Week 6 Corporations Power Constitutional Law Week 6 Corporations Power

Lecture Outline Today we will consider: 1. the nature and scope of the corporations power (eg. what activities or aspects of a corporation can be regulated) 2. which corporations fall within s 51 (xx) 3. the process of characterisation with regard to this HOP.

The nature of the corporations power Section 51 The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: (xx) foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth

The nature of the corporations power The trade and commerce power was relied upon to a much greater extent to regulate commercial activity than the corporations power until the decision in Strickland v Rocla Concrete Pipes Ltd. (1971) 124 CLR 468 which overruled earlier case law. The corporations power has the capability of expanding the ability of the Commonwealth to regulate many commercial activities.

The nature of the corporations power Huddart Parker v Moorehead (1909) 8 CLR 330 Court took a narrow view of the corporations power and held it could not support the predecessor to the trade practices legislation. Facts of the Case Result reflected a desire to protect the reserved powers of the states.

The nature of the corporations power Isaacs dissents, asserting the provisions are sufficiently broad to survive constitutional muster. There were limitations placed even in Isaacs view. The Cth. could regulate corporations with respect to their status, capacity, and conditions on which business may be allowed to operate. (eg. The Commonwealth could regulate the conduct of a corporations relations with the public through prospectus requirements but not the internal management of the company. Power did not extend to ‘domestic corporations constituted for such things as municipal, manufacturing, religious, scholastic, charitable, scientific and literary purposes.’ All five justices agreed the power did not extend to creation of corporations.

The nature of the corporations power Concrete Pipes Case Facts of the case- Challenge to certain provisions of the Trade Practices Act 1965 which covered corporations beyond those covered in s 51 (xx). Nonetheless, Barwick J in a unanimous HC decision overruled Huddart.The Commonwealth could not be prevented from regulating constitutional corporations on the basis their trading activities in intrastate trade was a matter for the State legislation exclusively. It does not follow that any law which includes constitutional corporations is necessarily within the ambit of the power. Laws made pursuant s s 51(xx) will cover a wide range of the activities of trading and financial corporations…but not necessarily limited to trading activities.

The nature of the corporations power The TPA was later amended and limited to trading, financial and foreign corporations. Concrete Pipes case marked a watershed for the corporations power in that the Commonwealth could regulate economic activity carried out by a trading, financial or foreign corporation even if it only related to intrastate trade.

The nature of the corporations power Two main issues arising post Concrete Pipes: Does a corporation fall under the Subject Matter HOP. What corporations constitute foreign, trading or financial corporations within the scope of s 51 (xx)? What aspects or activities of a corporation can be regulated under s 51(xx)? Narrow view: aspects or activities must be related to type of corporation Broader view: all aspects or activities [ie goes as least as far as Higgins’ list of “horribles”] can be regulated.

The nature of the corporations power These questions tend to focus on the interpretation of the power under s51(xx), rather than the characterisation of a particular law. The court has tended to focus on the latter in more recent cases such as Re Dingjan: Ex parte Wagner (1995) 183 CLR 323 and NSW v Cth (2006) 231 ALR 1 (Work Choices Case). NB: s51(xx) is a ‘subject matter’ power

Which corporations fall within s51(xx)? Foreign corporations Formed outside the limits of the Cth See NSW v Cth (1990) 169 CLR 482, at 498 Trading corporations Court has been divided on the appropriate approach to identifying trading corporations. The main question has been split between the original purposes of the entity and its current activities.

Which corporations fall within s51(xx)? Trading Corporations Earlier view: R v Trade Practices Tribunal; Ex parte St George County Council (1974) 130 CLR 533 The court examines the purposes that the corporation was established to achieve. Facts of the case: The Council established to buy and sell electricity and electrical appliances to consumers as a profitable sideline. Court holds the Council was not a trading corporation even though it supplied and sold electricity because the corporation had not been formed specifically for the purpose of trading but rather for the purposes of local government. It had a public purpose rather than a private enterprise function. Barwick and Stephen prefer the activities test, holding the Council a ‘trading corporation since it had substantial trading activities.’

Which corporations fall within s51(xx)? R v Federal Court of Australia; Ex parte WA National Football League (Adamson’s Case) (1979) 143 CLR 190 Four justices applied “activities test” and held that corporations engaged in WA league football were “trading corporations” because of their substantial trading activities. Gibbs J applied “purposes” test. Original purpose was football rather than trading.

