Part 2: The contracting rule

Local Authorities (Members’ Interests) Act 1968: A guide for members of local authorities on managing financial conflicts of interest.

2.1
In this Part, we discuss:

2.2
We also provide answers to some frequently asked questions about the contracting rule at the end of this Part.

Summary of the contracting rule

2.3
You will be automatically disqualified from office if:

  • you are "concerned or interested" in a contract or contracts with your local authority; and
  • the total payments made, or to be made, by or on behalf of the local authority for the contract or contracts exceed $25,000 in any financial year.

2.4
This contracting rule applies unless:

  • you have approval from the Auditor-General for the contract(s); or
  • one of the exceptions in the Act applies.

2.5
If you are concerned or interested in any contract with your local authority, you cannot participate in any discussion or vote on that contract (see Part 4).

2.6
The contracting rule applies to you, not the local authority. The Act does not affect the local authority's power to enter into contracts. The fact that a contract disqualifies you from membership does not invalidate the contract.

2.7
The contracting rule also applies to candidates standing for election to the local authority, but in a different way to members. If you are considering standing for election and want to understand how the contracting rule applies to you, see Part 3.

What it means to be disqualified from office

2.8
You are disqualified automatically if you are "concerned or interested" in a contract in breach of the contracting rule (see paragraphs 2.16 to 2.20).

2.9
Disqualification means that you cannot hold office as a member of the local authority or any committee of the local authority.8

2.10
A disqualification lasts until the next local government elections or the next opportunity for appointment to the local authority.

2.11
It is an offence under the Act for you to act as a member of the local authority (or a committee of the local authority) while disqualified.9

2.12
The only way to avoid disqualification is to apply for retrospective approval from the Auditor-General for the contract (see paragraphs 2.46 to 2.49). There is no guarantee that retrospective approval will be given. That is why it is important for you to understand the contracting rule, and to closely monitor any contracts with the local authority that you could benefit from.

Meaning of "contract"

2.13
Contract means a contract made by any person directly with the local authority. The Act defines it to include any relationship with the local authority that is intended to constitute a contract even if it is not an enforceable contract.10 This broad definition potentially covers transactions or relationships that are not typically thought of as "contracts", for example, grants and committee appointments. See the frequently asked questions about the contracting rule at the end of this Part.

2.14
The contracting rule also applies to subcontracts (see paragraphs 2.26 to 2.28).11

2.15
The contracting rule does not apply to a contract for the employment of any person as an officer or servant of the local authority.12

Meaning of "concerned or interested"

2.16
You are concerned or interested in a contract if you are a party to the contract.

2.17
You are also concerned or interested in a contract if the contract is between your local authority and another person or organisation, and:

  • you benefit financially from the contract; or
  • the Act deems you to be concerned or interested in the contract (see paragraphs 2.19 and 2.20).

2.18
It is difficult to be precise about what is or is not a concern or interest in a contract. Each case has its own circumstances. While the Act provides certainty in two common types of cases (see paragraphs 2.19 and 2.20), it is important to note that you can be concerned or interested in a contract in other ways – for example, your family trust has a contract with your local authority and you are a beneficiary of that trust.

Deemed interest through your spouse or partner

2.19
If your spouse or partner (that is, civil union partner or de facto partner) is concerned or interested in a contract, you are deemed to also be concerned or interested in that contract, unless:

  • the two of you are living apart; or
  • you did not know, and did not have a reasonable opportunity of knowing, that they were concerned or interested in the relevant contract.13

Deemed interest through company

2.20
If your local authority enters into a contract with a company in which you or your spouse or partner have some interest or involvement, the contracting rule applies if you or your spouse or partner:

  • singly or together, own 10% or more of the shares in the company or another company that controls it;
  • is a shareholder of the company, or another company that controls it, and one of you is the managing director or general manager (by whatever name you are actually called) of the company or the controlling company; or
  • is the managing director or general manager (by whatever name you or they are actually called) of the company and one of you is a shareholder of another company that controls it.14

The $25,000 limit on contracts

The limit is for the total value of all contracts, not for each contract

2.21
The limit is based on payments for contracts made, or to be made, totalling more than $25,000 in any financial year.15

2.22
If you have an interest in more than one contract, the limit is based on the value of all payments made for all contracts in which you are interested during the financial year, not for each contract.

