For NSW local government lawyers and procurement professionals, section 55 of the Local Government Act 1993 (NSW) (the Act) is familiar territory.

Less well understood is the exception in section 55(3)(i) of the Act, which permits a council to bypass the ordinary tendering obligation in defined circumstances. Two NSW decisions, SOCARES Support Group Inc v Cessnock City Council [2012] NSWLEC 23 and Tonkin v Cooma-Monaro Shire Council [2006] NSWCA 50, offer important guidance on the boundaries of this exception and the consequences of getting it wrong.

The tendering obligation

Section 55(1) imposes a mandatory obligation on councils to invite tenders before entering into contracts for the carrying out of works, the provision of services or facilities, the supply of goods or materials, the disposal of property, and certain instalment-payment contracts. The current prescribed threshold is $250,000 inclusive of GST, below which the tendering requirement does not apply.

The section 55(3)(i) exception

Section 55(3) lists several categories of contracts to which the tendering obligation does not apply. The most significant, and the most contested, is the exception in section 55(3)(i), which provides:

“(3) This section does not apply to the following contracts: …

(i) a contract where, because of extenuating circumstances, remoteness of locality or the unavailability of competitive or reliable tenderers, a council decides by resolution (which states the reasons for the decision) that a satisfactory result would not be achieved by inviting tenders.”

Tonkin v Cooma-Monaro Shire Council [2006] NSWCA 50

The Court of Appeal’s decision in Tonkin is a foundational authority on the consequences of non-compliance with section 55. In Tonkin, a landholder challenged the enforceability of a contract between a council and a contractor for weed spraying on the landholder’s property, on the basis that the tender provisions of the Act had not been complied with.

The significance of Tonkin lies in two propositions. First, the Court of Appeal noted that the onus lies on a council to demonstrate that an exception under section 55(3)(i) applied when its reliance on an exception is challenged. Second, and as the OLG’s Tendering Guidelines for NSW Local Government subsequently underscored, Tonkin “emphasised the risk of surcharging action where the tendering provisions of the Act are not complied with.” In other words, a failure to comply with section 55 does not simply create a governance issue, it exposes the council, and potentially individual officers, to direct financial consequences.

SOCARES Support Group Inc v Cessnock City Council [2012] NSWLEC 23

The SOCARES decision of Pain J in the Land and Environment Court is the most detailed judicial examination of section 55(3)(i) to date. Cessnock City Council had resolved, without inviting tenders, to enter into a five-year agreement with the RSPCA for the provision of pound services. The Council relied on section 55(3)(i), asserting both “extenuating circumstances” and the “unavailability of competitive or reliable tenderers.”

The applicant, a local animal welfare group, brought judicial review proceedings challenging the Council’s decision. Three aspects of the Court’s analysis are of particular relevance to local government practitioners.

1. The test is “reasonable satisfaction,” not objective correctness

Pain J held that section 55(3)(i) requires a council to be reasonably satisfied of one of the three defined grounds, not that the ground objectively exists as a matter of fact:

“The Council must form the required state of satisfaction having regard to the evidence relevant to the ground in s 55(3)(i) relied upon. The question in judicial review proceedings is whether the Council could be reasonably satisfied on the basis of the material before it of the two exceptions relied on in s 55(3)(i) (extenuating circumstances and unavailability of competitive or reliable tenderers). This is not an objective test.”

This is an important clarification. It means that a court reviewing a council’s reliance on section 55(3)(i) will not substitute its own view for the council’s, but will ask whether the council’s satisfaction was one it could reasonably have formed on the material available.

2. “Extenuating circumstances” sets a lower hurdle than “exceptional circumstances”

The Court considered the meaning of “extenuating circumstances” , for which there is no definition in the Act. Pain J accepted the Council’s submission that:

“The meaning of extenuating in this context is that the Council must be satisfied that there are circumstances which are sufficiently different to justify not calling tenders in order to comply with s 55(3)(i).”

Her Honour drew a deliberate distinction between “extenuating” and “exceptional,” observing that the legislature chose the former term, which sets a lower hurdle. In the Cessnock case, the dire condition of the existing pound (a contaminated site, no development consent, occupational health and safety concerns, and the lessor’s refusal to permit upgrades) were held to be material on which the Council could reasonably have been satisfied that extenuating circumstances existed.

3. The resolution need not follow a rigid “two-step” process

The applicant in SOCARES argued that section 55(3)(i) imposes a two-step process: the council must first identify the defined circumstance (e.g. extenuating circumstances) and then separately state that a satisfactory result would not be achieved by inviting tenders. Pain J rejected that construction, finding that a resolution which mirrored the language of the section and set out reasons relating to the defined circumstances was sufficient.

The Court also rejected the submission that section 55(3)(i) requires a council to conduct an express investigation to identify alternative tenderers.

Practical guidance for councils

While the SOCARES decision is a favourable one for councils, it should be read as reinforcing, not relaxing, the need for disciplined processes when relying on section 55(3)(i). The following principles emerge from the case law and OLG guidance:

1. Do not treat section 55(3)(i) as a shortcut. The exception is not intended to permit a council to avoid the tender process because it has decided in advance that it prefers one provider.
2. Pass a resolution that mirrors the statutory language and states clear reasons. The resolution should identify which of the three defined circumstances the council relies upon (extenuating circumstances, remoteness, or unavailability of competitive or reliable tenderers) and explain why a satisfactory result would not be achieved by inviting tenders.
3. Assemble and retain the evidentiary basis. The council’s reasonable satisfaction must be grounded in material actually before it at the time of the resolution. Staff reports, site inspections, market inquiries, and records of council briefings all form part of the evidentiary foundation that would be scrutinised in any challenge.