When you have been doing Government related legal work as long as I have, the cyclicality of issues in Government and the reality of the French maxim “Plus Ca Change, Plus Ca Meme Chose” come home to roost.

The NSW Procurement Direction 2019 and a decision in April 2018 in Desane Properties Pty Limited v State of New South Wales [2018] NSWSC 553 (the Desane Decision) brought those words back to my mind.

The decision is something of an embarrassment for Government, both public relations wise, commercially and legally.

Introduction

In 2011, I delivered a paper entitled “Funding Agreements Swings and Roundabouts or Something more”.  So similar are the issues I address today that I have used the same slide format, though updated and changed the text, and I apologise for the antiquated look

At that conference another speaker, Rod Best, spoke of many Funding Agreement related relevant legal issues.

A version of his paper that I read referred to Funding Agreements as “the Scarlet Pimpernel Agreements”. I considered that a wonderful description, so I thought, consistently with Scarlett Pimpernels being what they are or are not, I would approach my 2011 paper from a different tangent.

I choose to look upon them, for the purposes of that conference, from a practical perspective in which I pointed out a number of problems and asked a number of questions. Some of those questions, for me, were then and remain unresolved and are now, especially in light of the provisions of the NSW Procurement Direction 2019,  increasingly problematic for any involved in funding type procurement, particularly Government lawyers.

I considered and consider today only those funding agreements which are intended to have contractually enforceable status.

I deal with them by way of illustration of things that I have seen cause problems and/or go wrong, particularly in light of the text of the NSW Procurement Direction 2019.

Given the frequency with which we see “scandals” in respect of grants of various types including some  commonly referred to as “sports rorts”,  one must be forgiven for describing an increasingly large number of Funding Agreements as Scarlet Pimpernels.

Funding Agreement procedure and content may, of course, be the subject of specific statutory mandates and policy directives.

This paper is more general. Accordingly, I only mention a few aspects of the policy and choose to deal with common operational issues.

NSW Procurement has issued many policy guidelines on procurement. There are even practice guidelines on Grants Administration[1] should be considered by NSW agencies.

It is a guide to good practice. It is of general import, though obviously subject to specific legislative requirements in particular circumstances.

The Policy recognises an international “trend for governments to outsource and partner with non government organisations to deliver services previously delivered by government organisations”.

The very use of the word “partner’ causes me concern.

I have long seen so many parallels between the two such that I see, too often, “Funding Agreements” as akin to procurement, if not actual procurement, despite many policy documents, Including the NSW Procurement Direction 2019, seeking to keep the two separate.

Premier’s Memorandum 91-34 still sets out requirements for publication by NSW agencies of details of grants in their annual reports.  That should not be seen as limiting any obligation under Government Information (Public Access) Act 2009.

The reality is that lawyers and “procurement” people are often not closely involved in individual Funding Agreements (and too often only add “sign off”), due to things like the use of generic procedures and templates. However, issues remain which crop up from time to time.

 What is it?

Absent a picture of a Scarlett Pimpernell, other than the little red flowered the plant “angagallis arvensis”  which I did not see as relevant, the best I could come up with for my original 2011 presentation was a picture of a ghost some slides of the presentation. Regrettably, not much has changed.

I could not guess how many Funding Agreements I have seen in the last 30 years.

The range with which I am familiar extends from Commonwealth Government agreements to facilitate various types of action by both the State and private organisations, some for profit, some charitable, State agency funding covers a vast range of activities from education to research, from industry assistance and facilitation to cultural development, scientific research, medical research and everything in between.

In short, I have seen Funding Agreements used for everything from funding aspects of sports facilities to research on bats and Defence issues that I won’t go into.

They range from outright gifts, to conditional gifts, loan agreements, contracts for services, contract of service and all things in between.

Even apart from legislation specific to a proposal, there is a range of legislation which can have impact upon a Funding Agreement, though time prevents detailed consideration of that today. It is not uncommon for Funding Agreements to require the recipient to comply with, not simply the law, but also certain policies of the funder and to deliver something.

