Opinion Number. 1923

Subject

BORROWING BY COMMONWEALTHLOAN AGREEMENT BETWEEN COMMONWEALTH AND INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT: OPINION REQUIRED BY BANK THAT COMMONWEALTH’S OBLIGATIONS UNDER AGREEMENT ARE VALID AND BINDING: STEPS REQUIRED FOR LOAN AGREEMENT TO BE BINDING ON COMMONWEALTH: OPERATION OF s 105A OF CONSTITUTION: SCOPE OF 1927 FINANCIAL AGREEMENT BETWEEN COMMONWEALTH AND STATES: WHETHER LOANS FOR DEFENCE PURPOSES ARE WITHIN SCOPE OF FINANCIAL AGREEMENT: FUNCTIONS OF AUSTRALIAN LOAN COUNCIL: SCOPE OF COMMONWEALTH EXECUTIVE POWER: ENFORCEMENT ACTION BY BONDHOLDER AGAINST COMMONWEALTH

Key Legislation

CONSTITUTION ss 51(iv), 83, 105A: FINANCIAL AGREEMENT ACT 1944 s 4: FINANCIAL AGREEMENT VALIDATION ACT 1929: JUDICIARY ACT 1903 ss 56, 64: Loan Agreement between Commonwealth of Australia and International Bank for Reconstruction and Development dated 22 August 1950: FINANCIAL AGREEMENT BETWEEN THE COMMONWEALTH OF AUSTRALIA, THE STATE OF NEW SOUTH WALES, THE STATE OF VICTORIA, THE STATE OF QUEENSLAND, THE STATE OF SOUTH AUSTRALIA, THE STATE OF WESTERN AUSTRALIA and THE STATE OF TASMANIA dated 12 December 1927 cll 3, 4, 13

Date
Client
The Treasurer of the Commonwealth

Under a decision of the Australian Loan Council, the Commonwealth is to borrow from the International Bank for Reconstruction and Development the sum of 100,000,000 dollars. The terms and conditions upon which the borrowing will be made are contained in a Loan Agreement entered into by the Commonwealth with the Bank on 22 August, 1950.1 Loan Regulations No. 3 of the Bank have been accepted by the parties to the Agreement, with the same force and effect as if the Regulations were fully set forth in the Agreement (section 1.02 of Agreement).

(2)  Section 9.02 of the Loan Regulations requires the Commonwealth to furnish to the Bank an opinion or opinions satisfactory to the Bank of counsel acceptable to the Bank showing:

(a)  that the Loan Agreement has been duly authorized or ratified by, and executed and delivered on behalf of, the Commonwealth and constitutes a valid and binding obligation of the Commonwealth in accordance with its terms;

(b)  that the Bonds when executed and delivered in accordance with the Loan Agreement will constitute valid and binding obligations of the Commonwealth in accordance with their terms and that, except as stated in the opinion, no further signatures or formalities are required for that purpose; and

(c)  such other matters as shall be specified in the Loan Agreement.

(3)  I am advised that, as Solicitor-General of the Commonwealth, I have been designated as counsel acceptable to the Bank for the purpose of furnishing the opinion or opinions mentioned.

(4)  I have the honour to advise that, in my opinion—

(a)  the Loan Agreement has been duly authorized by, and executed and delivered on behalf of, the Commonwealth and on the effective date will constitute a valid and binding obligation of the Commonwealth in accordance with its terms;

(b)  the Bonds when executed and delivered in accordance with the Loan Agreement will constitute valid and binding obligations of the Commonwealth in accordance with their terms, and no further signatures or formalities will be required for that purpose.

So far as concerns point (c) in paragraph 2 above, there do not appear to be any other matters specified in the Loan Agreement as requiring my opinion.

(5)  I shall set out concisely below the considerations by reference to which I have formed the opinion stated in paragraph 4 above.

Authorization execution and delivery of the Loan Agreement.

