MAI --- Constitutional Validity in the High Court
PART 1 of  3 PARTS
The Multilateral Agreement on Investment (MAI) treaty is unconstitutional according to Australian law. Various High Court decisions are detailed, plus the implications of signing, opportunities for a challenge in the High Court, and political and legal options for action to oppose MAI. David Keane

[ 79 ] [ Contents ] [ Home ] [ Concise Overview ] [ Open Letter ] [ Foot ] [ Next ] [ 81 ]                       By David Keane
August 1998

This article seeks to demonstrate that the signing and implementation by the Commonwealth government of Australia, of a proposed international treaty called the Multilateral Agreement on Investment (MAI), is unconstitutional according to Australian law. The article then proceeds to discuss the implications of signing, opportunities for a challenge in the High Court, and political and legal options for action to oppose MAI. But first, for those not yet familiar with exactly what MAI is, some introductory material is here presented.

What is MAI?

The Multilateral Agreement on Investment has been planned and negotiated in secret since 1991 by representatives of the 29 governments of the Organisation for Economic Co-operation and Development (OECD), the world's richest nations, in association with major corporate lobby groups. Official negotiations over the MAI began in 1995 and the first draft treaty was ready in January 1997.

A leaked copy of the document found its way onto the internet and people were progressively alerted to what was going on. Opposition mounted, preventing the finalisation of the agreement at the initial May 1997 deadline or subsequent April 1998 deadline. From October 1997, opposition pressure forced some limited consultation with non-governmental groups that represent environmental and social interests. The negotiating committee is due to resume its work in October 1998 to finalise the treaty so that it can be ratified.

According to the 1997 draft, it is an agreement designed to:


In Australia the Joint Standing Committee on Treaties (JSCT) started its public hearings on the MAI in Canberra on 6 May 1998, having received largely 800 largely hostile submissions. It is the job of this committee to recommend to the government whether Australia should sign the agreement.

Janine Murphy (representing the Department for the Treasury) told the committee that "Treasury would agree that trade and investment liberalisation is good for economic growth". The Treasury submission stressed the benefits of the proposed agreement: "It is likely that the main benefits to Australia from the MAI would flow from greater certainty for Australians investing overseas and from overall greater certainty for global investment."

In its Interim Report, the JSCT Committee strongly criticized the Treasury's submission as inadequate:

1.54 "The Treasury submission is a disappointing document especially from the department responsible for the MAI, because it does not assist us significantly in evaluating the agreement. Running to only 11 pages, it provides a quick summary of issues rather than addressing the MAI in more detail."

The Committee also criticised Treasury officials for inadequate information shared with State governments, municipalities and the public.

1.25 "Our impression at this early stage of the inquiry is that the Treasury's assertions about a 'very wide ranging and consultative process' considerably overstates the reality. At the public hearing on 6 May 1998 we were unable to obtain a complete (and coherent) picture of the nature and extent of consultations to date and received insufficient information to justify such a strong claim. The message from many submissions so far received is that consultation has been inadequate."

1.30 "Although the MAI is likely to have significant ramifications for the States and Territories, Commonwealth consultation with the States and Territories to date has been inadequate. The Premier of Victoria, the Hon. Jeff Kennett, described the information provided to the States and Territories as 'limited'. "

1.40 . . . . . " Indeed, the scope of the MAI is such that it would have been appropriate for the States and Territories to be represented on the negotiating team from the outset." (from 1995)

1.41 "The fact that Australia's preliminary exceptions do not include State/Territory matters suggests that the States and Territories are not, as yet, sufficiently aware of the implications of the MAI to develop their views on the potential impact of such an agreement. It is also an indication that their concerns have not yet found their way into Australia's negotiating position, some three years after the process commenced at the OECD."

1.42 "Questions also remain about the impact of the MAI on local government. If this is the case, as several submissions claim, then local government too ought to be involved closely in the consultative process. We note that the list of organisations consulted to date omits this level of government."

