I refer to your memorandum of 2 March, 1950, in which you ask advice whether the exchange of letters between the Premier of Victoria (21 April, 1949) and the Prime Minister (8 July, 1949) would be sufficient to establish the basis of sale thus agreed upon, and release the Commonwealth for all time from liability under clause 14(3) of the Agreement, or whether legislation is required to authorize an amendment of the Agreement to that effect.

(2)  In my opinion those letters constitute (subject perhaps to formal completion, as suggested in paragraph 3 below) an arrangement inconsistent with the Agreement, and unless and until the new arrangement is authorized by Parliament it can have no binding legal effect in releasing the Commonwealth from its obligations under clause 14(3).

(3)  The two letters referred to in paragraph 1 above may perhaps be thought still incomplete. The then Prime Minister did indeed in his letter of 8 July, 1949, accept the proposal put forward by the Premier in his letter of 21 April, 1949. But strictly he accepted it in a somewhat qualified form—‘in principle’—and probably therefore his request for details of the proposed averaging scheme should be regarded as emphasising the incomplete character of the consent. The details of the proposed plan were duly supplied by the Premier in his letter of 28 September, 1949. The papers submitted to me do not include any reply by the Prime Minister to this letter. A formal reply of acceptance would, however, complete the arrangement, and I have prepared this advice on the assumption that such a reply will in due course be sent, if in fact it has not been sent already.

(4)  Clause 14(1) of the Agreement provides—

A dwelling may be sold by a State at any time after its completion but except with the consent in writing of the Treasurer of the Commonwealth a dwelling shall not be sold at or for a price less than the capital cost of the dwelling ascertained in accordance with the provisions of the First Schedule to this agreement provided …

(The proviso is immaterial to the questions asked).

(5)  Sub-clause 3 of this clause provides—

any loss resulting from the sale of a dwelling as provided in sub-clause 1. of this clause shall be included as a separate item in the annual statement supplied by the Treasurer of the State to the Treasurer of the Commonwealth as provided in paragraph 1. of the Second Schedule to this agreement and shall be borne as to 3/5ths by the Commonwealth and as to 2/5ths by the State.

(6)  These clauses contemplate the calculation of a capital cost in respect of each particular dwelling although the provisions of the First Schedule to the Agreement allow a degree of averaging in respect of certain components of the capital cost of a particular dwelling by reference to the aggregate cost of those components for the total number of dwellings in a project.

(7)  The Victorian Premier in his letter to the Prime Minister setting forth this proposal said,

… we would be prepared to consider foregoing for all time the State Government’s right to pass on to the Commonwealth the 3/5th of any capital losses which accrue as provided by clause 14(3).

(8)  In his reply the Prime Minister said,

I am prepared to agree in principle to the sale of houses in Victoria on the basis of average cost, provided the State pays to the Commonwealth each quarter the full purchase price of the house payable by the purchaser in accordance with clause 14(2) and, in addition, (as you have suggested) assume for all time responsibility for the full amount of any net losses arising under clause 14(3).

(9)  The proposal of the Premier to sell houses at ‘the average cost’ could involve calculations of a cost by taking an average either—

(a)  over an aggregate of projects; or

(b)  over one project but otherwise than in accordance with the First Schedule.

(10)  I understand the Premier in fact proposes to average the cost of all houses constructed between the commencement of the Agreement and 31 December, 1948, so that the purchasers of the more recently constructed houses will have the benefit of the lower costs obtaining in the early years of the Agreement.

(11)  It necessarily follows that some houses will be sold under this proposed plan at a greater price than the capital cost calculated in accordance with the Agreement. Under clause 14(1) of the Agreement the State has full power to make such sales. But it also follows that some houses will be sold at a price less than the capital cost calculated in accordance with the Agreement. Clause 14(1) of the Agreement prevents a State from doing this without the consent of the Treasurer of the Commonwealth. But if his consent is given, then any resulting loss is to be borne, as to three-fifths, by the Commonwealth (clause 14(3)).

(12)  Clause 14(3) plainly contemplates the Commonwealth bearing portion of the loss where houses are sold for less than the capital cost calculated in accordance with the Agreement. An arrangement between the Treasurer and the Premier by which the Commonwealth did not make the contribution towards this loss which the Agreement provides for is directly inconsistent with the express provisions of the Agreement. It therefore becomes necessary to examine whether such an arrangement may be made having regard to the constitutional and statutory basis of the original Agreement.

(13)  The constitutional foundation for the Agreement is, I think, to be found in section 96 of the Commonwealth Constitution, which provides for financial assistance to the States upon such terms and conditions as the Parliament thinks fit. Parliament has thought fit to prescribe terms and conditions by authorizing the execution of an Agreement substantially in accordance with the form scheduled to the Commonwealth and State Housing Agreement Act 1945. Any arrangement between the Commonwealth and a State which is inconsistent with a provision of that Agreement would, therefore, purport to vary by executive action the conditions laid down by Parliament for the grant of financial assistance to the State. There is I think no power to do this.

(14)  In my opinion, therefore, the proposed arrangement between the Premier and the Prime Minister can have no legal effect unless approved by the Commonwealth Parliament. It is of course true that the proposed variation of the approved conditions would operate to relieve the Commonwealth of a contingent liability. But I do not think this can alter the legal position.

(15)  The Premier’s letter does not indicate how the State proposes to give effect in State law to its willingness to waive the claim which the Agreement gives it to a 3/5ths contribution towards any loss incurred by selling houses below capital costs. Presumably however an appropriation, if and when the time arrives, would meet all requirements.

(16)  If, however, it is not desired to bring the matter before Parliament, the Commonwealth might be prepared to accept the Victorian proposal on the footing of a ‘gentlemen’s agreement’, which of course would have no legal sanction, but which would place the State under a clear moral and political obligation. Whether it is advisable to take this course is plainly a matter of policy, on which it is not my province to advise. If however it is so decided, an exchange of letters would be the appropriate course.

(17)  From discussions with Treasury officers I gather that it is proposed to submit to the States certain principles which should govern the exercise by the States of the discretions conferred in paragraph 14(1) of the Agreement. The Treasury officers desire to know whether these principles should be embodied in a formal agreement (which is favoured by them) or should be dealt with in an exchange of letters between the Prime Minister and the Premiers, as suggested by the Minister for Works and Housing.

(18)  There is no intention to alter the Agreement; the real intention is to adopt uniform principles for the exercise of powers already given to the States by the Agreement. In my opinion, this is a matter which could most conveniently and effectively be dealt with in an exchange of letters. Nevertheless I would point out that the letters should be formal and precisely drafted, somewhat along the lines of an exchange of notes in international relations. I emphasise this in view of the loose form of the Premier’s letter of 21 April, 1949.

[Vol. 39, p. 136]