Part 3: Problems with the Act

The Local Authorities (Members' Interests) Act 1968: Issues and options for reform.

3.1
We think there are a number of problems with the Act as it is currently worded. In this Part, we describe the problems we have encountered in administering it.

General provisions

Obscurity of language

3.2
The Act is 37 years old. In many areas its language is archaic, difficult to follow, and out of date. Some key provisions are long16 and use language that appears old-fashioned and clumsy to the reader of today. The Act’s style does not accord with modern parliamentary drafting standards.

Bodies covered by the Act

3.3
The First Schedule lists the local authorities covered by the Act. There are some inconsistencies:

  1. Wananga are not included, although other tertiary education institutions are.
  2. The printed copies of the Act (but not the electronic versions published by Brookers) contain editorial notes stating that the references in the Act to licensing trusts were “impliedly repealed” by section 230(2) of the Sale of Liquor Act 1989. We consider that licensing trusts are still covered by the Act, but the situation is not entirely clear.17

3.4
It may be timely to review each of the bodies and classes of bodies listed in the Schedule, to determine whether:

  1. the body or class of body still exists;18
  2. if so, whether it ought to remain covered by the Act; and
  3. if so, whether it is correctly described in the Schedule.19

Enforcement and penalties

3.5
Removal from office and criminal prosecution (which go hand in hand) are the only available remedies under the Act.20 Yet a criminal conviction is sometimes too blunt and heavy an instrument to comprise the only possible formal consequence for a breach of the Act. This sanction has 3 particular limitations:

  1. Convictions are difficult to achieve, because the criminal law requires a standard of proof beyond reasonable doubt.
  2. The concepts of “pecuniary interest”21 and “concerned or interested”22 sit uncomfortably in the criminal law,23 because they are terms most readily understood in a civil law context.24 The civil law test is based on what a reasonable bystander would think, and on an objectively assessed reasonable expectation of (or future potential for) financial advantage or disadvantage. Moreover, issues of motive, good faith, and the actual financial result are irrelevant. By contrast, a Court dealing with a criminal offence may wish to focus on actual financial advantage or disadvantage,25 or on the subjective belief of the defendant, or on the defendant’s motives and good faith.26 This could lead to uncertainty and confusion in applying the Act because of the potential for a legal test to exist that is different to the better-known test that applies when the validity of a decision is under challenge in a (civil) judicial review action.
  3. Some situations are sufficiently serious to warrant some type of formal censure, but are probably not sufficiently serious to require the intervention of the criminal law.

3.6
If removal from office is – in effect – the real penalty, it seems odd that a criminal prosecution is the means used. Loss of public office is really a civil sanction, not a criminal one. If that is the desired outcome, it is arguably unnecessary to also have to inflict a criminal record upon the offending member.

3.7
Therefore, alternative or additional remedies for breach of the rules may be desirable.

3.8
If a criminal sanction is to be retained at all, it may be appropriate to review and increase the level of the penalties able to be imposed in sentencing. These are presently too low to be of any real significance.27

Deeming provisions

3.9
The Act contains provisions that set out when a person who is associated with a company is deemed to share any pecuniary interests of that company.28 These “deeming provisions” are useful in providing certainty for some cases, but they raise further inconsistencies. The following difficulties exist with the company deeming provisions:

  1. A literal reading of the deeming provisions (in relation to the discussing and voting rule, but not in relation to the contracting rule)29 is likely to catch members who own shares in companies solely as a trustee of a trust (but who are not beneficiaries of that trust). This may be unnecessarily harsh.30
  2. The deeming provisions do not apply to other bodies such as partnerships. Partnerships are used as the legal structure for many professional businesses (such as law and accounting firms), so it is unclear when a partner in a firm should be deemed to share the pecuniary interests of that firm. Arguably, similar deeming provisions ought to apply.
  3. It is not entirely clear whether the deeming provisions are exhaustive in relation to companies – in other words, whether interests that fall short of the statutory threshold31 are automatically assumed not to give rise to a pecuniary interest in the company’s affairs.32
  4. The deeming provisions refer to a “member” of a company. This terminology comes from the now-repealed Companies Act 1955, which used that word to mean “shareholder”. Sometimes the term is mistakenly thought to refer to a director. The terminology could usefully be updated.

3.10
A member can also have a deemed interest through their spouse,33 or through their spouse’s deemed interests in a company.34 The spousal deeming provisions (in relation to the discussing and voting rule, but not in relation to the contracting rule) are likely to catch a member whose spouse owns property solely as a trustee of a trust (but where neither the member nor the spouse are beneficiaries of that trust).35 This may be unnecessary.