2.23
The $25,000 limit does not apply only to the amount of profit you expect to make or the portion you will personally receive. It applies to all payments made for the contract(s).

The limit includes goods and services tax

2.24
The $25,000 limit is GST-inclusive.

Meaning of "financial year"

2.25
We use the local authority's financial year as the relevant time period (for example, 1 July to 30 June for territorial authorities and regional councils and 1 April to 31 March for cemetery trusts).

How the contracting rule applies to subcontracts

2.26
The contracting rule also applies to subcontracts.

2.27
That means if you are concerned or interested in a contract with your local authority as a subcontractor, the contracting rule applies in the same way as if you had an interest in the head contract. However, the limit of $25,000 applies to the value of the subcontract, not the head contract.16

2.28
Under the Act, the term subcontract has a wider meaning than what is generally understood. It extends to any "subsidiary transaction".17 For example, if you are involved in a contract with a local authority as an agent for the other contracting party (such as a real estate agent for a property transaction), the arrangement for your remuneration as an agent falls within the definition of a subcontract.

Exceptions to the contracting rule

2.29
There are some situations in which you will not be disqualified, even if you are concerned or interested in contracts that exceed the $25,000 limit.

If the Auditor-General has approved the contract

2.30
You will not be disqualified by entering into a contract that causes the $25,000 limit to be exceeded if the Auditor-General has approved the contract. Approval must generally be obtained before the contract is entered into (prior approval), although the Auditor-General can give retrospective approval in limited circumstances.18

2.31
For more information about criteria for approval for a contract, and how to apply, see paragraphs 2.41 to 2.57.

If you were not aware of the contract

2.32
You will not be disqualified by a contract that causes the $25,000 limit to be exceeded if:

  • the contract was entered into, under delegated authority, by a committee of which you were not a member or by an officer; and
  • you did not know, and did not have a reasonable opportunity of knowing, about the contract at the time it was made.

2.33
However, in this case, your local authority must notify us as soon as you or your local authority becomes aware of the contract. The local authority must write to us to verify that you did not know and did not have a reasonable opportunity of knowing about the contract. We might also ask you to verify this in writing. The local authority's letter must confirm that the committee or person who entered into the contract was properly authorised to do so.19

If your interest is as an administrator or trustee

2.34
You will not be disqualified by a contract that causes the $25,000 limit to be exceeded if your interest in the contract arises as:

  • an administrator or a trustee of any estate or trust (as long as you are not also a beneficiary); or
  • the manager appointed under the Protection of Personal and Property Rights Act 1988.20

Exempt interests and contracts

2.35
The following types of interests and contracts are not subject to the contracting rule.21 This means that you can be concerned or interested in the following types of contracts without being disqualified:

  • a loan raised (received) by the local authority (whether on security or otherwise);
  • a payment for an advertisement from the local authority in any newspaper;
  • a lease granted to the local authority;
  • a compensation payment under the Public Works Act 1981; and
  • the supply of goods or services during a civil defence emergency (subject to some constraints).

The Auditor-General's power to approve contracts

2.36
The Auditor-General can grant approval for contracts that exceed the $25,000 limit in any financial year if certain criteria are satisfied.

2.37
The local authority must generally obtain approval before the contract is entered into, although we can give retrospective approval in limited circumstances.

2.38
We can give approval for:

  • a single contract; or
  • multiple small contracts that are of the same or similar type (such as day-to-day purchases of supplies) up to a particular value.

2.39
We prefer to specify a precise monetary amount or upper limit but, if the exact amount is not yet known, a reasonable estimate of a suitable upper limit is enough. Where the approval is for an ongoing arrangement, our usual practice is to grant approval for only one financial year at a time.

2.40
We consider it a good idea to seek approval for a contract that does not exceed the $25,000 limit by itself but could when combined with other small contracts. Similarly, where several similar small contracts might cumulatively approach or exceed the $25,000 limit, we encourage an application for approval of a higher limit to apply to all of those contracts.

Criteria for approval

Getting approval before the contract is entered into

2.41
The Act requires the existence of a "special case" before prior approval can be granted.22 This requires a full assessment of the circumstances to determine whether approval should be given.