Which corporations fall within s51(xx)? Financial Corporations Re Ku-ring-gai Co-operative Building Society (No 12) Ltd (1978) 22 ALR 621 Full Federal Court held that co-operative building societies providing finance for their members were “financial corporations” within the meaning of s 51(xx). State Superannuation Board of Victoria v Trade Practices Commission (1982) 150 CLR 282 Majority adopted a similar approach to “financial corporations” as Adamson’s Case approached “trading corporations”. A corporation is a “financial” corporation if it engages in financial activities and these need only form a substantial proportion of its total activities (see Mason, Murphy and Deane JJ at 304-6).

Which corporations fall within s51(xx)? Fencott v Muller (1983) 152 CLR 570 Mason, Murphy, Brennan and Deane JJ now applied the “purposes” test in the shelf company: ‘…in the absence of any current activities, the character of the corporation should be determined by the purposes for which it was created.’ Gibbs CJ, Wilson and Dawson JJ dissented – the entity was not a s 51(xx) corporation under the “activities” or “purposes” test.

Which corporations fall within s51(xx)? Commonwealth v Tasmania (Tasmanian Dams Case) (1983) 158 CLR 1 Mason, Murphy, Brennan and Deane JJ held that the HEC was a ‘trading corporation’ It engages in large scale sale of electrical power by bulk and to retail consumers. The connection with the State govt and its policy-making role do not exclude the HEC from being a ‘trading corporation’ (per Mason J at 155-6)

Which corporations fall within s51(xx)? Commonwealth v Tasmania (Tasmanian Dams Case) (1983) 158 CLR 1 (cont) Gibbs CJ (in dissent at 116-7): Saying that the Commission is a “trading corporation” robs those words of all distinctive meaning. “the words “trading corporations” in s 51(xx) describe corporations of a particular character. It must follow that in deciding whether a corporation answers the description, it is necessary to determine its true character.”

What aspects or activities of a corporation? This question has never been comprehensively answered by the High Court. In R v Aust Industrial Court; Ex parte CLM Holdings (1977) 136 CLR 235 it was established that if a corporation fell within s51(xx) then the conduct of people engaging in the corporation’s activities (eg company directors) could also be regulated. What other aspects of corporations can be regulated?

What aspects or activities of a corporation? Types of activities that have been held to be within the power under s51 (xx) Anti-competitive practices of trading and financial corporations. Quality of goods and services supplied to consumers by corporations. The construction of a dam by a State electricity supplier. Contracts for services to which a corporation has entered into for the purposes of its business. Regulating the industrial rights and obligations of corporations and their employees and the means by which they conduct their industrial relations.

What aspects or activities of a corporation? Actors and Announcers Equity Association v Fontana Films Pty Ltd (1982) 150 CLR 169 Sect 45D of the TPA provided protection for corporations from ‘secondary boycotts’. Question: what is a secondary boycott? s45D worked to protect corporations, rather than regulate them. Whole court upheld this as a valid law under s51(xx).

What aspects or activities of a corporation? Variety of views about the scope of s51(xx) Murphy J: Took the widest view of the power The power is … plenary; it enables Parliament to make comprehensive laws covering all internal and external relations of foreign trading and financial corporations. The power is not confined to laws dealing with the trading or financial operations of trading or financial corporations

What aspects or activities of a corporation? Murphy J (cont) It extends to authorise laws providing for the formation, operation and dissolution of trading and financial corporations. It enables Parliament to protect trading, financial and foreign corporations from others and to protect others from such corporations.” [at 212] It extends to laws dealing with industrial relations so that in relation to such corporations Parliament, may legislate directly about the wages and conditions of employees and other industrial matters

What aspects or activities of a corporation? Murphy J (cont) This point was conceded by one of the plaintiffs, but not decided by the High Court in Victoria v Commonwealth (Industrial Relation Act Case) (1996) 187 CLR 416 However it forms the basis for the Workplace Relations Amendment (Work Choices) Act 2005 (Cth) on s51(xx) and was affirmed by the High Court in NSW v Cth (2006) 231 ALR 1.