The JSCT also listed a wide range of concerns including rollback and withdrawal provisions that need to be resolved.

As a result the Interim Report recommended that

(1) Australia not sign the final text of the MAI unless and until a thorough assessment has been made of the national interest and a decision is made that it is in Australia's best interest to do so.

and (2) the Committee continue its public enquiry into the MAI and provide a fuller report to Parliament at a later date.

The Nature of Australian Constitutional Law.

Australian national government was formed on January the first, 1901, through a British statute, establishing the Australian Constitution as the legal basis for future Australian government. The Constitution specifies the essential structure for national government (called in that document the Commonwealth of Australia), how that government is strictly divided into three sectors, the legislature, the executive and the judiciary, and how power of government is shared federally between the Commonwealth and the several States (formerly British colonies). Ultimate decision of all legal questions relating to interpretation of the Constitution is vested in the High Court.

A phrase taken directly from the Constitution itself refers to questions of distribution of power between the Commonwealth and of the several States, as inter se questions, meaning "between". In particular, it is contended in this article that the Commonwealth does not have the Constitutional right, according to inter se considerations, to sign the MAI agreement. The Constitution shows how power is divided between the Commonwealth and the States, much in the way of deciding how a cake is shared between two parties. The Constitution defines various definite powers which are granted to the Commonwealth, but it does not specify the powers granted to the States. The States are generally free to govern in any area of government (a right conferred to them through the various colonial constitutions), except in those areas specifically defined in the Constitution of Australia, as attributed to the Commonwealth. That is, the Commonwealth is granted specific powers, clearly defined in the Constitution, and the States are granted the remainder of unspecified powers, or the general residue.

In general, if the right for the Commonwealth government to enact legislation or conduct certain executive activities are challenged on inter se grounds in the High Court, then the Commonwealth must as a first step in its defence, declare which specific powers nominated in the Constitution grant the Commonwealth the right to enact the disputed legislation or conduct the disputed activity. In effect, they must find a suitable 'pigeonhole' under which the law or activity contested may be classified.

If the MAI agreement is contested in the High Court, the Commonwealth will be required to declare which pigeonhole is granted to the Commonwealth in the Constitution for such legislation or activity. There is little doubt which pigeonhole the Commonwealth will choose in such a High Court case. They would cite section 51 (xxix) (foreign affairs power). In full, this sub-section reads;

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:-
(xxix) External affairs:

There is no question that the MAI agreement 'touches and concerns' this head of governmental power, but to achieve a final ruling on inter se questions, requires many more considerations. Let us then begin with a consideration of some of the landmark cases which have guided the High Court to adopt an expansive interpretation of the external affairs power.

Burgess (1936). The High Court found that, where an international agreement imposes obligations, these must be substantially carried out for the executing law to have validity merely by virtue of this power. Following this ruling and with the proliferation of treaties and agreements on such diverse areas as human, economic, social and cultural rights, and ecological protection, the foundation was laid for a view of the external affairs power which admitted the Commonwealth to many new areas of responsibility, without Constitutional amendment.

Sharkey, Burns (1949).The High Court ruling implied that the international agreement must be on a subject ordinarily considered appropriate for international action.

Franklin Dam.The High Court held by a 4 to 3 majority, that the external affairs power authorised the contentious section of the National Parks and Wildlife Conservation Act in that it permitted the carrying out of regulations to prohibit the destruction of trees, the building of roads and the construction of a dam in the Western Tasmania Wilderness. The Court held that it was enough for validity that the government entered into a convention - on any matter - and that Parliament, in conformity with the convention, implemented its provisions. There were three dissents, Justices Gibbs and Wilson requiring something involving international relations, and Justice Dawson requiring a matter of international concern.

The Case against MAI

Below are listed four grounds for constitutional challenge against MAI.