2.42
We consider whether the process followed by your local authority in awarding or agreeing to the contract is fair and transparent and whether its reasons for selecting you as its preferred contractor are justifiable. We must be satisfied that there is no risk that you might have received preferential treatment from your local authority or that you might have had an undue influence on the decision.

2.43
For a single contract (usually for a larger amount), the questions we are likely to ask are:

  • Has your local authority taken all reasonable steps to ensure that all potentially interested parties had an opportunity to tender or quote for the contract?
  • Has your local authority considered and evaluated each of the tenders or quotations, and can it justify the preferred choice on the basis of cost, performance, or quality of service?
  • Has your local authority resolved to accept the contract subject to the Auditor-General's approval?
  • Do the minutes record that you declared your interest and did not vote or speak on the matter when it was considered at a meeting of your local authority?

2.44
For multiple contracts for smaller amounts, such as day-to-day purchases of supplies, it will usually be necessary for a local authority to confirm that:

  • after due enquiry, it has found no alternative satisfactory source of supply or product; or
  • the desired source of supply is the most efficient and/or the most competitive on the basis of cost, performance, or quality of service.

2.45
You cannot assume we will give prior approval. We must be satisfied that the criteria set out above are met and that any risk of undue influence or preferential treatment has been addressed.

Retrospective approval

2.46
We have limited power to grant retrospective approval, that is, approval for contracts already entered into.

2.47
When considering an application for retrospective approval, we apply the same criteria as for an application for prior approval. However, we must also be satisfied that:

  • there is a sufficient special reason why prior approval was not obtained; and
  • prior approval would have been given if it had been sought.23

2.48
When applying for retrospective approval, the local authority will need to be able to explain and justify why approval was not sought before the contract was entered into.

2.49
We recognise that, in many cases, a failure to seek prior approval is the result of an oversight. We look at each case on its merits. However, because the test for retrospective approval is narrow, you cannot assume we will give approval.

How to apply for approval

2.50
The local authority, rather than you, must apply for approval to enter into the contract. Usually the local authority will hold the relevant information that we need to determine whether the criteria have been satisfied.

2.51
The application must be made in writing. We recommend that the local authority use the form on our website. Alternatively, the application can be emailed to LAMIA@oag.parliament.nz.

2.52
The local authority should let us know if the application is urgent and the reasons why.

When to apply for approval

2.53
Your local authority should apply for approval as soon as there is a possibility that the contracting limit might be exceeded.

2.54
For a series of small contracts over a period of time that would not individually require approval but that, cumulatively, might exceed the $25,000 limit, we suggest applying for approval:

  • at the beginning of the financial year, if it seems certain that the limit will be exceeded; or
  • as soon as it becomes clear that the limit will be exceeded.

2.55
For tenders for contracts, a local authority does not need to seek approval as soon as tenders are invited. The most suitable time to seek approval of a tendered contract is usually either:

  • once tenders for the project have been received and assessed, and it looks likely that the contract is to be offered to you (or your company or your spouse or partner); or
  • immediately after the local authority has resolved to accept the tender, subject to the Auditor-General's approval.

Information we need in the application

2.56
Your local authority needs to provide us with information about:

  • the reasons the local authority wishes to use the proposed contractor for this work (for example, how the local authority justifies its choice on the basis of, for example, cost, performance, quality, expertise, or experience);
  • the process the local authority has followed in selecting the proposed contractor (including whether other potential contractors were considered or had the opportunity to quote or tender, whether the local authority followed its standard procedures for contracts of this type or value, how the proposal was evaluated, and who was involved in making the relevant recommendation or decision);
  • whether the member concerned has had any involvement in any local authority decisions about the contract; and
  • the monetary amount for which approval is sought.

2.57
See Appendix 3 for a full checklist of the information we need to consider an application for approval.

Managing compliance with the contracting rule

2.58
Both you and the local authority will need to take steps to ensure that you comply with the Act.

Make your local authority aware of your potential contracting interests

2.59
You are responsible for letting your local authority know about any interests you have that might result in you benefitting from contracts, either directly or indirectly (for example, through your spouse or partner or through a business you are involved in).

