The Law taketh away, the Law giveth back: Political risk and exploration licences in NSW

Duncan v NSW (2015) 318 ALR 375
Metgasco Ltd v Minister for Resources and Energy [2015] NSWSC 453

A pair of recent decisions in challenges to NSW government cancellations of coal and CSG exploration licences.

To the Victorian observer, it is striking to note the prominent place of energy issues in recent NSW politics. This note addresses a recent pair of decisions challenging cancellations by the NSW government of coal and CSG exploration licences: instances where the politics of energy have proven to be fraught, or worse.

Following well-publicised enquiries, the NSW ICAC made findings that corrupt conduct had occurred in the granting of coal exploration licences to companies that were, or became, controlled by NuCoal Resources Ltd and Cascade Coal Pty Ltd. ICAC found that the exploration licences had been granted by the then Minister for Mining, Ian Macdonald MLC, contrary to his public duty as a minister, and in circumstances which, if proved, would establish that he had committed misconduct in public office or conspiracy to defraud.

ICAC further recommended that the licences were so tainted by corruption that they should be expunged, and that the NSW government should do so legislatively, in order to avoid the risks that might arise from court challenges to any ministerial decision to cancel the licences. The licence holders were then invited by the government to make submissions against those recommendations.

In January 2014, the Mining Amendment (ICAC Operations Jasper and Acacia) Act 2014 was passed. The objects provision stated that the Parliament was satisfied, because of information that had come to light through those investigations, that the grant of the licences had been tainted by serious corruption, and noted the exceptional nature of the circumstances. The Act specifically cancelled the 3 relevant exploration licences, and expressly excluded any compensation for the cancellation of the licences.

The licensees each commenced proceedings in the High Court, alleging that the 2014 Amendment Act was invalid, on the grounds that:

• it was not a “law” which the NSW Parliament was competent to enact, because it was targeted specifically at the 3 identified licences; and
• it was an impermissible exercise of judicial power, akin to a bill of pains and penalties.

The proceedings were unanimously dismissed, in a short judgment of the High Court: Duncan v NSW (2015) 318 ALR 375. The 2014 Amendment Act was a “law”, despite its specificity, as the High Court had held in the original Kable decision. Unlike Kable, the Duncan plaintiffs did not succeed on Ch III grounds. Terminating the statutory licences was not an exercise of judicial power, as it did not determine the existence of any criminal or civil liability. Nor was it an exercise of judicial power for the Parliament to enact the Amending Act based its own satisfaction that serious corruption had occurred in the granting of the licences. Depriving the licensees of valuable property, without compensation, was not tantamount to judicial punishment.

On its own, Duncan is a textbook and unremarkable decision. But it highlights the latitude enjoyed by State governments in the absence of a “just terms” requirement such as s 51(xxxi) of the Commonwealth Constitution. More difficult questions of characterisation and compensation would have arisen if the cancellations had been enacted by the Commonwealth Parliament.

Separately, in February 2014, a delegate of the Minister for Resources and Energy gave approval under an exploration licence held by Metgasco Ltd for the construction of a coal seam gas exploration well near Lismore in northern NSW. The exploration licence included a condition that required Metgasco to consult with the community regarding its prospecting operations. Significantly, that condition was not designated as one of the “environmental management conditions” of the licence. (Section 22 of the Petroleum (Onshore) Act 1991 allowed the cancellation of a title for a breach of any condition of the title, but only allowed the suspension of operations under a title only for breach of an “environmental management condition”.)

The project became politically controversial, with environmental groups and local residents setting up a blockade at the site, and mounting a letter-writing campaign to the Minister. (In the recent State election, the Greens placed second to the National Party in the seat of Lismore, and won the neighbouring electorate of Ballina.)

On 14 May 2014, without prior notice, the delegate immediately suspended the approval, for Metgasco’s failure to comply with the consultation condition under the licence. Metgasco was placed in an ASX trading halt, and suffered a 40% share price fall when the suspension was removed. Metgasco requested a review of that decision, and was invited to make submissions. After receiving Metgasco’s submissions, the delegate made a further decision “to confirm the suspension of Metgasco’s activities”.

Metgasco sought judicial review of both the initial suspension and the subsequent confirmation decisions. The Minister conceded that, in making the first decision, the delegate had not complied with the requirement to notify Metgasco of the proposed suspension and provide it with opportunity to make representations. The focus of argument was therefore whether the later “confirmation” of the earlier decision was valid.

Button J held that the confirmation was also invalid:

(i) because there was no power under the Act to “confirm” a suspension, especially where it had been invalidly made, and (ii) because the consultation condition was not an “environmental management condition”, and did not permit the Minister to suspend exploration activity: Metgasco Ltd v Minister for Resources and Energy [2015] NSWSC 453. Accordingly, the suspension of Metgasco’s exploration activities was quashed.

The Minister recently confirmed that he will not appeal, and has begun negotiations with Metgasco regarding compensation. In a similarly textbook way, Metgasco highlights how executive interference with rights for essentially political purposes is more susceptible to challenge than legislative interference, particularly by State governments who are not subject to “just terms” guarantees.

Meanwhile, US shareholders in Nucoal Resources, are reported to be pursuing redress under the Australia-US Free Trade Agreement. The absence of “just terms” guarantees at State level, coupled with State governments’ demonstrated willingness to legislatively revoke investors’ contractual and statutory rights, may mean that the risks of investment treaty claims will arise more commonly with regard to the treatment of foreign investors at the hands of State governments.