New Zealand Law Students Journal
Last Updated: 27 May 2014
CONTRACTING WITH PUBLIC AUTHORITIES: THE RULE AGAINST FETTERS
There is a distinction in law between private and public law. Contracts
between private individuals and organisations are in
the domain of
private law, while the decisions, acts and powers of the government and public
bodies1 are subject to public law. When a governmental body
enters into a contract, the two domains collide. Ordinary contractual
are sometimes said to be “awkward” when applied to government
dealings,2 and so a conflict ensues between holding parties
to their promises on one hand, and preserving the executive’s discretion
on the other. The battle is between private law and public law. Public
law emerges as the victor, with the common law rule
against fetters voiding
contracts that would otherwise be binding. The outcome is that governmental
bodies can completely escape
their contractual obligations, and the other
party to the contract is left without a remedy.
Even when the government enters into private contracts, at times it appears to be playing by a different set of rules. In one case, the government made an agreement with a tobacco company not to introduce laws relating to tobacco advertising in exchange for the tobacco company providing it with certain information and abiding by other requirements.3 It later decided to introduce legislation, and did not have to pay damages for breach. In another case, the government agreed to provide a supply of rimu for sawmilling.4 When it decided to end rimu logging, it cancelled the contract without paying
* LLB/BCom(Hons), The University of Auckland. The author would like to thank Max Harris and Lucy Luo for their thoughtful suggestions and encouragement.
1 For simplicity, the term “governmental body” will be used throughout this
article to cover both the government and public bodies.
2 Nicholas Seddon Government Contracts – Federal, State and Local (4th ed, The
Federation Press, NSW, 2009) at 7.
3 Rothmans of Pall Mall (NZ) Ltd v Attorney-General  NZHC 632;  2 NZLR 323 (HC).
4 Westco Lagan v Attorney-General  NZHC 1350;  1 NZLR 40
Of course, there will sometimes be good reason for why
the government breaks contracts, and this article
the rationale for the rule against fetters. It then scrutinises the
qualifications that have been put forth
to circumscribe that rule. Attention
then turns to criticisms of the rule, from both private and public law
perspectives. The rule
against fetters threatens overarching
principles in both domains, specifically certainty of contract and
the rule of law. Alternatives to the rule in New Zealand are also
canvassed, testing the strength of the rule’s justification.
already exists in contract law to preserve the government’s flexibility
and discretion, and the fundamental doctrine
of parliamentary sovereignty acts
as a backstop in other cases. Finally, the consequences of abolishing the
fetters are discussed and evaluated. The article concludes that
the rule against fetters is both unnecessary and undesirable in New
Even though the rule against fetters originated in the United Kingdom, the
focus of this article is primarily on the rule
against fetters as it
operates in New Zealand. Some of the discussion in this article may be equally
applicable to other jurisdictions
with similar legal systems, but it should be
borne in mind that New Zealand’s Parliament is sovereign, and that a
right (which can include contractual rights) is not entrenched in our
constitution. It may be the case that in jurisdictions without
features, the justifications for the rule against fetters will hold more
Other areas of law, such as estoppel, restitution and the doctrine of
legitimate expectation, may also mitigate some harsh effects
of the rule against
fetters. However, these avenues may not always be available and, even if
successful, will not result
in full expectation damages. This article will not
cover these other areas of law. The focus is on an outcome that
grants private contractors the expectation damages to which they are
entitled in contract law.
5 See Forests (West Coast Accord) Act 2000, ss
A. The Rule against Fetters
1. The rule and its rationale
Rederiaktiebolaget Amphitrite v The King (The Amphitrite)6
is widely regarded as the founding case for the rule against
fetters.7 That rule provides that the government cannot enter into
contracts that purport to constrain future executive action. In The
Amphitrite, the British government made an undertaking during wartime to
neutral Swedish shipowners that their ship would not be detained.
faith of this undertaking, the shipowners sent their ship to the
United Kingdom. Upon arrival, in breach of
the government’s promise,
the ship was refused clearance. The shipowners sued for contractual damages,
but were unsuccessful.
Rowlatt J held that there was no enforceable
[I]t is not competent for the Government to fetter its future executive
action, which must necessarily be determined by the needs
of the community when
the question arises. It cannot by contract hamper its freedom of action in
matters which concern the welfare
of the State.
Today, The Amphitrite still stands as authority in New Zealand for the
rule against fetters. 9 The rationale for the rule is
6 Rederiaktiebolaget Amphitrite v The King  3 KB 500 [The Amphitrite].
7 Note that The Amphitrite has been cited as the founding authority for both the rule against fetters (see Laws of New Zealand Administrative Law (online ed) at ; Hamilton City v Waikato Electricity Authority  1 NZLR 741 (HC) at 761; Mark Campbell “The Legal Consequences of Promises and Undertakings Made by Public Bodies”  CanterLawRw 1; (2002) 8 Canta LR 237 at 238) and the doctrine of executive necessity (see Anne CL Davies The Public Law of Government Contracts (Oxford University Press, New York, 2008) at 180; Peter W Hogg and Patrick J Monahan Liability of the Crown (3rd ed, Carswell, Toronto, 2000) at 227). While there may be some conceptual differences between the two, their practical effect is often the same and most cases can be formulated to fit either rule. For simplicity, this article will mainly refer to the “rule against fetters”, but most of the discussion is equally applicable to the doctrine of executive necessity.