(1) The MAI agreement is in essence and substance a commercial contract dealing with the powers and rights of both Commonwealth and State governments. The Commonwealth does not have the power to make such contracts on behalf of the States.

In deciding what characterises a particular law, the High Court must make an evaluation and choice as to what is thought to be the most important feature of the law.

Thus in Second Uniform Tax (1957), the Court by majority held invalid a Commonwealth law which prohibited the payment of State income tax until the Commonwealth tax for the year in question should have been paid. The provision certainly 'touched and concerned' the subject of Commonwealth tax (section 51 (ii)), but the majority thought its qualities as a law concerning State taxation was more significant than its quality as a law concerning Commonwealth taxation.

Also in Homebush Flour (1937), the NSW government attempted to impose what in substance was an excise duty on flour manufacture (control of excise duties are conferred to the Commonwealth under section 90), by compulsorily acquiring flour from merchants, then offering it back at a higher price than the acquisition price. The merchant was not legally compelled to purchase, but it was in practice essential for him to do so if he wanted to stay in business. The High Court held unanimously, that this was an excise. The majority ruled by treating the substantial effect as decisive, with the incidental inference that strong inducement could be treated as equivalent to compulsion.

In Bank Nationalisation (HC) (1948), it is implied that the financial corporations power (section 51 (xx)) probably does not include power over banks, because otherwise the carefully guarded terms of the banking power (section 51 (xii) ) would be without purpose. That is, if an interpretation is suggested for one Commonwealth power so broad as to make it unnecessary for the Commonwealth to be given other powers, then the interpretation is likely to be rejected by the High Court.

The parallel between Bank Nationalisation and the MAI agreement is that the Constitution makes ample provision for the federal sharing or powers between Commonwealth and States. The Commonwealth cannot therefore through executive action, even though claimed under the external affairs power, set up a mechanism which would deny the States its rights and powers in a general sense. In Franklin Dam, the effect of the expansive interpretation of the external affairs power was such as to transfer the area of conservation management from the States to the Commonwealth. Franklin Dam transferred just one specific head of power. If the MAI agreement were signed it would potentially lead to the general transfer of numerous heads of power.

How could the signing of the MAI agreement lead to a State losing some (or several) heads of power? If a foreign investor thinks a country where it has invested is violating the MAI, the investor can directly challenge the host country (Australia) before a special international corporate tribunal. The tribunal will decide whether the Australian government is in breach of the agreement and if so, can advise it to change the laws and award damages which could run up to millions of dollars. The breach ruled against by the special tribunal may be an act of a State government, or an activity of a State citizen acting within the laws of the State; in fact anything a State government did which had an adverse effect on any company asset could be challenged in court. There are many such State laws and powers that could be challenged and taken to this special tribunal, because they would be deemed under the terms of the MAI to discriminate against or restrict foreign investment, or apply special conditions. Virtually anything to do with financial management is subject to legal challenge in this way. This may include financial support by State governments for public facilities such as public hospitals or public schools, or laws protecting heritage buildings or measures to prevent toxic waste dumping or environmental protection of rivers, flora and fauna. The special exemptions granted to any nation would be no protection against eventual legal challenge, because such exemptions, if granted, would probably have to be rolled back according to a set timetable.

It may be argued that the intention of the MAI agreement is simply to facilitate freedom of international investment. But when that freedom is granted supreme authority through a treaty implemented through the courts, the freedom can dominate other sectors of government. Two examples may be given here as an illustration. Firstly there is the Ethyl Corporation v Canada case regarding the NAFTA treaty. The Canadian government banned a petrol additive called MMT, considering it to be a dangerous toxin. But after Ethyl Corporation sued for damages on grounds of restricting foreign investment guaranteed under the NAFTA treaty, the Canadian government was forced to make a public statement that MMT was safe, and that Canada would allow use of the petrol additive. Secondly we may consider section 92 of the Australian Constitution, which guarantees that interstate trade shall be free. Now the original intention of this section, as broadly acknowledged by historians, was simply to protect interstate trade from discriminatory legislation. But the effect of section 92 as it has been interpreted in the High Court, has been to restrict the ability of government to regulate any trade which has an interstate component.

