N5021
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS NO 682 OF 2005

DENNIS MARUS
Plaintiff

V

KIMBE URBAN LOCAL-LEVEL GOVERNMENT
Defendant

Kimbe: Cannings J
2006: 8, 21 September,
2007: 6 July

CONTRACTS – breach of contract – whether contract in existence, capable of enforcement – whether contract lawfully entered into on behalf of a local-level government body – consequences of illegality – whether a party to an illegal contract can sustain a claim in equity for work actually done.

The plaintiff entered into a memorandum of agreement, which he says is a contract, with the Kimbe LLG (the council). The agreement was that the council would pay him for provision of his services. They did not pay him anything for the work he did so he sued for breach of contract. The council says it is not obliged to pay as there was no contract with the plaintiff; but if there were a contract it was entered into unlawfully by the town mayor, so it is illegal and unenforceable.

Held:

(1)	The contract was not void for uncertainty.

(2)	The Mayor was not authorised to sign the contract and it was therefore illegal and unenforceable. Further it purported to outsource the administrative functions of the council to a single person, which was unlawful as it offended against the principle of representative democracy on which Papua New Guinea's three-tier system of government is based.

(3)	The council did not breach the contract as the plaintiff did not do the things that the contract required him to do.

(4)	Despite the illegal aspects of the contract, the court, in the exercise of its discretion, granted restitution to the plaintiff of 5% of the contract sum, on a quantum meruit basis.

Cases cited

The following cases are cited in the judgment:

Fly River Provincial Government v Pioneer Health Services (2003) SC705
John Vulupindi v John Gideon CIA No 4 of 2006, 22.06.06
Veltro Ltd and Others v Steven Liu Huang and Others OS No 478 of 2006, 12.09.06, unreported

STATEMENT OF CLAIM

This was an application for enforcement of a contract.

Counsel

T Waisi, for the plaintiff
G Linge, for the defendant

6th July, 2007

1. CANNINGS J: The plaintiff, Dennis Marus, is claiming that Kimbe Urban Local-level Government ("the council") owes him K60,000.00 for a strategic plan he prepared for them. He says that in April 2004 he entered into an agreement with the council to prepare the plan. He kept to his side of the bargain. He prepared the plan within the six-month deadline. He waited for payment for almost a year before taking the matter to court. He is suing the council for breach of contract. If the council succeeds in showing some illegality in the contract, he says he still has a claim in equity.
 
2. The council says it owes Mr Marus nothing. There never was a contract. The memorandum of agreement is too vague. It does not specify who the parties are. Besides that the town mayor, who signed the document, had no authority to do so. The proposal to enter into an agreement with Mr Marus was not approved by the council or its finance committee. This makes the contract – if there was one – illegal and unenforceable. The subject matter of the agreement also makes it illegal as it purported to divest management of the council to Mr Marus. If all of those arguments fail, the council says it is still not guilty of any breach of contract as Mr Marus has not done what he was required to do by the contract. If anyone has breached the contract, it is Mr Marus, not the council. Surprisingly the council did not argue that the contract was entered into without a public tender contrary to the Public Finances (Management) Act 1995, and was therefore unenforceable. So I am not going to address that issue. There are five questions to resolve:

1	Was the agreement void for uncertainty?

2	Was the Mayor authorised to sign the agreement? If not, is it enforceable?

3	Was the subject matter of the contract lawful?

4	Did the council breach the contract?

5	If there is no breach of contract or the agreement is illegal or unenforceable, does the plaintiff have a claim in equity?

3. Mr Waisi, appearing for Mr Marus, submitted that all those questions should be answered yes. Mr Linge, for the council, submitted that they should all be answered no.

1 WAS THE AGREEMENT VOID FOR UNCERTAINTY?

4. The agreement is three pages in length and consists of a preamble and five clauses. The parties to the agreement are stated at the beginning to be:

•	Kimbe Urban Local-level Government – the "Engager"; and

•	Denis Holiua Marus of Island Consultant Services Ltd – the "Engagee".

5. Mr Linge argued that the agreement was void for uncertainty and therefore not a contract as the party that executed it was not Mr Marus but another entity called "Island Consultant Services Ltd". A company seal in that name was affixed to the agreement, next to where Mr Marus signed as "principal director". Mr Linge also submitted that Mr Marus's statement of claim (the court document by which this case was commenced) added to the uncertainty by pleading that the party to the contract was Mr Marus, not Island Consultant Services. Mr Linge referred to my decision in Veltro Ltd and Others v Steven Liu Huang and Others OS No 478 of 2006, 12.09.06, to argue that Mr Marus had failed to plead the details of the contract with sufficient particularity to establish a cause of action.

