Dressing Dutton Up as Lamb - Section 44 and the Competing Arguments for Disqualification and Exoneration of Peter Dutton

Anne Twomey

05.09.18

While the failure of Peter Dutton’s leadership challenge took some heat out of the question of his potential disqualification from Parliament, it left unresolved whether his seat has been vacated due to a breach of s 44 of the Constitution and he has ceased to be a minister due to the application of 64 of the Constitution.

Janina Boughey has recently addressed whether ministerial decisions can be challenged by judicial review when the decision-maker has become disqualified from Parliament but has continued to exercise the powers of a minister for more than 3 months without a parliamentary seat, contrary to s 64 of the Constitution.

This post will instead focus on the prior question of whether Mr Dutton might be disqualified from Parliament due to a breach of s 44(v) of the Constitution.  In particular, it will compare and analyse the competing legal opinions that have now been made public on this issue.

The Facts

The facts, to the extent that they are publicly known, are as follows.  According to the parliamentary register of interests, Peter Dutton is a beneficiary of the RHT Family Trust, the trustee of which is RHT Investments (Qld) Pty Ltd (‘RHT Investments’).  RHT Investments operates the Camelia Avenue Childcare Centre in its capacity as a trustee, while it operates the Bald Hills Childcare Centre in its own right under a separate provider’s number.  Mr Dutton’s wife is the sole director of, and shareholder in, RHT Investments.  On 7 January 2015, RHT Investments was certified as an ‘approved provider’ with respect to the Camelia Avenue Childcare Centre with effect from 1 December 2014.  This entitled it to receive directly, or through parents, payments of Commonwealth childcare subsidies for children that attend its centres.

Under the old legislative regime, these subsidy payments (the child care benefit and child care rebate) were primarily made to parents and used by them to defray the cost of the child care fees.  Under the new statutory scheme that came into effect on 2 July 2018, payments under the ‘Child Care Subsidy’ are made directly to childcare centres that are operated by approved providers.

It was reported in the media that the Camelia Avenue Childcare Centre received $2.03 million in Commonwealth funding between 2014 and 2018 and the Bald Hills Childcare Centre received $3.6 million in Commonwealth funding from 2010 to 2018.

The Constitutional Issue

Section 44(v) of the Constitution renders a person incapable of being chosen or of sitting in Parliament if he or she ‘has any direct or indirect pecuniary interest in any agreement with the Public Service of the Commonwealth otherwise than as a member and in common with the other members of an incorporated company consisting of more than twenty-five persons’.  Section 45 automatically vacates the seat of a senator or member of the House of Representatives who becomes subject to any of the disabilities listed in s 44.

The issue is whether Mr Dutton’s interest as a beneficiary of the RHT Family Trust causes him to have an indirect pecuniary interest in an agreement between the trustee of the trust and the Commonwealth Public Service, triggering the application of s 44(v) or s 45.

The Opinions

So far, four legal opinions about whether this arrangement caused the disqualification of Mr Dutton from Parliament have been published.  The first was a brief two page opinion by Guy Reynolds SC for Mr Dutton on 4 December 2017, finding that Mr Dutton was not disqualified because the benefits came under a statutory scheme that did not amount to an agreement.  The second was a more comprehensive 17 page opinion provided by Bret Walker SC and James Mack on 18 April 2018 to the National Secretary of the Australian Labor Party.  It concluded that it was arguable that the arrangement did amount to an agreement and that there was a reasonable prospect that a Court would find Mr Dutton disqualified.

The third opinion, by David Bennett QC for Mr Dutton on 23 August 2018, was a 3 page comparison and assessment of the two prior opinions.  It concluded that there was no ‘agreement’, so that Mr Dutton was not disqualified.  All three opinions were based upon the legislative scheme as it existed prior to 2 July 2018.

The fourth opinion was by Stephen Donaghue QC, the Commonwealth Solicitor-General, on 24 August 2018.  His 26 page opinion addressed in detail both the old and new legislative regimes and the relevant jurisprudence.  He concluded that the ‘better view’ was that Mr Dutton was not disqualified because there was no ‘agreement’, although he noted that it was ‘impossible to state the position with certainty’ and that there was ‘some risk, particularly in light of the substantial size of the payments’ that the Court might conclude there was a ‘conflict between Mr Dutton’s duty as a parliamentarian and his personal interests’.