Now if the Australian government is found guilty of breaching the MAI agreement by an international court, it will have a double obligation. Firstly it must, under the terms of the MAI, stop the State from continuing the supposed violation. If the act or law is rightfully by the Australian Constitution in the sphere of State residue of power, the Commonwealth can do nothing except apply financial pressure, to force the renegade State to comply with its demands. Otherwise, Australia would continue to be in breach of MAI, and the damages against Australia might increase.

Secondly the Commonwealth must find some way of paying the initial damages costs to the offended foreign investor. How much could be involved? We can compare the recent case under the North American NAFTA agreement between the US, Canada and Mexico, which had rules similar to the MAI agreement. The US petroleum giant Ethyl Corporation recently sued for damages of $251.US million from the Canadian government because its profits have been restricted by a Canadian ban on MMT, a toxic manganese based anti-knock petrol additive that the company had been making and selling in Canada, but which is considered by Environment Canada to be a public health hazard.

Where would the Commonwealth get such a huge amount of money except by again applying financial pressure to the offending State, or by reducing by this amount annual grants to the offending State, for hospitals, schools and roads? This would be most definitely regarded by the High Court in any appeal going to it, as an act of strong inducement, and as in the case of Homebush Flour, it would be deemed by the High Court as compulsion. The High Court has on numerous occasions, ruled that what cannot be achieved directly through the High Court, cannot be achieved by indirect approaches that on the face permit the State government to maintain its areas of former government. But the effect of Australia joining the MAI may enforce State run public institutions such as schools or hospitals to go private, so to safeguard themselves against attack by not providing a level playing field for international investment. This, the High Court will see straight away, and so it must inevitably rule against the Commonwealth.

In any hearing before it on such matters, the High Court must inevitably rule that the MAI agreement is in essence and substance a commercial contract infringing upon the Constitutionally guaranteed powers and rights of the State governments.

(2) Signing of the MAI by the Australian Government in effect grants to the special international corporate courts set up under MAI, authority to decide upon inter se questions. Under the Australian Constitution, such authority can only be vested in the High Court.

By signing the MAI, the Australian Government commits itself to force the States to toe the line to this agreement, even by assuming vast control over State areas of power. In effect, the Commonwealth can do this only by asserting unbearable financial pressure against any renegade State (that is, a State trying to maintain its Constitutionally guaranteed rights and powers). The court that will decide which Constitutionally guaranteed State freedoms and powers are to be abridged will be, under the MAI agreement, a special international corporate tribunal set up under MAI. That is, if the MAI treaty is to be strictly honoured and adhered to, power will be granted to the MAI international courts to rule against constitutionally correct activity and legislation of States. In this way, if no challenge is made to the High Court concerning the validity of MAI, then the High Court will become in comparison with the international courts, relatively ineffectual.

In effect, signing of the MAI agreement is an attempt to set up a fourth sector of Australian government. Our Constitution provides for three distinct sectors of government. Section 1 states clearly that legislative power is vested in the legislature; section 61 that executive power is vested in the Crown, and section 71 that judicial power is vested in the courts there mentioned. Signing the MAI by the Australian Commonwealth government, would ensure that a fourth sector would be set up, an economic sector. Power in the economic sector would be vested in the multinational corporations, who would be granted the freedom to sue the Australian government according to its greed, and would indeed do so, until all other sectors of the Australian and States governments were submissive to it. Thus in the end, the Australian experiment in federal constitutional government would wind up in just one dominant sector, the economic sector vested in the multinational corporations. And federalism as we have come to know it would become extinguished.

