The Court of Appeal has handed down a chilling judgment in respect of the legality of the rates of the KDC and the NRC. In a bizarre and troubling judgment it has reversed some of the findings of Duffy J in the High Court but still found some of the actions of the KDC and NRC were unlawful.

However, in a sweeping act of judicial muscle it has validated all of the illegal acts of the two councils pursuant to a power in the Judicature Amendment Act which allows a court to validate “technical irregularities”.

With the news of this judgment the champagne corks will be popping throughout the local government world. The Local Government (Rating) Act (LGRA) has finally been eviscerated by the Court of Appeal. The prescriptive requirements of the Act, which Parliament deliberately introduced to make local authorities accountable to ratepayers, have all been consigned to the rubbish bin.

Local authorities now have the endorsement of the Court of Appeal to ignore the requirements of the Act, knowing that even the most blatant and fundamental failures to comply with the law will be whitewashed and validated by the ever-obliging courts.

This is how the Court of Appeal dealt with the issues of illegality.

Omission of due dates from rates resolution

In the resolution to set rates a local authority is obliged to state the due dates for the payment of rates by instalment. The NRC did not state the dates but made reference to dates in documents that were not yet in existence.

The Court had no doubt that the NRC had failed to comply with the legislation and that the rate-setting resolutions were invalid.

However, the Court did not leave it there. It went on to argue that ratepayers would have been aware that the rates were payable by instalments and the rates assessment notice, when delivered, would have alerted them to the due dates for payment.

The Court proceeded to validate the defective rates resolutions under its powers pursuant to section 5 of the Judicature Amendment Act. A court may exercise that power where there is “a defect in form or a technical irregularity”.

The Court compared the situation to an earlier case Westland County Council v Greymouth Harbour Board where the Court had held that it was outside the scope of section 5 to validate a compulsory resolution that the council had failed to make. The Court of Appeal argued that in the Rogan case the defects were in contrast “highly technical”.

Really? If an important statutory resolution fails to contain matters which are absolutely required by the legislation then that resolution is invalid and of no effect. It is no different legally to a resolution that was not made. There is either a legally compliant resolution or there is no resolution. That is a simple principle of law that the Court either did not grasp, or simply steered clear of.

The Court seems to have no understanding or the significance of the rates resolution. The rates resolution is the vital step in converting proposed rates into valid enforceable rates. But to do that a local authority must comply strictly with the law and include all the essential matters in the rates resolution. If a single element is missing then the resolution is invalid.

If the rates resolution is defective then the proposed rates do not become valid, enforceable rates and the whole rating process comes to an abrupt halt. Rates that are not lawfully set cannot be assessed or invoiced etc.

If there are no due dates for payment in the rates resolution then there are no valid legal dates for the payment of rates. The fact that the dates are included in the rates assessment notice and the rates invoice is irrelevant because the formal process of making those dates lawful in the rates resolution has not occurred.

The order of the Court in respect of the rates resolutions confirms that it does not understand the rating process. It orders that the defective rates resolution are valid notwithstanding the failure to state the appropriate dates. The problem is that the validated rates resolutions still do not include the dates for payment of the rates so there is no legal basis for the dates of payment in the rates assessment notices and the rates invoices.

The Court should have stated what the dates for payment were or validated the resolutions on the basis that the dates of payment were the same dates as set out in the rates assessment notices.

The Court could only validate the rates resolutions under section 5 “if the Court finds that no substantial wrong or miscarriage of justice has occurred”. Not only was there no finding in that respect but those matters were not even considered. The Court decided that there was no “prejudice” to the Rogans or to other ratepayers but that appears to be largely in respect of the errors causing no detrimental financial outcomes. But the Court failed to consider the wrong done to ratepayers being coerced into paying rates that had not been lawfully set, and the financial consequences of being forced to pay rates for which they were not legally liable. Looked at from the point of view of the rule of law, there was a huge miscarriage of justice.

There is no doubt in law that the omissions in the rates resolution rendered the resolutions invalid. It is also absolutely clear that such an issue in a document of such importance is not a defect of form or a technical irregularity. It is a fundamental failure that brings the rating process to a halt. No matter what the Court of Appeal decided, no court has the power to ‘validate’ such a major error. In fact in drafting the LGRA Parliament was aware that such errors could happen and made provision for a local authority to set a rate again (section 119) where there was an irregularity in setting the rate in the same year. Where the irregularity goes back in time there is a procedure for the replacement of invalid rates (section 120).

It is more than surprising that the Court of Appeal felt it necessary to stretch its powers of validation in such a questionable way when the legislation it was dealing with provided statutory solutions.

It is also surprising that in a case concerned with the setting of coercive taxes (rates) the Court of Appeal did not simply apply the law and make appropriate orders and then leave it to Parliament to decide whether to ameliorate the consequences of any court order with validating legislation.

