Summary
In ACCC v Baxter Healthcare Pty Ltd, the High Court held that Trade Practices Act 1974 (TPA) applies to corporations when they enter into negotiations or contracts, or perform a contract, with a government authority even if the government authority is not carrying on a business. The full range of TPA remedies, including pecuniary penalties, was found to be available to the ACCC.
Prior to this decision, the common law shielded corporations from the TPA when dealing with a government authority that was not carrying on a business.
Implications for business
There are many industries in which government authorities dominate the demand for goods or services. In submitting tenders, conducting negotiations and entering/ performing contracts, business suppliers should be aware that they are no longer immune from the TPA even if the government authority is immune.
Tenders to and contracts with government authorities should be reviewed for potential TPA issues, especially where there are long term exclusive supply offers or arrangements. Where there is a contravention, the full range of TPA remedies, including pecuniary penalties may be imposed on businesses.
Businesses may apply to the ACCC for authorisation or notification where there may be a contravention of the TPA. The ACCC will assess whether the agreement may have public benefits that outweigh any public detriment.
Background
Baxter manufactures and supplies different types of sterile fluids used in hospitals. Sterile fluids include large volume parenteral (LVP) used for re-hydration, irrigating solutions (IS) for cleaning of surgical wounds and parenteral nutrition fluids (PN) for providing nutrition to patients. Baxter also supplies peritoneal dialysis (PD) products used to treat chronic renal failure.
The State Purchasing Authorities (SPAs) acquired sterile fluids following a competitive tender process. However, the SPAs were not carrying on a business in acquiring the fluids from Baxter.
Baxter had a monopoly in the Australian market for LVP, IS and PN fluids, but it faced competition in the supply of PD fluids in Australia. When tendering for the State/Territory contracts, Baxter offered to supply LVP, IS and PN fluids at particular prices or offered to supply the PD fluids bundled together with LVP, IS or PN fluids for substantially lower prices on the basis of a long term exclusive supply agreement. Baxter's bundled offer was significantly cheaper than supplying LVP, IS or PN fluids alone and was intended to prevent competition in the PD fluids market.
Section 2B of the TPA relevantly provides that Pt IV of the TPA binds the Crown in right of each of the States and Territories in so far as the Crown carries on a business, either directly or by an authority.
In the Federal Court, Allsop J, found that Baxter's conduct in pre-contractual tendering and negotiations would have contravened ss.46 (misuse of market power) and 47 (exclusive dealing) but for the derivative crown immunity applying to Baxter. The Full Federal Court confirmed that derivative Crown immunity extends to Baxter.
In this context, the highlights of the High Court’s judgment include:
* there is no longer a presumption of derivative Crown immunity applying to corporations, even when dealing with a government authority that has Crown immunity;
* pre-contract negotiations and tenders are subject to the TPA; and
* ambiguity remains as to whether the Commonwealth, States and Territories are manifestations of the Crown for the purposes of applying English doctrines of Crown immunity.
Key Issues
Bradken’s Case
The High Court’s decision in Bradken Consolidated Ltd v Broken Hill Co Ltd (1979) was authority for the proposition that no statute binds the Crown unless the Crown is expressly named or unless there is a necessary implication that it was intended to be bound. Following the introduction of s.2B, the Bradken principle enforced the position that the TPA does not apply to the Crown or other contractual parties when the Crown is not carrying on a business.
In ACCC v Baxter Healthcare, the High Court found the inflexible rule in Bradken no longer represents the law. Statutory construction of s.2B and consideration of the language of the Act, its objects and subject matter led the majority of the High Court (including Kirby J) to conclude that a corporation does not enjoy a general immunity when it deals with a State/Territory. To apply a general immunity to Baxter, the majority said, would go beyond what is necessary to protect the legal rights of government and would be irreconcilable with the object of the TPA.
Justice Callinan, in the sole dissenting judgment, found that s.2B is directly and expressly immunising the conduct of the States/Territories when they are not carrying on a business. Justice Callinan held that as a matter of reality and practicality, to subject all offers, invitations to tender, discussions and negotiations up to the point of concluding a contract would impair the immunity that s.2B says the States should have.
Incidental legal effect upon the Crown
It was also argued that parties contracting with government should be given the benefit of derivative Crown immunity because failing to do so would mean some proprietary rights or interests of government would be prejudiced. In other words, by denying a business a right to derivative Crown immunity, a government's unfettered freedom to contract with that business is incidentally affected.
The High Court dismissed this argument. It held that there are many laws which constrain the freedom of governments to enter into contracts.
Since it is in the power of the Commonwealth to make laws with respect to trading corporations, laws that promote competition and fair trading do constrain the freedom of corporations and the government when entering into contracts in the course of carrying on a business.
Pre-contract tenders and negotiations
The trial Judge considered whether derivative crown immunity only prevents the application of the TPA to enter into or give effect to the impugned contracts once formed, as crystallized legal rights, or whether it extends to commercial negotiations leading up to the formation of the impugned contracts. At trial, the ACCC argued that conduct prior to a contract could only affect commercial interests of the Crown not its legal rights or legal situation.
The majority of the High Court said as a matter of statutory construction, the TPA does apply to conduct by non-government parties in response to an invitation to tender. The High Court agreed with the Full Federal Court that "It would be remarkable to have a substantial area of commerce in which restrictive practices can be carried on by all those dealing with a government, perhaps to the disadvantage of the public purchasing authority, but also to the detriment of other suppliers and consumers."
Commonwealth, States and Territories as manifestations of the Crown
Justice Kirby in a minority judgment criticised picking up the whole English common law on crown immunities and applying it to the Australian Constitutional text. His Honour did not agree that the Australian Commonwealth, States and Territories are manifestations of the Crown for the purpose of attracting all of the immunities, privileges and prerogatives of the Crown. Such an approach, said His Honour, would be incompatible with the structure and character of the Australian Constitution.
The High Court may in the future revisit the application of Crown immunity to the Australian Commonwealth, States & Territories. However, it is unlikely that any change to applications of Crown immunity would alter the decision in ACCC v Baxter Healthcare.
Contributors to this Update
Aldo Nicotra – Partner
Direct Line: (02) 8274 9536
aldo.nicotra@jws.com.au
Anusha Kangatharan – Associate
Direct Line: (02) 8274 9511
anusha.kangatharan@jws.com.au
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Trade Practices Update - Sept 2007.pdf