FAIRLAND OVERSEAS DEVELOPMENT v. SECRETARY FOR JUSTICE

HCA2154/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2154 OF 2005

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J U D G M E N T

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1. On one level this case involves a banal contract between the parties, in which the Government has merely failed to carry out its agreement to erect two traffic signs.  But on a human level this case involves the exasperated and sustained attempts by a private landowner to ensure that its private road is protected by the Government by the law of contract, from unregulated public use.  Yet on a constitutional level this case engages far-reaching questions about the competence in law of the Government to enter into certain types of contracts at all. 

Introduction

2. Is the Government contractually bound to erect certain road signs which would regulate traffic flow onto Fairview Park Boulevard?  The Boulevard is a private road connecting the residential development at Fairview Park with Castle Peak Road, a major public road.  Prior to the creation of Kam Pok Road (the partial product of resumption of land by the Government) the Boulevard was the only road access to Fairview Park Estate a residential development where some 20,000 people live.  The plaintiff is the owner of the Boulevard, and also the developer of Fairview Park.  The defendant, the Secretary for Justice, represents the Government in these proceedings. 

3. The map at Schedule One illustrates a bird’s-eye perspective of the general area showing the interrelationship of the Boulevard, Kam Pok Rd and Castle Peak Rd.  The modern San Tin Highway is generally parallel to but east of Castle Peak Rd.. 

4. The diagram at Schedule Two shows a close up of the Boulevard and its intersections with Kam Pok Road, Castle Peak Road,  Beer House Lane and Ha San Wai Road are identified, as are Junction B and Junction Z where the two traffic signs were agreed to be erected.  Each sign would prohibit any vehicle over 10 metres in length, except coaches, from entering the Boulevard.  The sign at Junction Z would make it unlawful for any container vehicle to enter the Boulevard by a left-hand westward turn into the Boulevard from Castle Peak Road.  The sign at Junction B would prohibit a left-hand eastward turn from Kam Pok Road into the Boulevard.  Container trucks would therefore be prohibited from entering into Beer House Lane at all from the Boulevard.  The Boulevard has a central dividing median strip which precludes any u-turn.  A significant number of container trucks service the established storage businesses that operate down Beer House Lane. 

Background

5. In March 1997 the Government proposed to resume part of the Boulevard for the purposes of a wide-ranging drainage project in the North West New Territories — an area notoriously prone to flooding.  The then Secretary for Transport proposed road works ancillary to the drainage project over both Government land and part of the Boulevard.  Such works involved, among other things : the construction of a drainage channel and two roads ancillary to it, one of them to become a 7.3 metres wide access road (now Kam Pok Road) and the other to become a 3.5 metres wide maintenance road.  A part of the Boulevard needed to be resumed for the construction of the drainage channel and the ancillary roads; a bridge was to be constructed over the drainage channel to replace the resumed part of the Boulevard.  The proposal would involve the resumption of a small section of the Boulevard — cutting it into two quite unequal parts in length, separated from each other by the compulsorily acquired land at the intersection with Kam Pok Road. 

6. The procedure for the resumption of the Boulevard land was governed by the Road (Works, Use and Compensation) Ordinance (Cap. 370) (“RWUCO”).  For any proposed land resumption under RWUCO, the relevant plans are required to be advertised by specified means.  Under s 10, any person affected by the proposed works may, by notice in writing to the Secretary for Transport within the specified time, object to the proposed works.  Under s 11, if no objection to the works exists or remains, the Secretary for Transport may execute the works.  If any unresolved objection is maintained, then the plans and the objection would have to be considered by the Chief Executive-in-Council to decide to either authorise or decline the proposal. 

7. Upon notification of the proposal, the plaintiff, through solicitors, wrote to object to it.  Among other things, the plaintiff indicated that its principal concern was that the proposed works (in particular the construction of the sections of Kam Pok Road) would very significantly increase the amount of traffic passing through its Boulevard, which, being a private road, would have to be maintained at the expense of the plaintiff.  The plaintiff was concerned that the current use of the Boulevard by container trucks would significantly escalate because of the increased options which would become available with the construction of the new road. 