(6)  The authority of the Commonwealth to arrange for the borrowing from the Bank of a sum of 100,000,000 dollars is derived from section 105A of the Constitution of the Commonwealth, which is as follows:

105A.(1.)  The Commonwealth may make agreements with the States with respect to the public debts of the States, including—

(a)  The taking over of such debts by the Commonwealth;

(b)  The management of such debts;

(c)  The payment of interest and the provision and management of sinking funds in respect of such debts;

(d)  The consolidation, renewal, conversion and redemption of such debts;

(e)  The indemnification of the Commonwealth by the States in respect of debts taken over by the Commonwealth; and

(f)  The borrowing of money by the States or by the Commonwealth, or by the Commonwealth for the States.

(2.)  The Parliament may make laws for validating any such agreement made before the commencement of this section.

(3.)  The Parliament may make laws for the carrying out by the parties thereto of any such agreement.

(4.)  Any such agreement may be varied or rescinded by the parties thereto.

(5.)  Every such agreement and any such variation thereof shall be binding upon the Commonwealth and the States parties thereto notwithstanding anything contained in this Constitution or the Constitution of the several States or in any law of the Parliament of the Commonwealth or of any State.

(6.)  The powers conferred by this section shall not be construed as being limited in any way by the provisions of section one hundred and five of this Constitution.

(7)  By virtue of this section 105A of the Constitution, the Financial Agreement between the Commonwealth and the States, originally made in 1927 and validated by the Financial Agreement Validation Act 1929 but now in operation as amended to 1944, has binding legal effect, notwithstanding anything contained in the Constitution or in the laws of the Commonwealth or of any State. The original Agreement and each variation thereof have in fact been approved by Act of the Commonwealth Parliament. But, even if this step had not been taken, the legal position is that, by virtue of the unique provisions of section 105A of the Constitution, the rights and duties conferred and imposed by the Financial Agreement would not rest merely upon a contractual basis, as between the parties. Not only is the Agreement given statutory validity as to every clause in it, but over and above the Agreement validated there is the statutory enactment (i.e. section 105A of the Constitution) binding the parties by a statutory obligation to carry out the Agreement. And this binding obligation applies equally to any variation of the original Agreement. (Constitution, section 105A(5)).

(8)  The special character of the provisions of section 105A of the Constitution was illustrated by certain well-known decisions in 1932, when the Government of New South Wales, under the stress of the general financial depression, endeavoured to repudiate its obligations to the Commonwealth under certain of its loan contracts and the Financial Agreement. In New South Wales v. Commonwealth (No. 1) (46 C.L.R. 155) the Court upheld a Commonwealth Act which, in face of this default by the State, authorized what was in effect a garnishee procedure under which the Commonwealth enforced against the revenues of the State the State’s obligations under the Financial Agreement. Specified revenues of the State became, by virtue of Commonwealth law, payable to the Treasurer of the Commonwealth. Notwithstanding the specific provisions of the State Constitution and of State laws as to the receipt and expenditure of the public moneys of the State, payment to the Commonwealth Treasurer by a person liable to the State operated as a discharge of that person’s liability to the State. The Court upheld the Commonwealth law as being either a law, under section 105A(3), ‘for the carrying out by the parties thereto’ of the Financial Agreement or, in the alternative, merely incidental to a judgment by the High Court that money was due payable and unpaid by the State to the Commonwealth. From this decision, and others relating to the same attempt at repudiation, the fair conclusion is I think that the High Court of Australia, in order to prevent default on the loan contracts of any Australian Government, would give the widest permissible interpretation to the terms both of section 105A of the Constitution and of any agreement made in pursuance of that section, even to the extent of subordinating to the terms of those instruments the established principles or rules relating to the Parliamentary control of public finance.