The discussing and voting rule

Operation of the rule

3.11
The basic rule is not problematic. However, similar laws elsewhere36 define the key concepts in greater detail, so there may be some scope for clarification for the benefit of unfamiliar users.

3.12
Two different exemption powers exist, which can be confusing.37 They could usefully be reviewed and (if both are to be retained) combined.

Overlap with the Education Act

3.13
In the case of universities, polytechnics and colleges of education, there is some overlap between section 6 of the Act and a similar rule in section 175 of the Education Act 1989. The wording of the 2 provisions is slightly different, which leads to the odd result in some cases where one provision will appear to allow member participation in a matter, while the other will prohibit it.38 It seems anomalous that both provisions should apply to those bodies.

The district plan exception

3.14
There are a number of statutory exceptions to the discussing and voting rule. One of these relates to district plans. It provides that:

6(3) Nothing in subsection (1) of this section shall apply with respect to any of the following matters: …

(e) The preparation, recommendation, approval, or review of a district scheme under the Resource Management Act 1991 or any section of such a scheme, unless the matter relates to any variation or change of or departure from a district scheme or section thereof or to the conditional use of land as defined in that Act.

3.15
Some of the language in section 6(3)(e) is out of date because it refers to terminology used in the now-repealed Town and Country Planning Acts. The wording needs to be amended to reflect terminology used in its successor, the Resource Management Act 1991. We currently interpret the references to terms such as “district scheme”, “section”, “variation”, “change”, “departure”, and “conditional use” as if they were the equivalent terms in the Resource Management Act.39 The terminology is technical, however, and may be particularly confusing to lay people.

3.16
More significantly, a recent Court decision gave a surprisingly broad interpretation to the scope of section 6(3)(e).40 We had always taken the view that, for the section 6(3)(e) exception to apply, the particular matter before the authority or committee must actually be the preparation, recommendation, approval, or review of a district plan (or a territorial section thereof). That is, the exception will not apply if the matter simply relates to a district plan or an issue covered by a plan; nor will the exception apply to the preparation, recommendation, approval, or review of part of or a discrete issue in a district plan. We considered that the exception exists because consideration of an entire district plan is likely to encompass issues so wide-ranging and numerous that all members would otherwise be excluded from voting on the adoption of such documents.41

3.17
However, the Court decision appeared to apply section 6(3)(e) to matters that “formed part of the preparation of” the district plan. The Court applied the provision to a discrete matter relating to a council policy that the Court found was (at the relevant time) being considered “for possible inclusion in” part of the district plan.42

3.18
This decision represents the only available case-law on the scope of the section 6(3)(e) exception to date, and so is likely to be relied on as a precedent.43

3.19
We think the Court’s interpretation leaves the scope of section 6(3)(e) unacceptably wide. This is concerning, because:

  1. a. Local authorities typically consider a wide range of matters that may ultimately be included in or managed by a district plan. It now appears that councillors can participate in all such matters even where they have a pecuniary interest. Such a broad interpretation of this exception would erode a great deal of the efficacy of the discussing and voting rule, and so appears inconsistent with the policy of the Act.
  2. b. It will be more difficult to apply the Act in individual situations, because it will not always be obvious to a councillor – or to those advising him or her – whether a particular matter is covered by the exception.

The contracting rule

Operation of the rule

3.20
There are several distinct issues connected to the operation of the contracting rule:

  1. The $25,000 annual limit for contracts44 (above which our approval is required) has not been increased since 1982. Because of inflation over the last 23 years, that limit can now be reached easily, and we receive a large number of applications for approval of a member’s interest in contracts.45 It may be appropriate to review and raise the statutory limit.
  2. It is not clear whether or not the monetary limit includes GST.
  3. The contracting rule focuses on the time when payments are made, but these days local authorities more commonly account for contracts on an accrual rather than a cash basis. Therefore, it makes more sense for the rule to focus on the time when the local authority incurs an expense (regardless of when payment is actually made).
  4. The concept of automatic disqualification, without any formal declaration to that effect, creates uncertainty. A member may be technically disqualified from office without being aware of the fact, or alternatively the member may disagree with our (or someone else’s) assertion that they are disqualified. In addition, the concept sits uncomfortably with the power of retrospective approval,46 which may mean that a member is disqualified for a period but is later deemed not to have been disqualified. Furthermore, it is not entirely clear how long a disqualification lasts.47
  5. The Act establishes different tests for prior and retrospective approval.48 One test for both types of approval may be simpler to apply.
  6. The Act requires applications to be made only by the local authority, not by the member personally. Yet it would be unfair if a member was disqualified through an inadvertent (or deliberate) omission by an officer of the authority.