8. If a container vehicle left Ha San Wai Road to go eventually south down the San Tin Highway say to the new Kwong Sham Western Highway, it would, if the proposed road signs were in force, first have to cut across any southbound traffic on Kam Pok Road.  It then would proceed north and eventually take a soft right-angle course to the east before coming to the junction of Kam Pok Road and Castle Peak Road.  The vehicle would then have to take a right angle turn to travel south (as there is no slip road at that point to join the San Tin Highway) all the way back to the eastern junction of the Boulevard/Castle Peak Road where it is possible then to connect southward to the San Tin Highway.  The result is like a knight moving twice in chess, first up and then back down to the same line but on the other side : retirer pour mieux sortir. 

9. The maximum speed limit on the San Tin Highway is 100 kph and it is half that on Castle Peak Road.  Castle Peak Road is only between 6.3 to 6.7 metres in width; Kam Pok Road is 7.3 metres in width.  If at the junction of Kam Pok Road and Castle Peak Road the vehicle wishes to travel to Lok Ma Chau (a border crossing to the Mainland) it turns left and north along Castle Peak Road, crossing several sets of traffic-light controlled intersections and also three pedestrian crossing, before quite a few kilometres later, the vehicle could finally join the Highway. 

10. Ever since the decision in Attorney General v. Melhado Investments Ltd [1983] HKLR 327 (CA) which accepted that storage as an activity did not offend Crown leases describing the underlying land in agricultural terms, the character of the New Territories became irreversibly changed.  The permitted use of storage and ancillary industry on land meant container trucks.  They have been a way of life in the New Territories for nearly a quarter of a century.  They have brought both problems and prosperity to Hong Kong and to the New Territories in particular. 

11. When the resumption proposal was notified the plaintiff was understandably anxious to protect the environmental amenity of the area for its residential owners.  Important issues of safety and maintenance of the surface of the Boulevard were also raised.  Therefore the plaintiff engaged in correspondence with the Assistant Commissioner for Transport for the New Territories (“ACT”), in an endeavour to secure by contract a solution at law that would in the future, upon the opening of Kam Pok Road, prohibit by traffic signs container trucks from travelling along the Boulevard in either direction at any time.  On 25 July 1997 after considering the detailed objection, substantiated by demonstrable concerns, the ACT replied :

“…the proposed connection of new roads to Fairview Park Boulevard under the captioned project will likely attract traffic on route the boulevard.  The argument of [the Plaintiff’s solicitors] is considered reasonable.”

12. There was at this time consideration given by the Government to installing traffic signals — which would authorise, but regulate the flow of all vehicles onto the Boulevard.  The plaintiff objected.  It required actual prohibition of all vehicles in excess of 10 metres in length — not an invitation to them.  The plaintiff reminded the Territory Development Department of the Government that it had the right itself to erect traffic signs on the Boulevard as provided for in the Code of Practice for Private Roads, which is authorized by s 109(4A)(a) Road Traffic Ordinance Cap. 374 (“RTO”). 

13. Negotiations then followed.  Meetings were held between, the representatives of the plaintiff, the Yuen Long Provisional District Board (“YLPDB”) and representatives of several Government Departments : the Transport Department (“TD”), the Territory Development Department (“TDD”) and the Planning Department.  Such negotiations culminated in the following :

(1)	On 11 February 1998 the plaintiff offered to withdraw its objections to the land resumption, provided :
	(a)	YLPDB had endorsed without conditions the erection of appropriate road signs at Junction Z (i.e. the junction between the Boulevard and the Fairview Park Roundabout at Castle Peak Road) and Junction B (i.e. the junction between the Boulevard and Kam Pok Road) to the effect that any entry to the Boulevard by any vehicles exceeding 10 metres was prohibited and;
	(b)	had received a letter from the Project Manager, NT North of the TDD confirming that the two road signs would be erected upon the opening of the new access roads (Kam Pok Road).

The manifest intention was an agreement which would prohibit container trucks, in particular, from ever entering the Boulevard, from either end. 