(9)  Under clause 3 of the Financial Agreement, the Commonwealth and each State is required to submit to the Loan Council a programme setting forth the amount it desires to raise by loans during each financial year for purposes other than those expressly excepted, and not here material. Sub-clause (9) of clause 3 provides that:

If the Loan Council decides that the total amount of the loan programme for the year cannot be borrowed at reasonable rates and conditions, it shall decide the amount to be borrowed during the year and may by unanimous decision allocate such amount between the Commonwealth and the States.

Failing unanimity as to the allocation, the amount to be borrowed is to be allocated in accordance with a formula set out in sub-clause (10).

(10)  The total amount to be borrowed having thus been determined, clause 4(1) of the Financial Agreement then provides that (with exceptions not here material), ‘the Commonwealth … shall, subject to the decisions of the Loan Council … arrange for all borrowings for or on behalf of the Commonwealth or of any State …’. And clause 4(4) declares that ‘moneys shall not be borrowed by the Commonwealth or by any State otherwise than in accordance with this Agreement’. In this as in other inter-governmental agreements, the obligations resting upon ‘the Commonwealth’, are to be understood (unless otherwise provided) as obligations to be discharged by the Executive Government of the Commonwealth.

(11)  On 7 September, 1950, the Australian Loan Council at a regularly constituted meeting considered the borrowing programmes submitted by the Commonwealth and the States for the current financial year 1950/51, determined the amount to be borrowed during the year and, in pursuance of clause 3(9), allocated this amount between the Commonwealth and the States. It also specifically decided to approve of the Commonwealth borrowing from the Bank the sum of 100,000,000 dollars at interest rate 4¼% per annum including commission of 1%, and with a commitment charge of ¾%.

(12)  On 26 September, 1950, an Order made by His Excellency the Governor-General of the Commonwealth of Australia in Council, in pursuance of the Loan Council’s decision, authorized the Treasurer to arrange for the borrowing of the approved amount from the Bank on the terms stated; to issue bonds in respect of that borrowing in forms substantially in accordance with the forms in the Schedules to Loan Regulations No. 3 of the Bank, as accepted by the parties to the Loan Agreement of 22 August, 1950; and to sign, or appoint other persons to sign, on behalf of the Commonwealth, the bonds to be issued pursuant to the Loan Agreement.

(13)  It is plain that the Commonwealth Parliament could, if it thought fit, make a law to do what was done by the Order-in-Council of 26 September, 1950, that is, to arrange for the borrowing and authorize the Loan Agreement. Such a law would be within the powers conferred on the Parliament by section 51(iv) of the Constitution—power to make laws with respect to borrowing on the public credit of the Commonwealth—and also by section 105A(3)—power to make laws for the carrying out of the Financial Agreement by the parties thereto. I am aware that, in accordance with the intimation of the Government’s intentions given to the Bank in a letter from the Australian Ambassador on 22 August, 1950, a Bill is at present before the Houses which when passed will give an expression of Parliamentary approval in an appropriate form of the Government’s action in raising the loan.2 Having regard, however, to the overriding statutory force of the obligations imposed by the Financial Agreement on the Commonwealth and the States there is no legal necessity for statutory, as distinct from executive, action for the performance of these obligations.

(14)  Putting the same point in another way, the position is in my opinion that once the Australian Loan Council has decided that an amount is to be borrowed by the Commonwealth, clause 4(1) of the Financial Agreement authorizes and indeed requires the Commonwealth to ‘arrange for the necessary borrowing’. This duty is discharged by the Order-in-Council of 26 September, 1950, authorizing the Treasurer to take the necessary steps, including the issue of appropriate bonds, in accordance with the Loan Agreement of 22 August, 1950; see paragraph 12 above.

(15)  On 18 August, 1950, by Order-in-Council, His Excellency the Governor-General approved the issue to the Honourable Norman John Oswald Makin, Australian Ambassador in the United States, of an authorization to sign and deliver, for and on behalf of the Commonwealth of Australia, the Loan Agreement with the Bank, and all related papers. The Ambassador duly executed and delivered the Loan Agreement on 22 August, 1950, for and on behalf of the Commonwealth. The Order-in-Council in pursuance of which the Ambassador acted was in my opinion a normal, regular and valid exercise of the executive power of the Commonwealth.