Unauthorised delegation by the NRC of power to assess rates

The Court portrays the assessment of rates process as a mechanical process that is done by computer.  it calls assessment “an IT service” that can be performed by anyone by simply pressing a button. Because, in the Court’s view, it “involves no element of discretion or evaluative judgment” the power to assess rates can be delegated to any third party. Accordingly, the delegation by the NRC to the KDC was lawful.

That is fundamentally wrong. Despite what the Court of Appeal says, let me make the situation quite clear. The assessing of rates is a formal legal process that applies rating formulas to each rating unit in the district. Those formulas are held in a rating information data base that the local authority must keep and maintain, and in the funding impact statement of the local authority’s annual plan. Once the rates are mechanically assessed by applying the individual formulas for each rating unit, the amount of liability for rates is entered in to the rates records for each rating unit. The rates records must be kept and maintained by the local authority.

These processes are vital to the correct assessment of rates and must be carried out by the local authority itself. The local authority is fully accountable for the accuracy of its assessment processes. Any errors in the rating information database or the rates records can be challenged by a ratepayer and the local authority is obliged to reissue a correct rates assessment.

The assessing of rates is statutory power that is vested solely to the local authority. The assessment process creates the liability for rates so it is a procedure where strict compliance should be demanded by the courts.

For the Court to minimise the complexity of the assessment procedure and to ignore its important role as a formal legal process that creates liability for billions of dollar of rates throughout the country is bad enough, but for the Court to suggest that a local authority can delegate its fundamental statutory power to assess rates to any third party without express statutory authority is quite ludicrous.

The Court chose to ignore the effect of its ruling, namely that local authorities can now delegate the power to assess rates to anyone anywhere in the world. Call centres in Bangladesh and perhaps North Korea will now be able to assess rates for all New Zealanders.

Unauthorised delegation by the NRC of power to add penalties

The Court dismissed this important issue in one sentence, adopting the same argument it used in the assessment of rates.

Again, it is quite amazing that the Court can ignore the fundamental fact that in the rating process the powers of a local authority are defined by the provisions of the LGRA. There is no power of general competence because that cannot apply to rating. The LGRA sets out exactly what a local authority can do in respect of rating. Any action outside those statutory powers is ultra vires and unlawful.

The LGRA states quite clearly that only a local authority can impose penalties on its own rates.

End of story.

Setting rates on a GST inclusive basis by the KDC and NRC

The argument of the Court in respect of GST is also fundamentally wrong. The Court states:

Under the GST Act, the legal liability to Inland Revenue for payment of GST falls on the supplier of the goods and services, not the recipient of those services. The cost of the GST liability thus falls on the local authority and from its perspective it is simply another cost incurred in the course of carrying out its functions, to be recovered through rates in the normal way.

There is no doubt that the local authority has to account to the IRD for the GST that is collected on rates, but equally there is no doubt that the GST is payable by the recipient of any goods or services as part of the price. To suggest otherwise is just foolish.

To state that GST is treated as a business overhead is a wrong in principle and in fact, as anyone who is registered for GST knows.

To compare rates to a bottle of milk, as the court does, is facile. They both end up with GST added at the time of supply, in both cases when the invoice is issued. But rates have to go through a complicated statutory process which the Court has chosen to ignore.

The setting of rates by resolution is the formal legal process of making the rates lawfully enforceable. Only rates as defined in the LGRA can be set as rates. No other charges can be included, and that includes GST. In any case GST is irrelevant at this stage. Rates, as set, are general in nature, being simple formulas. They do not apply to any particular ratepayer or rating unit. There is no supply, and no recipient in terms of the GST Act. It is the assessment process that links the set rates to each rating unit, and the GST Act deems that the time of supply for rates is when the rates invoice is issued.

In short, rates when set and assessed cannot include GST because of the provisions of the LGRA, but at the time of invoicing the GST is added and becomes payable. Bottles of milk do not have to go through formal statutory procedures to arrive at their price.

Can penalties be charged on the GST content of rates?

In the commercial world any penalty for late payment is charged on the total price of the goods or services, which includes GST. That is a contractual matter and binding on that basis

Penalties on rates are different. Penalties may only be added pursuant to provisions in the LGRA, and those provisions state that penalties can only be added to “rates assessed”. When rates are set and assessed GST has no part to play because it is not a “rate”, as defined in the LGRA, and at that stage of the rating process there has been no supply.

Because of its finding on GST above, the Court held that penalties could be charged on the GST added to rates. This results in a massive windfall for local authorities that was never anticipated by the legislation.

Authorising the adding of penalties

If a local authority opts to add penalties to rates then it is obliged to pass a resolution to “authorise” the adding of penalties.

The courts are normally vigilant in ensuring that provisions whereby coercive taxes are charged are strictly interpreted. In this instance the Court of Appeal showed surprising laxity.

