Part 2: The rules on contracting with your authority

Guidance for members of local authorities about the local authorities (Members' Interests) Act 1968.

In this Part, we explain the Act's restrictions on your ability as a member of an authority to be involved in contracts with the authority.

Disqualifying contracts

The disqualification rule

You will be automatically disqualified from office if you are "concerned or interested" in contracts with your authority and the total payments made, or to be made, by or on behalf of the authority exceed $25,000 in any financial year. In practice, we use the authority's financial year as the relevant time period (that is, 1 July to 30 June).

The $25,000 limit includes GST. The limit relates to the value of all payments made for all contracts in which you are interested during the financial year. It does not apply separately to each contract, nor is it just the amount of the profit the contractor expects to make or the portion of the payments to be personally received by you.

We can give prior approval and, in limited cases, retrospective approval for contracts that would otherwise disqualify you under the Act. See paragraphs 2.25-2.48 for information on how to apply.

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

A disqualification lasts until the next:

  • general election for the authority; or
  • opportunity for appointment to the authority.

Disqualification means that you cannot be elected or appointed to:

  • the authority; or
  • any committee of the authority;

or hold office as a member of the authority (or any committee).

The restriction applies to you, not your authority

The restriction on contracting applies to you, not to the authority. The Act does not affect the authority's power to enter into contracts. The fact that a contract has disqualified you from membership does not invalidate the contract.

It is your responsibility to keep track of payments under any contracts or subcontracts in which you are concerned or interested. If you are concerned or interested in contracts through your business, you should ensure that everyone in your business is aware that you could be disqualified from membership of the authority if the total amount of payments to the business exceeds the $25,000 limit in one financial year (without our prior approval).

You should ensure that all business interests are recorded in the authority's register of interests (if one exists). This will help the staff of the authority to support your compliance with the Act. You should also regularly advise the chief executive of your authority about interests that may result in dealings with the authority.

You cannot discuss or vote on the contract

If you are concerned or interested in any contract with your local authority, you cannot participate in any discussion or voting on that contract (see Part 3).

When are you "concerned or interested" in a contract?

You can be disqualified if you are either directly or indirectly concerned or interested in a contract with your authority.

You are directly concerned or interested if you are a party to the contract. You may be indirectly concerned or interested if the contract is between the authority and another person, and you:

  • have a personal connection with that person; or
  • could benefit from the contract.

Types of indirect interest

It is difficult to be precise about what is or is not an indirect "concern or interest" in a contract. Each case has its own circumstances. The Act does provide certainty in two common types of case (discussed below). However, it is important to note that you can be indirectly concerned or interested in a contract in other ways (such as, for example, where your family trust has a contract with your authority and you are a beneficiary of that trust).

Interest through spouse or partner

If your spouse, civil union partner, or de facto partner is concerned or interested in a contract, the Act says that you are deemed to be concerned or interested, unless:

  • the two of you are living apart; or
  • you did not know, and had no reasonable opportunity of knowing, that they were concerned or interested in the contract.

This rule applies whether their interest is direct or indirect.

Interest in a company

If a contract is between the authority and a company in which you or your spouse or partner have some interest or involvement, the disqualification rule applies only in the following cases:

  • 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; or
  • either you or your spouse or partner is a shareholder of the company, or another company that controls it and either of you is the managing director or general manager (by whatever name you are actually called) of the company or the controlling company; or
  • either you or your spouse or partner is the managing director or general manager (by whatever name you or they are actually called) of the company and either of you is a shareholder of another company that controls it.

The disqualification rule also applies to subcontracts

The disqualification rule also applies if you are concerned or interested in a contract with the authority as a subcontractor, as if it were a contract directly with the authority. The limit of $25,000 applies to the value of the subcontract, not the head contract.

The term "subcontract" is defined in section 2(1) of the Act. The definition is wider than the generally understood meaning, because it extends to subsidiary transactions. For example, if you are involved in a contract with an authority as an agent for the other contracting party (such as a real estate agent acting in relation to a property transaction), the arrangement for your remuneration as agent falls within the definition of a subcontract.

Community boards

Community boards are subject to the Act in their own right, separate from their "parent" authority. If you are a member of a community board, but not a member of the "parent" city or district council, the disqualification rule will not apply to your contracts with the council. This is because the disqualification rule applies only to contracts between you and the authority of which you are a member. This is the same for local boards in Auckland.


There are several circumstances in which, although you are concerned or interested in a contract, you will not be disqualified.

If you were unaware of the contract

You will not be disqualified by a contract that exceeds the $25,000 a year limit if:

  • the contract was entered into by a committee of the authority, or an officer, acting under delegation; and
  • you were not a member of that committee and did not know, and had no reasonable opportunity of knowing, about the contract at the time it was made.

However, as soon as you or the authority becomes aware of the contract, the authority must write to us to verify that you did not know and had no reasonable opportunity of knowing about the contract. The letter must confirm that the committee or person who entered into the contract was properly authorised to do so.

If your contract is exempt from the Act

Certain types of contracts are not subject to the Act.2 This means that you can be concerned or interested in the following types of contracts without being disqualified under the Act:

  • an employment agreement between you and the authority;
  • a loan raised by the authority (whether as security or otherwise);
  • a payment for an advertisement inserted by the authority in any newspaper;
  • a lease granted to the authority;
  • a compensation payment under the Public Works Act 1981;
  • the supply of goods or services during a civil defence emergency;
  • a contract to be an administrator of an estate or a trustee of a trust – as long as you are not a beneficiary of the estate or trust, or a manager under the Protection of Personal and Property Rights Act 1988.