What aspects or activities of a corporation? Gibbs CJ: words of s51(xx) suggest that nature of corporation to which laws related must be a significant element in the nature or character of the laws. [at 182] A law may be one with respect to a trading corporation, although it casts obligations upon a person other than a trading corporation. [at 183]

What aspects or activities of a corporation? Stephen J: The fact that only some elements in the description of a law fall within one or more of the grants of power in s51…will be in no way fatal to its validity. So long as the elements, which do not fall within a grant of power, are not of such significance that the law cannot fairly be described as one with respect to a grant of power then … the law will be valid. [at 192] Prohibition in this case is directed to those who act with the purpose of harming corporations – this generates a sufficient connection with corporations.

What aspects or activities of a corporation? Commonwealth v Tasmania (Tasmanian Dam Case) (1983) 158 CLR 1 s10(4) of the WHPC Act 1983 (Cth) prohibited trading corporations from performing a range of activities for the purposes of its “trading activities” HEC planned to build a dam to generate electricity for the purpose of sale HELD: s10(4) was valid under s51(xx)

What aspects or activities of a corporation? Mason, Murphy and Deane JJ argued that no necessary connection needed between trading corporations and trading activities. Brennan J did not decide this issue – but agreed that s10(4) was valid Gibbs CJ agreed s10(4) was valid, but HEC was not a trading corporation.

What aspects or activities of a corporation? Mason J Objections to restrictive treatment of Section 51(20): We must interpret the Constitution expansively. This means grants of power embodied in Section 51 should be given a broad rather than a restricted reading. The language of Section 51 (20) discloses no reason for interpreting the placitum restrictively. If the argument was correct it would mean that the Commonwealth could only legislate with respect to foreign corporations only to the extent of their overseas activities. This didn’t make sense. No historical reason to believe that it was only the trading activities of trading corporations which were the subject of the Commonwealth regulation. Unrealistic to divide the trading and non-trading activities of Section 51 (20) corporations. These activities necessarily overlap. Power to make laws with respect to corporations would seem to naturally extend to their acts and activities.

What aspects or activities of a corporation? B&W state: the Tasmanian Dam Case extended the scope of the power at least as far as laws regulating a trading corporation “with regard to activities undertaken for the purpose of its trading activities”. [at 832] The Work Choices Case has now dramatically extended the scope of the corporations power.

Characterisation and s51(xx) Re Dingjan; Ex parte Wagner (1995) 183 CLR 323 Provisions of the Industrial Relations Act 1988 (Cth) conferred a power on the IRC to examine unfair contracts imposed on independent contractors and these contracts could be set aside or varied. Power extended to cases where the contract related to the business of a constitutional corporation (under s127C(1)(b)).

Dingjan’s Case The corporation was not a party to the contract in question – which was a sub-contract arrangement between its transport contractor and the Dingjans. Only possible basis for the review of the contract was s127C(1)(b)). HELD: Provision could not be supported under s51(xx) Dissenting judgments by Mason CJ, Deane and Gaudron JJ

Dingjan’s Case All judgments focused on whether there was sufficient connection or degree or relevance to constitutional corporations as a question of characterisation, rather than on the wide or narrow approach to the question: “What aspects or activities?” This shift to questions of characterisation meant that the abstract question of the outer limits of power had been bypassed by the court.

Dingjan’s Case Nevertheless, most judges described the power as plenary even though they came to different results about the validity of the provisions in question. A number of the majority (eg Dawson and HcHugh JJ) used the language of Gibbs CJ from the Actors Equity Case in focusing on the need for the law to be significant “for the activities, functions, relationships or business of the corporation”, rather than simply referring to or operating on elements of corporate identity. [see McHugh at 369]

Dingjan’s Case McHugh J s 51(xx) does not authorise “any law that operates on conduct that relates to the activities, functions, relationships or business of trading, financial or foreign corporations…the law must have a “relevance to or connection with a s 51(xx) corporation. To determine whether a law is with respect to a s51 head of power, 2 steps must be taken: Determine the character of the law – by reference to the rights, powers, liabilities, duties and privileges which it creates. Determine whether the law so characterised can be said to be connected to a head of power conferred by s 51 - considering both the practical and legal operation of the law.