8 The Amphitrite, above n 6, at 503.
9 Hamilton City v Waikato Electricity Authority, above n 7, at 761. Arguments that an executive discretion has been fettered by contract are not uncommon: see for example Legal Services Agency v Meyrick  3 NZLR
518 (HC); Comalco Power (New Zealand) Ltd v Attorney-General
 NZAR 1
Rowlatt J’s statement—the executive must be free to act in
the best interests of the public at all times. When
the executive must be able to change its course of action if the
public interest so requires.
Taken further, it has been said that flexibility is
vital not just to allow the executive to respond to changing circumstances, but
also to allow different “governments of the day” to promote
different versions of the public good.10 It has even been suggested
that without the rule, an outgoing government who is sure they would not obtain
the support at the next
election could make things difficult for the incumbent
government by entering into numerous costly contracts.11
The clear underlying rationale for the rule is therefore to preserve
flexibility in dealing with public affairs.
With statutory powers or discretions, the doctrine of parliamentary sovereignty also comes into play. It has long been held that a body given statutory powers for public purposes is incapable of divesting or fettering those powers, if it is incompatible with the objects of the statutory body.12 This “incompatibility test” was subsequently affirmed by the House of Lords13 and later adopted in New Zealand in The Power Co Ltd v Gore District Council.14 The Amphitrite was never cited in Power Co. Though there is overlap, the rule against fetters goes further than statutory interpretation. The focus in this article is on the common law rule against fetters, which can apply to all government contracts, whether made under express or implied statutory authorisation, the Crown prerogative or “third source” powers. Even if that rule were abolished, contracts would still be voided if they are incompatible with a statute. But such situations will be rare, as the “incompatibility test” has a very high threshold, requiring “a sale of ‘part of the birthright’ of the public authority”.15 In contrast, the ambit of the rule against fetters
10 Janet Mclean “The Crown in Contract and Administrative Law” (2004)
24(1) OJLS 129 at 134.
11 At 139.
12 See R v Inhabitants of Leake  EngR 266;  5 B & Ad 469, 110 ER 863 (KB); William Cory & Son Ltd v London Corp  2 KB 476 (CA); York Corp v Henry Leetham & Sons Ltd  1 Ch 557; Power Co, above n 9.
13 Birkdale District Electric Supply Co Ltd v Corp of Southport  AC 355 (HL).
14 Power Co, above n 9, at 547–548.
15 At 548.
is potentially much wider.
2. Qualifications of the rule
The concern to preserve the executive’s flexibility is
understandable, but if taken to the extreme, would prevent governmental
from entering into any contracts. All contracts limit the contracting
parties’ future ability to act freely,
at least to some
extent. 16 Rowlatt J considered this meant that at common
law, all public servants were dismissible at the Crown’s pleasure,
because “it is in the interests of the community” that the Crown be
able to dispense with the services of its employees
if it sees fit. 17
Such an interpretation would render all government contracts
binding in honour only, which would make parties reluctant
to enter into
contracts with governmental bodies. Contracts are needed for the everyday
function of governmental bodies, and so courts
and academics alike have
attempted to qualify the rule against fetters to make it more workable.
(a) Commercial vs. non-commercial
The first qualification to the rule comes from The Amphitrite itself. Rowlatt J asserted that there was “[n]o doubt” that the government could bind itself by a commercial contract like anyone else, but held that the impugned contract was not a commercial contract.18 Rather, it was an assurance as to the government’s future executive action. No more was said about what makes distinguishes a commercial contract from a non-commercial one, and this is by no means self-evident. A contract to manage prisons, for example, could be characterised as “commercial” from the management company’s point of view, as management is their business and they would be looking to profit from that contract. Nonetheless, such a contract undoubtedly has major policy ramifications, as evidenced by the controversy surrounding prison privatisation. It is for this reason that this distinction has been
16 Jess Connors and others “Contracts: contents and principles” in Helen Randall and Lianne Smith (eds) Local Government Contracts and Procurement (LexisNexis Butterworths Tolley, Edinburgh, 2002) 101 at [5.13]; Seddon, above n 2, at 237; Power Co, above n 9, at 548.
17 The Amphitrite, above n 6, at 504. Note that as a result of legislative intervention this is no longer the situation in New Zealand.
18 At 503.
criticised for being “notoriously unclear”.19
The distinction is also illogical. It is true that many commercial
contracts will be for mundane and uncontroversial transactions,
such as the
purchase of office supplies, where a degree of fettering is
acceptable. But there can be commercial
transactions that significantly fetter
important policy decisions.20 There will also conceivably be non-
commercial contracts that only fetter executive discretion to a minor
extent. The distinction
between commercial and non-commercial
contracts is not logically justified and has no relation to the rationale for
against fetters. Accordingly, it has been proposed that what is
relevant is not the character of the contract, but rather, the character
governmental body’s discretion.21
(b) Operational vs. policy
The operational/policy distinction was introduced by Lord Wilberforce in the well-known Anns v Merton London Borough Council 22 case, a negligence claim against a public authority. Lord Wilberforce considered that “policy” decisions were decisions for public authorities to make, as opposed to the courts, and that “operational” powers or duties were the “practical execution of policy decisions”.23 Campbell has imported this distinction to cases involving fetters of executive discretion, 24 and other academics have appeared to advance similar distinctions. Though academics have attached different labels to this distinction,25 it appears the underlying sentiment is the same—ordinary,
19 AR Blackshield “Constitutional Issues Affecting Public Private Partnerships”  UNSWLawJl 53; (2006) 29 UNSW Law Journal 302 at 303. For similar criticisms, see also Ansett Transport Industries (Operations) Pty Ltd v Commonwealth of Australia  HCA 71; (1977) 139 CLR 54 (HCA) [Ansett] at 74 and Antra Hood “Unlikely Entrepreneurs – The Commercial Dealings of Australian Local Governments” in Bryan Horrigan (ed) Government Law and Policy: Commercial Aspects (The Federation Press, Sydney, 1998) 205 at 233.