Beneficiary of a trust

Can a beneficiary of a discretionary trust be regarded as having an indirect pecuniary interest in any agreement that the trustee of the trust has with the public service?  In Re Day [No 2], Kiefel CJ, Bell and Edelman JJ observed at [62] that:

Beneficiaries of a discretionary trust, which benefits from, or via its trustee is party to, an agreement to which s 44(v) refers, may be considered to have an indirect pecuniary interest in an agreement.

Gageler J held at [90]-[92] that Day was disqualified, amongst other grounds, because he was the beneficiary of a family trust, whose trustee was the beneficiary of another trust, which via its trustee leased a property to the Commonwealth.  This chain of beneficial interests was sufficient to establish that Day held an indirect pecuniary interest in the lease, causing his disqualification.

Nettle and Gordon JJ also accepted at [287] that if the rent for Day’s electorate office had passed back via this chain to the Day Family Trust, Day would have had a disqualifying indirect pecuniary interest in the lease for the purposes of s 44(v).

Accordingly, both Donoghue at [62] and Walker and Mack at [37] agreed that if the trustee had an agreement with the Public Service that triggered s 44(v), then Mr Dutton, as a beneficiary of the trust with a prospect of receiving a distribution from it, may have an indirect pecuniary interest in the agreement.  Depending on the terms of the trust deed, which is not publicly available, the argument might be strengthened if Mr Dutton were a default beneficiary or appointor of the trust.

Statutory entitlements and pecuniary interests

Reynolds saw the Commonwealth childcare payments as ‘a form of statutory entitlement for parents in relation to child care’.  According to this argument, it is the parents who are entitled to the payment and receive the payments, either directly or in the form of a reduction in the fees that they owe the childcare centres.  It is argued that the approved provider of the childcare and any beneficiaries of an approved provider that is a trustee have no pecuniary interest in the arrangements governing the payment of the subsidies, as they concern only the parents and the Commonwealth.

Donaghue focused on the fact that the mechanism for paying the subsidy, under the post-July 2018 system, is by way of fee reduction.  He observed at [39] that the ‘provider directly receives the amount, but is required to pass on that amount to the individual, making the provider merely a conduit for the [subsidy] that is payable to the individual’.

In practice, however, this means that the approved provider keeps the payment and simply deducts the amount from the fee otherwise payable by the parent.  These Commonwealth subsidies allow approved providers to charge higher overall fees (due to the reduction in the amount directly payable by the parent) and to provide more hours of care to children, because this is made more affordable for parents.  Profit is factored into these fees and flows back through the trustee to the trust, making it potentially payable to the beneficiaries of the trust.

As Keane, Nettle and Gordon JJ put it at [191] and [253] in Re Day [No 2], it is enough that a person’s ‘pockets … might be affected’.  If a trustee operates a childcare centre that is ‘approved’ to receive Commonwealth subsidies, then its beneficiaries are likely to have their pockets affected by the payment or withdrawal of those subsidies.  If, for example, the childcare centre ceased to be operated by an ‘approved provider’ so that the care it provided to children could no longer be the subject of Commonwealth subsidies, would this only affect the parents of the children, or would it also affect the profitability of the childcare centre?  It would seem more than likely that this would reduce the number of children cared for, the hours of care and the fees that could be charged by the centre, potentially making it not only unprofitable but unviable to run.  Pockets would therefore be affected.

Agreement with the Public Service

But is there an ‘agreement with the Public Service of the Commonwealth’?  This is a necessary condition for the application of s 44(v).  Both Reynolds and Bennett appeared to focus on the relationship between the Commonwealth and the parent in relation to the payment of the subsidies.  Bennett observed (apparently in reference to the older scheme):

The Commonwealth merely subsidises clients who contract for those [childcare] services and, on their request, pays the subsidy directly to the provider.  To describe this as an “agreement” between the service provider and the Commonwealth stretches the word beyond any reasonable interpretation.

