceedings commenced by the Mayor and General Manager (Respondents) against the Applicant, on the basis that the Respondents would repay any legal costs incurred by Council in full from any damages or costs recovered in the litigation. The Respondents commenced the defamation proceedings shortly thereafter.

The Applicant sought orders from the Court to quash the Council’s decision to use its funds for the personal benefit of the Respondents in the defamation proceedings.

The Respondents argued that the Council was asked to fund the proceedings on the basis that the defamation action by the Applicant against them had nothing to do with their personal dealings. Instead, it was argued that Council had an obligation to ‘protect’ the Respondents in their respective roles as Mayor and General Manager, as the Applicant’s ‘attacks’ were solely related to their positions with Council, and the work that they carried out with Council.

Relevant Findings

The Court held that there was no authority in the relevant Local Government Act, or elsewhere, for local  councils in Tasmania to use public funds to support the private litigation of councillors or council staff.

The Court held that the defamation action was a matter personal to the person suing, and that the laws governing the functions and powers of councils do not authorise local government councils to fund private litigation by councillors or council employees, even if that litigation has its genesis in the role of the person as a councillor or council employee.

As councils are required to act in the public interest and for the public purpose of the benefit of ratepayers, the Court noted that councils cannot fund private litigation, unless it is specifically contemplated in the relevant Local Government Act. The Court considered that, while there are grants and benefits payable by the Council, such as in-kind assistance or reduced rates, fees, and charges, it does not extend to funding private litigation that is not in the public interest.

Relevantly, the Court held that the resolution of the Council to fund the Respondents’ defamation proceedings was invalid, void, and of no effect. The resolution was found to have been made unlawfully and without legal authority.

On that basis, the Respondents were ordered to repay Council the sum of their legal costs and disbursements in the defamation proceedings. Notably, the Court stated that, as a Mayor and employee of high standing in a local government authority, the Mayor and General Manager should have understood that use of council funds for private purposes was illegal and arguably corrupt conduct.

Implications

Although a Tasmanian case, the case has interesting implications and key takeaways for NSW councils to consider.

In NSW, the Office of Local Government (OLG) has published guidelines, which must be taken into account by councils in accordance with s23A of the LG Act. Relevantly, the OLG Guidelines for the payment of expenses and the provision of facilities for Mayors and Councillors in NSW (October 2009) provides that a council must ‘not meet the legal costs of legal proceedings initiated by a councillor under any circumstance’.

While there is nothing in the LG Act saying that a council’s expenses policy must adopt the guidelines, the OLG guidelines are very explicit, so councils must give careful consideration as to whether it will resolve to pay a councillor’s legal expenses in respect of defamation proceedings initiated by the councillor.

Councils may grant financial assistance pursuant to s356 of the LG Act, including to persons acting for private gain if public notice is given of the proposal. However, financial assistance can only be provided by a council for the purpose of exercising its functions.

The McCullagh decision would suggest that funding defamation action of staff members or councillors would not be for the purpose of a council exercising its functions, given the findings that defamation proceedings are for a private purpose and not a legitimate function of Council.

As such, while McCullagh may not necessarily be relied upon in NSW as precedent, it provides timely and useful insight into whether defamation or private proceedings are in the public interest, and whether a council may resolve to spend public funds to finance such private proceedings.

The judgment can be found here.

If you would like to discuss any of the above, please get in touch with Megan Hawley or Fayette Vermeer.