Part 12: Local Authorities (Members' Interests) Act 1968

Local government: Results of the 2006/07 audits.

The Local Authorities (Members' Interests) Act 1968 (the Act) contains a number of rules to regulate conflicts of interest that may arise from the personal pecuniary interests of members of local authorities. The Office of the Auditor- General carries out the primary statutory functions under the Act.

We continue to receive a steady stream of requests for guidance about how the Act works, applications for formal approvals and exemptions, and complaints about alleged breaches of the Act.

We have recorded our view many times in recent years that the Act is in need of reform.1 In 2005, we published a detailed report outlining our views on the difficulties with the Act and options for reform.

Each year we report on matters of interest about the Act.2 This year, we discuss how the Act affects candidates for election and the particular difficulties that arose during the 2007 local authority elections. The experience in 2007 highlights that the difficulties with the Act have practical consequences and can have a significant effect on the operation of the local democratic process.

In this Part, we discuss the difficulties that the contracting rule can cause candidates for election (or newly elected members) with contracts that were entered into before their election.

Disqualification of candidates for election

The contracting rule

Under section 3(1) of the Act, a person is disqualified from being a member of a local authority if they are concerned or interested in contracts with the authority where the total of payments made, or to be made, by or on behalf of the authority exceeds $25,000 in any financial year.

It is an offence for a person to act as a member of the local authority while disqualified under the contracting rule.

The contracting rule can raise issues for sitting members and prospective candidates for election.

We receive many requests for guidance, especially around the time of local elections, about whether a candidate is caught by the contracting rule. We cannot issue a “ruling” about a person's eligibility for election, but we offer advice where we can.3

Exceptions to the contracting rule

The Act allows the Auditor-General to grant formal prior approval (and, in limited cases, retrospective approval) of a member's interest in contracts that exceed the statutory limit. This has the effect of suspending the contracting rule for that case. We are frequently asked to exercise this power. It is surprisingly common, especially in small and rural districts, for a local authority to contract a business in which one of its members has an interest. Most of the time we are able to grant the approval sought, because we are satisfied that the contract has been handled in a fair and transparent manner, and that the authority is able to justify its decision.

However, we do not have the power to grant formal approvals for a candidate for election who is not yet a sitting member.4 Nor can we grant approval for a contract that was entered into before the person became a member.5

Instead, the Act contains some specific exceptions to the contracting rule that can apply to candidates for election.6 Contracts that come within these exceptions can be disregarded for the purpose of the contracting rule.

The wording of these exceptions is complicated and difficult to follow. For convenience, we paraphrase them as providing that a candidate for election will not be disqualified if the contract falls within any of the three following categories:

  • if the work under the contract has already been performed and the amount to be paid is fixed;
  • if the work is still to be done, but the amount to be paid has been fixed in the contract (subject to amendments and additions allowed for in the contract); or
  • if the work is still to be done and the amount to be paid will not be known until the work is done, but the contract does not exceed 12 months or the person gives up the contract within a month of being elected.

The purpose of exceptions for contracts already in existence is presumably to permit situations where the capacity of the authority to influence future payments under a contract is minimal, because the contract is effectively complete, the amount to be paid is fixed, or the contract is of relatively short duration. Therefore, the effect of the exceptions is that a person with an existing contractual relationship with the local authority should not be able to be elected as a member if the amount to be paid under the contract cannot be ascertained at the time of election (unless the contract is for a short term). Uncertainty in a service contract could arise either because the nature or extent of the goods or services to be provided is flexible or open-ended, or because the price for delivering the goods or services remains open to negotiation or other uncertainty.

Although the purpose is reasonably clear, there are difficulties in practice with these exceptions.

The exceptions can be hard to understand and apply

It can often be difficult to decide whether or not the amount to be paid under a contract can be regarded as “fixed”. It can also be hard to decide whether a variable or contingent component can be regarded as an “amendment” or “addition” allowed for in the contract. For example, sometimes the price is specified as a rate for each unit or hour where the number of units or hours is not known with certainty (or the price is a formula where a material factor may vary).7 Sometimes the price may be able to be renegotiated or adjusted during the life of the contract. Sometimes a price has both a fixed portion and a variable portion. Sometimes the main portion of the price will be “fixed”, but there is the possibility of contingencies. These sorts of situations can be complicated. The precise terms of the contract will often be critical.

There are other complexities with the exceptions. The long and complex drafting means they are hard to follow.8 They also contain ambiguity, with the result that it is not clear to some readers whether there are in fact two or three separate exceptions.9

The overall effect of this complexity and ambiguity is that it can be very difficult for potential candidates to know if they would be disqualified under the Act.

