Spending quickly in a crisis - Does the Commonwealth owe a duty of care when exercising executive power?

What you need to know

• The Supreme Court of Victoria has dismissed a class action for the early termination of the 2009 Home Insulation Program, part of the economic stimulus package in response to the Global Financial Crisis.
• The Court applied the "salient features" test to decide whether a duty of care is owed by the Commonwealth when exercising executive power to respond to a financial crisis.
• The Court held that the Commonwealth did not owe a duty of care in the design, implementation or administration of the Program, as such a duty would impose liability for a policy making function and have a chilling effect on future policy design.

What you need to do

• Commonwealth departments and agencies can act with confidence when designing and implementing short term spending measures in response to a financial crisis, as the courts will be slow to impose liability to third parties.
• Corporates interpreting short-term government spending announcements should note that commitments can be withdrawn if there is a change of policy. In addition, the government may not be legally responsible for the way it designs, implements and administers a spending program.

Ordinarily, Commonwealth Government expenditure is authorised by legislation and regulated by statutory powers, duties or discretions. However in a financial crisis by the time the usual statutory and bureaucratic structures are in place the economic benefit of a financial stimulus may be too late. If the Government does not wait for legislation, will the Commonwealth be legally liable for mistakes made when implementing a spending program undertaken under the Government's executive power? A recent decision of the Supreme Court of Victoria indicates that while the issue is complex and fact sensitive, the Commonwealth is unlikely to be held liable for a policy decision to implement an urgent fiscal measure in the exercise of executive power.

What was the class action about?

On 31 May 2019 the Supreme Court of Victoria dismissed a class action brought on behalf of persons who had suffered loss as a result of the early termination of the Commonwealth Government's Home Insulation Program between February 2009 and February 2010: Roo Roofing Pty Ltd & Anor v The Commonwealth of Australia [2019] VSC 331.

The plaintiffs were the manufacturers, suppliers and installers of insulation, and the ultimate owners of those businesses. They claimed that the Commonwealth breached its duty of care to avoid economic harm in the design, implementation and administration of the Program. They also relied on statements about the Program, which they said were negligent or misleading or deceptive. Finally, they argued that the Commonwealth had repudiated a contract with them.

This Update focuses on whether the Commonwealth owed a duty of care, and the significance of the reasoning.

When does the Commonwealth owe a duty of care?

There are four key issues in determining whether a duty of care exists in novel circumstances: (a) the "salient features test", (b) the limited application of negligence to cases involving "pure economic loss", (c) the different treatment of acts and omissions, and (d) the "policy-operational distinction".

(a) salient features test

In established categories of relationships, such as employer – employee, the law is clear that a duty of care exists. In novel cases, Australian courts consider factors known as the "salient features" to determine whether a duty should be imposed. These include whether the defendant had control of the risk, whether the plaintiff was vulnerable in the sense of being unable to protect himself or herself, and whether the defendant knew of the risk of harm.

(b) pure economic loss claims

An exception to the rule that pure economic loss is not recoverable is in cases of negligent misstatement, where the defendant assumes responsibility and knows the plaintiff is relying on a statement.

(c) different treatment of acts and omissions

Many of the negligence claims against government have distinguished between positive acts on the one hand, and omissions on the other hand. While a public authority is unlikely to be held liable for exercising a discretion negligently or negligently failing to exercise a power, it may owe a duty of care where it positively intervenes.

Similar reasoning was applied by the Supreme Court of the United Kingdom in its decision on 6 June 2019 in Poole Borough Council v GN (through his litigation friend "The Official Solicitor") and another [2019] UKSC 25. In that case the Court struck out a claim by children who had been housed by the local council on an estate next to a family who persistently engaged in anti-social behaviour. The Court held that public authorities do not owe a duty of care merely because they have statutory powers or duties. However, they can come under a duty where they create the source of danger or assume a responsibility to protect someone from harm.

(d) policy-operational distinction

Finally, while government authorities are not generally immune from liability in negligence, it remains the case that there is governmental immunity in negligence for "core policy making functions" as distinct from operational decisions.

Was there a duty of care covering the Home Insulation Program?

The decision in Roo Roofing addresses the range of issues raised by the application of negligence to the Commonwealth, ultimately deciding that the design, implementation and administration of the Program were dictated by financial, economic, social or political factors, and were not merely operational.

This was the first case to consider whether the Commonwealth owes a duty of care in the exercise of its executive power. Accordingly, in these novel circumstances, the Court applied the "salient features" test to decide whether a duty of care is owed in novel situations.

The Court declined to apply a line of cases imposing a duty of care on public authorities for positive acts (as opposed to omissions) in the exercise of a statutory power or discretion to the exercise of executive power in the particular circumstances of the case. The Court did not say that the Commonwealth could never owe a duty of care when exercising that executive power, but rather rejected a duty of care where it would impose liability with respect to the Commonwealth's core policy making function.

The Court also refused to impose a duty for policy reasons, as it would have a chilling effect on future policy design because public servants would be constrained from acting in the public interest generally by duties to particular groups of businesses.

Policy to stimulate the economy – Home Insulation Program (the Program)

One plank of the Government's economic stimulus policy in response to the 2008 Global Financial Crisis was the announcement in February 2009 that for a period of two and a half years from 1 July 2009 owner-occupiers without ceiling insulation would be eligible for free product and installation, capped at $1,600. Prior to the Program, about 50,000 homes per year were retrofitted with insulation in Australia. By contrast, between February 2009 and February 2010, insulation was installed in 1.2 million homes. However on 19 February 2010 a decision was made to terminate the Home Insulation Program. At that time 1.1 million claims had been made under the Program at a cost of $1.5 billion.

What went wrong with the Program?

In the 2015 Report of the Royal Commission, Commissioner Hanger found that the tension between the stimulus objective of the policy, its need for expedition, and the energy efficiency objectives, caused decisions to be made that exposed workers to unacceptably high risk of injury or death.
In the present case, the Court found that the Department of Environment ought to have banned Reflective Foil Laminate from the Program (although this did not lead to liability as the Commonwealth did not owe a duty of care).

What is the Commonwealth's "executive power" in a financial crisis?

Under the Australian Constitution, the Commonwealth's revenue is consolidated and appropriated by Parliament for particular purposes by legislation. The actual expenditure of money is also normally governed by legislation. However, the Government can rely on its executive power to spend in certain circumstances.

In Pape v Commissioner of Taxation [2009] HCA 23, the High Court upheld by a 4:3 majority the validity of legislation authorising spending on a "tax bonus" on the basis that the Commonwealth's executive power extends to short-term fiscal measures to address economic conditions affecting the nation as a whole.

The Program was undertaken by the Government without recourse to statutory power, in accordance with the same executive power used in Pape.

Authors:  John Pavlakis, Partner; Ian Bolster, Partner; Andrew Westcott, Senior Expertise Lawyer.