Subcontracts

3.21
The contracting rule applies to subcontracts, and the term “subcontract” is defined broadly.49 This can cause difficulties in situations where a member acts as a general supplier of goods to another business that is involved in contracts with the authority. The member may not be aware of the head contract, or it may not be possible for the member to predict whether the customer will use the goods to perform contracts with the authority.

Community boards

3.22
Section 3(3)(j) contains an exception to the contracting rule for members of community boards who are interested in contracts with a city or district council. This exception is redundant, since community boards are subject to the Act in their own right, separate from their “parent” authority.50 If a person is a member of a community board, but not a member of the “parent” city or district council, section 3 will not apply to their contracts with the council.

Candidates for election

3.23
The contracting rule can cause particular difficulties for candidates for election (or newly elected members) in respect of contracts that were entered into before their election.

3.24
First, the Act provides exceptions for some circumstances,51 but the specified criteria do not cover all situations where the contract was entered into before the person became a member. For instance:

  1. The member, while legally interested in the contract, may not have the power to relinquish it;
  2. The member may not have relinquished the contract within a month of being elected; or
  3. It may be impracticable or prohibitively expensive to one or both parties for the contract to be relinquished.

3.25
Secondly, one of the exceptions contains a drafting ambiguity. The wording of section 3(3)(g) is long and complex.52 As a consequence, it is not clear whether or not the requirements labelled (i) and (ii) apply to contracts where the amount to be paid by the authority has already been fixed.53

3.26
Thirdly, we consider that we do not have the ability to grant prior approvals in respect of non-members who are candidates for election.54 Nor do we have the ability to grant retrospective approval once they are elected.55 Thus, in cases where the statutory exceptions do not apply, there is no scope for flexibility in the rules as they apply to contracts that predate the member’s election. The disqualification rule applies strictly to such contracts, which may lead to some unduly harsh results.56 In one recent case, the disqualification was not discovered until months after the member had been sworn in. There was no scope for us to grant a retrospective approval, and so the member had to vacate office.57 In 2 other recent instances, we advised prospective candidates that they may have been disqualified from being elected.

16: See, for instance, section 3(3)(g).

17: Section 230(2) of the Sale of Liquor Act did not expressly amend the Local Authorities (Members’ Interests) Act. Rather, it repealed a number of enactments that had established licensing trusts. But new bodies called licensing trusts could be established under the Sale of Liquor Act, and section 241 of that Act provided that a number of then existing licensing trusts would continue to exist, and that the provisions of that Act would apply to them as if they had been constituted under that Act.

18: For instance, the Schedule still refers to the Auckland Regional Authority, Christchurch Town Hall Board of Management, catchment boards, drainage boards, and river boards, none of which now exist.

19: For instance, “teachers’ colleges”, “technical institutes” and the “Lincoln College Council” need to have their names and governing enactments updated, and the Auckland University of Technology now needs its own entry.

20: If the contracting rule is breached, the person is automatically disqualified from being a member of the local authority, and it is an offence to continue to act as a member of the authority. If the discussing and voting rule is breached, vacation of office is an automatic consequence if the member is convicted of the offence of contravening that provision.

21: The wording in section 6.

22: The wording in section 3.

23: This difficulty is discussed in the judgment in Auditor-General v Christensen [2004] DCR 524.

24: See, for instance, R v Secretary of State for the Environment, ex parte Kirkstall Valley Campaign [1996] 3 All ER 304; Calvert v Dunedin City Council [1993] 2 NZLR 460; Loveridge v Eltham County Council (1985) 5 NZAR 257; Re Guimond and Sornberger (1980) 115 DLR (3rd) 321; Meadowvale Stud Farm v Stratford County Council [1979] 1 NZLR 342; Downward v Babington [1975] VR 872; Re Wanamaker and Patterson (1973) 37 DLR (3rd) 575; Rands v Oldroyd [1959] 1 QB 204; and Brown v DPP [1956] 2 QB 369. A finding of pecuniary interest, at common law, gives rise to a presumption of bias. Summaries of most of these cases are contained in our Conflicts of Interest publication (see footnote 13).

25: As the Court did in Auditor-General v Christensen [2004] DCR 524.

26: As the Court did in Auditor-General v Christensen. But contrast this with a stricter position taken in respect of motive in another criminal case, Auditor-General v Love (1967) 12 MCD 64.

