Ultra Vires

January 23rd, 2019

Local Authorities in Bermuda, such as the capital, Hamilton, do not have a General Power of Competence.  Nonetheless the decision of the Privy Council on 21 January 2019 in Mexico Infrastructure Finance LLC v The Corporation of Hamilton (2019) UKPC 2 is of general interest.  The Privy Council ruled 3-2 that the Corporation had acted beyond its powers, because “municipal” is a word of limitation and the Corporation was not acting for a “municipal purpose”.

The principal issue on the appeal was whether the grant by the Corporation of Hamilton (“the Corporation”) of a guarantee (“the guarantee”) to support a borrowing by a private developer was ultra vires and unenforceable as it was not for a “municipal purpose” within section 23(1)(f) of the Municipalities Act 1923 of Bermuda (“the 1923 Act”). The loan was a bridging loan made by Mexico Infrastructure Finance LLC, the appellant, to the developer in connection with the development of an existing single-level car park (“the Car Park”) in Hamilton owned by the Corporation as a hotel with a new multi-level car park. The public would be able to use two underground levels of the car park. The Court of Appeal for Bermuda concluded that the grant was ultra vires … . The bridging loan has become repayable but the developer has not repaid it. In consequence, the appellant seeks to obtain repayment from the Corporation under the guarantee.

The majority of the Privy Council reasoned as follows:-

“10.   The powers and functions of the Corporation must be ascertained from the statutes constituting it. They may be express or implied.”

“12. … the Corporation was established in order to run the city of Hamilton on behalf of its inhabitants.”

“14.  Regarding guarantees, there is no express power to issue guarantees so the power is said to be implied from other provisions, … conferred by section 23(1) of the 1923 Act.”

“16.  Unlike a commercial company, the Corporation has no objects clause setting out the purposes for which it was incorporated. Those purposes must be identified by interpreting the enactments which constitute the Corporation. The power to make ordinances provides important guidance on its functions, … The 1923 Act confers powers to make ordinances for specific purposes, …

17.             Ordinances are binding on those affected by them and may even create civil rights of action or criminal offences. The purposes for which ordinances may be made are more extensive than the purposes for which rates may be raised.”

“19.           It is clear … that the Corporation has an implied power to borrow money and execute guarantees, but the purposes for which it may do so are not set out … . This is a significant omission. The objects clause of a commercial company will usually confer power to issue guarantees as a separate and independent object, so that it does not have to be shown that the guarantee is issued for one of the purposes of the company, but there is no similar provision in the case of the Corporation.

20. As to land, the Corporation has power to buy land and to use it in various ways for profit … The Corporation also has power to construct any building on any land it owns “where such works are calculated to facilitate or is conducive or incidental to the discharge of any function of the Corporation”. …  There is a further express power to provide off-street parking.”

“22. The Board considers that the powers in section 20 are clearly to enable the Corporation to carry out its functions and that they are not conferred for the purposes of some separate and independent business of investing or trading in land.”

“26. The amendment to section 37 made by the 2013 Act now makes clear that the Corporation has an implied power to issue guarantees within the limits imposed by section 37 (1) of the 1923 Act, as amended. However, as explained, those guarantees cannot be an activity in themselves and must therefore be issued for an authorised purpose found elsewhere in the 1923 Act.”

“28. Consideration of these issues must commence with a detailed examination of the wording of section 23(1)(f). …”

“35. If the appellant is right that the issue of the guarantee falls within section 23(1)(f), then it would also follow on its argument that the Corporation could itself build a luxury hotel within the city limits. …”

“41. To succeed on this appeal, the appellant must show that the execution of the guarantee was reasonably incidental to the development agreement or alternatively that the execution of the guarantee was itself a “municipal purpose… being [a purpose] of an extraordinary nature…” within section 23(1)(f) of the 1923 Act.

42. It is well established that there must be implied into a statutory provision constituting a public body the power to do that which is reasonably incidental to any express power (see the well-known case of Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653). In asking whether a power is reasonably incidental to the exercise of an express power, it is necessary to examine the express power that was exercised. Here the Corporation had power to dispose of an interest in its land and was thus able to enter into the development agreement. It cannot be said that the guarantee was incidental to the execution of that agreement. The development agreement deliberately distanced the Corporation from the development. If the developer did not demonstrate within a stipulated period that it had obtained the finance needed to complete the hotel, the Corporation could terminate the development agreement and the developer would never be able to complete the development. The terms of the agreement specifically provided that the Corporation and the developer were not partners for the purpose of the hotel development.

43. That leaves the alternative argument that the guarantee fell within section 23(1)(f) of the 1923 Act. This question falls into two parts: (i) the meaning of section 23(1)(f) and (ii) the application of that paragraph to the facts.

44. The key word in section 23(1)(f) is “municipal” in relation to the purpose for which rates may be raised. The appellant puts forward a two-part test of “municipal”. However, in the opinion of the Board, neither element of this test is satisfactory. The Board takes the components in turn.

45. As to the first component, the statement that the purpose has to be exercisable within the geographical limits within which the Corporation can act throws little or no light on whether the purpose of the act is authorised or not. The city limits may also not coincide with the areas within which a power may be exercised (see section 20(2)(b) of the 1923 Act).