Walker and Mack, however, focused on a different ‘agreement’, being that by which the Secretary of a Department of the Public Service accepted the application of the service provider and declared it to be an ‘approved provider’, entitling it to receive the subsidies in relation to the care of the children of eligible parents.  It is this arrangement with the Public Service of the Commonwealth that ultimately affects the pockets of the childcare service provider by making it eligible to receive the subsidies and reduce the fees paid by parents accordingly.  It is this arrangement, therefore, in which the beneficiaries of a trust, which through its trustee is an ‘approved provider’, arguably have an indirect pecuniary interest.

The question then is whether this arrangement amounts to an ‘agreement’.  This is the nub of the disagreement between Donaghue on one side and Walker and Mack on the other.  Walker and Mack noted that a childcare operator voluntarily enters into this arrangement with the Commonwealth by making an application.  The application involves the making of undertakings, declarations and acknowledgements.  Approval gives rise to both an entitlement to receive the subsidy with respect to eligible parents and obligations, such as the requirement to use the subsidy to reduce the fees payable by the eligible parent.  It also makes the approved provider subject to the imposition of sanctions if it breaches its undertakings and obligations, including the cancellation of approval, civil penalties and criminal prosecution.

Walker and Mack concluded that the mutual obligations which inhere in the approved provider and the Commonwealth do not amount to a ‘contract’, but that it is ‘clearly arguable’ that they amount to an ‘agreement’ for the purposes of s 44(v).  As Keane J noted in Re Day [No 2] at [190]-[191], s 44(v) does not require a legally binding contract.  The term ‘agreement’ was intended to be broader and to encompass arrangements that would not be legally enforceable contracts.

Bennett and Donaghue both agreed that the term ‘agreement’ is broader than ‘contract’.  Donaghue continued at [47] to support the submission that he had put in Re Day [No 2] that ‘agreement’ encompasses ‘any agreement, arrangement or understanding’.  However he rejected the proposition that the process of application and approval of a childcare centre operator as an ‘approved provider’ amounted to an agreement for two reasons.  The first was that under the pre-July 2018 legislation, the Secretary of the Department was required to approve any applicant that met the eligibility criteria.  Donaghue concluded at [50] that an ‘agreement’ requires mutual consent of all parties and if one or more parties cannot choose whether or not to agree, it is not an agreement.

Some doubt may be raised in relation to this proposition.  There are many examples of the sale of goods and services where one party is obliged to enter into the arrangement with a party that meets eligibility criteria, resulting in a binding contract that can be described as an ‘agreement’.  For example, at common law, the keeper of a ‘common inn’ was obliged to receive travellers as long as they were willing to pay an adequate price for the accommodation offered and arrived in a state fit to be received.  Under statute, various utility providers are obliged to provide services to persons who request them and agree to pay for them.  These are agreements, despite the obligation upon one party to participate.

The second reason given by Donaghue at [52] is that because the Secretary was obliged by law to grant the approval, he or she had ‘no capacity to influence Mr Dutton in the discharge of his parliamentary duties’.  While this is relevant to one of the underlying purposes of s 44(v), concerning the application of political influence, it does not address the other purpose recognised in Re Day [No 2] by Kiefel CJ, Bell and Edelman JJ at [39] of ‘prevention of financial gain which may give rise to a conflict of duty and interest’ and by Nettle and Gordon JJ at [252] of avoidance of the circumstances where a ‘person could conceivably prefer their private interests over their public duty’.  Hence, even though the Secretary of the Department is obliged to grant approval to eligible operators, this does not necessarily prevent a conceivable conflict of interest arising where millions of dollars of Commonwealth subsidies flow to an entity of which a Member of Parliament is a beneficiary.

Exceptions for ordinary agreements between the Commonwealth and citizens

In Re Day [No 2], Kiefel CJ, Bell and Edelman JJ noted at [69] that there ‘can be no relevant interest if the agreement in question is one ordinarily made between the government and a citizen’.  They were concerned that otherwise ‘every day-to-day dealing which a citizen has with government could result in the disqualification of a citizen who happens to be a parliamentarian.’  Hence, ordinary social security payments, payment for a passport or the purchase of a stamp or a Commonwealth bond would most likely not be caught by s 44(v).  But an agreement concerning approval of a childcare service provider which allows it to receive childcare subsidies would be more difficult to categorise as one ordinarily made between the government and a citizen.

