N2090

PAPUA NEW GUINEA

[NATIONAL COURT OF JUSTICE]

OS 298 of 2000

BETWEEN:

THE INDEPENDENT STATE OF PAPUA NEW GUINEA
Plaintiff

AND:

BARCLAY BROTHERS (PNG) LTD
Defendant

Waigani: Kapi DCJ
26, 27, 28 March, 6 June 2001

Contracts – Public Finance (Management) Act – Tender Process – Requirement for tender prescribed – Intention of the Parliament to prohibit contracts without tender s 40 (1) – Meaning of "public body" discussed.

Counsel:
I. Molloy with K. Kua for the plaintiff
J. Griffin QC with G. Varitimos for the defendant

6 June 2001

Kapi DCJ:	The State in an originating summons seeks a declaration that it is not a party to a written contract entered into between Barclay Brothers PNG Limited (BB) and Southern Highlands Gulf Highway Limited (SHGHL) to construct a national road link between Southern Highlands and the Gulf Provinces and that SHGHL did not act as agent of the State in entering into the contract. In the alternative, it seeks a declaration that even if SHGHL was acting as an agent of the State in entering into the contract, it is nevertheless null and void for not complying with certain provisions of the Public Finance (Management) Act 1995 (as amended) (PFM Act). 

Counsel for the State submits that SHGHL is a separate entity and there is no express or implied agreement that SHGHL entered into the contract as agent of the State, and therefore, it cannot be bound by its terms. He further submits that even if SHGHL acted as agent of the State, the contract is null and void because it was entered into in breach of s 40 and s 47 of the PFM Act. On the other hand, counsel for BB submits that SHGHL was acting as the agent of the State and therefore it is bound by its terms. He further submits that breach of s 40 and 47 of the PFM Act in the present case does not invalidate the contract.

The background to the originating summons is this. For some years, the National Government in consultation with the Gulf and the Southern Highlands Provincial Governments has been interested in building a national road linking the two Provinces via the existing road network from Kagua to Erave and then via Samberi to the Kikori District in the Gulf Province. The National Executive Council (NEC) approved this project in principle at its meeting (Meeting No. 18/98) on 27th March 1998. The NEC regarded this project as a "priority project of the State" and at its meeting on 7th May 1998 (Meeting No. 242/98) the NEC approved the various phases of the project and its funding and subsequently appointed a Steering Committee to oversee the project. Some contractual work was carried out on the road project through the Department of Works under the authority and direction of the Steering Committee.

On the 23rd September 1998, the State incorporated the SHGHL under the Companies Act. The company was established for the single purpose of constructing the road and for raising finance for the road project. There was only one share on issue and was initially held by the Minister for Treasury and Corporate Affairs on behalf of the State and was subsequently assigned to the Minister for Works.

The NEC at its Meeting No. 61/98 on 13th November 1998 approved (Decision No. 282/98) SHGHL as the "implementation agency" for the road project. The then existing contracts with the State in respect of the road project were subsequently assigned to SHGHL. On 8th December 1998 the Heads of Agreement was executed between the State, BB and SHGHL to negotiate and execute a performance-based contract to construct the road. SHGHL subsequently published a full page public notice in the newspapers in March 1999 that it was the "principal" in respect of the road project.

Subsequently, SHGHL entered into several contracts in respect of the road project. The relevant contract for the purposes of the present proceedings is the contract entered with BB on 9th April 1999. This contract was retrospectively approved by the NEC on 28th April 1999 in Decision No. 96/99. At the same meeting, the NEC approved financing of the road project that included approval for the PNGBC to advance money to SHGHL and the State proposed to provide a guarantee in favour of PNGBC. The bank granted a loan on this undertaking but the State failed to provide a guarantee as promised. Subsequently, when the Executive Government changed, it withdrew its support for the road project and SHGHL was unable to meet its obligations. The bank in an effort to recover its advances to SHGHL took legal proceedings and the National Court appointed an interim liquidator to SHGHL on 24th September 1999.

