BY NICK SEDDON

The fettering rule

When government enters into a contract, there is always a potential tension. To what extent does the contract bind the government in a way that may thwart the government’s task of governing? The answer to this traditionally has been that freedom to govern trumps freedom of contract. Under various labels (executive necessity, the rule against fettering or, more vaguely, sovereign risk) the government must be free to implement its programs and policies even if this causes the government to be in breach of contract. Traditionally, that is too bad for the contractor with no right to a remedy.

This collection of principles has generated much controversy over many years, though it arises rarely. The controversy is fully described by Bell P, the lead New South Wales Court of Appeal judge in Searle v Commonwealth.

This tension is captured in a number of propositions (stated starkly here):

The government may simply break a contract with impunity; The government cannot contract out of, or relieve the contractor from, existing statutory obligations; The government cannot through a contract fetter its future exercise of executive power; The government cannot through contract commit to future legislation; The government may instigate legislation to override an existing contract.

Propositions 2 and 4 are less controversial and are well-established. Propositions 1 and 3 are controversial and ill-defined. Proposition 5 is well-established but controversial.

What happened in Searle

On the face of it, the facts of Searle hardly seemed to raise issues of executive necessity or fettering and, indeed, at trial the Commonwealth only very belatedly realised it had an argument based on the fettering principle.

Searle joined the Navy as a marine technician. After being signed up, he entered into a training contract under which he would undertake a course of training towards a Certificate IV in Engineering. The training contract expressly said that it was legally binding. Under it the Navy undertook to provide a training plan and the various components to achieve the Certificate. The Navy failed to provide these elements of training. The Navy had decided no longer to sign up servicemen or women to training contracts of the kind entered into by Mr Searle. After leaving the Navy, Searle sued for damages for breach of contract. He argued that, if he had achieved the Certificate, he could have obtained a more remunerative job in civilian life than he in fact got. Other Navy personnel were similarly affected and joined a class action.

There is a special legal background to this story. Going back to medieval times, English law held that the Crown does not enter into contracts with its servants. This applies in Australia although, for the ordinary public service, it has been superseded by elaborate legislation. Not so for the military, or at least not so as to remove the basic proposition that there is no contract between an ADF member and the Commonwealth (see the then applicable provision in 2011: Defence (Personnel) Regulations 2002 (Cth), reg 117). Such members are engaged at her Majesty’s pleasure.

The no-fettering argument in Searle

The Commonwealth said that the basic employment arrangement was not contract but, instead, an exercise of the Crown’s prerogative (or executive) power. Even if the training contract was a separate arrangement, over and above the underlying employment arrangement, the training contract could not fetter the Navy’s prerogative right to direct, control and manage Searle as a military person (dubbed “Navy Command” in the Court of Appeal). This was therefore a proposition 3 (the training contract could not fetter the exercise of Navy Command), or possibly a proposition 1 (the Commonwealth could simply break the training contract with impunity), case. This argument succeeded before the trial Judge, Fagan J (Searle v Commonwealth of Australia [2018] NSWSC 1017). The training contract could not prevent, for example, a decision to post Searle to a ship or to an overseas posting, even if such a posting prevented the required training.

The consideration point in the Supreme Court

It was also argued before Fagan J that Searle had not provided any consideration under the training contract because he was not promising to do anything more than he was already obligated to under his employment arrangement. Although it was not necessary to decide, the Judge agreed that there was no consideration. Performing, or promising to perform, an existing duty is no consideration.

Justice Fagan made a contingent assessment of damages of $60,000 in case he was wrong.

Appeal

On appeal, the New South Wales Court of Appeal took this opportunity to examine the long-standing controversy about particularly propositions 1 and 3, described as “uncertain” and “ill-defined”. The lead judgment by Bell P was supported by short judgments from Bathurst CJ and Basten JA. It was held that the training contract did not amount to a fetter on the Commonwealth’s executive (or prerogative) power of Naval Command and that the Commonwealth was liable to pay damages.

In this note, space does not allow coverage of the very thorough description and analysis by Bell P of the difficulties and criticisms of the fettering doctrine when applied to the supposed fettering by contract of the exercise of future executive power. Making a government contract almost invariably employs the executive power. The fettering rule says that that contract is void if it purports to dictate or control a future exercise of executive power, including making another contract. If this is correct, it is a public law intrusion on contracting. There is no rule of contract law that says that it is not possible to make two inconsistent contracts. If that is done, one or other of the parties will inevitably be in breach of one of the contracts with the usual consequences.

The Mason solution

Mention has been made of the consequence of invoking the fettering rule: the contract that offends the rule is void. This has been one of the strands of criticism of the rule. Voidness is usually chaotic. Many years after the contract is made, a court pulls the rug leaving the parties in a very uncertain position. Further, a contract, apparently normal and routine with no obvious danger signals of possible fettering, turns out to be a fetter because of later unforeseen and fortuitous events, as with the training contract.

