Can government contracts survive the Fettering doctrine?
In this case, the New South Wales Court of Appeal considered the nature and extent of the doctrine that a government or public authority may not fetter the future exercise of discretionary powers reposed in the executive or a public authority (the Fettering doctrine).
The court held that for a contract that was otherwise validly entered into by a government or a public authority, an action in damages is available for a breach of contract arising from the exercise of discretionary powers by that government or public authority, so long as the damages awarded do not have the effect of fettering the exercise of executive discretion. In this regard, questions of degree and public policy may be involved.
This case is significant for three reasons. First, it attempts to settle the conflicting, and often confusing, positions on the Fettering doctrine at common law. Second, it proposes an approach that balances the desirability of the free exercise of executive discretion in the public interest with the need for private parties to have sufficient contractual certainty to enter into contracts with the government. Lastly, if all courts adopt the approach taken in this case, where certain qualifications are satisfied private parties could be more certain of recovering damages for breach of contract by government or public authorities.
On 17 January 2011, the applicant, Mr William Clayton Searle, was enlisted in the Royal Australian Navy as a marine technician. That enlistment included the following relevant conditions:
- a commitment by Mr Searle to an initial minimum period of service of four years;
- a requirement to comply with directions and orders given to him by persons in the Australian Defence Force who had legal authority to do so; and
- an acknowledgement by Mr Seale that no civil contract was created or implied between a member of the Australian Defence Force and the Crown or the Commonwealth, consistent with regulation 117 of the Defence (Personnel) Regulations 2002 (Cth).
On 20 June 2011, Mr Searle, at the instruction of the Navy and among a large number of other servicemen and women, entered into a contract with the Commonwealth to undertake training that would lead to a Certificate IV qualification in Engineering (the training contract). The nominal term of the training contract was four years. The commencement date was 4 April 2011.
The Navy did not provide the training specified in the training contract during Mr Searle's service. In June 2014, it announced that the servicemen and women who had signed such contracts would not be obtaining the Certificate IV. By 4 April 2015, this had come to pass.
On 19 December 2015, Mr Searle was discharged from the Navy (at his own application made 12 months before, according to his conditions of enlistment). Following discharge, he brought representative proceedings under Part 10 of the Civil Procedure Act 2005 (NSW).
On 11 February 2016, proceedings commenced. Mr Searle sued the Commonwealth for damages for breach of the training contract, together with related claims for negligent misrepresentation and in deceit. In the first instance, the Commonwealth argued that:
- it lacked the power to enter into a contract with an enlisted serviceman or woman that had the effect of fettering the exercise of the Naval Command, which, it asserted, was the effect of the training contract; and
- the training contract was not enforceable because it was not supported by consideration on Mr Searle's part.
Relevantly, the primary judge held that:
- the training contract did fetter Naval Command's discretion and was therefore beyond the Commonwealth's power; and
- in any event, the training contract was not supported by consideration on the part of Mr Searle.
Mr Searle appealed His Honour's decision on three grounds, and the Commonwealth sought to challenge the primary judge's assessment of damages by notice of contention. The relevant contractual grounds of appeal were that:
- '[t]he primary judged erred in failing to find that the Training Contract did not constitute an impermissible fetter upon the exercise of the power of military command… because the circumstance that the Commonwealth might have been liable for damages consequent upon a breach of the Training Contract did not preclude, inhibit or stultify the exercise of that power'; and
- 'the primary judge erred in failing to find that the Training Contract was supported by consideration'.
On the second relevant ground of Mr Searle's appeal, the court held that Mr Searle provided consideration on the basis that by entering into the training contract, he had extended his minimum term of enlistment by around three months.
On the first relevant ground of appeal, the court considered:
- the nature of Naval Command;
- the nature and true extent of the Fettering doctrine; and
- whether or not the training contract in fact fettered Naval Command's discretion, including whether the potential award of damages for breach of the training contract would have an impermissible fettering effect.