6. I reject those submissions. An initial reading of the agreement gives rise to an element of ambiguity about who the "engagee" is – whether it is Mr Marus of Island Consultant Services Ltd. However, a closer reading reveals that the "engagee" and the party to the contract is clearly Mr Marus in his individual capacity. If the council were to sue the engagee for breach of contract it would have to make Mr Marus the defendant. The statement of claim correctly stated that Mr Marus was the plaintiff. The contract is not void for uncertainty.

2 WAS THE MAYOR AUTHORISED TO SIGN THE AGREEMENT? IF NOT, DOES THIS MAKE IT UNENFORCEABLE?

7. Mr Waisi submitted that the question of Mr Marus's engagement went before the council's finance executive committee on 6 April 2004, which resolved to seek legal advice. A week later the mayor and the town manager consulted the acting provincial administrator, Willie Edo, who advised them to engage Mr Marus for a six-month period. The Mayor was therefore authorised to sign the agreement, Mr Waisi submitted.

8. I reject that submission as it is contrary to the evidence. The minutes of the committee meeting referred to by Mr Waisi show that the question of Mr Marus's engagement was discussed by the finance executive committee. But a decision was deferred pending advice from the District Administrator and the LLG Adviser. That was done so that "the Assembly can make a decision on this proposal". It is not clear what "Assembly" was being referred to. Was it the assembly of the council or the provincial assembly? For present purposes, it does not matter except to observe that the finance executive committee did not approve the contract with Mr Marus and did not decide to seek advice from the Provincial Administrator. The committee decided to seek advice from the District Administrator and the LLG Adviser. In any event, there is no reliable evidence before the court that Acting Provincial Administrator, Mr Edo, advised the Mayor or the council to engage Mr Marus. I conclude that the Mayor was not advised or authorised to sign the agreement by the finance executive committee, the full council, the district administrator, the provincial administrator, the provincial assembly, the provincial governor or any other person or authority.

9. To lawfully sign the agreement the mayor had to be authorised to do so by the finance executive committee or the full council. The laws that prescribe the powers, functions, duties and responsibilities of local-level governments do not delegate to or permit the head of a local-level government to enter into contracts on behalf of the local-level government without authority. Those laws are the Organic Law on Provincial Governments and Local-level Governments and the Local-level Governments Administration Act. A local-level government has legal capacity under Section 6 of the Organic Law. It can sue and be sued. The Kimbe town council was capable of entering into a contract with Mr Marus. But it does not follow that the Mayor could unilaterally decide to sign a contract on behalf of the local-level government. The institutional structure of local-level governments ordained by the Organic Law is that, like provincial governments, they have a legislative arm and an executive arm. Section 36(1) of the Organic Law says that the executive arm consists of all the members of the legislative arm. Section 36(2) says that an Act of the Parliament shall make provision for the powers and procedures of the executive arm of a local-level government. Section 17 of the Local-level Governments Administration Act allows the executive arm of a local-level government to be determined by that executive arm. These laws allow the executive arm of a local-level government to delegate the power to enter into contracts on its behalf to the head of the local-level government, subject to any procedures the executive arm sets. In the present case the members of the Kimbe town council could have decided to delegate the power to the Mayor to sign contracts on behalf of the council. But that did not happen. There is no instrument of delegation in evidence and it was not even suggested that there is one. The Mayor therefore acted without actual authority when he signed the agreement with Mr Marus.

10. Though it was not raised by either party I have considered whether, though he acted without actual authority, the law of agency had the effect of rendering the mayor's actions lawful. I set out the principles of agency in an appeal against a decision of the Kimbe District Court, John Vulupindi v John Gideon CIA No 4 of 2006, 22.06.06. A person (an agent, such as the Mayor) who holds out that he is acting on behalf of another person (the principal, such as the council) can enter into a binding agreement on behalf of the principal even if the agent has no actual authority to do so, if the agent has ostensible authority to do so. Ostensible authority exists when the principal holds out (ie acts in a way that creates an impression) that the agent has authority to act on its behalf. If the principal allows a situation to develop whereby a third party would reasonably think that the agent has the principal's authority to act on its behalf, the agent can bind the principal even if, in fact, the principal did not authorise the agent to enter into binding agreements. This is also regarded as the law of estoppel. The principal is, because of its conduct (ie allowing a situation to develop), estopped (ie prevented) from denying that the agent has authority to act on its behalf.