Dingjan’s Case McHugh J (cont) To have such a connection, a law in its legal or practical operation must have significance for the corporation – that is, for the activities, functions, relationships or business of the corporation. “A law operating on the conduct of outsiders will not be within the power conferred by s 51(xx) unless that conduct has significance for trading, financial or foreign corporations. In most cases, that will mean that the conduct must have some beneficial or detrimental effect on trading, financial or foreign corporations or their officers, employees or shareholders.” [at 370]

Dingjan’s Case McHugh J (cont) The jurisdiction conferred by s 127C(1)(b) is not dependent upon the contract having any effect on, or any other significance for, the corporation. The IRC is given jurisdiction to intervene and set aside a contract on the bare condition that the contract relates to the business of a s 51(xx) corporation. That is not enough in my opinion to make ss 127A, 127B and 127C(1)(b) a law with respect to a s 52(xx) corporation. s 127C(1)(b), as enacted, was not authorised by s 51(xx) of the Constitution. [at 371]

Dingjan’s Case Brennan J returned to his earlier test of “discriminatory operation” from the Actors Equity Case but assimilated this test to that of “significance”. “If the constitutional character be “significant” to the relationship with the law, it must be because the character of the corporation is the factor which attracts the operation of the law. If that be so, I perceive no distinction between that test and a test of discriminatory operation.” [at 337]

Dingjan’s Case The minority (Mason CJ, Deane and Gaudron JJ) held s127C(1)(b) to be valid. Mason CJ agreed with Gaudron’s reasoning, but still used the language of the majority in emphasising that the contract related to “the business operations of the corporation in a substantial and significant practical sense”. [at 335] Gaudron J took the broadest view of s51(xx) and held that it was sufficient for the law to operate on the business functions, activities, or relationships of constitutional corporations. There was no need for an extra element of “significant” or “substantial” connection with the corporation. [at 364]

Work Choices Case Majority of the court affirmed that the character of the law must be determined by reference to the rights, powers, liabilities, duties and privileges which it creates  ie direct legal effect The practical as well as the legal operation of the law must be examined. “If a sufficient connection with the head of power does exist, the justice and wisdom of the law, and the degree to which the means it adopts are necessary or desirable, are matters of legislative choice”. [(2006) 231 ALR 1 at para 142]

The corporations power and the Workplace Relations Act 1996 History of industrial relations in Aust Reliance on s51(xxxv) B&W p.836 Rationale of Work Choices amendments Workplace Relations Amendment (Work Choices) Act 2005 (Cth) enacted on the assumption that Cth has power to legislate on industrial rights and obligations of constitutional corporations and their employees. 40

The corporations power and the Workplace Relations Act 1996 Therefore the conciliation and arbitration power s51(xxxv) was not relied upon and the legislation was based on s51(xx). Challenge brought by five States and unions and peak union bodies. Decision of the High Court: NSW v Cth (Workers Choices Case) (2006) 231 ALR 1 41

The corporations power and the Workplace Relations Act 1996 Arguments by the States and unions: The focus of the Act is on the relationship between employers and employees. Therefore it should be characterised as a form of industrial relations regulation, rather than a law with respect to corporations. Misuse of the term ‘constitutional corporation’ as a means of deriving constitutional validity for a scheme which is really about the employment relationship. 42

The corporations power and the Workplace Relations Act 1996 Arguments by the States and unions (cont): Control of the internal affairs of a corporation is too remote to that head of power. New South Wales put forward an internal management theory which states that persons who are not fundamentally linked with finance and/or trade are not subject to Cth legislative authority. 43

The corporations power and the Workplace Relations Act 1996 Arguments by the Cth: s51(xx) does not limit the Cth to legislating for purposes related to the power It is a subject matter power which nevertheless allows the Cth to legislate to achieve other purposes using the subjects of the power as vehicles to achieve its aims. 44

The corporations power and the Workplace Relations Act 1996 Arguments by the Cth (cont): The internal management theory is inappropriate because it was developed by Isaacs J in parallel with the reserve powers doctrine. In addition, it is illogical to claim the Cth can’t legislate for employees, because employees can bind their corporations by their acts, so the Cth should have the power to legislate with respect to employees. 45