20 See William Cory, above n 12.
21 L’Huillier v State of Victoria  VicRp 79;  2 VR 465 (SC) at .
22 Anns v Merton London Borough Council  UKHL 4;  AC 728 at 754 (HL).
23 At 754.
24 Though he does not refer to the Anns case: Campbell, above n 7, at 240.
25 Davies distinguishes between decisions relating to the delivery of public services and decisions about mundane transactions: Davies, above n 7, at
79; Seddon discusses the difference between contracts used
everyday decisions are deemed “operational” decisions, which
can be fettered by contract. Decisions relating
to the governmental
body’s public purposes are “policy” decisions, which cannot be
Though some decisions (for example, the office supplies example) can easily
be classified as “operational”, the line is
more difficult to draw
in other cases.26 It is unclear whether a decision to employ a civil
servant, for example, would be an operational or policy decision. The seniority
of the civil servant in question may be relevant. Appointing a senior civil
servant, such as the commander of the New
Zealand Defence Force, is
more likely to be a policy decision, as it arises from the special position of
the government as a public
institution. Appointing a lower- level civil servant
is more likely to be an operational decision—hiring a receptionist is
unlikely to bear any significant public implications, but is a decision commonly
made by many private businesses also. These two
examples appear relatively
clear, but many cases would be more difficult.
Decisions may also overlap. In the above example, if the decision to hire
a particular receptionist is deemed operational,
employment contract should not constitute an unlawful fetter on the public
Yet if the governmental body decides to
terminate the division in which the receptionist works, making that receptionist
that would appear to be a policy decision. It is therefore quite
possible that a contract entered into by a governmental body in
execution of an
operational discretion may have the side effect of fettering its policy
discretions. A single contract could
then fetter both operational and
The qualifications advanced to restrict the rule against fetters are of limited help. The commercial/non-commercial distinction is illogical, and the operational/policy distinction is hard to apply in practice. While the qualifications alleviate the harshness of having a blanket rule that could arguably apply to all government contracts, they are not certain
26 This difficulty was recognised by Lord Wilberforce himself in Anns, above
n 22, at 754.
enough to be applied predictably in every case. The qualifications have also
been applied haphazardly in various cases, and
it unclear which
qualification provides the prevailing “test”. This all serves to
undermine the certainty of contract,
one of the fundamental values of contract
B. Criticisms of the Rule Against Fetters
Three main criticisms can be levied at the rule against fetters. First, as
just mentioned, the rule undermines the certainty of contract.
qualifications to the rule are so unclear, it can be hard to predict when the
rule may be invoked to upset a
contractual bargain. That concern is with
how the rule disrupts contract law and the values highly regarded within it. The
main criticism is that the rule deprives the rights of parties
contracting with the government. Not only will there be injustice
particular cases, but wider concerns about the accountability of governments and
the rule of law are also invoked. The final criticism
is that the justification
for the rule against fetters is weak, as the aim of the rule (preserving
flexibility for the
executive) can already be achieved using existing
1. Undermining certainty of contract
As explained above, the qualifications to the rule against fetters undermine the certainty of contract, a fundamental value in contract law. A primary purpose of contract law is to facilitate trade; there are economic benefits to enforcing bargains.27 When a party enters into a contract with another, its expectation is that the law will uphold their contract. If the party contracts with a governmental body and believes there is a risk that their contract will therefore be rendered void, it will factor in this risk and demand a premium contract price to cover that risk,28 assuming the parties have relatively equal bargaining power. An inefficient allocation of resources may result. Contractors will not be well-placed to assess the probability that the contract may later be broken for public policy reasons so are likely to overestimate the risk,
27 Douglas G Baird “Introduction” in Douglas G Baird (ed) Economics of
Contract Law (Edward Elgar Publishing Ltd, Northampton, 2007) at ix.
28 However, the contractor may not be able to demand this
risk premium if the governmental body is in a position of strong
bargaining power: see Airways Corp of New Zealand Ltd v Geyserland Airways
Ltd  1 NZLR 116 (HC) [Geyserland].
leading to a higher contract price. Hogg and Monahan posit that, in the long run, the rule against fetters does not benefit the government but instead hinders it. 29 An illustrative example is where governmental bodies compete with private companies for employees, as in L’Huillier v State of Victoria.30 Individuals will be more hesitant to work for governmental bodies when their employment contracts might be terminated without compensation for public policy reasons. Accordingly, Hogg and Monahan have asserted that denying the executive the legal capacity to bind itself in the future “would be denying to the public sector ... a legal capacity which is enjoyed by the private sector”.31 Underlying this assertion is the reminder that the government’s original decision to enter into any contract is completely voluntary; private law obligations are assumed, not imposed. 32
Undermining the certainty of contract will result in long
A response to these criticisms is that the rule against fetters is rarely invoked in practice because of the “reputation effect”.33 It is not in the government’s interests to obtain a reputation as an unreliable contracting partner for the reasons explained above, so it is expected that governmental bodies will be reluctant to break their contracts.34
Even so, occasionally a governmental body might decide that breaking a
contract is the preferred course of action.35 It is doubtful that the
rule against fetters being “rarely invoked” will then
comfort the few contractors that
are affected by it. Relying on the
“reputation effect” is effectively relying on the
“honour” of the government,
and contracts that are binding in
honour only are worthless in law.