The High Court has always insisted that it has the final responsibility for deciding questions of constitutionality; they have not allowed any element in any decision whether a legal or factual element, to be decided by any authority other than themselves. As Justice Griffith put it in Heiner and Scott (1914), "The stream cannot rise above its source". Thus the High Court would have no hesitation in deeming invalid, any attempt to diminish the power of the Australian judiciary and of the States, through a simple executive action.

(3) The Commonwealth government cannot, through a single executive action, take control and usurp the basic powers of States nor destroy the democratic system which has been fundamentally guaranteed in our Constitution.

Signing of the MAI carries with it the effect, if unchallenged in the High Court, comparable with the extreme application of a purposive power, in which the Commonwealth seeks, through a simple executive action, to dominate all facets of Australian government, both Commonwealth and State.

The High Court has ruled that there is only one head of power under the Constitution which is purposive in nature. That head is section 51 (vi), the defence power. In the case Farey (1916), the High Court ruled that "the Commonwealth may make laws reasonably calculated to achieve the purpose of defence". In this case, the majority ruled that the defence power was treated as extending in times of 'hot war', to control of the domestic economy for purposes of war organisation. Through rulings in numerous cases brought before the High Court, the application of the defence power was found to depend on whether the nation was in a time of 'hot war', or post-war unwinding, or deep peace, or growing international tension, or preparation for war. At times of hot war, the scope of the defence power expands enormously, and the Commonwealth has virtual freedom to do anything it desires which could reasonably be considered as contributing substantially to the war effort.

The signing of the MAI agreement would be an attempt by the Commonwealth government to assert as great a control over all aspects of government, including traditional State areas of control, as it had enjoyed at times of "hot war". It can justifiably be suggested that the signing of the MAI agreement is purposive in its effect, the purpose being the submission of all sectors of Australian government, Commonwealth and State, to economic control by multinational corporations. The scope of this power, if unchallenged in the High Court, would be so vast as to make all other laws and rights and powers guaranteed in the Constitution, ineffective.

In an article by David Rowan in the Guardian Weekly of February 22, 1998, he writes;

"The MAI gives international investors a 'level playing field' . . . it would grant corporations the right to buy, sell and move their operations wherever they wish around the world, without government regulation . . . the constitution's bill of rights extends only as far as the investors . . . three conditions apply, (1) non-discrimination (foreign investors cannot be treated worse that domestic companies), (2) no entry restrictions (signatories cannot refuse any form of foreign investment, including the purchase of privatised companies, in any sector apart from defence), (3) an absence of special conditions (such as to ensure local employment or to control currency speculation) . . . we are about to cede to international investors some of our more fundamental democratic rights . . . MAI will give multinationals power to sue national governments for any profits lost through laws which discriminate against them . . . it will put at risk international UN treaties on climate change, and over fishing, and will threaten workplace and environmental legislature . . . it will acknowledge for the first time that corporate capital now has more authority and freedom to act than mere national and local governments . . . and what of a national government that decided to prevent an international press baron from pricing his newspapers below cost? . . . MAI would, according to Friends of the Earth, let companies oppose the Kyoto agreement under which industrial countries gave developing countries 'climate-friendly' technology in return for pollution rights: for such rights would be an anti-competitive subsidy. Similarly, the MAI could challenge the UN Convention on Biological Diversity, designed to protect developing countries' genetic resources, as foreign multinationals demand equal access to such resources."

Such extremes of control of State rights and powers by the Commonwealth have only one approximation in the entire Australian Constitution, namely the defence power at times of hot war.

A principle strongly adopted by the High Court, and which has been frequently contended by Sir Garfield Barwick, is that powers must be exercised on grounds or by reference to criteria which are reasonably related to the power itself; for example a law with respect to banking must take banking considerations as the basis for its operation. Under this principle, the head of power granted by section 51(xxix) (foreign affairs power) could never justify the extreme acts for compliance by States which would be demanded in order to avoid breach of the MAI agreement.