The exceptions can lead to harsh consequences for candidates

Sometimes a person will not be able to come within any of the statutory exceptions. This can lead to an overly harsh result, because the circumstances might seem quite acceptable. It may well be that the contracting process was entirely fair and justifiable, and the equivalent situation would be approved if it arose after the person's election.

This is most often the case where the amount to be paid cannot be determined in advance and the contract is for more than one year. Sometimes the member can resolve the situation, for example, by relinquishing the contract within a month of being elected, or by removing their interest in the contract (such as by selling their shares and relinquishing any directorship). Those can be very significant steps for the individual, and may effectively mean that a person has to give up a business, or terminate a long-standing contract, to be elected.

Other cases may be even more problematic, if for instance:

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

Because we cannot use our approval power here, there is no flexibility or discretion to deal with such cases. The contracting rule applies strictly to contracts that pre-date the member's election if the statutory exceptions do not apply.

The consequences can be even more unfortunate if the situation is not discovered until after the person has been successfully elected to the local authority. The newly elected member may have to vacate office.

Issues in previous years

In one instance in 2002, a member's 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 the statutory exceptions did not apply. The member had to vacate office.

We also advised prospective candidates that they may be disqualified from being elected, once in 2003 and once in 2004.

Issues in the 2007 local elections

The contracting rule gave rise to numerous questions for prospective candidates during the 2007 local elections. We dealt with 32 requests for guidance about whether and how the contracting rule applied to candidates for election. Sometimes the candidates themselves contacted us. Sometimes the question was raised by the electoral officer or another official.

In most of these instances, the person was not disqualified. Some situations required detailed and careful consideration of the specific terms of the relevant contract, highlighting the complexity and ambiguity of the relevant legislative provisions. However:

  • In one instance, a candidate withdrew from the election after we advised him that we considered he was disqualified from being elected.
  • In three instances, prospective candidates withdrew after preliminary discussions with us.
  • In two instances, candidates took steps to dissociate themselves from companies that were contracting with the local authority, after we had expressed the view that they were disqualified.

Several of the queries did not arise until after the election. In none of those cases was the person disqualified.

Options for the future

In our view, it is significant that in the 2007 local authority elections four people were either prevented or discouraged from participating as candidates, and two more had to rearrange their personal interests to participate. This came as a result of a legislative rule that is poorly drafted and has an unclear rationale. It does little to encourage or strengthen democracy at the local level.

It makes little sense that the Act has harsher consequences for people who have not yet been elected than for people who have already been elected. The risk of preferential treatment, undue influence, or significant and ongoing conflicts of interest will usually be smaller where the person was not a member of the local authority at the time the contract was entered into. Any concerns about influence when the contract comes up for review or renewal would be able to be managed in the usual way.

This is one of the issues that could usefully be addressed if the Act was reviewed by the relevant policy agencies. The difficulties with candidates for election could be resolved if our statutory approval power was extended to cover candidates (or contracts that pre-dated a member's election). We could then consider these situations on a case-by-case basis, as we do for contracts that arise during a member's term of office.

Alternatively, these difficulties could disappear altogether if the overall utility of the contracting rule was reconsidered. In previous reports where we have recommended a review and reform of the Act, we have expressed doubts about whether the contracting rule continues to serve a useful purpose at all.10

As long as the contracting rule remains the law, we are obliged to apply it as it stands. However, we will continue to raise our concerns about this Act with the relevant agencies.

1: See The Local Authorities (Members' Interests) Act 1968: Issues and Options for Reform, June 2005; Local Government: Results of the 2001-02 Audits, parliamentary paper B.29[03b], 2003, part 2.4; and Second Report for 2000: Local Government Matters, parliamentary paper B.29[00b], 2000, part 7.

2: Our general guidance about the Act is contained in our 2007 publication Guidance for members of local authorities about the law on conflicts of interest.

3: However, our role in administering the Act does include prosecuting persons who we consider have breached the Act.

4: Crown Law has repeatedly advised us that our approval power cannot be used for persons who are not yet members, although this view has been contested by others.

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

6: Sections 3(3)(f) and 3(3)(g).

7: Our general view is that, if a contract's price is specified as a “rate”, the amount to be paid is not “fixed”.

8: One sentence comprises 277 words, with 12 commas or semi-colons.

9: Our view is that the second of the three exceptions is not constrained by the requirements that the contract is to be for fewer than 12 months or be relinquished by the member. But this is not beyond all doubt. Some people have taken the view that those conditions apply to all contracts where the work is still to be done.

10: See our 2005 report The Local Authorities (Members' Interests) Act 1968: Issues and options for reform.

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