2. Public law criticisms
The main public law concern with the rule against fetters is that it undermines the rule of law. The rule of law encapsulates the idea that,
29 Hogg and Monahan, above n 7, at 211–212.
30 L’Huillier, above n 21.
31 Hogg and Monahan, above n 7, at 212.
32 See generally Brian Coote Contract as assumption: essays on a theme (Hart
Publishing, Oxford, 2010).
33 Davies, above n 7, at 171.
34 At 171.
35 See for example Westco Lagan, above n 4.
like its citizens, the government should be held legally accountable for its actions. This is ordinarily the case: s 3 of the Crown Proceedings Act
1950 provides that any person may bring proceedings against the
Crown for breach of contract. Joseph has claimed that
Crown to escape its contractual duties is an “anomalous exception”
to governmental accountability.36 The rule against fetters leaves
parties contracting with governmental bodies unprotected when their contract is
voided, often after
they have already embarked upon performance. At least in
some cases, the rule imposes “retrospective voidness”
it will not be known that the contract will be voided until the executive
decides to do something inconsistent with the
contract at a later
date.37 The rule against fetters might therefore be challenged
in public law, either under the New Zealand Bill of Rights
(BORA), or a possible common law right.
(a) New Zealand Bill of Rights Act 1990
The lack of a private property right in the BORA has meant that New Zealanders are not protected from the expropriation of property without compensation, as illustrated by Westco Lagan v Attorney-General,38 as well as the controversial Foreshore and Seabed Act 2004. In Westco Lagan, the plaintiff attempted to rely on s 21 of the BORA, claiming that the government’s cancellation of their contractual rights amounted to an “unreasonable...seizure”.39 The plaintiff’s claim inevitably failed, as the rights were cancelled by express legislation, and s 4 of the BORA provides that legislation can override any rights in the BORA. The High Court still considered the interpretation of s 21 and acknowledged that, taken in strict isolation, the “right to be secure against unreasonable ... seizure [of property]” could apply to the uncompensated “annihilation” of contractual rights.40 However, in the context of the surrounding provisions, the Court held that s 21 should be confined to its traditional
36 Philip Joseph Constitutional and Administrative Law in New Zealand (3rd ed, Thomson Brookers, Wellington, 1993) at 560.
37 Seddon, above n 2, at 259. The criticism is even more acute when the rule is
conceived of as the doctrine of executive necessity (see note 7 above) as conceptually that doctrine does not void the contract but merely allows governmental bodies to breach contracts without paying damages.
38 Westco Lagan, above n 4.
39 At .
40 Westco Lagan, above n 4, at .
application to cases where evidence has been unreasonably seized.41
That conclusion is strengthened by the fact that numerous attempts to include a private property right in the BORA have been unsuccessful.42
It was surely not the legislature’s intention to create a property
right when enacting s 21, rendering any argument based
on s 21 a tenuous
(b) A common law right?
Despite the absence of a private property right in the BORA, a claim might still be founded on the common law. The Report of the Regulatory Responsibility Taskforce has noted that many other countries have constitutionally enshrined a right against the taking of property without compensation,43 and stated that even though New Zealand has not done so, there is still has a strong “presumption” that if the government takes private property, compensation will be paid.44
This common law presumption is founded on a respect for individual dignity
and possession of property, and is buttressed by c
29 of the Magna Carta
129745 and Blackstone’s commentaries.46 At
their core, these are concerns about the rule of law and the accountability of
government under the law.
A detailed analysis of the importance of this presumption and whether it should be included in the BORA is outside the scope of this article. It is sufficient to note for now that this presumption exists. Even though
41 At .
42 See Geoffrey Palmer “A Bill of Rights for New Zealand: A White Paper” (1984–
1985) I AJHR A6; the defeat of Gordon Copeland’s Bill of Rights (Private Property Rights) Amendment Bill 2005; and the defeat of Owen Jennings’ Bill of Rights (Property Rights) Amendment Bill 1997.
43 Regulatory Responsibility Taskforce Report of the Regulatory Responsibility
Taskforce (The Treasury, September 2009) at [4.57]. Examples listed include the United States, Australia, and countries who have assented to the European Convention of Human Rights.
44 At [4.58]–[4.59].
45 Though admittedly, the Magna Carta applies to interests in land rather than general property rights.
46 William Blackstone Commentaries (1765) Vol. 1
at 134–135 as cited in Regulatory Responsibility Taskforce, above n
43, at [4.62]. The Regulatory Responsibility
Taskforce considered the common
law presumption to be sufficiently broad so as to cover contractual
Parliament may rebut this presumption by legislating to take away
property rights (as it did in Westco Lagan), this does not mean the
courts should allow governmental bodies to invoke the rule against fetters. In
Wells v Newfoundland,47 the Supreme Court of Canada held
that courts should give effect to the presumption so that the government in
that case was bound
to its contract:48
In a nation governed by the rule of law, we assume that the
government will honour its obligations unless it explicitly
exercises its power
not to. In the absence of a clear express intent to abrogate rights and
obligations—rights of the
highest importance to the
individual—those rights remain in force. To argue the opposite is to say
that the government is
bound only by its whim, not its word. In Canada this
is unacceptable, and does not accord with the nation’s understanding
of the relationship between the state and its citizens.