The corporations power and the Workplace Relations Act 1996 Majority decision: Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ Approved of the wider view of the scope of the corporations power adopted by the minority in Dingjan’s Case. In particular affirmed Gaudron J’s position in that case and restated in Re Pacific Coal Pty Ltd (2000). Law applies on its face to ‘constitutional corporations and to other persons indifferently’, but its practical operation has a particular impact on its corporate subjects. The distinctive character test was an additional filter to establish sufficiency of connection. 46

The corporations power and the Workplace Relations Act 1996 Business activities of corporations formed within Australia signify whether they are trading or financial corporations, and the power to legislate with respect to foreign corporations must be directed to their business activities in Australia. Power conferred by s 51(xx) extends at least to the business functions and activities of constitutional corporations and to their business relationships. Once this is accepted, it follows that the power “also extends to the persons by and through whom they carry out those functions and activities and with whom they enter into those relationships”. Power also extends to the regulation of those whose conduct is capable of affecting a corporation’s activities, functions, relationships or business. [177] 47

The corporations power and the Workplace Relations Act 1996 “I have no doubt that the power conferred by s 51(xx) of the Constitution extends to the regulation of the activities, functions, relationships and the business of a (constitutional) corporation, … the creation of rights, and privileges belonging to such a corporation, the imposition of obligations on it and, in respect of those matters, to the regulation of the conduct of those through whom it acts, its employees and shareholders. The legislative power conferred by s 51(xx) extends to laws prescribing the industrial rights and obligations of corporations and their employees and the means by which they are to conduct their industrial relations.” [115] 48

The corporations power and the Workplace Relations Act 1996 Rejection of plaintiff’s arguments Division between a corporation’s external and internal relationships is not supported by text of s51(xx) and strong reasons to treat relationships with employees as external to the corporation. WRA regulates the relationship between corporations and their employees and so can be characterised as a law with respect to corporations without the nature of the corporation (trading, financial or foreign) being a significant element in character of the law. The distinction between external and internal relationships of corporations ‘should be rejected as an inappropriate and unhelpful distinction. ‘In so far as the plaintiffs contended that a test of distinctive character or discriminatory operation is to be adopted is enough to say that…the impugned provisions of the Amending Act which depend upon s 51(xx) either single out constitutional corporations as the object of statutory command (and in that sense have a discriminatory operation) or, like the legislation considered in Fontana Films, are directed to protecting constitutional corporations from conduct intended and likely to cause loss or damage to the corporation. ‘ 49

The corporations power and the Workplace Relations Act 1996 Rejection of plaintiff’s arguments (cont) No basis for arguments based on the need to preserve the federal balance. Court reaffirms principle of Engineers which overturned implied immunity of instrumentalities and reserved State powers doctrine. 50

The corporations power and the Workplace Relations Act 1996 Expansive reading of s51(xx) which allows: Regulation of industrial rights and obligations Registration and accountability of organisations Restriction of union rights of entry under state OHS laws. 51

The corporations power and the Workplace Relations Act 1996 Dissenting judgments Kirby J Criticism of majority’s reliance on Gaudron J’s judgment in Dingjan’s Case and Re Pacific Coal: [486-9] Gaudron J was in dissent Her qualifying remarks omitted from the passage relied on by majority Relationship between s51(xxxv) and (xx) not considered in Re Pacific Coal 52

The corporations power and the Workplace Relations Act 1996 Kirby J (cont) It is a mistake to read s 51(xx) of the Constitution in isolation and to ignore other paragraphs of that section. The power afforded to the Federal Parliament by s 51(xx) must be read together with s 51(xxxv). Work Choices Act should be characterised as an Act pertaining to the prevention and settlement of industrial disputes inherent in the regulation of industrial relations. 53

The corporations power and the Workplace Relations Act 1996 Kirby J (cont) Using s 51(xx) in the way attempted in the Work Choices Act alters in a disconcerting way the federal/state balance. Potential for radically reducing the application of State laws in many fields, including: Education, healthcare, town planning, transport, security and protective services, environmental protection, aged care, gaming, fisheries and Indigenous communities. Kirby J emphasised the importance of privatisation and outsourcing at the State level in potentially making more rapid a shift of power to the Commonwealth government. 54