Subsequently, BB commenced arbitration proceedings on or about 20th April 2000 in the International Chamber of Commerce International Court of Arbitration in Paris against the State on the basis that when SHGHL entered into the contact it did so as agent of the State. As a consequence of the proceedings in Paris, the State brought this summons to determine whether it is a party to the contract and liable under the contract. BB has undertaken not to proceed further with the arbitration until the proceeding now before me is determined.

I am satisfied that the State incorporated SHGHL for the single purpose of financing and constructing the road. The company was incapable of doing anything without the injection of vision, personnel, finance and infrastructure from the State and its instrumentalities. Counsel for the State does not contest this. 

However, he submits that significant events have taken place that affected the status and the relationship between the State and SHGHL. In particular, he submits that the State intended to establish a separate legal entity that would take over all aspects of the road project. He submits that this intention was confirmed in Heads of Agreement entered into between the State, BB and SHGHL on 8 September 1998. He submits that at no stage did the officers acting on behalf of SHGHL stated either orally or in writing that it was entering into the contract as agent of the State other than that they were doing so as authorized officers of a separate entity. He relies on several factors including the public notice published in the media in which SHGHL is referred to as the principal.

The parties do not contest the general principles of agency and are summarized as follows 

"The general rule is that a principal is bound by, and entitled to the benefit of, the contract of his agent made on his behalf within the scope of such agent’s actual authority, whether the principal was disclosed, i.e. his existence, even if not his identity, was known to the third Party at the time of contracting, or undisclosed (i.e. his existence was not so known)" (Chitty on Contract 25 edn vol. 2 para. 2246).

The onus is on the State (plaintiff) to prove that SHGHL was not acting as agent of the State when it entered into the contract. I take into account the submission by counsel for the State that there is no record in the contract expressly stating that SHGHL was entering into the contract as agent of the State. This of itself is not determinative of this issue. 

I am satisfied that the NEC expressly gave authority to the SHGHL to raise funds and to construct the road. There can be no doubt that the NEC regarded the SHGHL as it’s "implementation agent". The question is, whether, the SHGHL was acting as agent of the State when it entered into the contract from all of the circumstances?

The State relies on evidence of two witnesses; Mr Michael Gene the Attorney-General at the relevant time and Mr Mumu the Deputy Secretary of Works. Mr Gene’s evidence is not helpful on the question whether SHGHL was acting as agent for the State when the company signed the contract with BB. He did not disagree with the suggestion in cross-examination that NEC regarded the road project as important and incorporated SHGHL as its implementing agent. His real complaint was that the NEC did not consult him on the legal aspects of the execution of the contract. He agreed in cross-examination that the National Government had previously authorized and incorporated a company to carry out Government projects.

Mr Mumu was at the time the Deputy Secretary and was involved with the project from the beginning. It is not necessary to set out the effect of his evidence in full. His evidence also confirms the intention of the NEC that SHGHL was incorporated for the sole purpose of constructing the road on behalf of the National Government. He was not able to give evidence on whether SHGHL entered into the contract with BB as agent of the State.

Two members of the SHGHL Board, Mr O’Neill and Mr Brian de Lucas gave evidence and simply assumed all the time that SHGHL entered into the contract as agent of the State. They explained that they did not express this in the contract as it was obvious. 

Having regard to the whole of the evidence, I am not satisfied that the State has discharged the onus of showing that SHGHL was not acting as agent of the State. On the contrary I find that SHGHL acted as agent of the State in entering into the contract.

In the alternative, counsel for the plaintiff submits that the contract entered into is null and void because it breached ss 40 and 47 of the PFM Act. 