2.60
Although it is not a legal requirement, we encourage local authorities to establish a register of members' interests to support compliance with the Act and to ensure that relevant staff are aware of its contents. If your local authority has one, you should ensure that any business interests you or your spouse or partner have that might result in contracts with the local authority are recorded in the register. This helps ensure that you have been transparent about your interests, and that staff at the local authority who need to know can monitor contracts or contracting processes in which you might have an interest.

Make your spouse, partner, or business aware of the contracting rule

2.61
You should ensure that your spouse or partner, and relevant people in your business, are aware of the contracting rule, particularly the $25,000 limit, and that you will be disqualified from office if you breach the contracting rule.

2.62
This is particularly important, for example, if you have an interest in a business, but are not involved in its day-to-day operations and so might not be aware of situations where your business decides to put in a tender to provide services to the local authority.

Monitoring contracts and payments under contracts

2.63
It is your responsibility, and the responsibility of the local authority, to keep track of payments under any contracts or subcontracts in which you are concerned or interested.

2.64
If a local authority makes periodic purchases from businesses in which members have an interest, it should establish some form of monitoring system to provide regular checks on the accumulating value of contracts.

2.65
Particular vigilance might be necessary for subcontracts, because they can often "slip under the radar", especially if it is decided only after a head contract has been awarded who the subcontractors will be.

Seeking extensions to an approved limit

2.66
You and your local authority need to monitor contracts that we have approved to ensure that payments do not exceed the amount approved. Contracts are often varied or extended. But if the approved amount is exceeded, the consequence is the same as for exceeding the $25,000 limit – you are disqualified.

2.67
This problem can be avoided by applying to us for an extension to the previous approval, to take account of the additional payments. This application should be made, and the extension obtained, before the payments exceed the amount we originally approved. Inadvertent breach of an approved amount requires retrospective approval, which should not be assumed.

Frequently asked questions about the contracting rule

2.68
I stand to benefit from a contract with the local authority, but the contract is not for a fixed amount or for a fixed quantity of goods or services, so I do not know at this point whether payments will exceed the $25,000 limit. Do I need an approval?

There is no requirement at this point to get an approval. You could wait and see how much the local authority is spending under the contract, and the local authority could apply to us for approval if it is getting close to the $25,000 limit.

However, there is a risk with that approach. If you do not keep track of payments and they exceed $25,000, you will be in breach of the Act and automatically disqualified. The local authority would then need to apply to us for retrospective approval. Before we can grant that, the Act requires us to be satisfied that there was good reason why the local authority did not apply for prior approval.

In situations where you do not know how much the contract is worth at the start, but there is a good chance it will be more than $25,000, we recommend that the local authority estimate the amount it is likely to pay under the contract and apply for approval for that amount before the contract is entered into.

If we approve the contract, you and the local authority will still need to monitor payments to make sure you do not go over the approved amount.

2.69
The local authority buys goods from my business from time to time, but there's no "contract" as such. We just invoice them at the time. If the local authority spends more than $25,000 in a financial year, would I be in breach of the Act?

Yes. The term "contract" in the Act has a broad definition and potentially includes an agreement, in any form, that creates legally enforceable obligations, including casual, one-off purchases, even if those are not documented in a formal contract.

The $25,000 limit applies to all payments made in a financial year, not for each contract. Therefore, if the local authority makes multiple small purchases during a financial year, you and the local authority will need to keep track of payments, and apply to us for approval if there is a risk that the payments made will go over the $25,000 limit.

2.70
I have approval for a contract. The contract is coming to an end, but it looks like it might be renewed or rolled over. Do I need another approval?

Yes. We give approval for the term of the contract or for a fixed period. The approval does not cover any renewal period. If the contract is renewed or "rolled over" the local authority should check whether it needs to apply for another approval from us.

2.71
I potentially stand to benefit from a grant from the local authority to a community organisation because the grant will be used to pay for the services I provide to that organisation. Does a grant count as a contract?

Technically a grant is not a contract because grants and contracts create different sorts of legal obligations. But the line between a grant and a contract can be blurred. Also, the Act defines contract in quite a broad way. It includes any sort of agreement that creates legally enforceable obligations.