The corporations power and the Workplace Relations Act 1996 Rudd government’s Fair Work Act is based on the same corporations power. The Fair Work Act has inherited the ‘same problems...[in that] thousands of local government, education, health, religious charitable, child-care and other organisations still do not know whether they or their employees fall under federal or state law.’ High cost for legal advice for many employers to figure out if federal or state law applies to them and lawyers cannot provide certainty in their advice. Similar organisations getting different advice. Early HC cases held a trading corporation is one when it ‘has substantial trading activities, that is, when its trading activities form a significant proportion of its overall activities.’ Though most businesses operating for profit clearly fall within these boundaries, it is not at all clear if non-profit corporations, such as education or community service, and not revenue, as their primary goal, fall within these boundaries. The answer is ‘specific to each body, and does not apply across an industry as a whole…Uncertainty remains… Some lower courts have found unis and some charities (eg. Red Cross) to be constitutional corporations, and therefore federal law applies to them. These decisions can be overruled by the High Court. See George Williams, SMH (2009) ‘Pressure has been building on the Commonwealth to fix this by winding back the Fair Work Act…Whatever the flaws of Work Choices, that single system remains a worthy goal. Australia does need one law of workplace relations, not the fragmented system that Workers Choices and the Fair Work Act have brought about.’ 55

The corporations power and the Workplace Relations Act 1996 Impacts of the decision Dramatically extends Cth power in the industrial relations arena. Ron McCallum says using the corporations power as the constitutional justification for our labour laws will further reshape those laws – away from collective bargaining – towards individual bargaining between employer and employee. McCallum refers to this as the corporatisation of Australian labour law. Post-Howard era returning to collective bargaining but still flaws in the Fair Work Act as pointed out above. 56

The corporations power and the Workplace Relations Act 1996 Has the potential to dramatically expand Cth power to pass laws on other topics where corporations are involved. Will change the nature of federalism: less need for co-operative relationships with the States. No definitive view on: The definition of “constitutional corporation” The scope of s51(xx) – “conduct capable of affecting a corporation …” 57

The Incorporation Case NSW v Cth (1990) 169 CLR 482 Murphy J had argued in the Actors Equity Case that the Cth has power to incorporate or form corporations. The Court held (Deane J dissenting) that s51(xx) does not enable the Commonwealth to regulate the process of incorporation. This was because the power emphasises “trading and financial corporations formed within the limits of the Commonwealth”. So it refers to corporations which have already been formed. 58

The Incorporation Case Mason CJ, Brennan, Dawson, Toohey, Gaudron and McHugh JJ: The word “formed” is a past participle used adjectivally, and the participial phrase “formed within the limits of the Commonwealth” is used to describe corporations which have been or shall have been created in Australia… The subject of a valid law is restricted by that phrase to corporations which have undergone … the process of formation in the past, present or future. The power is one with respect to “formed corporations”. The words “formed within the limits of the Commonwealth” exclude the process of incorporation itself… [at 498] 59

The Incorporation Case Mason CJ, Brennan, Dawson, Toohey, Gaudron and McHugh JJ (cont): There is no ground for thinking that s 51(xx) was framed with the intention of conferring upon the Commonwealth the power to provide for the incorporation of companies. The history of the paragraph…indicates that the draftsmen of the provision did not contemplate that it should confer any power otherwise than in respect of corporations already formed. [at 502] 60

The Incorporation Case Deane J (dissenting): Argument of the majority fails to give proper scope to the words “with respect to” in s 51 or to the settled principle which requires that par (xx), which is a constitutional grant of plenary legislative power, be liberally, and not narrowly or technically, construed… References to the Convention debates are far from compelling with contrary statements by early commentators. Should not constrict the effects of the words which were adopted by the people as the compact of a nation by reference to the intentions or understanding of those who participated in or observed the Convention debates. 61

The Incorporation Case Deane J (cont): I am of the view that the legislative power which the second limb of par (xx) confers upon the Parliament with respect to local trading or financial corporations extends to authorize the making of laws governing the formation or incorporation of such corporations. That is the effect of the words of the Constitution when they are construed in accordance with the principles applicable to the construction of a plenary grant of legislative power. [at 512] 62

The Incorporation Case The Incorporation Case means that the Commonwealth has no power to legislate for its own national corporations law. Firm rejection of Murphy J’s wide approach in the Actors Equity case. Instead, the Commonwealth established a co-operative arrangement with the States. 63