21 May 2021

Support for local businesses: a good idea, but watch those fish hooks

Who doesn’t love supporting their local businesses? It’s a powerful driver for not only individuals, but also business owners and managers.

But what about councils? Can they establish a “buy local” policy that favours businesses just down the road over those outside their borders, and if so what are some things to consider?

Acts that come into play when considering this question include the Competition and Consumer Act 2010 (Cth), the Fair Trading Act 1987 (NSW) and the Local Government Act 1993 (Act). “Tendering Guidelines for NSW Local Government”, issued in October 2009 (Guidelines), must also be considered and, in some circumstances, even some international trade agreements may also come into the frame.

Given the volume of legislation to consider, it may come as a surprise that the answer is a clear “yes” – councils’ freedom to institute buy local policies is recognised in, among other places, the Tendering Guidelines for NSW Local Government (Guidelines).

But that freedom is not absolute or unlimited, as becomes obvious from paragraph 1.6 of the Guidelines, which states that a council should develop a buy local policy if it wishes to consider local preference as a factor in the procurement process.

Note the temperate wording: “consider”, “preference” and “a factor”. Add these together, and it’s obvious that a buy local policy is not a licence to tilt the playing field unduly in favour of the businesses in the council neighbourhood.

Which then raises the question of what is an acceptable advantage, and at what point does a line get crossed?

The law – as it often is – is not prescriptive on this point. Some councils offer local businesses a 15% price advantage when putting projects out for tender, and there has yet to be a successful legal challenge to this. But as to how much exactly is too much, has yet to be determined.

Also important is the type of work to be carried out. By implementing a Buy-Local policy, councils may not, in certain circumstances, be breaching the Competition and Consumer Act, which is designed to prevent practices that substantially lessen competition. Its provisions regarding restrictive trade practices apply to councils when they are acting as, or carrying on, a business, as opposed to carrying out statutory functions.

What constitutes (and doesn’t constitute) carrying on a business is – again – not prescribed in all cases. Case law provides some useful guidelines.

  • For an activity to be regarded as a “business” it must have some element of commerce of trade such as a private citizen or trader might undertake.

  • A business refers to activities undertaken as a going concern, not just a one-off activity.

  • Although a business can be for non-profit, the existence or absence of a profit-making purpose is relevant.

  • A business activity is one that takes place in a business context and bears a business character. That generally rules out the carrying out of regulatory or governmental functions in the interests of the community or the performance of a statutory duty in relation to which fees are charged.

As mentioned, activities that fall outside this purview include those required by council as part of their statutory or regulatory obligations. Such things, that is, as sewage. Also, not regarded as business activities are those that a council undertakes at its discretion in order to meet the current or future needs of its community.

Note, however, that while building a road might be considered part of a council’s statutory role, charging tolls on that road could well be regarded as a business activity. Murphy v Victoria [2014] VSCA 238, which centres on such an instance, is still being argued and we await the outcome with interest.

If considering a Buy Local policy, councils should keep in mind the following requirements. The policy should be:

  • Based on sound reasoning and include a statement indicating the basis for its use.

  • Clear in its application - for example, where an additional cost would be incurred by the council in implementing its policy, the maximum amount or percentage of that additional cost should be specified and the particular circumstances in which the amount should also be acceptable to the local community.

  • Disclosed to all potential tenderers prior to their decision to submit a tender.

  • Included in the tender documents and identified in the evaluation criteria.

  • Referred to when reporting the result of the tender evaluation process including the details of any additional cost to be incurred by the council if it accepts a tender, other than the lowest tender, as a result of the implementation of the policy.

In summary, councils:

  • Generally, may implement or apply a Buy Local policy, or other policy designed to favour local businesses, in relation to works that are conducted as part of their statutory obligations and do not include any business-type activity.

  • Must ensure the policy does not unduly tip the playing field in favour of local businesses.

  • Must be transparent in their application of the policy. > Should seek legal advice when developing or amending a Buy Local policy, or any initiative designed to confer an advantage on local businesses, to avoid the potential fish hooks are both numerous and widely scattered throughout numerous pieces of legislation. Gaining an independent, specialist view is a prudent investment.

Author: Norman Donato