Regarding the nature of Naval Command, the court (per President Bell with Chief Justice Bathurst and Justice Basten agreeing) held that:
- the Navy was authorised, via the chain of Naval Command provided for under the Defence Act 1903 (Cth), to enter into the training contract and to instruct Mr Searle to do likewise; and
- the Defence Act does nothing to limit Naval Command's broad power, which includes that to require an enlisted person 'at any time to carry out whatever orders his officers might give in furtherance of the interests and objectives of the Navy'.
The court then turned to the nature and true extent of the Fettering doctrine, noting that it has been:
- variously described as 'exceedingly vague and far-reaching', 'unsettled' as to its extent and 'ill-defined';
- considered from both a public law and contract law perspective, with respective contrasting considerations of:
- 'was the Minister or governmental contracting party authorised to enter into a contract which fettered or had the effect of fettering the future exercise of executive discretion'; and
- was the contract contrary to public policy, and therefore void or unenforceable, or was the Fettering doctrine relevant to the 'determination of parties' respective intentions to enter in contractual relations and/or the manner in which a contract falls to be construed'.
- the subject of:
- significant confusion, controversy and contention, due to two competing considerations. First:
… the importance of a Minister, government department or public authority remaining free to act in the future in the public interest and for the public benefit by reference to relevant considerations at the time a particular prerogative or executive power is to be exercised.
second, '… the desirability of government being able to contract and of contractual counterparties having confidence that their bargains will be honoured'; and
- various attempts to delimit its scope, many of which the court found to be unsatisfactory in striking a balance between the competing considerations of public interest and contractual certainty.
Of the various delimitation attempts, the court preferred the approach, first proposed in a more limited sense1 in Justice Mason's dissenting judgment in Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54, of restricting:
… the remedies available to the innocent contracting party so that the contract in questions may not be enforced in a way that results in the executive in fact being fettered in the exercise of the relevant discretion, if and when the occasion arises to exercise it, but still preserving the right to an action for damages.
The court then added three qualifications to this approach:
- the contract in question is in power;
- the contract in question is:
… not contrary to public policy but that circumstances had arisen or may arise which make or may make its specific enforcement inappropriate, those circumstances being the need for the government or governmental or public authority to act in a manner inconsistent with earlier contractual undertakings; and
- in response to commentary that the 'prospect of an award of damages may itself operate as a fetter on the relevant discretion',2 the court should consider questions of degree and public policy in applying this approach.
Having established its approach to the Fettering doctrine, and that entry into the training contract was authorised by the chain of Naval Command and was a valid exercise of its broad power to contract, the court held that:
- the training contract did not in fact significantly hinder the exercise of the relevant discretion in the public interest or fetter Naval Command 'in any real sense';
- it would have been open to a court to decline any suit for specific performance of, or injunctive relief relating to, the training contract if granting such relief would have had the practical effect of fettering the Naval Command; and
- there was no evidence to suggest that Mr Searle's claim for damages against the Commonwealth would have acted as a 'practical fetter or source of inhibition on Naval Command', and that, in any case, it was difficult to see how such a modest award of damages could have that effect.
If the courts adopt this approach, when the three qualifications set out above are satisfied private parties would be more certain of recovering damages for breach of contract by government or public authorities resulting from the exercise of their discretion in the public interest.
Justice Mason proposed damages as a remedy in the circumstances where '… the contract is one to which the government is a party and the contract relates to the grant of a licence or privilege which under the law depends upon the exercise of a statutory discretion by an officer who is not a party to the contract'. In circumstances where '… statutory approval for the making of the contract exists and the contract contains an undertaking that the statutory power will be exercised in a particular way…', His Honour took the view that '… there is no room for the notion that the undertaking is invalid on the ground that it is an anticipatory fetter on the exercise of a statutory discretion. The contract, assuming it to be within constitutional power, is valid and the undertaking is free from attack.' Justice Mason further clarified circumstances where the statute imposed on the '… repository of the discretion a duty to exercise it in conformity with the undertaking…', noting that '… the contracting party may be able to compel the government and the person in whom the discretion is vested, though it has been relevantly converted into a duty, to comply with the undertaking.'
For example, E Campbell, 'Agreements about the Exercise of Statutory Powers' (1971) 45 Australian Law Journal 338 at 340; D Rose, 'The Government and Contract' in PD Finn (ed), Essays on Contract (1987, Law Book Co) 233 at 242.