The World War II cases Public Service (1942, 1943) involved limitations on the Commonwealth's defence power which were partly due to a judicial feeling that the Commonwealth should not, even in time of hot war, be allowed to go too far in the direction of running the government of the States. Justice Starke was most explicit, saying,

"The maintenance of the States and their powers . . . is as much the object of the Constitution as the maintenance of the Commonwealth and its powers. It is inconsistent with the federal system set up by the Constitution that the Commonwealth should enact legislation compelling the States, as such, to take or refrain from any action, or to expand their revenues, in manner prescribed by the Commonwealth".

And so in the Public Service cases, it was held that the Commonwealth could not regulate the working conditions of State public servants, not engaged in industrial undertakings, unless their duties were directly related to the war effort.

In State Banking (1947), Justice Starke said, "neither Federal nor State governments may destroy the other nor curtail in any substantial manner the exercise of its powers or obviously interfere with one another's operations". And so in these cases a principle of applied immunity, first expressed in D'Emden (1904), was reaffirmed, but with qualifications and cautions suggesting that the 'interference' prohibited must be 'substantial' (Starke) not 'notional and abstract' (Dixon).

Uther (1947), Bogle (1953) and Cigamatic(1962) are other High Court cases relating to the degree by which the Commonwealth might be subject to State law.

An argument along these lines was lost by the Tasmanian government in Franklin Dam, and this case gives an interesting insight in the issues involved in this line of challenge. The Tasmanian government contended that regulations made under the National Parks and Wildlife Conservation Act would impair the existence of Tasmania or its capacity to function, or its prerogative. The Court held that the Commonwealth law did not impair the continued existence of the State, or its capacity to function, legislatively or executively. Neither did the law impair Tasmania's prerogative in respect to its Crown land. This ruling, on face value, seems to support an expansive interpretation of Section 51 (xxix). Yet if we look at the judgments themselves, they indicate the probability of limitations to the scope of Section 51 (xxix). Justice Mason ruled that;

"Although the reach of the prohibitions contained in the Regulations is wide and the impact on Tasmania's capacity to control development is severe, . . . To fall foul of the prohibition, in so far as it relates to the capacity of a State to govern, it is not enough that the Commonwealth law adversely affects the State in the exercise of some governmental function as, for instance, by affecting the State in the exercise of a prerogative. Instead it must emerge that there is a substantial interference with the State's capacity to govern, an interference which will threaten or endanger the continued functioning of the State as an essential constituent of the federal system."

The argument here presented against the MAI agreement, is not that it affects the State government in the exercise of a single government function, but rather that it affects the State government in the exercise of most government functions. By imposing a threat of litigation against any constitutionally valid power of the State, to be decided in an international court not subject to the High Court, presents such a situation, which, in Justice Mason's words, would provide "a substantial interference with the State's capacity to govern, an interference which will threaten or endanger the continued functioning of the State as an essential constituent of the federal system." According to Justice Mason, a Commonwealth law providing such substantial interference to a State would be invalid.

(4) The Commonwealth government has no Constitutional authority to financially pressure the States, nor to enforce compliance with any MAI agreement by selectively administering money derived from collection of income tax, or by directing the manner in which the States should acquire their revenues.

The plain fact is that the Commonwealth government does not have exclusive Constitutional authority to collect income tax. Before 1942, both Commonwealth and States collected income tax, and the constitutional validity of this arrangement has never been disputed.

In Uniform Tax (1942) the High Court held valid all the essential elements by which the Commonwealth forced the States out of the income tax field. The measure under which the Commonwealth compulsorily acquired the State income tax departments, was valid only under the 'hot war' defence power.

It is vital that we consider the Uniform Tax (1942) case in greater depth. Several sections of the Constitution were ruled upon;

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:- (ii) Taxation, but so as not to discriminate between States or parts of States.

Section 96. During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit.

Section 99. The Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof.

