There is, in this post, a bit of a red herring. I will be comparing failures of a government to perform an admitted contract, and the effect of the contract obligation on the validity of the contracted obligation. Actually, the compared situtations are distinguishable on their facts, but the common notion is one of governance issues one necessarily encounters when contracting with a government. Thus, this is more a case of contrasts, not comparisons at a certain level, but a teachable moment nevertheless (I hope).
Note that I regularly, with no disrespect intended, slice and dice, reorganize, paraphrase, leave out critical facts and citations, and generally make a mess of the original source to fit the available space and the point to be made in a post. So, always, always, go to the source; read the original at the link and don't get misled by my wayward rendition.
The impetus of this post is the Australian appellate case captioned Searle v Commonwealth of Australia [2019] NSWCA 127, decided May 31, 2019. A good nutshell discussion of the case is provided by Dr Nick Seddon, an honorary professor at the Australia National University College of Law, on the Australian Public Law blog. Dr Seddon is an accomplished leading authority, and author, on Australian commercial and government contract law. Critically for this blog writer, he writes in a forthright and narrative style that is easy to read and grasp.
Searle v Commonwealth [2019] NSWCA 127 – government contracting and fettering
What happened in Searle? Searle joined the Navy as a marine technician. After being signed up, he entered into a training contract under which he would undertake a course of training towards a Certificate IV in Engineering. Under it the Navy undertook to provide a training plan and the various components to achieve the Certificate. The Navy failed to provide these elements of training. After leaving the Navy, Searle sued for damages for breach of contract. He argued that, if he had achieved the Certificate, he could have obtained a more remunerative job in civilian life than he in fact got.
There is a special legal background to this story. Going back to medieval times, English law held that the Crown does not enter into contracts with its servants. This applies in Australia although, for the ordinary public service, it has been superseded by elaborate legislation. Not so for the military, or at least not so as to remove the basic proposition that there is no contract between an service member and the Commonwealth. Such members are engaged at her Majesty’s pleasure.
The fettering rule. When government enters into a contract, there is always a potential tension. To what extent does the contract bind the government in a way that may thwart the government’s task of governing? The answer to this traditionally has been that freedom to govern trumps freedom of contract. Under various labels (executive necessity, the rule against fettering or, more vaguely, sovereign risk) the government must be free to implement its programs and policies even if this causes the government to be in breach of contract. Traditionally, that is too bad for the contractor with no right to a remedy. This collection of principles has generated much controversy over many years, though it arises rarely. The controversy is fully described by Bell P, the lead New South Wales Court of Appeal judge in Searle v Commonwealth.
This tension is captured in a number of propositions (stated starkly here):
1. The government may simply break a contract with impunity;
2. The government cannot contract out of, or relieve the contractor from, existing statutory obligations;
3. The government cannot through a contract fetter its future exercise of executive power;
4. The government cannot through contract commit to future legislation;
5. The government may instigate legislation to override an existing contract.
Propositions 2 and 4 are less controversial and are well-established. Propositions 1 and 3 are controversial and ill-defined. Proposition 5 is well-established but controversial.
The no-fettering argument in Searle: The Commonwealth said that the basic employment arrangement was not contract but, instead, an exercise of the Crown’s prerogative (or executive) power. Even if the training contract was a separate arrangement, over and above the underlying employment arrangement, the training contract could not fetter the Navy’s prerogative right to direct, control and manage Searle as a military person (dubbed “Navy Command” in the Court of Appeal). This was therefore a proposition 3 (the training contract could not fetter the exercise of Navy Command), or possibly a proposition 1 (the Commonwealth could simply break the training contract with impunity), case. This argument succeeded before the trial Judge.
Appeal: On appeal, the New South Wales Court of Appeal (the functional equivalent to a Supreme Court in many U.S. jurisdictions) took this opportunity to examine the long-standing controversy about propositions 1 and 3, described as “uncertain” and “ill-defined”. The lead judgment by Bell P was supported by short judgments from Bathurst CJ and Basten JA. It was held that the training contract did not amount to a fetter on the Commonwealth’s executive (or prerogative) power of Naval Command and that the Commonwealth was liable to pay damages.