The NRC in its penalties resolution supposedly authorising the adding of penalties, stated that “penalties may be added”. The MRRA argued that this did not authorise the adding of penalties but created an option to be exercised later, which was not permissible.

The Court showed no enthusiasm for the strict interpretation of such coercive tax provisions and held that, given the context, “may” meant “will’. The adding of penalties was therefore authorised.

Other penalty issues

The Court held that in some instances the KDC and the NRC had failed to comply with the requirements of the LGRA

Does the adding of penalties to rates authorise the adding of penalties to penalties already added?

Both the KDC and NRC authorised the adding of further penalties to rates, but did not state that the penalties were to be added to penalties already added to those rates.

Again the Court was generous in its interpretation. It held that under the definition section a “rate” could include a penalty, unless the context otherwise required. The MRRA pointed out that the context of the provisions relating to adding penalties to rates requires the use of the words rates (in its narrow sense) and penalties as separate entities to avoid confusion. In addition, ratepayers were entitled to know in clear unambiguous words what penalties were being added to, not having access to obscure provisions in the LGRA.

The Court held that penalties added to “rates assessed” also permitted the councils to add penalties to penalties on the rates assessed. That was despite the fact that rates when they are assessed have no penalties added to them.

Section 5 validation

As stated earlier the Court of Appeal went out of a very thin legal limb and validated the defective rates resolutions. It also validated all other actions that it found to be illegal. The end result is all the rates of the NRC and the KDC are deemed to be valid.

At the hearing of the case last November, the Court of Appeal, or at least two of the three Judges, did not disguise their antipathy to the MRRA legal challenge to the validity of rates. That did not bode for a good outcome for ratepayers, but we still anticipated that the law would be interpreted and applied appropriately and fairly by the Court of Appeal, given its place in the hierarchy of the courts.

We have been severely disappointed. The antipathy towards our case is reflected in the comment of the French J who wrote the judgment:

[88] ….This proceeding lacks complaints of substance. It largely consists of overly technical points involving no disadvantage to individual ratepayers, but the raising of which will have caused unnecessary cost to the general body of ratepayers in the area.

That summation is based on assessment of financial prejudice or disadvantage. A court that was more interested in the fundamental rights of individuals to challenge administrative decisions and in making local authorities accountable to ratepayers might have taken a completely different view. After all the Court of Appeal endorsed the finding of Duffy J that the NRC rates were unlawful because of the defective rates resolutions. The rates were therefore never set lawfully and the rating process ground to a halt. As a result all ratepayers of the district were coerced into paying rates that were unlawful. When viewed from the point of view of the rule of law, the rights of ratepayers and the accountability of local authorities that is a matter of huge substance.

If the failure to set rates lawfully does not meet the high bar set by the Court of Appeal for ‘complaints of substance” then it is hard to envisage what sort of illegal action by a local authority would survive the Court’s broad application of section 5 validation, and actually result in some accountability for local authorities.

Compare the approach of our Court of Appeal to the approach of the British House of Lords in the Boddington case. Mr Boddington was fined 10 pounds for unlawfully smoking on a train contrary to a byelaw. He appealed the decision right up to the House of Lords (which was then the highest court in the UK) on the grounds that the byelaw was unlawful. Boddington was unsuccessful in his defence but the House of Lords was not critical of his challenge. Lord Irvine stated:

In approaching the issue of statutory construction the courts proceed from a strong appreciation that ours is a country subject to the rule of law. This means that it is well recognised to be important for the maintenance of the rule of law and the preservation of liberty that individuals affected by legal measures promulgated by executive public bodies should have a fair opportunity to challenge these measures and to vindicate their rights in court proceedings.

Sadly, such a right-based approach is not evident in the courts in New Zealand.

As I said at the beginning, the decision of the Court of Appeal has eviscerated the LGRA. All local authorities now know that the word “must ” which appears 271 times in the LGRA – and nearly all relate to the local authority – creates no obligations in law. The Court of Appeal has now set a precedent to the effect that every error, every failure to comply with an obligation, and even failures of substance, will be treated as mere technical irregularities and be validated by the courts.

The losers are, of course, ratepayers. According to the ruling of Duffy J in the High Court, ratepayers are not allowed to defend an action for recovery of rates in the High Court even though the rates are blatantly unlawful. And now, if they apply to the High Court then all the errors are going to be validated, the ratepayers likely criticised for exercising their rights, and then stung with a massive bill for rates arrears and legal costs.

We fought this battle to hold the KDC and NRC accountable for their illegalities and to have the rule of law enforced in Kaipara. But, the irony is that as a result of our actions the courts have effectively destroyed all the rights of ratepayers in respect of challenging unlawful rates, and have placed local authorities in a position where they are outside the rule of law.

I guess that it is all part of the law. The law of unintended consequences.