Executive Summary
  • As a matter of fundamental constitutional principle, no parties, not even the State acting by its Executive Government arm, can purport to bind the Parliament in respect of its legislative action.
  • It follows that the Executive Government cannot by contract promise to compensate a taxpayer in respect of a liability to tax imposed by statutes.
Facts of the Case
  • Port of Portland (“the purchaser”) entered into an asset sale agreement with the Port of Portland Authority (“the Authority”) on 15 February 1996 to acquire the assets and business of the Authority for a sum of $30 million;
  • Among the assets acquired were a number of parcels of land which included buildings, breakwaters, berths, wharfs, aprons, canals and associated works (herein called “port improvements”);
  • The State of Victoria (“the State”) was a party to the asset sale agreement and was liable to carry out the Authority’s obligations;
  • A section of the asset sale agreement entitled ‘Adjustments’ provided the means by which the price was to be adjusted to reflect the respective responsibilities of the vendor and purchaser for periodic and other outgoings.  Broadly, clause 11.4 provides:
  1. The State will amend the existing land tax legislation to exclude port improvements from being subject to land tax; and
  2. In the event that such legislation is not amended, and as a result, the purchaser would be assessed on a higher land tax amount, the State will refund the difference between the two amounts.
Issue

The key issues surrounding this case were:
  1. Whether the Executive Government could contractually promise a taxpayer to amend parliamentary legislation; and
  2. In the event that such legislation is not amended whether the taxpayer can be compensated.
Decision

  1. In a two-one decision, the Supreme Court of Victoria found that the power to release a taxpayer from its taxation obligations without parliamentary approval is legally unenforceable.  The taxes had been imposed by Parliament, and so the affected taxpayer, could only be released from its obligation by a similar act of parliament - not just contractually.  Accordingly, the court found that any agreement to refund to the taxpayer any taxes which have been properly collected under law would be invalid as it is considered an unlawful dispensation from the obligations imposed by the statute. 

    It follows that this case highlights that the Executive Government does not have the power to contractually obligate the State to conditions that would otherwise require the legislative approval of Parliament.  The issue of whether the State had appropriately amended the legislation as per the contract therefore becomes irrelevant due to the unenforceability of the term being relied upon.

  2. The purchaser had no entitlement to damages for failure to amend the statute.

    Noteworthy, the dissenting judge commented that public confidence in government dealings and contracts would be greatly disturbed if such a covenant were held not to be binding to the extent that the State is lawfully and effectively able to perform the amendment
Implications

This case reinforces the sovereignty of parliament and ensures that government’s rights and responsibilities are clearly defined.  It makes it clear that any attempt to circumvent the parliamentary process through contractual agreements will be unenforceable, both against the government who entered the contract and any subsequent government upon which a party may try and enforce the agreement.  To allow such an action would be enabling the Executive Government to fetter the legislative power of Parliament.  The other key implication is that agreements made by the Executive Government to indemnify a party against a statutory liability will also be unenforceable.
Port of Portland is currently reviewing the decision and may appeal to the High Court.

Author: Colleen Dillon, Moore Stephens Melbourne