Getting approval to exceed the limit

Prior approval

Under section 3(3)(a) of the Act, we can grant prior approval for contracts that would otherwise take you above the $25,000 limit in any financial year.

When approval may be sought

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.

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 sufficient. Where the approval is for an ongoing arrangement, our usual practice is to grant approval for only one financial year at a time.

We consider it a good idea to seek approval for a contract that does not exceed the $25,000 limit by itself but could well do so when combined with the value of other small contracts. Similarly, where a number of similar small contracts may 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

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

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

In the case of a single contract (usually for a larger amount), the following criteria will usually be relevant:

  • Has the authority taken all reasonable steps to ensure that all potentially interested parties had an opportunity to tender or quote for the contract?
  • Has the 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 the 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 the authority?

In the case of multiple contracts for smaller amounts, such as arise from day-to-day purchases of supplies, it will usually be necessary for the 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.

Prior approval is not automatic

Prior approval cannot be assumed. We must be satisfied that the criteria set out above are met and that the risk of preferential treatment has been addressed.

When to apply for approval

A local authority does not need to seek approval to invite tenders for a contract.

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 the member (or their company); or
  • immediately after the authority has resolved to accept the tender, subject to the Auditor-General's approval.

In the case of a series of small contracts over a period of time that would not individually require approval but that cumulatively may 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 this is a distinct possibility.


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

The application must be made in writing and addressed to:

Assistant Auditor-General – Legal
Office of the Auditor-General
Private Box 3928
Wellington 6140
Telephone: 04 917 1500
Facsimile: 04 917 1549

Please indicate whether the application is urgent.

Information generally required in an application

In the authority's application, we need to be provided with information about:

  • the reasons the authority wishes to use the proposed contractor for this work (for instance, how the authority justifies its choice on the basis of, for example, cost, performance, quality, expertise, or experience);
  • the process the authority has followed in selecting the proposed contractor (including, for example, whether other potential contractors were considered or had the opportunity to quote or tender, whether the 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 authority decisions about the contract; and
  • the monetary amount for which approval is sought.

We provide a checklist in Appendix 4 of the information that should be included in the application.

Retrospective approval

We have a limited power to grant retrospective approval for contracts that have already been entered into.

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

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

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, approval should not be assumed.


We encourage authorities to establish a register of members' interests to support compliance with the Act. If the register is updated regularly, and relevant staff are aware of it, the register should help identify situations where contracts should not be entered into without our approval. Particular vigilance may be necessary for subcontracts.

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 of the accumulating value of contracts.

Seeking extensions to an approved limit

Contracts that have obtained our approval should be monitored, to ensure that payments do not exceed the amount approved. This can easily happen if contracts are varied or extended.

If the approved amount is exceeded, the consequence is the same as for exceeding the initial $25,000 limit – the member is disqualified. This problem can be avoided by applying to us for an extension to the previous approval, to take account of the additional costs. This application should be made, and the extension obtained, before the payments exceed the original approval. Inadvertent breach of an approved amount requires retrospective approval, which should not be assumed.

Candidates for election or appointment

The disqualification rule also applies to candidates

You cannot be elected or appointed to an authority if you have a disqualifying contract (or contracts) that is current at the time the election or appointment takes place. This means that, if you are concerned or interested in a current contract with the authority that exceeds $25,000 at the time of the election, you cannot be elected or appointed to an authority. The basic rule is the same as for existing members.

Every candidate for election or appointment to an authority should consider whether they might be ineligible under this rule. You should consider what contracts you have with the authority in the year of the election, and the value of payments to be made in that year.


Certain types of contracts will not disqualify a candidate from election or appointment. A candidate who has a contract that falls within any of the following categories will not be disqualified:

  • before the election or appointment, all of the candidate's obligations in relation to the contract have been performed and the amount to be paid by the authority has been fixed (whether or not it has been paid);
  • although the candidate's obligations under the contract have not been performed before the election or appointment, the amount to be paid by the authority is already fixed (subject to amendments and additions as allowed for in the contract), whether or not it has been paid; or
  • although the candidate's obligations under the contract have not been performed before the election or appointment, either:
    • the contract's duration does not exceed 12 months; or
    • the contract is relinquished (with the authority's consent) within a month of the candidate becoming a member and before they start to act as a member.

We cannot give prior or retrospective approval for contracts between a candidate and an authority. Therefore, if you are a candidate and are interested or concerned in current contracts with the authority that exceed $25,000 prior to the election, you cannot be elected unless you either fall within one of the exceptions in the Act or cease to be concerned or interested in the contract.

What if you are re-elected or re-appointed?

If you are re-elected to the authority at a general election or re-appointed to the authority at any time, your membership is considered unbroken under the Act. If you have been granted an approval for a disqualifying contract, and you are re-elected or re-appointed to the authority during the financial year to which the approval relates, the approval remains valid.

Re-election or re-appointment also overcomes a disqualification from the previous term. However, you could still be prosecuted for acting as a member while disqualified during the previous term (see Part 4 for more details on prosecutions).

2: The Act also includes a number of 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.
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