Issue the subject of this paper is whether and to what extent Funding Agreement requiring an output is either “procurement” requiring compliance with procurement rules in New South Wales or whether it is exempt in light of provisions of the NSW Procurement Direction 2019.

The question can arise whether; particularly where the recipient is an “individual”, the Funding Agreement is not, in law, more akin to a contract for services or even a contract of service to which various pieces of legislation relevant to an “employee employer” relationship can attach. That includes superannuation guarantee legislation and, following the introduction of the reformed Freedom of information legislation as the Government Information (Public Access) Act, that disclosure legislation an impact on disclosure of  some aspects of pricing.

Much can turn on the exact wording of a Funding Agreement and the circumstances surrounding its genesis.

A Bit of History

 When I became an Assistant Crown Solicitor for New South Wales, the issue of Funding Agreements and the content had become subject to more scrutiny.

This was, in part, reflective that the Independent Commission Against Corruption had commenced operations and there was, as there more or less remains, a policy to the effect that if government funds were to be provided to any individual or organisation then, unless it was an outright gift (which raised a whole string of other issues) it was considered appropriate that the recipient be obliged to account for the use and application of “public”  money by reference to certain performance criteria.

Needless to say the ebb and flow of control between the State and the Commonwealth, over the years (and obviously linked to the control of money) has had a significant impact on the form and content of Funding Agreements over the years. I could not guess how many I have advised upon or drawn over the years.

In the context of State/Commonwealth Funding Agreements I raise for your consideration, the issue arises whether the parties actually intend any such agreement ever to be justiciable. I more often than not see them more as “political” than contractual, so are not really part of today’s webinar.

Do they not depend more on the ongoing relationship between State and Commonwealth in a political and governmental context?

Whilst some I have observed remain in “project specific” form, I have noticed a drift to a form of umbrella agreement, containing general “boilerplate” with individual “projects” documented and effected pursuant to project specific schedules.

That may be all well and good in Funding Agreements between governments themselves but where the issue is between NSW Government and a non-government entity, questions can arise.

Often the purpose of a Funding Agreement is to facilitate some political / policy end, for instance improvement in the quality of life, medicine or education of a target group of the larger society.

If that end is not obtained, for some reason unrelated to the satisfactory performance of the funded agency, how does the Funder actually suffer loss?

If the aim is a “report” or “recommendation” from the fundee, such as may be the case on context of R&D, where is the line between procurement and grant?

I have seen some Funding Agreements which contain formulae aimed at recovering some of the amount in that situation. However, I have to query whether it will be an unenforceable as a “penalty”. In the event of a dispute between the Funder and the Fundee, I doubt a Court would see those formulas as enforceable. I have great difficulty seeing how they can be a genuine[2] pre-estimate of loss to the Funder for the purposes of the law relating to “contractual penalties”.

Are repayment obligations in a “grant” inconsistent with it not (sorry about the double negative) being a procurement in fact and law?

A question on which I am regularly asked to advise is who is to execute a Funding Agreement on behalf of a government agency in the absence of any express legislative provision relevant to a particular situation.

Where a particular Funding Agreement is, in substance, a mechanism to effect a procurement of something on behalf of the government it is relatively easy to determine who should execute the document on behalf of government as one can use the delegations in place for procurement.

If a grant agreement contains provisions vesting IP rights in the funder, is that an indicia of “procurement”, rather than “grant”?

Where the substance of the agreement is not a procurement but a grant under which various contractual stipulations performance, the question arises as to who would execute it. In a New South Wales context most financial delegations are linked to particular situations such as procurement, settlement of litigation and the like. It is something of an unresolved issue in respect of those type of Funding Agreements

 The situation which arose in Victoria in 2020 concerning hotel security and the unresolved question as to who “decided” various things for the quarantine security exercise is more than unfortunate.

