Part 4: Repeal or retention?

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

4.1
This Part considers whether the Act should be repealed or retained, and in what form. In our view, it is desirable to continue to have legislation that fulfils the function of the discussing and voting rule, but we have doubts as to whether the contracting rule needs to be retained. We favour retaining the Act as a stand-alone statute, and we favour rewriting the entire Act rather than just amending specific provisions.

4.2
We assess the discussing and voting rule and the contracting rule separately.

The discussing and voting rule

4.3
The discussing and voting rule is a partial codification of the common (i.e. judge-made) law about bias in public body decision-making. It needs to be considered in the context of this wider law.

4.4
The relevant legal principle58 is encapsulated in the phrase nemo judex in causa sua, meaning “no person shall be a judge in their own cause”. It exists to ensure that persons with the power to make decisions affecting the rights and obligations of others carry out their duties fairly and free from prejudice. If a decision is tainted by bias, the courts may declare it invalid. The general test is whether there is, to a reasonable observer, a real danger of bias on the part of a member of the decision-making body.59

4.5
The fact that the statutory discussing and voting rule applies only to interests of a pecuniary nature reflects a long-standing distinction in the common law, which treats pecuniary interests more strictly than other – non-pecuniary – types of bias. Under the common law, a pecuniary interest amounts to an automatic disqualification from participation in the decision,60 regardless of any suggestion or likelihood of actual or apparent bias. In other words, where the interest is financial, bias is presumed to exist.61

4.6
The common law principle about bias is long-standing and widely regarded as significant. Everyone accepts that public office-holders should use their official positions only in the public interest, and that they should not have the opportunity to use their positions for personal benefit.

4.7
But, given the existence of the common law, the question may then be asked why the legal principle needs to be expressed in statutory form as well. We consider that having the discussing and voting rule in legislation has several advantages:

  1. A well-written statute should promote certainty, transparency and accessibility of the law. Members of local authorities are more likely to be aware of a statutory rule, and to know how to comply with it.
  2. A statutory expression of the rule will provide a clear external framework for the most important legal limitations on members’ participation in decision-making. Pecuniary conflicts of interest are the most serious category of conflicts of interest, and a category for which strict and absolute rules apply. Retention of the discussing and voting rule in statutory form will highlight the particular importance of pecuniary interests.
  3. The statutory rule encourages personal responsibility. The Act, unlike the common law, establishes a penalty that can be imposed upon individual members.

4.8
Why should there be a special statement of the law for local authorities, when the law about bias applies to all bodies exercising public powers? This may be because members of local authorities are considered to be at particular risk of breaching the rule against bias. By definition, local authorities are concerned with matters affecting a small community in a defined geographical area. Members usually reside within that area, and so are likely to have personal interests in the area that from time to time are affected by decisions of the authority. In addition, local authorities may be made up of a higher proportion of part-time and non-professional members than other public bodies, and so may more usefully benefit from a clear statutory statement of important rules.

4.9
Moreover, it is increasingly common for other public bodies to have statutory rules about conflicts of interest (mostly covering similar ground to the discussing and voting rule) inserted into their own governing legislation.62 Similar laws also continue to exist in foreign jurisdictions, and a summary of some of those overseas laws is included as the Appendix to this report.63 All foreign jurisdictions reviewed have a rule very similar to the discussing and voting rule.

4.10
There have been very few prosecutions under the Act.64 However, the Act does not rely on regular enforcement action in order to be effective. Ideally, if it is working well, members will not breach it at all. We understand that local authority awareness of the Act is generally high. Moreover, the Act does not appear to be irrelevant. We continue to receive a steady stream of enquiries about the Act, and complaints about alleged breaches of the discussing and voting rule.

4.11
We are convinced that the purpose and principles underlying the discussing and voting rule remain sound and relevant today. The nature of local authorities and their decision-making processes have not changed in a way that affects the continuing validity or relevance of the principles discussed above.

4.12
Accordingly, we consider that it is desirable to continue to have legislation that fulfils the function of the discussing and voting rule.

The contracting rule

4.13
We take a different view of the contracting rule, and doubt whether it needs to be retained.

4.14
While the contracting rule reflects concerns about the potential for a member to profit from their public position, strictly speaking it is not actually part of the law about bias, because it is not connected to participation in decisionmaking processes. The contracting rule applies regardless of whether or not the member participated in formal decision-making about the contract. It involves a wider probity question, concerning a person’s suitability to even hold office.

4.15
The underlying principle seems to be that the mere existence of contracts over a certain value represents either a conflict of interest so pervasive, or an indication of improper behaviour so compelling, that the member should be disqualified from office.

4.16
We do not find this principle convincing. Being interested in a valuable contract or series of contracts will certainly create a conflict of interest for the member in certain areas of the local authority’s business. But this need not prevent the person from being a valuable and impartial member in other areas. Automatic disqualification from office may be too harsh a consequence.