Section 106. The Constitution of each State of the Commonwealth shall, subject to this Constitution, continue as at the establishment of the Commonwealth, or as at the admission or establishment of the State, as the case may be, until altered in accordance with the Constitution of the State.

Section 107. Every power of the Parliament of a Colony which has become or becomes a State, shall, unless it is by this Constitution exclusively vested in the Parliament of the Commonwealth or withdrawn from the Parliament of the State, continue as at the establishment of the Commonwealth, or as at the admission or establishment of the State, as the case may be.

The Commonwealth had earlier that year enacted several Acts of Parliament, whose combined effect was clearly (this was openly conceded by the Commonwealth) to give full control over income tax to the Commonwealth government for the duration of the war.

In the Tax Act, the Commonwealth raised the level of Commonwealth income tax to equal the combined total of the amounts which would have been raised by the Commonwealth and State Acts which were in operation till the preceding June 30th. The effect was that, on average, the States lost 63% of their total tax revenue, because the Commonwealth tax was so high that the States were afforded very little room to raise their own income tax.

The Court agreed that the Commonwealth Parliament had no power to prohibit a State exercising its taxing power. They pointed to sections 106 and 107 of the Constitution, which do not confer powers upon a State government, but rather preserve existing powers. After conceding that the States have every right under the Constitution to collect tax (apart from customs and excise which are exclusively vested in the Commonwealth) Justice Latham continued;

"These provisions (sections 106 and 107) cannot be relied upon to limit by either express or implied prohibition any provision conferring powers upon the Commonwealth. They do make it clear that the Commonwealth possesses only the powers granted by the Constitution. But they do not limit the sphere or restrict the operation of the powers which are so granted."

On this point, Justice Latham noted that there was no provision in the Tax Act to prohibit State taxation, and that therefore there was no reason why the Commonwealth should not be free to review the level of its income tax to any level it chooses.

The Commonwealth sought to redress the position which it had created by offering grants of money to the States by the State Grants Act. This Act was to continue until the last day of the first financial year after the war. The annual grants were made to each State upon the condition of that State not imposing any tax upon incomes in each relevant year. The States objected that the Acts involved discrimination contrary to Section 51(ii) and preference contrary to Section 99 of the Constitution, and that the Grants Act was, by reason of the condition of abstinence from imposing income tax attached to the grants, not a valid exercise of the power conferred by Section 96 of the Constitution to give financial assistance to the States.

Justice Latham pointed out that there was nothing in the Grants Act which deprived a State Parliament of the power to impose income tax. He continued, "Not withstanding the Grants Act State Parliament could at any time impose an income tax. The State would then not benefit by a grant under the Act, but there is nothing in the Grants Act which could make the State income tax legislation invalid." He continued, "Admittedly the Commonwealth Parliament could not pass a law compelling a State to surrender the power to tax incomes or prohibiting the exercise of that power by a State. This identification of a very attractive inducement with legal compulsion is not convincing. Action may be brought about by temptation --- by offering a reward --- or by compulsion. But temptation is not compulsion."

He clarified the State's position in these words, "The Grants Act does not compel the States to abandon their legislative power to impose a tax upon incomes. States which do not abstain from imposing income tax cannot be said to be acting unlawfully. There is no command that they shall not impose such a tax."

He pointed out that revenues collected under the Tax Act were not earmarked, but went into the Consolidated Revenue Fund. It was from this Fund that State grants were financed. He went on to say that there was no discrimination between States and preference to States under Section 96 "because that section is not subject to any limitation with respect to discrimination."

In conclusion, he ruled the Grants Act valid, saying: "The section (96) contains no express or implied prohibition against any kind of discrimination. Thus it is no objection to the Grants Act that States which abandon income tax are given a grant while those who retain income tax get nothing."