If you stand to benefit from a grant from the local authority, we suggest you talk to local authority staff about whether the grant falls under the contracting rule. After considering the nature of the grant, the local authority might want to apply to us for approval.

2.72
My company has a contract with the Council. I am a member of a community board, but not the Council. Does the contracting rule apply to my company's contract with the Council?

No. The contracting rule applies only to contracts with the local authority of which you are a member. Community boards are subject to the Act in their own right, separate from their "parent" authority.

That means, if you are a member of a community board but not a member of the "parent" city or district council, the contracting rule will not apply to any contracts you have with the "parent" city or district council.24

2.73
I am a member of a local board in Auckland, and my company has a contract with Auckland Council. Does the contracting rule apply to my company's contract with Auckland Council?

Potentially yes. Auckland Council has a two-tier governance structure made up of its governing body and the local boards in Auckland. The decision-making responsibilities of Auckland Council are shared between the governing body and the local boards. The Local Government (Auckland Council) Act 2009 provides that a local board cannot enter into contracts because it does not have separate legal standing from Auckland Council. However, local boards are subject to the Local Authorities (Members' Interests) Act in their own right. Our view is that the contracting rule applies to contracts between Auckland Council and a local board member where their local board has decision-making responsibilities in respect of that contract.

2.74
Are payments made by a council to an appointed committee member for meeting attendance and transport costs covered by the contracting rule?

Potentially yes. Because the term "contract" in the Act has such a wide definition, we consider that it potentially also captures any relationship that has the features of a binding contract – such as certainty of terms, consideration, and an intention to be bound.

Although council employment contracts are specifically excluded from the definition of "contract", appointments to council committees are not.

Although the position is not without doubt, we suggest the Council err on the side of caution, and seek approval for payments made to appointed committee members for their meeting attendance and transport costs, where there is a possibility that those payments will exceed the $25,000 limit. However, where the payments have been determined by a third party, such as the Remuneration Authority, we do not think the contracting rule applies.

2.75
I am not a member but I have a contract with the Council and I want to stand for election. Can the Auditor-General give me an exemption from the contracting rule to allow me to stand?

No. The Auditor-General has no power under the Act to grant candidates an exemption from the contracting rule. So you will need to check if the contract you are party to is subject to the contracting rule and, if so, whether any of the exceptions to the rule apply. See Part 3.

If you are unsure, contact us, and we will provide guidance if we can. If your situation is particularly complicated, you might need to seek legal advice.

2.76
What happens to an approval in an election year? If I am re-elected, do I have to re-apply for approval for the contract?

No. If an election falls within the financial year and you are re-elected or re-appointed, the Act continues to apply as if your membership is unbroken.

In other words, the $25,000 limit continues for the entire financial year and any approvals granted for that year continue to apply.

2.77
If I am disqualified because I have breached the contracting rule, can I stand for election again?

Yes. Re-election or re-appointment overcomes any disqualification from the previous term. However, you could still be prosecuted for acting as a member while disqualified during the previous term.


8: Section 4 of the Act.

9: Section 5 of the Act.

10: Section 2 of the Act.

11: Section 3(3)(b) of the Act.

12: Section 2 of the Act.

13: Section 3(2A) of the Act.

14: Section 3(2) of the Act.

15: Section 3(1) of the Act. The monetary limit for the contracting rule was last increased in 1982.

16: Section 3(3)(b) of the Act.

17: Section 2 of the Act.

18: Section 3(3)(a) and 3(3)(aa) of the Act.

19: Section 3(3)(ab) of the Act.

20: Section 3(3)(h) of the Act.

21: Section 3(3)(d) of the Act. The Act also includes several other exemptions for certain types of advances or agreements that are no longer relevant because the empowering legislation for those types of agreements or advances has been revoked and not been replaced. Those exemptions were for: an advance made by an authority under the Rural Housing Act 1939, an advance made or guarantee given by an authority under Part 32 of the Local Government Act 1974, and an agreement under section 81 of the Noxious Plants Act 1978.

22: Section 3(3)(a) of the Act.

23: Section 3(3)(aa) of the Act.

24: The Act includes an exception for members of community boards (see section 3(3)(j), (3A), and (4)) that is no longer relevant. We treat this exception as redundant because community boards are no longer committees of local authorities.