The Court’s judgment is laudable, and courts should follow suit in New
Zealand. Like the BORA, the Canadian Charter of
Rights does not
provide protection for private property, yet this did not deter the
Supreme Court from recognising such
protection in the common law. An argument
might be mounted that giving effect to a property right in common law would
the legislature, given that a conscious decision was made to
exclude property rights from the BORA. But, as in Canada, there
legislation in New Zealand expressly denying a right to be free from the
uncompensated taking of property, so such a right
is not precluded.
3. Alternatives to the rule
A further criticism of the rule against fetters is that it is unnecessary.
Orthodox rules of contract law, together with parliamentary
already preserve to a large extent the government’s
flexibility. This greatly weakens any justification
for the rule
against fetters. The requirement that parties must intend to create
legal relations, as well as the
existence of express termination clauses and the
courts’ flexibility in granting remedies, already go a long way towards
making the rule against fetters redundant. In other cases, arguments
based on consideration and frustration have
also been raised
47 Wells v Newfoundland  3 SCR 199.
48 At .
attempts to get around contractual fetters, though these are more
dubious. As a last resort, legislative override will always
be available if the
other existing rules of contract are insufficient.
(a) Intention to create legal relations
In determining whether parties demonstrated an objective intention to create
legal relations, it is usual to look to the factual
matrix in which the alleged
contract was formed. 49 When one of the parties is a
governmental body, that may sometimes be relevant. Governmental bodies do
not intend to
be legally bound by all promises they make; a distinction must
be drawn between a mere statement of policy or intent,
for which there
is only political accountability, and a binding commitment in
contract.50 Governmental bodies are not businesses and will often
have special powers to be exercised for the public benefit. Robertson J in
Rothmans of Pall Mall (NZ) Ltd v Attorney-General51 stated
that in normal business affairs the onus of showing no intention to
create legal relations is a heavy one, but observed
that the onus was reversed
in government affairs.52
Lack of an intention to create legal relations is the basis on which the
landmark case of The Amphitrite should have been, and possibly was,
decided. Rowlatt J had considered whether or not there was “an enforceable
and held that there was not. The use of the phrase
“an enforceable contract” is ambiguous (and unfortunate),
cannot tell whether the Judge thought there was a contract that was
unenforceable for policy reasons, or whether there
was no contract at all. The
former interpretation gives birth to the rule against fetters. It is found in
statement: “it is not competent for
49 Fleming v Beevers  1 NZLR 385 (CA). See also Phoebe Bolton
“Government Dealings and the Intention to Create Legal Relations” (2004)
16(2) SA Merc LJ 196.
50 See for example Australian Woollen Mills Pty Ltd v Commonwealth of Australia
 1 WLR 11 (PC); Cato v Minister of Agriculture, Fisheries and Food 
3 CMLR 513 (CA); Milne v Attorney-General for Tasmania  HCA 48; (1956) 95 CLR 460 (HCA).
51 Rothmans, above n 3.
52 At 326 citing M Aranson and H Whitmore Public Torts and Contract (Law
Book Co., Sydney, 1982) at 204.
Government to fetter its future executive action”.53 The
mandatory language of “it is not competent” tends to suggest that
the Judge was laying down a rule of law and asserting
that such a contract would
be outside the government’s authority and therefore void. An
alternative interpretation (that
there was no contract at all) can also be
supported. It is significant that Rowlatt J referred to the government’s
as an “arrangement” as opposed to a
“contract”, 54 and described the promise as
“merely an expression of intention to act in a particular way in a
certain event”. 55 Denning J (as he then was)
interpreted The Amphitrite in this way, claiming that Rowlatt J’s
assertion that the Crown could not fetter its executive action was
for the decision” because the promise was “not
... intended to be binding but only an expression of intention”.56
Mitchell points out that Rowlatt J cited no authority for his proposition
that the government could not fetter its discretion by
regarded [it] as established”.57 Moreover, as pointed out
earlier, Rowlatt J had stated that there was “[n]o doubt”58
that commercial contracts would bind governmental bodies, but failed to
explain why this only applied to “commercial”
contracts, or how to
determine when a contract is “commercial”. The certainty with
which Rowlatt J made these
statements, and the lack of guidance given,
indicates he was not proposing to lay down a novel rule of law, and instead
he was merely applying established rules to the facts at hand.
Reading The Amphitrite as a whole, it seems more likely that the case
was decided on the basis that the government did not intend to create legal
when giving its undertaking. If that is so, then Rowlatt
J’s statement that the government cannot by contract hamper
its freedom of
action in relation to matters affecting the welfare of the state
becomes obiter. It may be then that the
rule against fetters was created
inadvertently, and unnecessarily.
(b) Express termination clauses
53 The Amphitrite, above n 6, at 503.
54 At 503.
55 At 503.
56 Robertson v Minister of Pensions  1 KB 227 (KB) at 231.
57 J Mitchell “Limitations on the Contractual Liability of Public Authorities” (1950) 13(3) MLR 318 at 319.
58 The Amphitrite, above n 6, at 503.
Express termination clauses may also be inserted into contracts to allow
governments to terminate contracts for policy reasons. These
are often termed
“termination for convenience” clauses. Such clauses typically
specify the amount of compensation payable
on termination, which will usually
be less than full expectation damages. 59 Currently, the rule
against fetters can still void a contract containing a termination for
convenience clause so that the clause
will not be enforceable. A governmental
body is not obliged to terminate a contract in accordance with its termination
clause.60 Yet an express termination clause would expectedly make
courts less likely to apply the rule against fetters. A governmental
could hardly argue that a contract is an unlawful fetter on its discretion
when the contract itself provides an “escape”.