(2)     The YLPDB later unanimously supported the erection of the road signs but suggested that the proposed restriction should be further tightened and apply to all vehicles exceeding 7 metres in length (excepting all coaches). 

A copy of their letter was sent to the ACT. 

(3)     On 14 March 1998, the TDD wrote to the plaintiff on behalf of the Government stating :

“Having obtained [YLPDB’s] endorsement, this Office agrees and will erect appropriate traffic signs at the junctions of Fairview Park Boulevard with Castle Peak Road Roundabout and the 7.3m wide new road respectively upon opening the new road to the effect that any entry to the Fairview Park Boulevard by any vehicles, except coaches, longer than 7m are (sic) prohibited.” 

The TDD then asked the plaintiff to formally withdraw its objection as the agreement would its letter claimed : “put your mind at rest”. 

The plaintiff contends for its primary case that an executory contract occurred on 14 March upon the exchange of letters.  The defendant argues however, that the letter of 14 March amounted to a counter-offer, as it differs materially as to the exemption of coaches in any event, even if the more severe restriction of vehicles exceeding 7 metres logically includes vehicles exceeding 10 metres.  That must be right — it was a counter-offer.

(4)     On 25 March 1998, the plaintiff’s solicitors wrote and stated that it accepted coaches were to be exempted.  They observed that the endorsement by the YLPDB was in fact therefore only conditional, such that the plaintiff was not obliged to withdraw its objection.  But the letter continued :

“Nevertheless, our client hereby withdraws its objections contained in the letter of its previous solicitors of 22 May 1997.  The withdrawal is, however, made without prejudice to our client’s contention that the use of the boulevard by any coaches/buses remains subject to all our client’s rights over the boulevard.  We also expressly reserve all our client’s rights over the boulevard, including but not limited to, its existing rights to erect road signs on the part of the boulevard owned by our client to restrict / prohibit any vehicles longer than 10M from using its part of the boulevard.”

(5)     TDD wrote to the plaintiff on 26 March 1998, asking for confirmation that the withdrawal of the objection was unconditional.  The plaintiff’s solicitors replied on 27 March 1998, that its former response had merely restated its proprietary rights and was not thereby imposing any additional condition, so the solicitors stated that TDD’s “impression of (the plaintiff’s) objection being withdrawn conditionally is simply incorrect”. 

The plaintiff’s alternative case is that by the letters of 25 and 27 March a contract was reached in performance of which it withdrew its objection lodged under s 10 RWUCO.  It did not simply withdraw its objection, it did so only in consideration of the benefit of the contract.  However, it is worth noting that not even the Chief Executive-in-Council could have agreed under the RUWCO to the contractual terms the plaintiff required.  There is no power under RUWCO which permits the erection of traffic signs.  Traffic signs may only be lawfully erected under the auspices of the RTO with the agreement of the Commissioner for Transport (“CT”) — even though the Chief Executive can direct the CT, generally or specifically, in the performance of his powers or duties under that Ordinance — a lawful fettering of a statutory discretion : s 112 RTO. 

14. The terms of both the agreement and the alternative agreement only required the Government to erect the road signs upon the opening of Kam Pok Road.  There is no provision in either version of the agreement as to whether or when the Government can revoke, amend or temporarily suspend such road signs after they have been erected.  It is the plaintiff’s contention that after the road signs have been erected, the CT (who has the sole responsibility in law for decision-making as to all traffic signs in Hong Kong) is not at liberty to remove them, irrespective of any future material changes in traffic considerations after the date of the contract.  The plaintiff’s case is that the contract obliges the CT, in exercising his powers under the Road Traffic (Traffic Control) Regulations, Cap. 374, to continuously protect the interests of the plaintiff in relation to its own private land for as long as the plaintiff remains the owner of the Boulevard. 