I will deal first with the application of s 47 (1). Counsel for the State submits that the contract was not executed by the Head of State in accordance with s 47 (1). It provides:

"47.	Execution, etc., of State Contracts.
(1)	Subject to Section 42(6), where there is no provision in any law as to the person or authority empowered to execute a contract or agreement on behalf of the State, that contract or agreement may be executed—
(a)	by the Head of State, acting on advice; or
(b)	where the amount of the consideration does not exceed K5,000,000.00 by the Minister; or 
(c)	where the amount of the consideration does not exceed an amount (not exceeding K5,000,000.00.) specified by the Minister, by the Chairman of the Tenders Board which considered the tender leading to the contract or agreement."

The Supreme Court considered this provision in Curtain Brothers Pty Ltd v PNG [1993] PNGLR 285. The issue in that case related to the validity of the terms of a settlement of US$14 million, which having been negotiated by the Acting Solicitor-General, were executed, on behalf of the State by one Peter Aisi, a public servant. The majority reached the conclusion that this provision is expressly made subject to the ordinary rules of agency under the underlying law. The Court held that s 47 is not mandatory and is subject to ordinary rules of agency in accordance with the principles of underlying law. In the present case, I have already determined that SHGHL acted as agent of the State in entering into the contract in question. There is no question that SHGHL was authorized by the NEC to negotiate and finalize the contract in respect of constructing the road. 

I now turn to consider the application of s 40 and it provides:

"40.	Tenders for property, stores, works and services.
(1)	Subject to—
(a)	this section; and
(b)	Section 41,
tenders shall be publicly invited and contracts let for the purchase or disposal of property or stores or the supply of works and services the estimated cost of which exceeds the prescribed amount.
(2)	In relation to the purchase or disposal of property and stores and the supply of works and services the estimated cost of which does not exceed the prescribed amount, the provisions of the Financial Instructions shall apply.
(3)	The preceding provisions of this section do not apply to the purchase or disposal of property or stores or the supply of works and services—
(a)	that are to be purchased from, disposed of to, or executed or performed by—
(i)	a public body or an authority or instrumentality of the State approved for the purpose by the Minister; or
(ii)	a Provincial Government; or
(iii)	a Local-level Government; or
(iv)	an approved overseas agency; or
(b)	in respect of which a Board certifies that the inviting of tenders is impracticable or inexpedient; or
(c)	where, in individual transactions involving amounts not exceeding K500,000.00, the Minister in his discretion considers that there is a natural disaster or it is not expedient or proper to call public tenders and, prior to the goods or services being provided, by certificate in writing narrates these circumstances and waives the provisions of this section;
(d)	where the terms of an agreement concluded, or proposed to be concluded, with any international organization under which the State is to receive moneys, make specific provision for the manner in which tenders will be invited for contracts to be performed in relation to the agreement.
(4)	In Subsection (3)(a)(iv), "approved overseas agency" means the government, a government department, a government instrumentality or a statutory corporation of a country other than Papua New Guinea approved by the Minister by notice in the National Gazette.
(5)	In relation to contracts for the supply of works and services, the provisions of this section and of Section 41 shall apply to—
(a)	turnkey contracts; and
(b)	build-operate transfer contracts; and
(c)	contracts which in substance are similar to turnkey contracts or build-operate transfer contracts; and
(d)	contracts involving the expenditure of public moneys."

Counsel for BB submits that it is not open to the State to rely on breach of s 40 of the PFM Act if the contractual arrangements on their face are legal and they were entered into by parties expressly or ostensibly authorized to enter the same. He relied on the Supreme Court decision Subendranthan v The State (Unreported judgment of the Supreme Court dated 27th October 1999). Counsel for the State on the other hand submits that this case does not support the proposition relied on by counsel for BB. He submits that the decision in that case is to be understood on the peculiar facts of the case. He submits that section 40 is expressed in mandatory terms and a breach of the provision should result in invalidity of the contract.

I have considered the Supreme Court decision in Subendranthan and find that it is to be understood in the light of its own facts. That was a case in which the NEC advised the Head of State to sign a consultancy agreement with one Subendranthan to investigate corruption in the Department of the Prime Minister. The issue raised was whether, the consultancy agreement was executed without calling for tenders in breach of s 40 (1) of PFM Act. The Court reviewed the uncontested evidence and in particular made reference to Mr Bai’s letter dated 30th November 1993 to the Prime Minister. The Court reproduced the letter in full in its judgment. I refer in particular to the following paragraph in Mr Bai’s letter:

"The Consultancy Steering Committee and the National Supply and Tenders Board have already approved his engagement and I recommend that the National Executive Council also formalize his appointment."

