The Berejiklian government's remaining council merger plans have been thrown into upheaval after the NSW Supreme Court ruled the process used ahead of a proposed merger between Ku-ring-gai and Hornsby Councils did not accord with procedural fairness.
The decision could have ramifications for other Sydney councils challenging their proposed mergers in the courts, and mean that uncertainty around council mergers will continue for months or years to come.
Ku-ring-gai won in the Court of Appeal on five of its six arguments mounted against the process used to justify its proposed amalgamation with Hornsby.
At the heart of its challenge was a report by consultancy KPMG, which recommended council mergers and which the government refused to release in its entirety, claiming it was subject to "public interest immunity."
Based on KPMG's analysis and modelling, the Government's merger proposal stated that "around $70 million in net financial savings over 20 years" would be achieved through the amalgamation of Ku-ring-gai with part of Hornsby Shire.
Judges Robert Macfarlan and John Basten ruled that the delegate appointed to assess the proposed merger could not have properly carried out his assessment without access to the KPMG report.
They also found that the public interest in keeping the report secret was outweighed by the public interest in making the information available.
Judge Ronald Sackville dissented on these points.
Judge Macfarlan found the delegate, Garry West, "did not form his own judgment about the financial advantages or disadvantages of the proposed merger but instead adopted, uncritically, the results of the undisclosed KPMG analysis."
Judge Basten found that the financial advantages identified by KPMG for the government were a critical element in favour of the merger, but this analysis was not provided to the delegate or public.
As a result, Mr West had "constructively failed" is his statutory duty of examining the government's merger proposal.
"The Council was right to assert that the delegate could not properly carry out his function of examination without having access to that material," Judge Basten ruled.
"Release of the material was also necessary for public participation in the public inquiry to be meaningful."
The ruling could affect other councils fighting their proposed mergers, because similar processes were used ahead across the state.
When she became Premier, Gladys Berejiklian said she would listen to community views about council mergers.
She subsequently decided to cancel planned mergers in the bush that had been delayed because of legal challenges, but push ahead with Sydney mergers.
The councils that have not yet been merged, but which the government says it wants to merge, are: Burwood, Canada Bay and Strathfield; Hornsby and Ku-ring-Gai; Hunters Hill, Lane Cove and Ryde; Mosman, North Sydney and Willoughby; and Randwick, Waverley and Woollahra.
Ku-ring-gai mayor Jennifer Anderson said: "We believe the court's decision signals a turning point for Premier Berejiklian's government.
"If they continue with the merger process they will be flying in the face of our community and the court," Cr Anderson said.
The Opposition Leader, Luke Foley, said the government should drop further forced amalgamations and release the KPMG report.
"Thank God we've got an independent judiciary in NSW," Mr Foley said.
"After today's shellacking the government should just admit defeat," he said.
Greens local government spokesman David Shoebridge said: "Today the Court of Appeal has said the obvious, that it is blatantly unfair to forcibly amalgamate a local council on the basis of a secret report.
"This decision doesn't just affect Ku-ring-gai Council, it could dismantle every single outstanding amalgamation proposal."
Monday's judgment ordered that Mr West's report recommending the council merger be set aside. It also ordered that a subsequent review by the Boundaries Commission be set aside.
In an earlier Land and Environment Court judgment in September, Judge Tim Moore had ruled against Ku-Ring-Gai on all grounds but one. That ground was that the delegates' report had failed to consider the impact of the merger on an area south of the M2 Motorway.
A spokesman for Local Government Minister said: "The NSW Government is currently considering the Court decision for Ku-ring-gai Council handed down by the Court of Appeal today."