An important solution to this problem was suggested by way of obiter dicta by Mason J in Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 76. This was that the contract is not void but it could not be enforced by coercive orders such as an injunction of specific performance but could be the subject of a damages remedy. This solution preserves the underlying rationale of the fettering doctrine and, at the same time, protects the contractor. This idea has been supported by way of obiter dicta in a number of later cases, such as Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 (per Finn J at 75); L’Huillier v Victoria [1996] 2 VR 465 (per Callaway JA at 481); Upper Hunter Timbers Pty Ltd v Forestry Commission of NSW [2001] NSWCA 64 (per Giles JA at [58]) and Peregrine Mineral Sands Pty Ltd v Wentworth Shire Council [2014] NSWCA 429 (per McColl JA at [4]-[6]), but in no case was there an occasion to apply it. In Searle, for the first time in Australia, the Mason solution has been applied.

It is clear that the denial of the remedies of injunction or specific performance is because of the government’s imperative to be unhindered in its task of implementing its policies and programs and not for one of the reasons that guides a court’s discretion under the ordinary law of contract. To this extent the rule against fettering is preserved. The unavailability of these remedies means that the contract does not fetter (see [145]). Even if the contract was one in which the discretionary remedy could be made, it would not be ordered. (In the particular case of the training contract the discretionary remedy would not be ordered under the ordinary law of contract because of the nature of the contract. But that did not have to be considered.)

The training contract

In Searle the contest was between the training contract and the future exercise of the power of Naval Command. Absent a possible fettering argument, there was no basis for challenging the contract. The Commonwealth conceded (at [138]) that it had the power to enter into such a contract and did not attempt to argue that it lacked that power, absent a fettering argument. The training contract was within power (see [151], [156]).

At a factual level, the training contract simply did not fetter the power of Naval Command. Any resort to Naval Command that detracted from the obligations arising from the training contract did not fetter the Commonwealth in any real sense. Even the possibility of having to pay damages in accordance with the Mason solution would not amount to a practical fetter, although some commentators have canvassed the possibility that the spectre of damages would in effect amount to a fetter (see [127]). The Court of Appeal did not consider that this was a real possibility (at [130]).

President Bell, during the course of his wide-ranging examination of the academic and judicial criticisms of the fettering doctrine, was clearly motivated by the fundamental principle that contracts should be kept, not just for the sake of the contractor but also from the perspective of government because otherwise it would not be a credible commercial player (see [108]-[112], [116]-[118]), a point made by Mason J in Ansett at 74-75, among others. Having considered a number of possible ways suggested by commentators and academics in which the invalidating effect of the doctrine could be pared back, Bell P found the Mason solution to be the most satisfactory.

This approach is more nuanced than others which carry the crude, often overbroad and instinctively unfair consequence of a contract being treated as void. It is an approach which arguably best reconciles the competing policy considerations (at [114]).

The consideration issue in the Court of Appeal

The Court of Appeal found that there was consideration provided by Mr Searle in the training contract because the period of that contract was longer than his minimum commitment to the Navy under his employment arrangement.

Damages

The Commonwealth appealed against the contingent assessment of damages by Fagan J because the assessment was necessarily based on speculation, in this instance, about a very narrow band of the employment market. This raised one of the trickier problems of assessing damages – broadly whether a court can assess damages for loss of a chance or opportunity. The courts have endorsed this exercise, recognising that it is inevitably rough and ready. In such cases damages are “no more than an approximation lacking in mathematical or economic accuracy or sufficiency” (at [204] citing Barwick CJ in Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625 at 636). The Court of Appeal saw no error in Fagan J’s discussion of this problem and his ruling that Searle should be awarded $60,000 plus interest.

Other issues

There were two further issues, which in the end came to nothing.

The first was about Searle attempting to provide a back-up argument relating to the validity of the training contract. This back-up argument was based on a point that was left open in Williams v Commonwealth (No 2) (2014) 252 CLR 416 at [52]-[55], namely whether an appropriately worded appropriation Act can be the source of Commonwealth power to contract. No such argument had been put at trial and so Searle had to seek leave to advance it. President Bell declined leave, principally on the basis that the back-up was not necessary and involved a complex constitutional question which the Court should not embark upon where it is unnecessary to do so (see [169]-[186]).

The second was about the class action and whether two claims initially made by Searle (negligent misrepresentation and deceit) but then abandoned by him also meant that these claims had been abandoned by the other people in the class. The short answer to this was No. The long answer can be found at paragraphs [213]-[238].

Conclusion

This case “raises a number of very important questions of principle” (at [27]) about government contracting, albeit in an area of the law that is rarely litigated. The fettering doctrine, at least arising from propositions 1 and 3, has been festering over many years and is in need of a fresh look and restatement. The Mason solution has been applied for the first time in Australia by the New South Wales Court of Appeal. It strikes a sensible balance between the government’s imperative to govern and its need to make contracts.

Watch this space for a possible appeal to the High Court.

Nick Seddon is an honorary professor at the ANU College of Law and counsel in the projects practice at Ashurst.

Suggested citation: Nick Seddon, ‘Searle v Commonwealth [2019] NSWCA 127 – government contracting and fettering’ on AUSPUBLAW (12 June 2019) <https://auspublaw.org/2019/06/(opens in a new tab)searle-v-commonwealth-[2019]-nswca-127>