clauses commonly stipulate that a governmental body can only break the
contract for certain policy
reasons. Courts usually interpret general
termination clauses strictly, 61 and broad “termination
for breach” clauses have been read down to prevent parties from
terminating for minor
or technical breaches.62 The same diligence
should be applied to “termination for convenience” clauses in
Although express termination clauses serve to mitigate some of the harsh consequences of rule against fetters, they are still voluntary. Contractors may not be in a position to negotiate such clauses if the government is in a position of stronger bargaining power. For example, in Airways Corp of New Zealand Ltd v Geyserland Airways Ltd, Geyserland refused to sign the governmental body’s standard form agreement but was nonetheless obliged to use its services under statute. 63 Davies thinks it would be preferable if these clauses were incorporated into the general law.64 It is difficult to see how this approach would differ in practice from abolishing the rule against fetters and awarding damages, aside from the fact that the level of compensation under these clauses
59 Davies, above n 7, at 186; Seddon, above n 2, at 239.
60 Davies, above n 7, at 188; Seddon, above n 2, at 235–236.
61 Simon Whittaker “Termination Clauses” in Andrew Burrows and Edwin
Peel (eds) Contract Terms (Oxford University Press, Oxford, 2007) 253 at
62 At 253. See also L Schuler AG v Wickman Machine Tool Sales Ltd  AC
63 Geyserland, above n 28.
64 Davies, above n 7, at 176.
will commonly be less, but more certain, than full expectation damages.
Further, if the rule against fetters persists, then even
if a termination
clause is included in a government contract, compliance with that clause would
still be voluntary.
The discretion that courts have in awarding remedies for breach of
contract is another area in which executive discretion
can be preserved. In
Ansett Transport Industries (Operations) Pty Ltd v Commonwealth
of Australia, 65 Mason J posited that, at least in some
cases, free and unfettered exercise of executive discretion could
sufficiently preserved by awarding damages only for government
breaches of contract. By awarding damages rather than injunctions
performance, courts can limit the fetter that a contract has on executive
action. At the same time, this ensures that
contractors receive the compensation
to which they are entitled, and the executive is held to its promises. This
approach has gained
some approval,66 but can almost be regarded as
an abolition of the rule against fetters altogether. In the majority of
cases, parties can breach
contracts if they are prepared to pay the resulting
damages. Equitable remedies such as injunctions and specific performance
always discretionary, and have even been called an
“exceptional” remedy by the House of Lords.67 The fact
that making such orders may impinge on the executive’s powers will rightly
be relevant in deciding whether those orders
should be granted, but this is
neither new nor controversial.
Consideration is another requirement in the contract law toolbox that has
been used to disallow fetters on executive discretion,
though this line of
reasoning is more questionable. Contracts may be found void for lack of
consideration when a governmental
body promises to do
65 Ansett, above n 19.
66 Hogg and Monahan, above n 7, at 236. See also United States v Winstar Corp
 USSC 77; (1996) 518 US 839 [Winstar].
67 Cooperative Insurance Society Ltd v Argyll Stores (Holdings) Ltd  UKHL 17;  1 AC 1 at
11 (HL). This was cited with approval by Tipping J in Attorney-General for
England and Wales v R  2 NZLR 91 at  (CA).
something that it cannot legally promise. In Rothmans, 68
a tobacco company agreed to provide certain information to the government
and to abide by a code relating to tobacco advertising.
The only possible
consideration was an undertaking by the government—partly expressed and
partly implied—not to
introduce legislation or regulations for
tobacco advertising during the term of the agreement.69 The
executive could not restrict the legislative competence of Parliament as a
matter of constitutional principle,70 and so “the only promise
given by the Government which could be said to amount to consideration [was] one
which [was] without
any value”. 71 As a consequence, the
contract failed for lack of consideration.72
The case of United States v Winstar Corp73 suggests a
different result. The Supreme Court in Winstar held that when a party makes a
promise for a condition beyond their absolute
control, the promise should be
treated as a warranty that the promisor will indemnify the promisee for any loss
arising from that
condition’s non-occurrence. This can apply to all
contracts, not just government contracts. If applied to Rothmans,
the government would have been liable to pay damages for breach caused by the
legislature’s introduction of an Act banning
Parliament would not be deprived of its legislative power, and the
executive government would be held
to its contract.
As it stands, the case of Rothmans shows that there is overlap with the concept of ultra vires in this area. If a governmental body promises to do something beyond its legal ability, that promise is legally worthless. Many cases in which contracts have been held void for being ultra vires (specifically those involving statutory powers or discretions discussed earlier) could also have been decided on the basis that consideration was lacking. In both cases, the result is a void contract. The difference is that a finding of ultra vires gives the other contracting party possible
68 Rothmans, above n 3.
69 At 328.
70 A Currie Crown and Subject: A treatise on the rights and legal relationship of the Crown and the people of New Zealand as set out in the Crown Proceedings Act 1950 (Legal Publications, Wellington, 1953) at 52–53 was cited in Rothmans at 329 to support this “elementary” proposition.