46. As to the second, and in this case more important, component put forward by Lord Pannick (the local-interest component), in the view of the Board, the basic point is that the word “municipal” must be given an appropriate meaning. The word “municipal” is clearly a word of limitation. To find out the content of this limitation, in broad terms, the Board agrees with the approach of the judge, and also of the Sheriff-Substitute in the Scottish case of Arnot v WM McEwan & Co Ltd (1893) 1 SLT 500, that the term “municipal” must, in the case of a body with rate-levying powers, be interpreted by reference to its context. The relevant statutory provisions must be considered in their context and with regard to their relationship to one another.

47. The starting point is the 1793 Act. As explained, it is clear from the 1793 Act that the Corporation was established to benefit the inhabitants within the limits of Hamilton. Although the relevant clauses were repealed by the 1923 Act and so are no longer in force, the Corporation was not reconstituted with some wholly different functions or powers but continued with updated and more specific powers than previously

48. As to what purposes are municipal, guidance can be obtained from the Corporation’s power to make ordinances. As can be seen from section 38 of the 1923 Act, the purposes for which the Corporation may make ordinances concern the provision of services or facilities for inhabitants of Hamilton. One obvious example is the maintenance and use of a sufficient water supply. What the purposes in section 38 have in common is the fact that they are activities of a kind which would benefit the whole or part of the inhabitants of Hamilton by the provision of some facility or service, such as a water system and highways.

49.  … The Corporation was not given power, as commercial companies often are, to carry out any function that might advantageously be carried out.

50. A further point is that section 23(1)(f) does not permit rates to be levied for such purposes as the councillors consider to be municipal. The test is objective. The purpose must actually be municipal. That is an important safeguard for ratepayers. Express wording would be needed if the question whether an activity was for a municipal purpose was simply to depend on the opinion of the councillors who approve it.

51. Next, because section 23(1)(f) is a rate-levying provision, it must not be strained to cover purposes which are not fairly within it. That is an established approach to the statutory interpretation of penal and revenue statutes (see, for example, Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1, 10 per Hoffmann J). It cannot be avoided by pointing to the need for the Corporation to obtain ministerial consent. Obviously that is an additional safeguard but the inhabitants elect the councillors and accordingly they are entitled to hold the councillors to account for proper use of the rate-raising power.

52. Taking all these factors together, in the opinion of the Board, it is clear from the context provided by the statutes constituting the Corporation that the Corporation has not been set up to do an act simply because it may promote the prosperity of Hamilton. Such an interpretation would deprive the word “municipal” of any relevant meaning: the word might just as well have been omitted since councillors are bound to act in the interests of inhabitants. … Municipal purposes are clearly the purposes of a municipality as established by the statutes constituting it.

53. … The Legislature must surely be presumed to impose a manageable standard of accountability for a public body such as the Corporation.

54. … The Legislature must surely be presumed to impose a manageable standard of accountability for a public body such as the Corporation.

55.  …  In order for a purpose to qualify as a purpose of an extraordinary nature, a purpose must first overcome the hurdle of being a “municipal purpose”.

56. … in determining a “municipal purpose”, all the facts must be considered. …

57. … to be “municipal”, a purpose must be aimed at the provision by the Corporation of a service for the benefit of inhabitants of Hamilton. The Board reads “services” in this context as including the provision of facilities.

58. On the evidence before the Board, it is clear that the purpose of the Corporation in giving the guarantee was to help the developer obtain funding for the development. As to this, it is no part of the Corporation’s functions to act as banker to a developer.

59. The primary purpose of the guarantee was to enable the developer to obtain credit. … the guarantee was not capable of being brought within the Corporation’s powers by reference to a wider motivation and desire on the Corporation’s part generally to promote Hamilton’s economic development.”

The minority of the Privy Council reasoned as follows:-

“63. … the Corporation had power to guarantee the bridging loan to the developer. That power was to be implied from the power under section 23(1)(f) to levy rates for “such municipal purposes, being purposes of an extraordinary nature, as the Minister may in any particular case approve”. There are two reasons for this …

64. First, “municipal purposes” are purposes calculated to benefit the current and future residents, permanent or temporary, of Hamilton in their capacity as such. That is the relevant limitation. I can see no justification either in principle or in the language of the provision for distinguishing between benefits consisting in the direct provision of services or facilities to residents, and expenditure on the promotion of the city’s economic development which benefits the residents less directly. For example, expenditure on the provision of facilities for sport or entertainment in the city may be largely used by residents of other places. Expenditure on the promotion of foreign tourism or the staffing of tourist offices is likely directly to benefit only non-residents. But it would be artificial to say that these purposes, which indirectly serve the economic interests of the city and its inhabitants, are not municipal purposes. These examples, and one could give many others, illustrate the technical, functionally irrelevant and barely workable distinctions which it is necessary to make if the test favoured by the majority be correct.

65. Secondly, sub-section (1)(f) refers not just to municipal purposes, but to municipal purposes “of an extraordinary nature”. The natural meaning of this phrase is that the expenditure in question is expenditure of a kind which is incurred outside the ordinary course of a municipality’s functions. This does not give them unlimited discretion, for it is limited by the need to obtain the minister’s consent to levy the rate necessary to cover it. That in itself suggests that expenditure under this head was not expected to be confined to the ordinary provision of services directly to residents.

66. None of this means that the Corporation has power to engage in free-standing business activity for the purpose of earning profits with which to meet its expenditure, which was the perceived vice of the swap transactions held to be ultra vires in Hazell v Hammersmith and Fulham London Borough Council [1992] 2 AC 1. But the issue of a guarantee to assist a development thought to be in the broader economic interest of the city does not appear to have been a free-standing business activity, let alone an independent source of earnings.”

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