The Supreme Court relying on this evidence concluded:

"The uncontested evidence from Mr Bai showed that the State through its duly authorized servants or agent, Mr Bai had followed the proper procedures allowed by law, the same laws the respondent now relies on to invalidate the Agreement."

The Court accepted the evidence that the National and Supply Board had complied with the procedure set out under s 40 of PFM Act. This paragraph constitutes the real basis of the decision. However, the Court went further and made the following remarks

"We are of the opinion that where a contract has been entered into between an individual or a corporate entity and the Independent State of Papua New Guinea represented by the appropriate delegated officer or institution, such as the Head of State in this instance upon advice of the National Executive Council, the State cannot purport to contend that the agreement was in breach of statutory prescription and is thus invalid or illegal. The State is bound by its actions, represented by the relevant officers or institutions.

When, in this instance, the highest constitutional institution endorsed and signed the agreement, binding the State, it can be safely presumed to have been with full legal advice as to the validity and lawfulness of the agreement.

The State cannot then seek to avoid liability by contending that it invalidly or unlawfully entered into the agreement.

The State is a single whole person. It cannot be seen to contend that one hand did not know or approve of what the other hand was doing. What one hand does, or one part of the body does, binds the whole body corporately."

With respect it was not necessary to make these remarks in view of the findings of facts. These remarks can not be regarded as deciding the issue. Therefore, this case cannot be taken as authority for supporting the proposition that a breach of s 40 of PFM Act does not invalidate the contract. I note that these remarks were adopted by Sevua J in Yama Security Services Limited v Warupi & MVIT (Unreported judgment of the National Court dated 25th August 2000). In this case, a contract was entered into without the approval of the Minister in breach of s 61 of the PFM Act. After considering the arguments, his honour concluded at page 19:

"…I prefer the plaintiff’s counsel’s submission and the principles he submitted in relation to the Supreme Court decision in Visnanathan Sunendranthen (supra)…"

At page 20, the Court further held:

"I would adopt the principles stated by the Supreme Court in Subendranthan’s case. I find that the principles are appropriate in this case. I find it quite unfair for the second defendant to seek to hide behind the wall of procedural irregularities to deny and avoid responsibility and liability under the contract which was validly entered into..." 

His honour was persuaded to follow the remarks in Subendranthan case which remain open for proper determination. Los J in Fly River Provincial Government v Pioneer Health Services Ltd (Unreported judgement of the National Court dated 5th December 2000) followed Sevua J without a full discussion of the issue. 

However, for the reasons I have pointed out earlier, the remarks by the Supreme Court in Subendranthan’s case cannot be regarded as deciding this issue.

Moreover, the remarks in Subendranthan’s case relate to the actions of the Head of State on advice of the NEC and the assumption was that NEC complied with all lawful requirements. Without accepting this as a correct statement of the law, these remarks can have no application to the facts of this case. The Head of State was not involved in this case and the assumption that tender process was complied with cannot be applied here.

The terms of s 40 require closer examination. It is expressed in different terms to s 47. The requirement for tender under s 40 (1) is not made subject to any other provision of the law (as is the case with s 47) except s 41 of the PFM Act which is not relevant here. The question then arises; whether s 40 (1) prohibits the class of contract (that is a contract for services cost of which exceeds the prescribed amount) without going through the tender process under the PFM Act? A related question is, what is the effect of non-compliance with the tender process? 