71 Rothmans, above n 3, at 329.
72 At 329.
73 Winstar, above n 66.
remedies in judicial review. The ultra vires doctrine also suggests
“wrongdoing” on the part of the governmental
body in making
a promise that it was not entitled to make. In contrast, when a contract fails
for lack of consideration, no blame
is imputed to either party. For these
reasons, a public law finding of ultra vires (when appropriate) would be
preferable to a rather “awkward” application of the
The doctrine of frustration discharges parties from a contract when
unforeseen events operate to render performance of that
illegal or radically different from what was originally contemplated.74
Government intervention can be a frustrating event,75 but
this is less likely to be so when it is the government’s own actions that
are said to have frustrated a government contract.76 The Court of
Appeal in Power Co observed in obiter that traditional
frustration principles may be of limited relevance to some government
contracts, as variation
may be sought using executive or legislative
A hurdle that governmental bodies alleging frustration often face is that the
lawful exercise of their own powers may amount to
frustration.78 The point has not yet been raised in New Zealand,
but some have argued that a governmental body’s actions should
not amount to self-induced frustration, as the term has
negative connotations and implies that the governmental
body has behaved
improperly.79 If one accepts that self-induced frustration is
74 Taylor v Caldwell  EngR 526; (1863) 3 B & S 826 (QB); Krell v Henry  UKLawRpKQB 169;  2 KB 740 (CA).
75 See for example Metropolitan Water Board v Dick Kerr & Co Ltd  AC
119 (HL); Rayneon (NZ) Ltd v Fraser  NZGazLawRp 83;  NZLR 825 (SC); Hay v Laurent
Construction Ltd  NZHC 932; (1990) 1 NZ ConvC 190,387 (HC).
76 See for example Wells v Newfoundland, above n 47.
77 Power Co, above n 9, at 541.
78 For the general issue of self-induced frustration see Lauritzen (J) AS v
Wijsmuller BV  EWCA Civ 6;  1 Lloyd's Rep 1 (CA) [Super Servant Two].
79 Davies, above n 7, at 185; Paul Craig Administrative Law (6th ed, Sweet & Maxwell, London, 2008) at 546–547. But see also Carol Harlow “‘Public’ and ‘Private’ Law: Definition without Distinction” (1980) 43(3) MLR 241 at
the principle that a party should not benefit from its own wrongdoing, one
might also agree that a governmental body’s
actions should not
amount to self-induced frustration when the frustrating act is a change in
policy for the public good.80 But others would counter that there is
nothing “immoral” about self-induced frustration. 81
There will also surely be cases where a private contractor will
have valid “moral” reasons to frustrate
a contract, just as
there might be cases where a governmental body deliberately thwarts a
contract to escape a bad
bargain. If the laws on self-induced frustration
were to change, it would be more logical to examine the reasons
all self-induced frustrating acts, regardless of whether the party is
a governmental body. Self-induced frustration, as it
currently stands, is
not a moralised doctrine; it does not involve consideration of the reasons
behind the frustrating
act and does not impose any moral sanctions.
While frustration is an argument that governments might rely upon to avoid
being bound by its contracts, it is unlikely to succeed unless a special
exception to self-induced frustration was created
bodies. Such an exception would be no more palatable than the rule against
(f) Legislative override
Finally, if holding a governmental body liable to pay damages is unacceptable
in a particular case, and the other rules of contract
law do not point to any
other result, Parliament could always enact legislation overriding the specific
contract and explicitly denying
or restricting compensation. This is a drastic
step extinguishing contractors’ property rights and, accordingly, it is
Parliament to take this step and face any consequences in the democratic
process. It is not the courts’ role to protect
Legislative override was the option taken in Westco Lagan.82 There the government introduced the Forests (West Coast Accord) Bill 2000, which cancelled the West Coast Accord contract and included a clause
80 Seddon, above n 2, at 260.
81 See Maritime National Fish Ltd v Ocean Trawlers Ltd  UKPC 1;  AC 524 (PC) at
530, where the Court in a unanimous judgment declared that “[t]he essence of ‘frustration’ is that it should not be due to the act or election of the party”.
82 Westco Lagan, above n 4.
providing that “no compensation [would be] payable by the Crown to any
person”.83 Despite the fact that the Bill allowed
“expropriation of property without compensation”,84 the
Court acknowledged that the doctrine of parliamentary sovereignty
precluded relief. 85 There is nothing in the New Zealand
constitution preventing Parliament from extinguishing property rights
so long as clear, unambiguous language is used. While
the enactment of such legislation is not advocated, it is preferable
Parliament to exculpate the executive from their legal liabilities if
necessary than for the courts to do so. Parliament
is held democratically
accountable for its choices while courts are not. The Forests (West Coast
Accord) Bill 2000 has been
criticised in the media for taking away contractual
and property rights without compensation,86 but such criticism
is rightly directed toward the government and not at a common law rule. An
example where such legislation
might be required is when a newly elected
government wishes to change many policies, and needs to terminate numerous
to do so. The mass termination of multiple contracts may
prove costly if the government had to pay damages for all contracts,
justify legislative override.
The existing contract law framework has already developed many rules that, whether by coincidence or by design, allow the preservation of government flexibility. In cases where the help is coincidental (in the areas of intention to create legal relations, express termination clauses, and remedies), it is perfectly acceptable as the government is held accountable in law just like any other citizen. Other doctrines, such as consideration and frustration, are not similarly suited to help preserve government flexibility, so should not be used to do so. When private law’s existing rules fail to preserve government flexibility sufficiently, it is always open for public law, in the form of parliamentary sovereignty,
83 Forests (West Coast Accord) Bill 2000, cl 7.
84 Westco Lagan, above n 4, at .
85 At .
86 See Terry Dunleavy “Dialogue: West Coast skullduggery makes joke of openness” The New Zealand Herald (New Zealand, 14 June 2000); Magna Carta Society “Forests (West Coast Accord) Bill” (Press Release, 3 June
2000); Mediacom “West Coast Sawmiller Sues The Government” (Press
Release, 19 June 2000).
to step in and override those rights conferred by private law. With these
alternatives at the government’s disposal, it is
hard to see why the rule
against fetters is needed.