4.17
Concerns about the potential for undue influence or preferential treatment can be satisfactorily addressed if the authority follows thorough, transparent and competitive processes in awarding large contracts. Such practices may not have always been the case, but are standard for local authorities in the 21st Century. Any instances of poor practice these days should be exposed by a combination of:

  1. new Local Government Act 2002 principles requiring open and prudent decision-making and financial management;65
  2. accounting and auditing standards;66
  3. the Official Information Act 1982;
  4. the operation of the discussing and voting rule;
  5. the organisation’s own internal controls; and
  6. scrutiny by the media, the public, politicians, and relevant central government agencies.

4.18
Our brief review of foreign jurisdictions has not found equivalent statutory rules for local authorities abroad. We do not know why this is, but possible reasons might be that other jurisdictions:

  1. have strict and explicit rules and procedures for local authority contracting, including about what sort of contracts must be the subject of a public tender process;
  2. have statutory requirements for registers of interests, which will necessarily contain details of contracts in which a member is interested; or
  3. are much larger, with the consequence that it may be uncommon for a local authority member to wish to contract with their authority.

4.19
Nor are we aware of any comparable statutory rules applying to other public entities in New Zealand.67

4.20
The contracting rule is heavy-handed, because all contracts that exceed the statutory limit need to be the subject of an application to the Auditor-General, if disqualification is to be avoided. The compliance costs of requiring every such contract to be the subject of formal oversight by an external agency may outweigh any benefits. We have developed criteria for assessing applications for approval of contracts, and we consider each application carefully. However, in practice this process is considered by most parties involved to be a simple but time-consuming administrative burden. It is extremely rare for the Auditor-General to decline to approve a contract.68

4.21
As long ago as 1986, we expressed the view that the contracting rule may no longer be necessary.69 At that time, we recommended replacing the contracting rule with a requirement for local authorities to make public disclosure of contracts with members that exceeded a certain limit.

4.22
For the above reasons, we have doubts as to the future usefulness of the contracting rule. To abolish it would be a significant policy decision, however. The Government should undertake a careful review of the rule, in consultation as necessary with local authorities and other stakeholders, before any decisions are made.70 It is not our role to pursue or decide upon such a major policy change.

4.23
Part 5 of this report discusses some options for the future of the contracting rule (and considers scenarios based on both the abolition and retention of the rule).

The appropriate form of revised legislative rules

4.24
If one or both of the rules in the present Act are to be retained in some form, they could:

  1. remain in a stand-alone statute; or
  2. be consolidated into a more general piece of legislation, such as the Local Government Act 2002.

4.25
Re-enacting the Act’s provisions as a new Part or Sub-part in the Local Government Act might make them relatively easy to locate, and would not add considerably to the size of that statute. On the other hand, a stand-alone statute reinforces the importance of the rules in the Act, and may enhance awareness of them. Also, the Act currently affects a range of other classes of bodies that are not strictly part of “local government”, as that term is usually understood. If that scope of coverage is to remain, a stand-alone statute is probably necessary. On balance, we think a stand-alone statute is preferable.

4.26
The revision of the Act could be done in either of 2 ways:

  1. piecemeal amendments to the current Act; or
  2. rewriting the entire Act.

4.27
In our view, rewriting the entire Act is preferable. The following factors support this view:

  1. the problems are numerous, and will require most of the substantive provisions in the Act to be rewritten;
  2. archaic language occurs throughout the Act;
  3. rewriting the entire Act using modern drafting language and techniques will make the statute more cohesive and consistent;
  4. the Act is not large, and so rewriting the entire statute will not be particularly complicated or expensive;
  5. the Act is old, and has not been thoroughly reviewed for 37 years; and
  6. most other major pieces of legislation affecting local government have been reviewed and significantly reformed within the last 4 years.71

58: Which forms part of the set of legal principles collectively termed “natural justice”.

59: Recent cases that examine the nature of the test for bias include Zaoui v Greig (HC, Auckland, CIV-2004-404-000317, 31 Mar 2004, Salmon & Harrison JJ); Ngati Tahinga and Ngati Karewa Trust v Attorney-General (2003) 16 PRNZ 878 (CA); Erris Promotions v Commissioner of Inland Revenue (2003) 21 NZTC 18,214 (CA); Man O'War Station Ltd v Auckland City Council (No 1) [2002] 3 NZLR 577 (PC); Porter v Magill [2002] 2 WLR 37 (HL); Riverside Casino v Moxon [2001] 2 NZLR 78 (CA); Locabail (UK) v Bayfield Properties [2000] 1 All ER 65; R v Bow Street Metropolitan Stipendiary Magistrate ex parte Pinochet Ugarte (No 2) [1999] 1 All ER 577 (HL); Auckland Casino Ltd v Casino Control Authority [1995] 1 NZLR 142 (CA); R v Gough [1993] AC 646 (HL).