11. In the present case the town council did not create the impression or allow a situation to develop that the Mayor had the authority to act on its behalf. A reasonable person in Mr Marus's position would not have believed that, without something in writing, the Mayor had the authority to enter into the agreement. The Mayor did not therefore act within the scope of his ostensible authority. The law of agency does not render his actions lawful. I conclude that the Mayor acted without lawful authority when he signed the agreement. The contract is therefore illegal and unenforceable.

12. That does not mean necessarily that Mr Marus should receive nothing for the work that he did. That remains a live issue, which I will address in question No 5 below. Before doing that, there are two other issues to be resolved. They cannot, in view of my conclusion that the contract is illegal and unenforceable, determine the result of the case. Nonetheless it is useful to consider them as they might influence the exercise of discretion that is involved in resolving question No 5.

3 WAS THE SUBJECT MATTER OF THE CONTRACT LAWFUL?

13. Mr Linge submitted that the effect of the contract was to outsource to Mr Marus all of the Kimbe town council's administrative functions, which is not permitted by law. He based that submission on clause 1 of the agreement, which stated that Mr Marus was responsible for the following matters:

(a)	Taking overall management and control over the existing staff to overhaul and to restructure the manpower structure of the council.

(b)	Review and revise the annual budget on a quarterly basis.

(c)	Control all the internal revenue and computerise the accounting system.

(d)	Managing and controlling all the public resources of the council, including public finances, public utilities and public amenities etc, as according to law.

(e)	Taking taxing measures and levy taxes on all the internal revenue heads of the council as constituted under the Organic Law on Provincial Governments and Local-level Governments.

(f)	Do up projections, costing and documenting all the council projects for the Aid funding organisations and agencies within and outside of the country.

(g)	Implement the plans and policies of the council in consultation with the Provincial Government and the National Government where applicable in accordance to Law.

(h)	Draw up database and map out the town residences with house numbering and street numbering, town and settlement population survey and censuses.

(i)	Draw up plans to take drastic measures to control law and order problems in the town ULLG areas.

(j)	Conduct training programs for all sector development.

(k)	Rationalise all council activities for all sector development.

(l)	Do up journalism and media exposing on all council activities. [sic]

14. Those responsibilities are very broad indeed, especially: (a) taking overall management and control over the existing staff; (c) controlling all internal revenue; (d) managing and controlling all the council's public resources; and (g) implementing all the council's plans and policies. The last responsibility seems intended to give Mr Marus almost total control over the council's activities. Putting aside the question of whether it is a good idea for a local-level government to outsource its functions in that way, the legal issue raised by Mr Linge's submission is whether it can be done as a matter of law. What are the executive or administrative (as distinct from legislative) functions of a local-level government? Section 15 of the Local-level Governments Administration Act states:

The functions of a Local-level Government executive arm are—

(a) to implement the laws and policies made or adopted by the Local-level Government; and

(b) to implement the laws and policies of the National Government and the Provincial Government applying to the Local-level Government area; and

(c) such other functions as are allocated to it by this Act or any other law.

15. Section 38(1) of the Local-level Governments Administration Act states:

(1) Subject to—

(a) the Constitution; and

(b) the Organic Law; and

(c) any overall policy directions by the National Government or the Provincial Executive Council,

a Local-level Government shall, in addition to its other functions, in relation to the Local-level Government area, be responsible for—

(d) preparing corporate plans and estimates; and

(e) preparing a rolling five year development plan taking into account rolling five year development plans for the wards as prepared by the elected ward members; and

(f) preparing an annual plan taking into account the rolling five year development plan; and

(g) preparing annual budgets based on the annual plans, to which shall be applied the—

(i) Organic Law grants to be paid directly to the Local-level Government; and

(ii) Local-level Government's own resources; and

(iii) revenues from any other sources; and

(h) keeping or causing to be kept proper accounts and records of its transactions and affairs as required by Section 102 of the Organic Law; and

(i) ensuring necessary arrangements and participation at forums on renewable natural resources; and

(j) granting appropriate approval or entering into dealings in relation to the resources referred to in Paragraph (i), including recommendations to relevant bodies or authorities; and

(k) constructing and maintaining infrastructure and facilities that are the responsibility of a Local-level Government; and

(l) initiating and implementing youth and women programmes; and

(m) providing support and assistance to the Provincial Government to enable it to carry out its functions effectively; and

(n) performing such other functions as are given to it or as are prescribed.