(16)  According to its terms, the Loan Agreement of 22 August, 1950, did not become effective by virtue of its execution and delivery alone. It will not in fact become effective until the Bank is satisfied (inter alia) that the Commonwealth is in a position to carry out the Agreement. By reason of section 105A of the Constitution and the terms of the Financial Agreement, the Commonwealth could not in point of law carry out its obligations under the Loan Agreement without a decision of the Loan Council approving of the borrowing. This decision has now been duly made, and the Commonwealth has acted in pursuance of it; see paragraphs 11 and 12 above. These steps thus form a necessary element in the action required to give binding character to the Loan Agreement. They have now been taken by the Commonwealth, and in my opinion no further action on the part of the Commonwealth is requisite to complete the binding character of the Loan Agreement. It will in my opinion become fully effective when, in pursuance of section 9.03 of the Loan Regulations, the Bank notifies the Commonwealth of its acceptance of the evidence furnished to the Bank in accordance with section 9.01 of the Loan Regulations.

(17)  In what I have said about the chain of legal authority for this loan, I do not wish to be understood as expressing the view that the law of the Australian Constitution makes Parliamentary approval a condition of the validity of every agreement, entered into by the Executive, which imposes a financial obligation upon the Commonwealth. But in my opinion it is unnecessary for present purposes to consider further this aspect of the matter, because for this loan statutory authority is to be found, in the Financial Agreement, read in the light of section 105A of the Constitution and the Acts of Parliament approving and validating the Financial Agreement.

(18)  It is nothing to the point, in my opinion, that since the Financial Agreement Parliament has in practice continued to pass laws, as it did prior to the Financial Agreement, authorizing in general terms the raising of loans as well as the appropriation of loan moneys. (By reason of section 83 of the Constitution, Parliamentary authority for the appropriation of moneys is always required). I observe that during the same period it has also been quite customary to bring before Parliament for approval major international engagements entered into by the Executive; but this does not in any way impair the prerogative of the Crown in external affairs to make and ratify treaties. In general, the approval of Parliament in both fields has political, not legal, significance. But I point out that in some instances (e.g. the Loan Act 1945) the loans authorized were for defence purposes; that loans for defence purposes approved by the Parliament do not come within the scope of the Financial Agreement at all, and therefore are not brought before the Loan Council (clause 3(8)). In those cases, therefore, the Financial Agreement itself would not have provided sufficient authority for the borrowing; indeed in the absence of Parliamentary approval it would have prohibited the borrowing.

Validity of the Bonds.

(19)  I have expressed the opinion in paragraph 4(b) above that the Bonds when executed and delivered in accordance with the Loan Agreement will constitute valid and binding obligations of the Commonwealth in accordance with their terms, and no further signatures or formalities will be required for that purpose. The reasoning upon which this conclusion rests is in part of course the same as that which applies to the validity of the Loan Agreement itself. But I add the further points—

(a)  that by virtue of sections 56 and 64 of the Judiciary Act 1903–1948 of the Commonwealth a bondholder, in the hitherto unknown contingency of default by the Commonwealth could sue the Commonwealth itself in contract, in like manner as he could sue a subject;

(b)  that judgment in such a suit could be satisfied only out of moneys provided by Parliament, but that in the absence of specific or express Parliamentary appropriation for the service of this loan a bondholder would in my opinion be able to rely upon the general and permanent appropriation of the Consolidated Revenue Fund made by section 4 of the Financial Agreement Act 1944 ‘to the extent necessary for the purpose of carrying out the Financial Agreement on the part of the Commonwealth’.

[Vol. 39, p. 449]

1 The Loan Agreement is set out in the First Schedule to the Loan (International Bank for Reconstruction and Development) Act 1950.

2 See the Loan (International Bank for Reconstruction and Development) Act 1950.