Space does not allow coverage of the very thorough description and analysis by Bell P of the difficulties and criticisms of the fettering doctrine. Making a government contract almost invariably employs the executive power. The fettering rule says that that contract is void if it purports to dictate or control a future exercise of executive power, including making another contract. If this is correct, it is a public law intrusion on contracting.
The Mason solution: The consequence of invoking the fettering rule -- the contract that offends the rule is void -- has been one of the strands of criticism of the rule. Voidness is usually chaotic. Many years after the contract is made, a court pulls the rug leaving the parties in a very uncertain position. An important solution to this problem was suggested by way of obiter dicta by Mason J in Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 76. This was that the contract is not void but it could not be enforced by coercive orders such as an injunction of specific performance. But, on the other hand, it could be the subject of a damages remedy. This solution preserves the underlying rationale of the fettering doctrine and, at the same time, protects the contractor. It is clear that the denial of the equitable remedies of injunction or specific performance is because of the government’s imperative to be unhindered in its task of implementing its policies and programs -- not for one of the reasons that guides a court’s discretion under the ordinary law of contract.
The training contract: In Searle the contest was between the training contract and the future exercise of the power of Naval Command. Absent a possible fettering argument, there was no basis for challenging the contract. At a factual level, the training contract simply did not fetter the power of Naval Command. Any resort to Naval Command that detracted from the obligations arising from the training contract did not fetter the Commonwealth in any real sense. Even the possibility of having to pay damages in accordance with the Mason solution would not amount to a practical fetter. The Commonwealth conceded that it had the power to enter into such a contract and did not attempt to argue that it lacked that power, absent a fettering argument.
President Bell, during the course of his wide-ranging examination of the academic and judicial criticisms of the fettering doctrine, was clearly motivated by the fundamental principle that contracts should be kept, not just for the sake of the contractor but also from the perspective of government, because otherwise it would not be a credible commercial player. "This approach is more nuanced than others which carry the crude, often overbroad and instinctively unfair consequence of a contract being treated as void. It is an approach which arguably best reconciles the competing policy considerations."
Conclusion: This case “raises a number of very important questions of principle” about government contracting, albeit in an area of the law that is rarely litigated. The fettering doctrine, at least arising from propositions 1 and 3, has been festering over many years and is in need of a fresh look and restatement. The Mason solution has been applied for the first time in Australia by the New South Wales Court of Appeal. It strikes a sensible balance between the government’s imperative to govern and its need to make contracts.
Watch this space for a possible appeal to the High Court.
In the U.S., the private law of contract has been undermined and supplanted by statutory laws applicable to government acquisition contracts. In the typical "procurement" government contract, the
government is acquiring something. "“Acquisition” means the acquiring by contract with appropriated funds of supplies or services (including construction) by and for the use of the Federal Government through purchase or lease.... Acquisition begins at the point when agency needs are established and includes the description of requirements to satisfy agency needs, solicitation and selection of sources, award of contracts, contract financing, contract performance, contract administration, and those technical and management functions directly related to the process of fulfilling agency needs by contract. 2 FAR 2.101(a) In the
Searle case, the government was acquiring nothing.
There was nothing more than an arrangement between the government and an employee that the government would provide a service for an employee. It was something in the nature of, what the U.S. Supreme Court has styled, a "gratuity": "Pensions, compensation allowances and privileges are gratuities. They involve no agreement of parties; and the grant of them creates no vested right. The benefits conferred by gratuities may be redistributed or withdrawn at any time in the discretion of Congress. ... On the other hand War Risk policies, being contracts, are property and create vested rights. The terms of these contracts are to be found in part in the policy, in part in the statutes under which they are issued and the regulations promulgated thereunder."