Whilst that was not a grant it does squarely raise the issue of how things can fall between the cracks. I can see much the same happening in respect of a “procurement” in sheep’s clothing as a “grant”.

 The Reasons

Corruption, Accountability, Recoverability and Politics.

From my observations I believe that Funding Agreements have, over the last 20 years, become much more complex than they often need to be and that contributes to the  problem.

However, I acknowledge that issues of Corruption, Accountability, Recoverability and Politics are of paramount importance and necessarily bear upon the form and content of any Funding Agreements.

The questions, for me, are:-

  • how far should they go?
  • Is it really a procurement exercise?

 PROCUREMENT (ENFORCEABLE PROCUREMENT PROVISIONS) DIRECTION 2019 – NSW – “Clayton’s” protection for SME’s?

 This NSW provision (which NSW Government webpage entries suggest has had a number of refinements) hangs off the State off NSW  “version” of the legislation the Commonwealth required New South Wales to enter into pursuant to the Trans-Pacific Partnership Agreement as incorporated into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11)) with the USA and others.

It is to do with, amongst other things, giving tenderers some recourse in the event of inappropriate procurement activity by NSW Government agencies. It is very differently based to that the Commonwealth introduced.

Granted it was drawn before COVID 19 changed things, but it seems to me, now, a bit odd to me to have provisions so intent on aiding overseas suppliers. However, that is a policy issue, distinct from the legal concern the subject of my presentation.

In some ways the Direction just seems to repeat the long standing provisions about the need to go to market in an open, transparent and open competition way.

What I find concerning, from the perspective of potential suppliers to NSW government agencies, is that the Direction has a number of “sleeper” provisions which could potentially operate to exclude certain arrangements from procurement rules and or exempt whole types of ‘procurement: from usual rules by transmuting them into a funding agreement. The one of most relevance to my presentation is that to do with Funding Agreements.

“Sleeper Provisions”

Whilst I don’t see that as the intention, I draw attention to the following: –

  1. Schedule 1 lists all the government agencies to which it is applied;
  2. Oddly, the Privacy Commissioner is exempt but not the Privacy Commission [schedule 1];
  3. It is important to note that by virtue of clause 6 (4), the threshold for the Enforceable Procurement Principles (EPPs) becoming “enforceable” is $9,247,000 for “construction services” and $657,000 for goods “or any other services” [“services” not being defined];
  4. Whilst, by virtue of definitions, it is clearly to apply to “construction services” and “goods”, it would appear less certain how well it will apply to “services”;
  5. Clause 4 renders a whole string of things to be “enforceable” but, in a sense, they are nothing different to what has been seen for years and I note that, by virtue of clause 5, they override any other policies;
  6. Making general procurement policies “enforceable” does not apply, by virtue of clause 6 (2) (a), to excluded procurements listed in Schedule 2 and that includes part of procurement that is a preference measure, as set out in schedule 3;
  7. Clause 10 allows government agencies effectively to outsource procurement functions but obliges the private sector operator to comply with the legislation;
  8. Clause 12 allows government agencies to exclude suppliers on certain grounds which include “insolvency” which might technically but inadvertently exclude a lot of people during this COVID-19 recovery period and I note that “supplier” is defined in a way to include directors and managers of the “supplier”;
  9. Clause 15 deals with circumstances in which limited tendering is permitted. The provisions are not all that unusual, though the width of the terms and breadth of exemptions are such that I fear there will be potential for the system to provide none of the suppliers envisaged by the Free trade Agreement.;
  10. I note that much of what Transport does is exempt;
  11. Given the width and loose wording of many of the items set out in Schedule 2, I fear it will be open to “interpretation”. For instance:-
  12. Does not 5, facilitate “grants”, skirt procurement requirements?
  13. Does not 6, by allowing staff to be employed from “labour hire” companies, create problems from an industrial law and recruitment policy perspective?;
  • The words “health and welfare services” and “education services” are potentially so wide for the purposes of paragraph 9 and 10 as to undo any protection the Direction would otherwise afford;
  1. Oddly and in something of an historical throwback, paragraph 18 excludes engagements of an “expert” on context of litigation, such as  “counsel or barristers”, but does not refer to solicitors who are often referred to as “counsel”;
  2. The width of paragraph 20, in allowing more “grant” arrangements to skirt procurement procedures is interesting and possibly concerning; This is an issue which has been of concern to me for many years as involving potential avoidance of the procurement rules;
  3. Schedule 3 lists exempt measures, including preferences and paragraph 3 is interesting suggesting that a preference to benefit “small and medium enterprise”will be exempt will not be in breach of free trade
  4. It’s also interesting that contracts to do with storage and hosting of sensitive government information are exempt. Whilst one can see some reason for that, care will have to be taken to ensure compliance with archive legislation.

