Contract law update 2019

Contracting with governments

The ability to enter into, and enforce, contracts with governments is complicated by the principle that governments cannot fetter the future exercise of their discretionary powers (known as the 'fettering doctrine'). Taken to an extreme, the fettering doctrine would prevent governments from ever entering into enforceable contracts – it being inherent in contracts that a party promises to take certain steps in the future, thereby fettering their ability to do something different.

The extent to which the fettering doctrine affects governments' ability to be bound by their contracts has been described as 'exceedingly vague and far-reaching', 'a largely unsettled question' and 'an ill-defined principle'.¹

The New South Wales Court of Appeal considered the scope of the fettering doctrine, and its interaction with the law of contract, in Searle v Commonwealth of Australia². In that case, President Bell, with whom Chief Justice Bathurst and Justice Basten agreed, considered the many academic and judicial attempts to reconcile the fettering doctrine with the principle (and desirability) of governments being able to enter into enforceable contracts.

President Bell also considered various attempts to limit the scope of the fettering doctrine in the context of government contracts, including by reference to: the nature of the power being exercised; the character of the discretion involved; the nature of the contract; the nature and degree of fettering; and the use of implied terms. Ultimately, however, President Bell held that the competing legal and policy arguments were best reconciled by, in most cases:

• permitting a party to recover damages from governments for breach of contract³; but
• not granting injunctions or making orders for specific performance against governments.

On the facts of Searle, the Federal Government was therefore obliged to pay damages to a marine technician who did not receive the training the Government had contractually promised to provide.

President Bell observed, however, that legislation sometimes prescribes how a power must be exercised and, by implication, invalidates contracts that are inconsistent with that prescription. For example, in Peregrine Mineral Sands Pty Ltd v Wentworth Shire Council⁴, the New South Wales Court of Appeal held that a local council had no power to enter into a contract with a mine operator that fixed land rates for 20 years (where there was a statutory obligation to fix rates each year). It is therefore very important when contracting with governments to be clear about the power the government is relying on to enter into the contract (including, in some cases, that power's constitutional validity⁵), and the extent to which the contract might fetter those powers.