Recent consideration of the fettering doctrine

In the context of the negotiation and drafting of contracts, we often advise our clients about the common law rule against the fettering of discretion.

The fettering doctrine was expressed in Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 74-75 as follows:

[T]he public interest requires that neither the government nor a public authority can by contract disable itself or its officer from performing a statutory duty or from exercising a discretionary power by or under a statute is binding itself or its officer not to perform the duty or exercise the discretion in a particular way in the future.

It has been understood that a contract is invalid to the extent that it purports to fetter future executive action: Attorney-General (NSW) v Quinn (1990) 170 CLR 1 at 18.

In January 2011, at the age of 18, Mr Searle enlisted in the Royal Australian Navy as a marine technician. In June 2011, he signed a training contract for a Certificate IV in Engineering with the Commonwealth acting through a Navy representative. The training contract stated that it was legally binding. In the training contract, the Commonwealth promised to employ and train Mr Searle as agreed in a training plan for this qualification and Mr Searle promised to attend work and undertake any training and assessment in the training plan. Mr Searle was discharged from the Navy on 19 December 2015 without receiving the training or achieving the qualification.

Mr Searle brought proceedings against the Commonwealth claiming damages for breach of contract calculated on the basis that he could have secured a higher paying job if he had the Certificate IV in Engineering. The New South Wales Supreme Court found that it was beyond the power of the Commonwealth to make the training contract because it fettered Naval command by establishing a training regime other than the free decision-making from time to time of the responsible Navy officers.¹ The Court found that the training contract would impede officers’ ability to change the content and scheduling of their training to keep up to date with technology and equipment changes and impede officers’ ability to suspend training for urgent deployments.

Mr Searle appealed that decision. The Court of Appeal found in Searle v Commonwealth of Australia [2019] NSWCA 127 that Naval command was not fettered.

The Court of Appeal observed that the ambit of the doctrine that a government or public authority may not fetter the future exercise of the discretionary powers of the executive government is uncertain and ill-defined.

The Court of Appeal noted that behind the fettering doctrine there are the following two competing policy considerations:

• 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 power is exercised; and
• the desirability of government being able to contract and of contractual counterparties having confidence that their bargains will be honoured.

President Bell in the Court of Appeal stated that there are various ways the ambit of the doctrine could be cut down to a proportion that is manageable and that these include references to the following:²

1. The nature of the power to which the statutory or executive discretion attaches, for example confining the operation to powers fundamental to the purpose and existence of the authority in question or policy level decision making.
2. The character of the discretion involved, namely whether it is one which, on its proper construction, may only be exercised once such that it is spent when exercised, as opposed to being exercisable from time to time.
3. The nature of the contract involved, for example, whether it is commercial or governmental.
4. The nature and degree of fettering involved or, as it is sometimes expressed, the degree of incompatibility between the exercise of the executive power, on the one hand, and the honouring of contractual obligations on the other hand. On this approach, fettering which is slight or unlikely to be significant would not invalidate the contract
5. Construing contracts as subject to an implied term that the contractual obligations undertaken by the government or public authority are subject to the exercise of discretionary public powers
6. Restricting the remedies available to the innocent contracting party so that the contract in question 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.

President Bell stated that Approach (6) is more nuanced than others which ‘carry the crude, often overbroad and instinctively unfair consequence of a contract being treated as void’, and that it is an approach which arguably best reconciles the two competing policy considerations identified above.

President Bell stated that when a broad grant of power has been conferred on the executive or a public authority which includes power to enter into contracts, ‘it is a recipe for uncertainty to read that power down by reference to a doctrine such as the fettering doctrine, the boundaries and proper sphere of operation of which have eluded and defied strict and satisfactory definition and which may legitimately be seen as compromising or undermining other important considerations of public policy and legal values’. President Bell also considered that ‘reading a limitation into a broad conferral of a power which includes a power to contract so it becomes a power only to enter into contracts which do not fetter a future exercise of discretion is contrary to established principles of statutory interpretation’.³

The approach of the Court of Appeal is that where a contract is not specifically enforced or specifically enforceable, the contract cannot be said to effect a fetter on the exercise of an executive discretion unless an award of damages or potential award of damages in itself has or may have that effect.  In this regard, questions of degree and public policy may be involved.

The Court of Appeal considered the potential damages award to Mr Searle of $60,000 to be minuscule in the context of defence expenditure and that it could not in any practical or real sense fetter the exercise of Naval command.⁴

The Court of Appeal found also that the Naval command plainly did not feel itself constrained in changing its views as to what training was appropriate, and directing servicemen and women, including Mr Searle, to undertake a different level of training from the training for a Certificate IV in Engineering.⁵ The contract did not fetter the Commonwealth’s power of naval command in any real sense, nor did any potential award of damages for breach of contract have this effect.

This approach is arguably different from the previous understanding of the ill-defined fettering doctrine.

The general rule is that when a person promises to do something under a contract they must keep their promise or pay damages to put the other party in same position as if they had they kept their promise.

An exception to this general rule is that if a person has no power to make the promise then the promise cannot be binding. This exception can apply where Parliament gives a power to a person for public purposes and that person promises to exercise the power in a certain way in the future. It is usually implicit in the grant of a power that the power must be exercised from time to time by the person as the circumstances require. This means that a promise to exercise the power in a particular way in the future can be outside of the power and invalid. Another basis on which this type of contractual promise can be invalid is that it is contrary to public policy.

Arguably the Court of Appeal has instead indicated that the power is to be construed broadly to include contractually promising how the power will be exercised in the future as long as a court would not specifically enforce that and damages would not be so high as to make the government feel compelled to exercise the power in the way it has promised.

Having regard to the approach of the court in this matter, the State and public authorities should take care to ensure that contracts do not include fetters, as courts may be more likely to award damages than find the contract is void as an unlawful fetter.

^{1 Searle v Commonwealth of Australia [2018] NSWSC 1017 at [119].}

^{2 Searle v Commonwealth of Australia [2019] NSWCA 127 at [114].}

^{3 Searle v Commonwealth of Australia [2019] NSWCA 127 at [139].}

^{4 Searle v Commonwealth of Australia [2019] NSWCA 127 at [130].}

^{5 Searle v Commonwealth of Australia [2019] NSWCA 127 at [1], [155] and [246].}

^{The information in this publication is provided for general purposes only. It is not to be relied on as a substitute for legal advice. Crown Law and the Department of Justice and Attorney-General accept no liability for losses caused by reliance on the material in this publication. Formal legal advice should be obtained for particular matters.}