Time will tell whether the protections envisage actually manifest.

 What does exemption 20 mean?

 Exemption 20

A procurement that is any form of assistance that a government agency provides, including a cooperative agreement, grant, loan, equity infusion, guarantee, subsidy, fiscal incentive or sponsorship arrangement.

 What to Look out For to Help Decide

The range and changes in intellectual property provisions in respect of the content of Funding Agreements over the years is quite intriguing.

Too often I have seen a series of Funding Agreements issue from a particular government agency where the funded activity, though much the same, had substantially different intellectual property provisions.

Sometimes the Funder is to own the intellectual property in material created, sometimes the Fundee was to own the intellectual property in material created and sometimes it was to be shared.

I and my clients were unable to find a relevant reason for intellectual property ownership to be so differently dealt with in substantively similar situations. One must wonder whether the perceived inconsistency suggests some inadequacy in consistency of use of templates.

Funding Agreements not infrequently contain indemnity provisions, though care needs to be taken to make sure that they are not triggered where there is no real “default”. Is not an indemnity provision itself an indicia of procurement

Similarly, a question arises where the provisions of the particular Funding Agreement allow the Funder to require changes to the output or product of the arrangement and for copyright in that output to be owned by the Funder. If the Funder has required changes and owns the copyright in the changed output, is the Fundee fairly expected to indemnify the Funder for any loss suffered as a consequence of something going wrong with the output or product?

Are not Funding Agreements/Grants with “Moral Rights” consent provisions allowing tampering with the “Report” more appropriate for a procurement situation than a grant?

Whilst, of themselves, I would have thought specific legislation for “moral rights” rather than engrafting them into the Copyright Act some years ago, they led to corresponding provisions being inserted into Funding Agreements and procurement contracts. ”Moral Rights” are, of course, personal to individual and cannot be owned or assigned to a corporate entity or sovereign entity.

As such, all that can really be done is to acknowledge that they exist to make some provision about reasonable endeavours to ensure that, to the extent of “moral rights” are involved in the product or output of the funding arrangement, aptly worded moral rights consents have been obtained from relevant contributors. But in the context of sovereign entities or even large corporate  employers.

I there not a latent industrial issue as to whether one can require an employee to consent in relevant terms.

Something Disguised

My greater concern today is whether use will be made of the NSW Procurement Direction 2019 “grant” exemption to avoid procurement rules inappropriately or in circumstances where it is not right to do so. Where that might be the case, what is the role of the lawyer advising government.

There is , of course, also the issue of what might happen when a process is being run by people not adequately trained in procurement or grants,

Just last week, a report was issues in respect of Icare which suggests staff training in procurement should be improved.

In that context I refer you to the two 2018 cases involving Desane[3] and the NSW Government as to “proper purpose” requirement for the exercise of any government power.

If something is cast as a funding agreement which is truly a procurement, is that not an invalid exercise of power?

I use the five slides relating to the Ansett staff bailout simply to illustrate the issue of whether, in any given situation, the use of a Funding Agreement could cross the line and be a procurement in disguise. It is increasingly common to see funding agreements used to have external entities ‘funded’ to provide something  historically provided by Government.