60: Subject to a de minimis threshold: Auckland Casino Ltd v Casino Control Authority [1995] 1 NZLR 142 (CA).

61: Some judges and lawyers refer to pecuniary interests as “presumptive bias”, and other types of bias as “apparent bias”. Cases that consider pecuniary interests include Collinge v Kyd [2005] 1 NZLR 847; Auditor-General v Christensen [2004] DCR 524; Locabail (UK) v Bayfield Properties [2000] 1 All ER 65; R v Secretary of State for the Environment, ex parte Kirkstall Valley Campaign [1996] 3 All ER 304; Auckland Casino Ltd v Casino Control Authority [1995] 1 NZLR 142 (CA); Calvert v Dunedin City Council [1993] 2 NZLR 460; NZI Financial Corporation v NZ Kiwifruit Authority [1986] 1 NZLR 159; 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; Attorney-General v Linnell (Magistrate’s Court, Hastings, 23 July 1976, Dougall SM); Downward v Babington [1975] VR 872; Re Wanamaker and Patterson (1973) 37 DLR (3rd) 575; Auditor-General v Love (1967) 12 MCD 64; Attorney-General v Pearce [1963] NZLR 459; Rands v Oldroyd [1959] 1 QB 204; Brown v DPP [1956] 2 QB 369; Hogg v Fowler (Controller and Auditor-General) [1938] NZLR 104; R v Hendon RDC ex p Chorley [1933] 2 KB 696; Dimes v Proprietors of Grand Junction Canal (1852) 3 HL Cas 759 (HL).

62: See, for example, the Crown Entities Act 2004, sections 62-72; Education Act 1989, sections 103A, 175, and clause 8(8) of Schedule 6; New Zealand Public Health and Disability Act 2000, clause 6 of Schedule 2, and clause 36 of Schedule 3; Health Practitioners Competence Assurance Act 2003, clauses 11-14 of Schedule 3; Gambling Act 2003, section 231; Weathertight Homes Resolution Services Act 2002, section 35; Health and Disability Services (Safety) Act 2001, section 33; Local Government Act 2002, clauses 17-23 of Schedule 4; Maori Television Service Act 2003, clauses 6- 10 of Schedule 2; Chartered Professional Engineers of New Zealand Act 2002, clauses 13-16 of Schedule 1; Greytown District Trust Lands Act 1979, sections 29 and 31. Before the enactment of the Crown Entities Act in late-2004, many of the statutory entities now covered by that Act already had similar provisions in their individual governing statutes. See also the Members of Parliament (Pecuniary Interests) Bill; Cabinet Manual, paragraphs 2.52-2.55; and Standing Orders of the House of Representatives, SO 164-166.

63: We have researched similar legislation in parts of the United Kingdom, Australia, Ireland, and Canada.

64: The only recent prosecution is Auditor-General v Christensen [2004] DCR 524, which resulted in an acquittal. One has to go back 30 years to find other prosecutions. Several prosecutions for alleged breaches of the discussing and voting rule were undertaken between 1967 and 1974. These related to:

  • a borough council mayor in 1967 (conviction);

  • a borough councillor in 1967-68 (conviction);

  • an electric power board chairman in 1969-70 (discharge without conviction, with costs to the Audit Office);

  • a city councillor in 1970-71 (conviction); and

  • a borough councillor in 1973-74 (discharge without conviction with costs to the Audit Office).

Of these older cases, only the earliest one has been reported: Auditor-General v Love (1967) 12 MCD 64.

65: See, for example, sections 14(1)(f), 77 and 101 of that Act.

66: Such as SSAP-22 and AS-510, regarding related party disclosures in financial statements.

67: Except for school boards of trustees, which until fairly recently were subject to the Act. In 2001, they were removed from the Act’s coverage, and an equivalent provision to the contracting rule was inserted in the Education Act 1989. See section 103A of that Act.

68: There is no recent litigation about the contracting rule. The most recent legal proceeding of which we are aware is the 1976 case of Attorney-General v Linnell (Magistrate’s Court, Hastings, 23 July 1976, Dougall SM) which was a civil proceeding brought (unsuccessfully) under the Local Government Act 1974 to attempt to oust a councillor from office on the grounds of breach of the contracting rule. Other, older, cases about the contracting rule include Attorney-General v Pearce [1963] NZLR 459 and Hogg v Fowler (Controller and Auditor-General) [1938] NZLR 104.

69: S T Keene, Local Authorities (Members’ Interests) Act 1968, January 1986. This is an unpublished paper setting out the Audit Office’s position on aspects concerning the administration of the Act.

70: It might be sensible to review the usefulness of section 103A of the Education Act 1989 at the same time.

71: See, for instance, the Local Electoral Act 2001, Local Government (Rating) Act 2002, and Local Government Act 2002.

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