16. The effect of clause 1 of the contract was to outsource all of the above functions to one person – Mr Marus. This is not permissible as it offends against the principle of representative democracy on which Papua New Guinea's three-tier system of government (National Government, Provincial Governments and Local-level Governments) is based. The Preamble to the Organic Law states that the goals of that system of government include "promoting equal opportunity and popular participation in government at all levels". Section 1(2) of the Organic Law obliges each Local-level Government and its agents, in carrying out its functions, duties and responsibilities, to comply with "the principle of … mainly elective (elected directly or indirectly) representative and participatory government". Those goals and functions cannot be achieved if a local-level government body abdicates its constitutional functions and responsibilities and outsources its administrative functions to one person. It follows that the subject matter of the contract was unlawful. For that reason also – in addition to the reason that the Mayor was not authorised to sign it – the contract was illegal and unenforceable.

4 DID THE COUNCIL BREACH THE CONTRACT?

17. Mr Marus's case is based on these propositions:

•	under the contract he was required "to formulate the Strategic Development Corporate Plan" for the council;

•	he prepared the plan and submitted it to the council by the end of the six-month contract period, 21 October 2004;

•	the council has failed to pay him the agreed remuneration of K30,000.00 per quarter, in this case a total of K60,000.00; and

•	therefore he has a cause of action in breach of contract against the council.

18. Mr Marus's case is fundamentally flawed as the preparation of a strategic plan was not one of the responsibilities conferred on Mr Marus by clause 1 of the contract. Clause 1 (set out in full above) required him to be responsible for the following matters:

(a)	managing and controlling the staff;
(b)	reviewing and revising the annual budget;
(c)	controlling revenue;
(d)	managing and controlling the council's resources;
(e)	taking taxing measures;
(f)	documenting projects for aid funding;
(g)	implementing the council's plans and policies;
(h)	drawing up a town residence database;
(i)	drawing up plans to control law and order;
(j)	conducting training programs;
(k)	rationalising the council's activities; and
(l)	preparing a media strategy for the council.

The 60-page document Mr Marus prepared addresses only some of those responsibilities, so Mr Marus did not do what the contract required. The council was not obliged to pay him. There has been no breach of contract by the council.

5 DOES THE PLAINTIFF HAVE A CLAIM IN EQUITY?

19. Mr Waisi submitted that if the contract is illegal and unenforceable (as I have already found) and Mr Marus cannot sustain a cause of action for breach of contract, I should nevertheless exercise my discretion as a matter of equity to order restitution in the sum of K60,000.00. Mr Waisi relies on the decision of the Supreme Court in Fly River Provincial Government v Pioneer Health Services (2003) SC705, where it was recognised that a party to an illegal contract who has wholly or partly performed its obligations under the contract can be granted a remedy, as a matter of equity. This can be done if the party seeking the remedy is innocent of wrongdoing. The remedy is granted to prevent unjust enrichment by the party for whom the services were performed. The argument is that Mr Marus presented the council with a 60-page strategic plan, he acted in good faith, he is innocent of wrongdoing, he has done the work and spent his own money producing what he was required to do. He should be compensated or, put another way, paid on a quantum meruit (as much as he reasonably deserves) basis for what he has done.

20. The problem with the argument, as I have already found, is that preparation of the strategic plan was not something expressly required by the contract. Mr Marus provided a service to the council but what he did was not covered by the contract. I have my doubts as to whether Mr Marus had the required level of innocence about the illegal aspects of the contract to warrant him being compensated for the work that he has done. Despite these concerns, it is clear that Mr Marus did put some work into the document and that he presented it to the council within the timeframe allowed by the contract. The council is now in possession of the plan and is able to use it if it thinks it is useful. As a matter of equity Mr Marus deserves something for what he has done. Having regard to all the circumstances of the case, I will exercise my discretion by concluding that he should be compensated to the extent of five per cent of the contract sum, ie K3,000.00.

COSTS

21. As both parties have to some extent succeeded, they will bear their own costs.

ORDER

22. The order of the court will be:

(1)	the contract, constituted by the memorandum of agreement, between Denis Holiua Marus and Kimbe Urban Local-level Government, dated 21 April 2004, is declared illegal and unenforceable;

(2)	Kimbe Urban Local-level Government shall pay restitution to Denis Holiua Marus in the sum of K3,000.00 within 30 days after the date of entry of this judgment;

(3)	the parties bear their own costs.
___________________________________
Mileng Lawyers: Lawyers for the Plaintiff
Linge & Associates: Lawyers for the Defendant