Government contracts and future discretions

People rightly expect freely negotiated contracts to be honoured. When a contract is with government, the expectation is not lessened. Indeed, it is accompanied by the reasonable expectation (if not the obligation) that the agreement will be administered fairly and according to law. The government’s failure to meet these expectations creates a form of sovereign risk.

However, the responsibilities of government are not confined to the administration of contracts. Public interest decision-making involves multifarious stakeholders, in different places and at different times. The interests of a contract counterparty may not always accord with the broader public interest and a promise by government about future conduct may hamper the future discharge of public duties. That said, it is necessary for governments to enter into contracts to discharge their public duties and the state benefits no less than private individuals from the principle that contractual undertakings should be reliable.[1]

The spectre of public and private interests in conflict does not necessarily leave either party without satisfactory remedies. Although the courts have not clearly articulated the balancing of respective rights and interests, a clear consensus is emerging for a doctrine that once was described as “exceedingly vague”.[2]

In Searle v Commonwealth of Australia[3], the New South Wales Court of Appeal recently considered the doctrine that a government or public authority may not fetter the future exercise of discretionary powers in the context of training obligations owing by the Royal Australian Navy to a marine technician, holding that neither the relevant contract nor damages for its breach fettered the power of the Commonwealth. In doing so, the court usefully outlined some of the underlying principles in this area, reinforcing that public and private interests normally can be balanced adequately.

Some fundamental propositions appear to be clear.

1. The principal obligation of the executive or a public authority is to administer the laws of the State.
2. Laws may require the executive or a public authority to undertake commercial activities, for example a statutory contract. There is little doubt that contracts entered into with legislative authority could not be avoided by “executive necessity”; the contract is, in fact, the law that the executive or authority is bound to administer.[4]
3. The executive or a public authority cannot contract so as to fetter the future exercise of a statutory power or discretion to be exercised in accordance with the public interest or by the criteria specified in the statute[5]. Any such contractual undertaking (and, depending on the circumstances, possibly the entire contract) is unenforceable as a matter of public policy. Similarly, an estoppel cannot be raised[6].
4. This principle does not mean that government contracts which affect public welfare or fetter future executive action are not binding.
   1. The state is subject to the general rule that a contracting party should not disable itself from performance or prevent the other party from performing contractual obligations.
   2. The public interest in governments making contracts, and being held to them, has led the courts away from blanket “executive necessity” exculpations[7].
   3. In general terms, the state when making a private contract, will not be construed as undertaking to fetter its discretions[8]. Unless the contract prevents the due exercise of discretion, the provision will not be void but will be construed “subject to the repository’s right not to perform the contract in the future if performance would be inconsistent with the proper exercise of the discretion”[9].
   4. The courts also have recognised the difference between fettering a future discretion and exercising a current discretion that might have downstream impacts on future decision making.
   5. Academic suggestions[10] that a contract cannot, despite its binding nature, fetter the government’s ability to carry out its programs and policies and can be broken with impunity are without authority and have been expressly rejected judicially[11].
   6. Courts will be reluctant to readily construe a commercial contract as fettering future action, particularly when the freedom of future action can be preserved by the payment of damages upon breach of contract. There is a distinction between executive necessity and convenience.

The Court of Appeal in Searle v Commonwealth held that –

• where a broad power to contract is conferred on the executive or a public authority; and
• the contract that is entered into is not specifically enforced or enforceable,

then the contract cannot be said have the effect of fettering the exercise of a discretion unless the award or potential award of damages itself had or has that effect.

The court noted that the policy tensions between upholding contracts and preserving governments’ freedom to act in the public interest are best resolved by courts withholding remedies of specific performance and injunctive relief for contracts which in fact have a fettering effect but preserving an action for damages for the benefit of the contractual counterparty for any breach of contract if the government subsequently exercised a discretionary power in a manner inconsistent, or in a way that made it impossible to comply, with contractual obligations^.[12]

Key takeaway

Absent exceptional circumstances, governments are likely bound by contracts they enter, at least to the extent of being liable for damages for breach, even if the public interest in the future is considered different to the public interest at the time the contract is made.

Related topic

In our Public Law Tracker in March 2019, we examined the use by governments of contractual termination for convenience clauses as protection against agreements being seen to fetter future discretions of government.

We pointed out that such clauses were not legally necessary for most government contracts in order to preserve discretions, particularly when the freedom of future action can be preserved by the payment of damages upon breach of contract. This accords with the decision in Searle v Commonwealth discussed above.

[1] Hogg, The Doctrine of Executive Necessity in the Law of Contract, (1970) 44 ALJ 154, 155
[2] P. Hogg, Liability of the Crown in Australia, New Zealand and the United Kingdom(Law Book Co, 1970) 130
[3] Searle v Commonwealth of Australia [2019] NSWCA 127
[4] It is also possible that aspects of its performance may be converted into a duty which a court may specifically enforce. In these circumstances, the government’s remedy – should it seek to avoid the obligation – is to introduce further legislation.
[5] Attorney-General (NSW) v Quin (1990) 170 CLR 1, 17-18 (Mason CJ); Ansett Transport Industries (Operations) Pty Ltd v The Commonwealth (197) 139 CLR 54 at 74 (Mason J); William Cory & Son Ltd v London Corp [1951] 2 K.B. 476; NSW Rifle Association v Commonwealth [2012] NSWSC 818 [57]
[6] Attorney-General (NSW) v Quin (n 5)
[7] Rederiaktiebolaget Amphitrite v R [1921] KB 500 is the high water mark of this doctrine. It has been repeatedly criticised and the High Court has noted that the principle stated in it was expressed too generally: see Ansett Transport Industries (n 5) at 74-5 (Mason J); A v Hayden (1984) 156 CLR 532, 543 (Gibbs CJ)
[8] That is, no term fettering the discretion will be implied. Clear wording is required to construe the contract as qualifying freedom of executive action: see Commissioners of Crown Lands v Page [1960] 2 QB 274, 291; City of Subiaco v Heytesbury Properties Pty Ltd (2001) 24 WAR 146 [55]
[9] L’Huillier v State of Victoria [1996] 2 VR 465, 481 (Callaway JA)
[10] See the fifth edition of Seddon, Government Contracts (Federation Press, 2013)
[11] NSW Rifle Association v Commonwealth (n 5)
[12] Unless the damages also have a fettering effect. One imagines that this would only arise where very substantial potential damages may be awarded. For a fuller analysis, see Searle (n 3) at [115] – [131].