The War-Time Arrangements Act showed an intention of the Commonwealth Parliament that the Commonwealth should take over the officers and the physical means which were necessary for the administering any system of State taxation upon income. As soon as a State which refused to abandon income tax formed a department to collect the tax, the Commonwealth could take it over. It was this Act which did in the most direct fashion compel the States to abandon their separate income taxes, and it was held valid only by a majority of 3 to 2, Justices Latham and Starke dissenting by reason of the doctrine of implied immunities developed in the Public Service cases. The measure under which the Commonwealth compulsorily acquired the State income tax departments, was valid only under the 'hot war' defence power.

Once the collection of income tax was entrusted to the Commonwealth, the system has maintained itself by its own economic and political momentum. Even though, since the end of the Second World War, with the ending of the special 'hot war' conditions, there has been no constitutional reason for the States not to resume collection of income tax, nor for the States to be bound to accept Commonwealth dominance in economic affairs.

In theory, the States could in peace-time re-impose income tax at any time. They could do it in practice if they all combined together to give the Commonwealth an ultimatum as to time and method of resumption, but there are formidable difficulties in the way of any one State or a small group of States acting separately.

In part, this is because under sections 51 (ii) and 99 of the Constitution, the Commonwealth would be unable to impose income tax at different rates in different States.

If the States ever did team together to re-impose State controlled income tax, then the States would have re-asserted their constitutionally valid financially equitable position with the Commonwealth. In this way, the Commonwealth would have lost financial control over the States to enforce compliance over MAI or any other matters.

- - - - -

There is a further ground of challenge which may be possible, depending upon the final draft of the MAI treaty. The most recent draft of MAI is so worded that only signing nations can be obliged to become respondents before the special international corporate tribunals. If this situation remains so in the final version of MAI, then this fifth ground for challenge will not be required. But MAI negotiations have had some heavy setbacks, and there could be substantial redrafting come October 1998. The MAI is in many respects modeled from the NAFTA agreement between US, Canada and Mexico, (ensuring unrestricted free trade and freedom for investment by multinationals). Recently under the NAFTA treaty, the Mexican government was sued by US companies because local authorities in Mexico stopped the companies from setting up toxic waste dumps within their jurisdiction.

If the final text for the MAI treaty requires States, local authorities or State citizens conducting activities approved under State law, to become respondents to a special international corporate tribunal set up under MAI, then the following ground of appeal to the High Court would also become highly relevant:

(5) The Commonwealth cannot oblige any of the States or citizens of a State to become respondents to the special international corporate tribunals set up under MAI.

If any State, local authority or State citizen conducting activities approved under State law, were required under the MAI treaty to become a respondent to a special international corporate tribunal set up under MAI, then such a State, local authority or State citizen would naturally immediately appeal against the summons to the High Court, where it would easily win the case because the Commonwealth does not have any Constitutional head of power that can justify such a summons.


- - - - -

There is also a sixth ground of appeal, which will be relevant only if the list of reservations submitted to the negotiating committee on MAI is expanded to include a number of headings relating to heads of power allocated by the Constitution to the States. At the moment the 16 headings of reservations seem not to include any State areas of authority, and so this ground is only applicable if the Commonwealth expands its list of reservations it is submitting to the negotiating committee.

(6) The Commonwealth cannot, by either executive action or by legislation, take away the general powers of States allocated to them under the Constitution, and substitute these general powers by a list of special powers nominated by the Commonwealth government.

Perhaps the most basic principle enshrined in the Australian Constitution is that the Commonwealth is given a list of special powers nominated in the Constitution, and the States are given the general residue of powers. The Justices of the High Court would not tolerate any attempt to undermine this most fundamental principle of Constitutional Law.

The very nature of the MAI agreement is to take away the State powers in a general sense. The fact that the Commonwealth may feel obliged to expand its list of reservations to include a list of State powers, would only be an admission by the Commonwealth that there is a need to do so, because the State powers are in fact taken away in a general sense by the MAI treaty. Continued in Part 2

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