27: The maximum fines are currently $200 for breach of the contracting rule, and $100 for breach of the discussing and voting rule. They have not been increased since the Act was enacted 37 years ago.

28: Sections 3(2) and 6(2). There are several provisions, but the most common one is owning 10% (or more) of the shares in a company.

29: Because of an exception in section 3(3)(h) that is not replicated in section 6.

30: Before the enactment of the present deeming provisions, the courts took a more lenient approach to the issue of trustees: Hogg v Fowler (Controller and Auditor-General) [1938] NZLR 104.

31: Such as, for instance, a 9.9% shareholding.

32: We have taken the view that a member in this position is deemed not to share the company’s interests. However, quite apart from the question of being deemed to share the company’s interests, we consider that a member may sometimes have a separate personal pecuniary interest in a matter concerning a company (for instance, if the member is a shareholder in the company and the matter is so significant that it is likely to materially affect the company’s share price, or if the member is a paid director and that matter is likely to materially affect their remuneration).

33: Sections 3(2A) and 6(2A). From 13 October 2007, the spousal deeming provisions will also apply to civil union partners and de facto partners. See the Relationships (Statutory References) Act 2005, section 4.

34: Sections 3(2) and 6(2).

35: Section 6(2A).

36: See, for instance, the foreign jurisdictions discussed in the Appendix, and the Crown Entities Act 2004.

37: Sections 6(3)(f) and 6(4).

38: For 2 examples of the potential for conflict, compare the exceptions in sections 6(1A) and 6(6) of the Act with section 175 of the Education Act.

39: “District scheme” can be read as “district plan”, but arguably also ought to be amended to include other major planning documents like regional plans and regional policy statements. The term “section” is used in the Resource Management Act and its predecessors to mean a discrete and self-contained “territorial section” (not simply any lesser portion or individual provision) of a plan. “Variation” and “change” are terms that have specific Resource Management Act meanings in relation to formally amending provisions in a district or regional plan or policy statement. The modern equivalent to the terms “departure” and “conditional use” is “resource consent”.

40: Auditor-General v Christensen [2004] DCR 524.

41: This view is supported by the fact that, by contrast, plan changes, variations, and applications for resource consent (to use the modern terminology – see footnote 39) are expressly excluded from the scope of the exception, presumably because they are likely to deal with specific issues or locations and so are unlikely to affect many members.

42: Auditor-General v Christensen, at paragraphs 21-28.

43: Despite the fact that the decision is recent, since then we have already discontinued one other investigation into a possible breach of section 6 because the Court’s reasoning in Auditor-General v Christensen would have meant that the section 6(3)(e) exception applied.

44: Section 3(1).

45: In the 2004-05 year, we dealt with 50 applications for prior approval and 4 applications for retrospective approval. In the 2003-04 year, we dealt with 31 applications for prior approval and 6 applications for retrospective approval. In the 2002-03 year, we dealt with 42 applications for prior approval and 9 applications for retrospective approval.

46: The power of retrospective approval in section 3(3)(aa) was inserted by an amendment in 1982.

47: One interpretation, based on section 4(2), is that a disqualification lasts only until the next general election, and at that point is “cured”, but this is not beyond doubt. It is also not clear what the position is for a person whose disqualification was not discovered and acted upon before they were re-elected at the next general election.

48: Both prior and retrospective approval require the existence of a “special case”. Retrospective approval requires that prior approval would have been obtained had it been sought, and that there is “sufficient special reason” why prior approval was not obtained.

49: Sections 2 and 3(3)(b).

50: Confusion often arises over the application of the Act to community boards, because under the Local Government Act 2002 community boards are effectively regarded as a constituent part of their parent authority (and they do not have a separate legal personality, for instance).

51: Sections 3(3)(f) and 3(3)(g). It appears that the second of these exceptions was first inserted in the Act’s predecessor in response to the case of Attorney-General v Pearce [1963] NZLR 459, where an Auckland City councillor was declared to be disqualified.

52: The paragraph comprises one sentence of 277 words, with 12 commas or semi-colons.

53: At present, we take the view that they do not, but the issue is arguable.

54: The Crown Law Office has repeatedly advised us that our approval power cannot be used in respect of persons who are not yet members, although this view has been contested by others.

55: Because one of the preconditions for retrospective approval in section 3(3)(aa) is that prior approval would have been granted had it been sought.

56: Sometimes the candidate is able to relinquish the contract, and then after being elected the local authority can seek our “prior” approval to remake the contract. However, this is cumbersome and, as discussed in paragraph 3.24, is not always practicable or possible.

57: This case arose in 2002, in Wairoa District.

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