In 2020 and 2021, not surprisingly, vast amounts of time and effort have input into fighting Covid 19 and developing a vaccine or vaccines in respect of it.

In a real sense, if and to the extent Government contributes to research for that public health purpose, I don’t see a real problem with it being a grant and so being exempt from procurement rules.

However, if the substance of the transaction had been more something in the nature of an investment or an outright purchase of the vaccine as a product, one could argue that it would have been more procurement than a grant.

Needless to say I only give that by way of example, recognising that the wide exemptions available to Health under the NSW Procurement Direction 2019 might themselves be best used in exactly that situation.

Often have I seen Funding Agreements which amounted to little more than a services contract under which a Government Agency, for one or other reasons, wishes to have an external entity or entities carry out certain activities rather than doing so itself.  .

The schematic slides in my presentation are to do with the Ansett staff entitlements bailout. The matter is outlined in the Report[4] to the Commonwealth made under Section 24 of the Air Passenger Ticket Levy (Collection) Act 2001

“Section 24 of the Act requires the Workplace Relations Minister to table a report on the following matters:

  • payments authorised under section 22 of the Act;
  • the activities to which those payments relate.

This is the first such report and it covers the period 1 October 2001 to 31 March 2002.

In summary, payments made under s.22 of the Act during the reporting period were:

  • $8.0 million paid to a private sector entity (SEES Pty Ltd) to meet repayment obligations of a loan facility established for the Special Employee Entitlements Scheme for Ansett group employees (SEESA).

This report also provides other relevant information, including:

  • $283.3 million advanced from the loan facility to the Ansett Administrators for payment of employee entitlements under the provisions of SEESA;
  • $1.7 million expenses incurred by the Commonwealth in collecting the ticket levy and administering SEESA;”

At one end of the scale, I have regularly had to advise on the Commonwealth/State Funding Agreements under which the state was to carry out certain activity with funds provided by the Commonwealth.

Even to the extent any particular Funding Agreement involves activity between three or more government agencies of a kind which might be perceived as having a commercial aim, the question arises whether things like the NSW Public Authorities (Financial Arrangements) Act’s “joint-venture” provisions would apply.

Whilst there is some exemption in those provisions where government agencies are involved, it is not, in my view, as simple as saying that in the event that there are all government agencies the relevant provisions do not apply.

Sometimes that activity is, to my view jurisdictionally and constitutionally, a State matter and the Commonwealth was merely providing funds sometimes to procure a particular end result but, on a number of occasions, I found the content of the documents was such that I considered that the Commonwealth was actually using the Funding Agreement to overcome its lack of power in a particular field and to impose its requirements contractually. Alternatively, I had to ask ‘was the obligation undertaken ultra vires the State? ’However, today is not about the Commonwealth Grants Power.

In one or two such examples I found contractual provisions requiring a State agency to comply with Commonwealth procedures and/or policies notwithstanding that there was NSW legislation directly on point.

I do have to wonder how prudent and proper it is, in a Federation, for one sovereign entity to require another sovereign entity to abdicate its sovereign status by requiring it to comply with the laws and policies of the funding jurisdiction which laws and policies may well not be applicable in the jurisdiction of the funded sovereign entity.

Would not too much of that undermine the constitutional structure of the Federation?

Comprehensibility, Size and Complexity

Do small organisations with only a small staff or, worse, volunteers in lieu of staff now not find themselves at a particular disadvantage in dealing with State agencies in respect of funding where big template documents are used (even if using plain English). Very large documents which include two or three schedules of detail cross linked to various clauses in the body of the contract are not really all that easily comprehended.

Can they not look suspiciously like “procurement”, rather than “grant”?

I have to say I wonder how appropriate and/or wise for any Government agency to adopt, as a matter of standard practice, template Funding Agreements of 20 to 30 pages of text, much of it very detailed, where the template is to apply across the board and whether the amount funded the $200 or $2,000,000.