C. Consequences of Abolishing the Rule
There are many valid criticisms, both from private and public law
perspectives, of the rule against fetters. It is also shown that
many other ways, again, both in private and public law, in which the
government’s flexibility and discretion can
be preserved, rendering the
rule redundant. It follows that the rule against fetters should be
Abolition would carry with it a number of
desirable consequences, and only one possible negative (and it is
argued, unconvincing) consequence.
If the rule were abolished, governmental bodies may still breach their
contracts to effect changes in policies; they would simply
be made to pay
damages. It is more just when “the public purse [bears] the cost of the
change of public policy”,87 than a single unfortunate
contractor. After all, it is the public that will share in any benefit of a
change in public policy,
not the contractor (except to the extent
that the contractor is also a member of the public). In this way, government
contracts are treated no differently to ordinary contracts, so the government
would not appear to be “above” the law.
Abolishing the rule against fetter may also have the fortuitous consequence of making governmental bodies less eager to use contract to implement their policies, when such a mechanism would be inappropriate. There are areas where contract law, as a private law tool, is ill-suited for pursuance of public policies.88 Governmental bodies should carefully consider whether their objectives could be better pursued using public law tools and powers, with their accompanying checks and balances. Daintith points out that two mechanisms are open to the government for the implementation of policy: imperium (use of
87 Hogg and Monahan, above n 7, at 229.
88 Exactly which policies can be pursued by contract and
which should be pursued using public powers is contentious:
Terence Daintith “Regulation by Contract: the New Prerogative”
(1979) 32 Current Legal Problems 41; Cheryl Saunders and Kevin Yam
“Government regulation by contract: Implications for the rule of
law” (2004) 15 PLR 51.
legislation) and dominium (use of government wealth).89 Daintith
notes that public law has focused on regulating the government’s
imperium powers and so its checks and balances may
not be as effective in the
dominium context. 90 When using private law tools,
governmental bodies should be held to at least91 the same standard as
anybody else. Otherwise, the government would be allowed to
“forum-shop”— employing the private
law until it is no longer
beneficial, then invoking the public law instead.92 Rothmans
is an example where contract law was inappropriately used to implement
policy. The contract there was expressly stated
to be “in lieu
of further legislative or regulatory restrictions on the marketing of
tobacco products”.93 It is of concern that a matter of public
health was dealt with in a private confidential agreement, rather than through a
where it would be open to scrutiny. The use of contract in
Rothmans was questionable, and such use should be discouraged.
One possible negative consequence of abolishing the rule against fetters is
that it may in practice bind a governmental body to its
contracts and any
accompanying policy, because the relevant governmental officer would have
a strong inhibition against putting
its employer in a position where it had to
pay damages.94 Yet even if the rule against fetters were to endure,
there would still be strong inhibitions against putting the governmental
body in a position where it has to break its word. Both of these pressures
reduce to political accountability; the absence
of the rule would not
prevent the governmental body from exercising its legal powers and
89 Daintith, above n 88. See also Davies, above n 7, at 68.
90 Daintith, above n 88.
91 Some academics have suggested that governmental bodies may be required to adhere to higher ethical standards in the private law context of contracts: see Seddon, above n 2, at 15; see also Blackpool and Fylde Aero Club v Blackpool Borough Council  1 WLR 1195 (CA) and Pratt Contractors Ltd v Transit New Zealand  2 NZLR 433 (PC), which suggest that courts may be more willing to imply standards of reasonableness and good faith in contracts involving public authorities.
92 Davies, above n 7, at 193.
93 Rothmans, above n 3, at 327.
94 Seddon, above n 2, at 264.
Private law and public law developed with different actors
and objectives in contemplation. Unsurprisingly, conflict
occurs when the
two domains collide. Private law, and its rules of contract law, may not always
be appropriate for public institutions.
There must be recognition of the special
position that governmental bodies hold, and the government’s need for
to execute changes in public policy. But the existing rules of
contract are surprisingly flexible, and already provide allowance
Courts have been careful not to impose legal obligations on governmental
bodies when it is possible they were
merely making a statement of intent
or policy, and the benefit of the doubt goes to the government in such cases.
will generally refrain from making orders for specific
performance or injunctions in cases where governments do breach contracts
policy reasons. 95 Governmental bodies may also choose to adopt
express termination clauses into their contracts as a matter of practice,
themselves an exit route if termination of a contract proves necessary
We should also be mindful that governmental bodies are in positions of
relative advantage vis-à-vis ordinary contractors.
has more powers at its disposal, including (in practice) the power to break
contracts by passing legislation, though
it is conceded that public bodies may
will not always be in a position to effect this. Parliamentary sovereignty can
private law in cases where paying damages would be
unacceptable. Parliament must then bear the brunt of its decision in
democratic process. In the end, public law, with its accompanying checks and
balances, should still win out over private
law. The rule against fetters need
not play a part in that battle.
95 There may even be exceptional cases where orders for specific performance or injunctions may be called for, such as when the government’s breach of a contract is not for bona fide policy reasons, but primarily to escape a bad bargain. It would be prudent not to close the doors to these equitable remedies altogether, but such cases will be very rare.