Boosting public confidence in government contracts: The court revisits the "fettering" doctrine

In Searle v Commonwealth of Australia [2019] NSWCA 127, the NSW Court of Appeal revisited the legal doctrine against "fettering", which applies specifically to contracts entered into by government. The effect of the doctrine is that a government cannot contract in a manner that "fetters" its future freedom to exercise statutory functions, govern through the use of the executive power or bind to legislate (or not legislate) in a particular manner. A contract which does this can be unenforceable on public policy grounds.

Justified or criticised? Tensions underlying the "fettering" doctrine

Searle concerned the application of the doctrine to the fettering of the future use of executive power in circumstances where (the Commonwealth contended) the Commonwealth's obligations to Searle in a "private" contract conflicted with its public duties.

The doctrine itself has been criticised as uncertain, ill-defined and as conflicting with key principles of contract and public policy considerations. Governments at all levels commonly choose to use private law contracts to achieve public purposes, and it is generally accepted that Governments ought to be bound by their undertakings in contract. However, it is also recognised that the needs of Government may in some circumstances justify Government's breaking of a contract where that contract may otherwise operate as a "fetter" on Government.

Sir Anthony Mason's judgment in Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 138 CLR 54, 74-5 remains the key articulation of these tensions:

“Public confidence in government dealings and contracts would be greatly disturbed if all contracts which affect public welfare or fetter future executive action were held not to be binding on the government or on public authorities. And it would be detrimental to the public interest to deny to the government or a public authority power to enter a valid contract merely because the contract affects the public welfare. Yet on the other hand the public interest requires that neither the government nor a public authority can by a contract disable itself or its officer from performing a statutory duty or from exercising a discretionary power conferred by or under a statute by binding itself or its officer not to perform the duty or to exercise the discretion in a particular way in the future.”

If the balance is struck such that private individuals come to consider that they cannot rely upon undertakings by Governments in the ordinary course (ie. that those individuals bear significant "sovereign risk"), then private law contracts can lose their utility to Governments as a means of achieving public goods.

In Searle v Commonwealth of Australia, the Court of Appeal concluded that:

• where a government or public authority enters into a contract under a broad power to contract; and
• the contract itself is not specifically enforced (or specifically enforceable),

the prospect that government might be liable for damages for breach of that contract does not in itself have the effect of fettering the exercise of the government's discretion unless the magnitude of the potential award of damages has this "fettering" effect.

William Searle, a Royal Australian Navy marine technician, entered into a contract with the Commonwealth to receive training that would enable him to attain an engineering qualification. When he did not receive the necessary training, he commenced proceedings for breach of contract. In response, the Commonwealth invoked the doctrine against fettering to deny Searle a claim for damages for breach of contract (and was successful in the Supreme Court).

Searle appealed on a number of grounds, including appealing against the lower Court's decision that the contract did have the effect of a fetter. The Court of Appeal concluded on that ground that (having regard to the quantum of damages for breach) the relevant contract was not beyond the Commonwealth's power, was a valid exercise of its broad power to contract, and neither the contract itself nor any potential award of damages for its breach fettered the power of the Commonwealth.

As Searle's appeal was successful, Searle was entitled to an award of damages for the Commonwealth's breach of contract.  The damages assessed in this case were not so significant as to give rise to a fetter.

Securing public confidence in government dealings: A question of degree?

On one hand, the outcome underscores the Court's recognition of the importance of upholding contractual bargains and the interests of certainty for those contracting with government and public authorities. On the other, it leaves open the prospect that in other circumstances the quantum of damages which could follow from a breach of contract might be significant enough to give rise to a fetter, rendering a contract unenforceable on public policy grounds.