Gageler J at [102] took the view that s 44(v) did not extend to agreements ‘entered into by the Executive Government of the Commonwealth in the execution of a law of general application enacted by the Parliament’.  Keane J at [199] agreed.  As the childcare subsidies are made under laws of general application, this would support Mr Dutton’s position.  However, Nettle and Gordon JJ rejected at [265] any interpretation of s 44(v) that excluded agreements authorised by statute.  Neither side constitutes a majority.

Given the divergent views of the Court as to whether agreements made under laws of general application are caught by s 44(v) and the difficulty of classifying the approval of a childcare provider as an agreement ordinarily made between the Commonwealth and citizens, some doubt arises as to whether or not such agreements would be excluded from the scope of s 44(v).

Other funding programs that clearly do involve agreements

In addition to childcare subsidies, childcare centres frequently participate in other funding schemes dealing with matters such as extra funding for the training of staff or to provide support for children with special needs.  The Solicitor-General, in his opinion, observed at [12] that he had been ‘briefed with very little factual information’.  However, his opinion did reveal that payments had been made by the Commonwealth to RHT Investments under the ‘Inclusion Support Programme’.

This programme has no statutory basis other than post-Williams authorisation in Sch 1AB of the Financial Framework (Supplementary Powers) Regulations 1997 (Cth).  To receive funding a childcare centre submits an application in accordance with guidelines, which must then receive approval.  The letter granting approval expressly states:

This Approval Letter, together with the Conditions of Funding, make up the agreement between the Commonwealth and You in relation to how the Subsidy, for which you have been approved, will be used.

It is clearly on its face intended to be an ‘agreement’ and the Solicitor-General accepted at [67] of his opinion that ‘it is very likely that RHT Investments had “agreement[s] with the Public Service of the Commonwealth”’ under this programme.  The objections above concerning purely a statutory schemes of general application and the absence of an ‘agreement’, therefore, could not be made.

Instead, the Solicitor-General contended at [68] that the ‘better view’ was that Mr Dutton was ‘unlikely to have an indirect pecuniary interest in the agreements’.  This was because the payments were to be used for funding an ‘Additional Educator’ to provide services for children with special needs.  He considered that this was unlikely to have generated a surplus for RHT Investments.

Again, doubt may be raised about this argument.  As has been pointed out by John Owens, a former partner of a law firm who is now the operator of a childcare centre, the childcare centre benefits financially in one of two ways.  Either the extra funding removes the burden on the service provider to pay for additional support from its own resources, generating higher profits or avoiding a reduction in profit, or it allows the service provider to provide services to a broader range of children, including those with special needs, without incurring higher costs.  Owens concluded:

The point is simple:  every dollar received by the Dutton Trust from the Government by way of a grant, is a dollar that does not need to be taken out of the Dutton Trust’s own pocket.  This is clearly an economic benefit; and that benefit would in turn give rise to an “indirect pecuniary interest” in the … agreement.

Conclusion

If one puts aside the political sensitivities of the matter, there is a genuine legal issue about Mr Dutton’s possible disqualification from Parliament.  It is an issue about which reasonable minds may differ.  When it comes to the child care subsidies, it may well be the case that the statutory regime precludes the arrangement from being regarded as the type of agreement to which s 44 is directed.  But this is by no means certain.  It may depend upon how strictly the Court of Disputed Returns, if the matter was referred to it, was prepared to enforce the provision and whether its focus was on the protection of parliamentarians or the system of representative government.

But even if the child care subsidies do not give rise to a breach of s 44(v), the funding under the Inclusion Support Programme is more liable to trigger disqualification under s 44(v) as it is not a statutory scheme and there is clearly an agreement.

These issues will not be resolved and the uncertainty will remain unless they are dealt with by the Court of Disputed Returns.

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Anne Twomey is a Professor of Constitutional Law and Director of the Constitution Reform Unit at the University of Sydney.

Suggested citation:  Anne Twomey, ‘Section 44 and the Competing Arguments for Disqualification and Exoneration of Peter Dutton’ on AUSPUBLAW (5 September 2018) <https://auspublaw.org/blog/2018/09/section-44-and-the-competing-arguments-for-disqualification-and-exoneration-of-peter-dutton/>