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Ieong, Patricia --- "Contracting with public authorities: the rule against fetters" [2012] NZLawStuJl 5; (2012) 2 NZLSJ 779

Last Updated: 27 May 2014

CONTRACTING WITH PUBLIC AUTHORITIES: THE RULE AGAINST FETTERS

PATRICIA IEONG^*

Introduction

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 rules 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 [1990] NZHC 632; [1991] 2 NZLR 323 (HC).

⁴ Westco Lagan v Attorney-General [2000] NZHC 1350; [2001] 1 NZLR 40 (HC).

compensation.⁵

Of course, there will sometimes be good reason for why the government breaks contracts, and this article first examines 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. Much scope 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 rule against fetters are discussed and evaluated. The article concludes that the rule against fetters is both unnecessary and undesirable in New Zealand.

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 property right (which can include contractual rights) is not entrenched in our constitution. It may be the case that in jurisdictions without these two features, the justifications for the rule against fetters will hold more weight.

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 5–7.

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. On 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 contract:⁸

[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 evident from

⁶ Rederiaktiebolaget Amphitrite v The King [1921] 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 [34]; Hamilton City v Waikato Electricity Authority [1994] 1 NZLR 741 (HC) at 761; Mark Campbell “The Legal Consequences of Promises and Undertakings Made by Public Bodies” [2002] 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 [2007] 3 NZLR

^{518 (HC); Comalco Power (New Zealand) Ltd v Attorney-General [2003] NZAR 1}

Rowlatt J’s statement—the executive must be free to act in the best interests of the public at all times. When circumstances change, 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

(HC); Petrocorp Exploration Ltd v Minister of Energy [1991] UKPC 10; [1991] 1 NZLR 641 (PC); The Power Co Ltd v Gore District Council [1996] NZCA 483; [1997] 1 NZLR 537 (CA) [Power Co].

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 [1833] EngR 266; [1833] 5 B & Ad 469, 110 ER 863 (KB); William Cory & Son Ltd v London Corp [1951] 2 KB 476 (CA); York Corp v Henry Leetham & Sons Ltd [1924] 1 Ch 557; Power Co, above n 9.

¹³ Birkdale District Electric Supply Co Ltd v Corp of Southport [1926] 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 bodies 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 the rule against fetters. Accordingly, it has been proposed that what is relevant is not the character of the contract, but rather, the character of the 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” [2006] 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 [1977] 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 [1996] VicRp 79; [1996] 2 VR 465 (SC) at [45].

²² Anns v Merton London Borough Council [1977] UKHL 4; [1978] 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 for

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 fettered.

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, the receptionist’s employment contract should not constitute an unlawful fetter on the public authority’s discretion. Yet if the governmental body decides to terminate the division in which the receptionist works, making that receptionist redundant, 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 policy discretions.

(c) Evaluation

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

governmental purposes and “private” contracts for routine transactions: Seddon, above n 2, at 9.

^{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 law.

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. Because the 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 second main criticism is that the rule deprives the rights of parties contracting with the government. Not only will there be injustice in 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 alternatives.

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 [1996] 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 term inefficiency.

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 allowing the 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” because 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 Act 1990 (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 [46].

⁴⁰ Westco Lagan, above n 4, at [57].

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 one.

(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 [58].

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 rights.

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 subvert the legislature, given that a conscious decision was made to exclude property rights from the BORA. But, as in Canada, there is no 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 sovereignty, 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 in

⁴⁷ Wells v Newfoundland [1999] 3 SCR 199.

⁴⁸ At [46].

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 contract” and held that there was not. The use of the phrase “an enforceable contract” is ambiguous (and unfortunate), as we 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 Rowlatt J’s statement: “it is not competent for the

⁴⁹ Fleming v Beevers [1994] 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

[1956] 1 WLR 11 (PC); Cato v Minister of Agriculture, Fisheries and Food [1989]

3 CMLR 513 (CA); Milne v Attorney-General for Tasmania [1956] 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 promise 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 “unnecessary 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 contract, “but 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 believed 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 relations 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 [1949] 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 body could hardly argue that a contract is an unlawful fetter on its discretion when the contract itself provides an “escape”. Furthermore, these 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 government contracts.

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

253.

⁶² At 253. See also L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC

235 (HL).

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.

(c) Remedies

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 be sufficiently preserved by awarding damages only for government breaches of contract. By awarding damages rather than injunctions or specific 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 are 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.

(d) Consideration

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

[1996] USSC 77; (1996) 518 US 839 [Winstar].

⁶⁷ Cooperative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1997] UKHL 17; [1998] 1 AC 1 at

11 (HL). This was cited with approval by Tipping J in Attorney-General for

England and Wales v R [2002] 2 NZLR 91 at [94] (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 tobacco advertising. 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 conceptually preferable to a rather “awkward” application of the consideration doctrine.

(e) Frustration

The doctrine of frustration discharges parties from a contract when unforeseen events operate to render performance of that contract impossible, 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 action.⁷⁷

A hurdle that governmental bodies alleging frustration often face is that the lawful exercise of their own powers may amount to self-induced 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 premised on

⁷⁴ Taylor v Caldwell [1863] EngR 526; (1863) 3 B & S 826 (QB); Krell v Henry [1903] UKLawRpKQB 169; [1903] 2 KB 740 (CA).

⁷⁵ See for example Metropolitan Water Board v Dick Kerr & Co Ltd [1918] AC

119 (HL); Rayneon (NZ) Ltd v Fraser [1940] NZGazLawRp 83; [1940] NZLR 825 (SC); Hay v Laurent

Construction Ltd [1989] 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 [1989] EWCA Civ 6; [1990] 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

^248–249.

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 behind 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 for governmental bodies. Such an exception would be no more palatable than the rule against fetters itself.

(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 for Parliament to take this step and face any consequences in the democratic process. It is not the courts’ role to protect the executive.

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 [1935] UKPC 1; [1935] 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 without compensation so long as clear, unambiguous language is used. While the enactment of such legislation is not advocated, it is preferable for 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 contracts to do so. The mass termination of multiple contracts may prove costly if the government had to pay damages for all contracts, which may justify legislative override.

(g) Summary

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 [91].

⁸⁵ At [91].

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 there exist 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 abolished altogether. 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: see 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 public forum 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 discretions.

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 [1990] 1 WLR 1195 (CA) and Pratt Contractors Ltd v Transit New Zealand [2005] 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.

Conclusion

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 flexibility to execute changes in public policy. But the existing rules of contract are surprisingly flexible, and already provide allowance for this. 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. Moreover, courts will generally refrain from making orders for specific performance or injunctions in cases where governments do breach contracts for policy reasons. ⁹⁵ Governmental bodies may also choose to adopt express termination clauses into their contracts as a matter of practice, giving themselves an exit route if termination of a contract proves necessary later on.

We should also be mindful that governmental bodies are in positions of relative advantage vis-à-vis ordinary contractors. The government 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 still override private law in cases where paying damages would be unacceptable. Parliament must then bear the brunt of its decision in the 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.