In my view, the proper approach to resolving these issues is set out by the High Court in Yango Pastoral Company Pty Ltd v First Chicago Australian Ltd (1978) 139 CLR 410. Mason J (as he then was) at 423 stated:

"The principle that a contract the making of which is expressly or impliedly prohibited by statute is illegal and void is one of long standing but it has always been recognized that the principle is necessarily subject to any contrary intention manifested by the statute. It is perhaps more accurate to say that the question whether a contract prohibited by statute is void is, like the associated question whether the statute prohibits the contact, a question of statutory construction and that the principle to which I have referred does no more than enunciate the ordinary rule which will be applied when the statute itself is silent upon the question. Primarily, then, it is a matter of construing the statute and in construing the statute the court will have regard not only to its language, which may or may not touch upon the question, but also to the scope and purpose of the statute from which inferences may be drawn as to the legislative intention regarding the extent and the effect of the prohibition which the statute contains"

This approach was adopted by Connolly J. in Hunter Bros v Brisbane City Council [1984] 1 Qd R 328. Connolly J at page 337 set out the nature of the argument on whether the requirements of a statute should be regarded as directory rather than imperative with the consequence that although it would be unlawful to disregard them yet failure to fulfil them does not mean that the resulting act is wholly ineffective. He considered the arguments on directory provisions and substantial compliance with statutory requirements and then concluded:

"The principle can however, in my judgment, have no application where, on the proper construction of the provision in question, it forbids the act in question. No authority should really be needed for the proposition that where the legislature in terms forbids the doing of an act, not only is the act itself unlawful but an agreement to do is itself unlawful"

The same approach was taken by the High Court in Australian Broadcasting Corporation v Redmore Proprietary Ltd [1988-189] 166 CLR 454. At page 456 the majority stated the issue:

"The question for determination on appeal is whether s 70 (1) of the Act is, as Bryson J. and the majority of the Court of Appeal held, merely directory (to the ABC) in character or whether it operates to confine the actual powers of the ABC or to render illegal or unenforceable any contract of the type to which it refers which is entered into by the ABC otherwise than in accordance with its terms."

The tender process under the PFM Act is intended to deal with supply of goods and services worth more than the prescribed amount. It can be implied from this that contracts worth less than the prescribed amount do not need to go through the tender process. On the face of it, s 40 (1) is expressed in mandatory terms. The section provides for exemptions as set out in s 40 (3). I will come back to application of this provision to the present case later. The fact that this subsection makes exemption points to the implication that no contract worth more than the prescribed amount should be allowed without the tender process. 

Furthermore, s 40 (3) (b) provides for the Board to certify that it may not be expedient or practicable to allow the tender process to take place. This implies that unless the Board certifies this, the tender process must be complied with.

The Act treats the tender process as important because it spells out the process in detail under s 42, 44, 45 and 46 of the PFM Act. The process and the exercise of discretion in awarding the contracts is regulated. This supports the argument that contracts entered into in breach of this provision are prohibited.

There is nothing in the PFM Act which indicates the consequences of breach of the tender process under the Act. In considering this issue, I bear in mind the purpose and policy behind such legislative provisions. It is not difficult to determine this in Papua New Guinea. The problem of corruption and misuse of public funds have become notorious and widespread. To quote the words of Connolly J in Hunter Bros v Brisbane City Council (supra) at page 339 this provisions are "designed to ensure regularity and openness in the purchase of goods and services. Its provisions are a matter of public law and there can be no injustice in holding not only the Council but prospective vendors to a strict observance of its requirements." As a matter of construction I conclude that s 40 (1) prohibits the class of contract which do not go through the tender process.

Counsel for BB submits that a breach of this provision can only result in a disciplinary charge under s 47A and submits that a breach would not invalidate the contract. In this regard I adopt the minority view of Brennan and Dawson JJ in ABC v Redmore Pty Ltd [1988-89] 166 CLR 454 at page 465 wherein they held that a disciplinary action may reduce the incidents of breach of the Act in the future but it does not fulfil the purpose of the prohibition and this would render such a prohibition meaningless and have no legal effect. I would apply this reasoning to s 40 (1) of the PFM Act. On that basis, if a breach of the provision has no impact on the validity of a contract, the State or its agents could with impunity enter into contracts without the requirement to invite tender in accordance with s 40 (1). The provision is designed to ensure regularity and openness in the purchase of goods and services.

