New South Wales Court of Appeal provides clarity on the doctrine of fettering of government power

In brief

The case of Searle v Commonwealth of Australia [2019] NSWCA 127 concerned an appeal to the New South Wales Court of Appeal (Court of Appeal) against a decision of the Supreme Court of New South Wales (Supreme Court) concerning an alleged breach of contract.

The Appellant was enlisted in the Royal Australian Navy (Navy) as a marine technician who had entered into a contract with the Commonwealth, which stated that the Appellant was to receive training in order to attain an engineering qualification (Training Contract). However, the training for the engineering qualification stated in the Training Contract did not occur. The Appellant therefore commenced proceedings in the Supreme Court and sought damages for breach of contract.

The Supreme Court held that the Training Contract had the effect of fettering the exercise of the Commonwealth's power of naval command and, therefore, it was beyond the power of the Commonwealth to have entered into the Training Contract. 

The Appellant appealed the Supreme Court decision on the grounds that the Supreme Court had erred in finding: 

• that the Training Contract constituted an impermissible fetter upon the exercise of the power of military command; and
• that the Training Contract was not supported by consideration. 

In order to determine the appeal, the Court of Appeal considered the following issues: 

• did the Training Contract have the effect of fettering the exercise of the Commonwealth's power of naval command; 
• did the Appellant provide consideration for the Training Contract; and
• did the Supreme Court err in the assessment of damages. 

The Court of Appeal held that the Training Contract was valid and was not void due to the fettering doctrine as it did not hinder the exercise of discretion in the public interest of military command. The Supreme Court decision was therefore overturned and the Appellant was awarded $60,000 in damages for breach of contract by the Commonwealth. 

Did the Training Contract have the effect of fettering the exercise of the Commonwealth's power of naval command?

The fettering doctrine is a doctrine which states that a government or public authority may not fetter the future exercise of discretionary powers reposed in the executive or a public authority. 

The Court of Appeal recognised that there has been considerable academic attention and debate surrounding the effect of the fettering doctrine. The debate surrounding the fettering doctrine has concerned the following two competing interests: 

1. 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; and 

2. the desirability of government being able to contract and of contractual counterparties having confidence that their bargains will be honoured. 

The Appellant argued that the Training Contract was not void due to the fettering doctrine and relied upon the dissenting judgment of Mason J in Ansett Transport (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 (Ansett Decision) which relevantly stated that at paragraph [76]: 

"… it has been suggested that the free and unfettered exercise of the discretion is sufficiently preserved if the validity of the contract is upheld, provided that it is enforceable only by way of action for damages and not by order or injunction." 

The Court of Appeal agreed with the Appellant's argument based on the judgment of Mason J in the Ansett Decision and determined that where a particular contract has been expressly authorised by statute, the fact that a discretion is fettered by the contract does not make it ultra vires. 

The Court of Appeal noted that the starting point in order to determine whether the Commonwealth had the power to fetter the Training Contract was to evaluate the Commonwealth's legislative power to enter into the Training Contract. 

The Commonwealth submitted that it had a broad power to enter into contracts; however, if there was potential inconsistency between contractual undertakings and the future direction by and in the exercise of naval command, that inconsistency amounted to a fettering of discretion and thus the contract would be void. 

The Court of Appeal determined that when the Navy, through the Department of Defence, authorised the Training Contract, it would have considered that the training would be of some significant benefit to the Navy and the protection and defence of the Commonwealth. The Court of Appeal further held that the Training Contract would not have hindered the exercise of discretion in the public interest or fettered naval command in any real sense. 

The Court of Appeal determined that from the facts of the case, it was clear that naval command felt no constraint in changing its views as to what training was appropriate and directed the Appellant to undertake training different to what was stated in the Training Contract. 

The Court of Appeal therefore held that the Training Contract was within the Commonwealth's power to enter into, and did not fetter the power of naval command. It was further held by the Court that the award of damages would not have fettered the future exercise of the discretion reposed in naval command. 

Did the Appellant provide consideration for the contract?

The Supreme Court had held that all of the training obligations assumed by the Appellant under the Training Contract were already imposed upon the Appellant by virtue of the Appellant's enlistment in the Navy, and accordingly the Training Contract was not supported by any consideration on the part of the Appellant, as the Appellant was bound to carry out any and all training, work experience, coursework, study and any other duties as directed, irrespective of the Training Contract. 

The Court of Appeal accepted that upon the Appellant's enlistment, the Appellant was bound to undertake training at the Navy's direction. The Court of Appeal, however, found it was necessary to consider whether the Training Contract would extend the Appellant's minimum service period in the Navy. 

The Court of Appeal noted that both the minimum service period in the Navy and the period of the Training Contract was for four years. The Appellant was enlisted into the Navy on 17 January 2011 and therefore, the minimum service period would conclude on 17 January 2015. The Court of Appeal also noted that the commencement date of the Training Contract was 4 April 2011 and would conclude on 4 April 2015. 

The Court of Appeal determined that the execution of the Training Contract by the Appellant exceeded the existing statutory service period. Therefore, the Court of Appeal held that the Appellant furnished sufficient consideration to render the Training Contract binding upon the Commonwealth.

Did the Supreme Court decision err in the assessment of damages?

The Supreme Court held that if the Supreme Court decision was successfully appealed, the award of damages was assessed to be $60,000. The Commonwealth sought to challenge the assessment of the damages made by the Supreme Court on the basis that it had not been established that any damages were payable to the Appellant. 

In order to determine the quantum of damages, the Court of Appeal noted various principles which have been applied in previous decisions of the High Court and Court of Appeal. The Court of Appeal noted that it was recognised in the case of Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1994] HCA 54 at [83] that:

"The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can".   

It was also noted by the Court of Appeal that when assessing damages, it is not essential to nominate a particular percentage of probability to be attributed to the prospect of a particular situation occurring (see Fightvision Pty Ltd v Onisforou [1999] NSWCA 323 at [147]). 

The Court of Appeal noted that the Supreme Court had identified a number of matters which were taken into account when determining the quantum of damages, which included the following:

• the evidence from the Appellant's remuneration and human resources consultant who suggested that a person with the engineering qualification stated in the Training Contract would earn $15,000 more per annum than what a person with the Appellant's current qualification would earn; 
• the possibility that jobs suitable to the engineering qualification stated in the Training Contract would not always be readily available; and
• the value of the engineering qualification would likely diminish over time as the Appellant acquired and benefitted from practical experience in the workforce.

The Court determined that the figure of $60,000 in damages estimated by the Supreme Court plainly built upon the $15,000 differential in earnings and took into account the contingencies and considerations stated in the Supreme Court's reasons. The Court of Appeal therefore upheld the Supreme Court's assessment of damages. 

Conclusion

The Court of Appeal held that the Training Contract entered into by the Appellant with the Respondent was not void due to the fettering doctrine and therefore set aside the Supreme Court's decision, which dismissed the Appellant's claim for breach of contract. The Court of Appeal ordered the Respondent to pay $60,000 in damages and also pay 70% of the Appellant's costs for the appeal.