Sometimes these agreements are effectively a straightjacket, though I acknowledge they do deal with Government funds.

I fear they may, too often, be used and can be seen as being used to ensure an intended outcome of the funded activity. Ensuring compliance with an outcome in the nature of improvement in Health, child safety or the like is one thing. However, where the substance of  the arrangement envisaged by Funding Agreement is in respect of, for instance, some form of research and report  —   too stringent set of template provisions, particularly some which I have seen which allow the funding agency to require rewriting of reports (if unsatisfactory to it when done in draft), can raise questions of transparency and  propriety and as to the nature of the document/ and ransaction.

This is in addition to whether the use of “grant” format to effect a procurement without compliance with procurement rules. Again, I refer to the “proper purposes” testing the Desane decisions.

Details, processes and or content of a Funding Agreement are an exercise in risk management.

The question is, “is the balance right?”

Talking in terms of Contribution of the Not-for-Profit Sector[5] in funding of delivery of services by other than Government but where funded by Government in 2010, the Productivity Commission commented to the effect that it saw a need for “fair and reasonable terms and conditions”.

 The issue of balance of Funding Agreement terms and conditions, particularly involving services provision, was in 2011 the subject of an interesting discussion at Australia – New Zealand Scrutiny of Legislation Conference 2011 in Brisbane. The paper raised the issue of “the extent of the erosion of fundamental constitutional principles facilitated by the use of private contracts” and touched upon administrative law remedies and perceived need for and facility for review of action under relevant Funding Agreements.

Do we not now have a situation in which the size and complexity of documents relating to funded arrangements is having the adverse impact of excluding small players whilst  much of this activity which has historically been funded to larger organisations with necessarily larger administration costs, so reducing the end amount actually applied to the intended project?

Similarly I have often seen application processes so long and so detailed, especially when linked to one of the template Funding Agreements I mentioned, that some likely participants or respondents find it uneconomic to apply and or participate in whatever the funded activity is.

Your Role

Funding Agreements can sometimes be used as a club to drive a particular result or they can also be a relatively harmonious relationship aimed at obtaining a particular result with proper accountability for funds being used for some social purpose.

The question, at all times, must be whether and to what extent the substance of the relationship requires documentation of the size and complexity so common now as well as whether it is, substantively a true “grant” or “procurement” in sheep’s clothing.

Indeed, one might query whether there should not be some legislated procurement Funding Agreement terms to minimise the cost and expense, particularly in respect of State/Federal funding arrangements of particular types.

  1. May 2021

The above is background paper to a webinar I delivered 4 May 2021 for the Chartered Institute of Procurement and Supply. If you would like a copy of the slides, feel free to contact me.

The views and comments expressed in this paper and accompanying presentation are those of the writer and not Eakin McCaffrey Cox. The content of the paper and presentation are of a general nature only and not to be taken as advice on any particular factual situation.

[1] http://www.dpc.nsw.gov.au/__data/assets/pdf_file/0009/92349/101117_Good_Practice_Guide_Nov_2010_Revision.pdf  See also Commonwealth publications such as http://www.finance.gov.au/publications/fmg-series/docs/FMG23_web.pdf

[2] High Court of Australia in Andrews & ors v ANZ Banking Group Limited [2012] HCA 20 [“the Bank Fees Case”] rejected the view that the law of penalties is restricted to the situation of contract breach only and held that other contractual stipulations and entitlements could be the subject of the doctrine to do with unenforceability of contractual penalties.

[3][2018] NSW SC 553 and [2018] NSWCA 196

[4]http://www.deewr.gov.au/WorkplaceRelations/Programs/EmployeeEntitlements/SEESA/Documents/SEESA_010801to310302.pdf

[5] Productivity Commission Paper Contribution of the Not-for-Profit Sector 2010  http://www.pc.gov.au/projects/study/not-for-profit/report