I find that the contract entered into without complying with the tender process is prohibited by s 40 (1) of PFM Act and therefore void. This conclusion is consistent with the decision of Injia J in Andrew Wag v. Mt Hagen Town Authority [1996] PNGLR 385.

Section 40 (3) of PFM Act provides for exceptions to the tender process set out in s 40 (1). During the course of considering my judgment, the question of the applicability of s 40 (3) came to my attention. Counsel for the parties did not address the application of this provision to this case. I recalled counsel and raised this issue for further arguments on 28th April. I directed them to file written submissions by 4th May 2001. Counsel have now filed supplementary submissions on this point.

The question I need to determine is whether, the supply of works and services to be provided by BB under the contract are "…executed or performed by a public body or an authority or instrumentality of the State approved for the purpose by the Minister.."? This provision relates to two broad categories; " public body" as distinct from "authority or instrumentality of the State" The term "public body" is defined by s 2 of the PFM Act:

"public body" means—
(a)	a body, authority or instrumentality (corporate or unincorporate) established by or under an Act or a Constitutional Law; and
(b)	a body, authority or instrumentality incorporated under the Companies Act (Chapter 146) where and to the extent that—
(i)	the Memorandum and Articles of Association of that body, authority or instrumentality provide; or
(ii)	an Act other than this Act provides,
that this Act shall apply to that body, authority or instrumentality,
other than—
(c)	the Auditor-General or the Office of the Auditor-General; or
[Legislative Amendment History]
(d)	the Privatization Commission established by the Privatization Act 1999;
(e)	a body, authority or instrumentality incorporated under the Companies Act (Chapter 146) other than one to which Paragraph (b) relates;

The relevant body for the purposes of the Act in this case is BB. Definition under 2 (a) is not applicable. BB is not established by an Act or a Constitutional Law. The applicable definition is 2 (b) (i). Counsel for BB has not suggested that Memorandum and Articles of Association of BB provide that PFM Act shall apply to BB. I have examined the Constitution of BB annexed to the affidavit of Assaigo and can find no such provision. I cannot conclude from this that BB is a public body.

The next question is whether BB is "an authority or instrumentality of the State approved for the purpose by the Minister"? Two issues arise for consideration. The first is, whether, BB is "an authority or instrumentality of the State"? If it is, the next issue is; whether, the Minister has approved BB for the purpose of providing supply of works and services. Counsel for BB in its reply to plaintiff’s supplementary submissions makes no such claims. However, counsel for BB in his written supplementary submissions made reference to the Constitution of SHGHL that expressly provides for the application of PFM Act. However, in the present case, SHGHL is not providing the services. The claim is made against BB and SHGHL is the agent for the State for the purposes of this argument. SHGHL may be regarded as a public body within the meaning of the Act. This fact may be relevant under s 59 of PFM Act. It is not necessary to set out this provision as counsel did not rely upon it. It requires all public bodies to go through the tender process. There are exceptions. Section 59 (2) (a) is not applicable as SHGHL is not providing the services. BB is providing the services. SHGHL in the instant case as a public body could have certified that public tender was impracticable or expedient. There is no suggestion that SHGHL had certified this.

BB cannot bring itself within the terms of s 40 (3) of the PFM Act which would exempt it from the tender process.

I make the following declarations:

1.	That SHGHL acted as the agent of the State in entering into the construction contract with BB on 9th April 1999 (with respect to Phase I and II and Stages 2A and 2B of the of the proposed Southern Highlands Gulf Road Link) and therefore the State is bound by its terms.

2.	That the contract breached the tender requirement under s 40 (1) of PFM Act and is therefore void.
____________________________________________________________________
Lawyers for the Plaintiff	:	FIOCCO POSMAN & KUA
Lawyers for the Defendant	:	MALADINAS