Lynch v. United States, 292 US 571,577, U.S. Supreme Court (1934)
I'm not sure if that is a difference with a distinction between the fettering rules for government contract as practiced in Australia and contract clauses available in U.S. government, and Guam, contracting regulations, but by definition,
Searle did not deal with a government contract as we know in procurement. "“Contract” means a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them. It includes all types of commitments that obligate the Government to an expenditure of appropriated funds and that, except as otherwise authorized, are in writing. In addition to bilateral instruments, contracts include (but are not limited to) awards and notices of awards; job orders or task letters issued under basic ordering agreements; letter contracts; orders, such as purchase orders, under which the contract becomes effective by written acceptance or performance; and bilateral contract modifications. Contracts do not include grants and cooperative agreements ...." 2 FAR 2.101(a)
Guam's procurement law would not provide jurisdiction for a court to hear the contract claim brought by Searle, because the Guam procurement law does not waive sovereign immunity involving government contracts that are not acquisitions. In Guam, the government has waived sovereignty to be sued under government contracts more generally, but under the Claims Act, and, similar to
Searle, the Claims Act only has jurisdiction to render judgement for monetary awards related to expenses incurred "upon a contract", not other monetary damages and it is an open question whether it even applies to to oral or un-written contracts, or to any theories of recovery based in equity, contracts implied in law, quasi-contract, or quantum meruit. The Guam Supreme Court has left to "another day our answer to whether the Guam Legislature has extended the waiver of sovereign immunity to oral or unwritten contracts, or to any theories of recovery based in equity."
Guam Police Department v. Superior Court (Lujan) 2011 Guam 8, ftnt 8.
But, to the extent that the authority of the executive branch of the government in the U.S. is impinged upon by the procurement contracting process, the U.S. government and most if not all other jurisdictions in the USA have obtained a bit of flexibility unavailable in private contract law to cope with matters of good public governance, resulting in similar outcomes as in
Searle yeilding a sensible balance between the government’s imperative to govern and its need to make contracts, in reliance on the immunity of the 'crown', particular laws and regulations, and the contract between the parties, all in concert, when a void contract is to be avoided.
An example of this is the accepted "Termination for Convenience" clause, which in private law of contracts would normally render the entire contract void as an illusory "bargain". It allows the government to unilaterally terminate a contract for practically any reason short of bad faith or fraud. However, it also requires that the government to compensate the contractor for work done and profits earned to the date of termination. It thus reached a similar outcome as in the
Searle case. The termination for convenience clause arose out of the experiences of war, in particular the armistice following hostilities (in the "good old" days of wars between established states), when peace suddenly broke out but war material contracts persisted, without the government's need for more war materiel -- indeed as an impediment to redirecting funds to meet the needs of rebuilding the country.
Another example is the standard contract disputes clause. In simple terms, this clause and implementing regulations provides that contract disputes between the government and a contractor will be decided by the government if the parties are unable to "mutually agree" on a settlement and resolution of the dispute. In the face of this somewhat illusory and certainly conflicted decision making process, the clause contemplates a review of the government's decision, administratively, judicially or both.
This discussion illustrates a point I make when people tell me that government contracting should be done in the same manner as private contracting: government contracting must be conducted with an eye to good public governance as the overriding principle on which the contracting is allowed. It is true that "when the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals".
Lynch v. United States, supra, 579, U.S. Supreme Court (1934) Nevertheless, only Congress can determine to allow a cause of action against the government arising under that contract. "The character of the cause of action — the fact that it is in contract as distinguished from tort — may be important in determining (as under the Tucker Act) whether consent to sue was given." Id., at 582 "
Specifically, the Tucker Act permits three kinds of claims against the government: (1) contractual claims, (2) noncontractual claims where the plaintiff seeks the return of money paid to the government and (3) noncontractual claims where the plaintiff asserts that he is entitled to payment by the government."
American jurisdictions tend to mitigate the "fettering tensions" discussed above by Dr Seddon with a combination of regulations and contract clauses, coupled with particular waivers of sovereign immunity. And they each, in their separate ways, look for that nuance which strikes a sensible balance between the government’s imperative to govern and its need to make contracts.