15. The Government proceeded to resume the land.  By its March/April 1998 newsletter to its residents, the plaintiff triumphantly informed them :

“… After much discussion and correspondences over the years with various government departments including the Transport Department, all parties agreed that entry to Fairview Park Boulevard by container vehicle would be prohibited upon the opening of the new highway intercepting the Boulevard. …In the future, our residents will no longer have to share Fairview Park Boulevard with container vehicles …”

16. After significant work for the building of Kan Pok Road had been carried out the plaintiff’s solicitors on 27 April 2002 asked the TDD to give the tentative date of erection of the relevant traffic signs, namely when Kam Pok Road would be completed.  The TDD was particularly reminded of its earlier 1998 agreement.  A reminder was sent to the TDD dated 6 October 2003, which led to the unequivocal confirmation by the TDD (copied to the ACT) dated 17 October 2003 that “The erection of the concerned traffic signs and the opening of the new roads along the drainage channel will be implemented at the same time.” 

17. Because the road surface condition of the Boulevard was deteriorating due to continuing use by heavy trucks and container vehicles, the plaintiff on 23 April 2004 wrote to the TD seeking confirmation that the new road would be completed about mid 2005.  A reply of 29 April 2004 on behalf of the ACT introduced the first inkling that the implementation of the agreement of 1998 might not be as smooth as had been intended. 

“Upon completion of Kam Pok Rd, … I understand that the implementation of 7m vehicle length prohibition on Fairview Park Boulevard is proposed.  Prior to further pursuing the proposal, this Department will seek the view of the trade as soon as possible …”

18. The plaintiff’s solicitors by a letter of 11 May repudiated the suggestion that the agreement was conditional upon the consent of the relevant transport operators and associated industries.  A week later the TD lamely stated that it was not in a position to address the previous letter and indicated that the plaintiff should pursue the matter with “the relevant parties concerned direct”. 

19. After a letter from the plaintiff’s solicitors on 24 May the TD replied on 1 June 2004 :

“… Any traffic measure that has not been implemented would still be a proposed measure and would remain to be a proposal.  It is the normal administrative procedure of Transport Department to seek the view of the affected bodies on new traffic measures prior to implementing them.”

20. After other correspondence on 24 August 2004 the TD wrote to the plaintiff’s solicitors :

“Further to my letter of 13 July 2004 and our teleconversation (Ngo/Lee) on 23 August 2004, please be informed that the meetings with the Goods Vehicle trade had been held, and the trade had no objection to the erection of traffic signs prohibiting vehicles longer than 7m to enter the section of Fairview Park Boulevard.  As such, the proposed traffic signs will be erected as requested and this traffic arrangement will take effect upon the commissioning of Kam Pok Rd.”

21. All seemed well again.  However, the evidence then discloses that with the prospect of Kam Pok Road opening in the next few months, representatives from neighbouring residential development to the north, on both the west and east sides of the new road, complained vociferously about what they saw as the adverse effects for them if the Boulevard would no longer be available (as it had permissively been) for container trucks.  Those trucks, if denied access to the Boulevard because of the two traffic signs, would then have to travel along Kam Pok Road which separates those residential developments of Royal Palms, Palm Springs and Maple Gardens.  During the resumption proposal from March 1997 to the agreement in March 1998 no objection to the proposal to build the new road had been raised by any of the owners of those residential developments.  With the advent of the new road looming large the traffic implications of closing the Boulevard to container trucks now assumed a larger dimension. 

22. After further correspondence from the plaintiff’s solicitors to the TD, at a meeting on 24 March 2005 involving the Owners Association of Fairview Park as well as the Yuen Long District Council, a written document of that date from the TD was tendered which stated :

“… having considered all issues concerned carefully, the government now planned to open Kam Pok Rd at the end of May and erect traffic signs on both sides of Fairview Park Boulevard to ban all long vehicles exceeding 7 metres …”

23. It appeared that another set back to the plaintiff had been avoided. The two traffic signs were erected just prior to April 2005 in accordance with the agreement.  But they were also covered over by the TD so that the information on them created no legal liability for any road user.  To be in force a traffic sign must be “visible and the general appearance and meaning of the sign” must not be materially impaired : s 110 RTO.  The two signs still remain covered. 

24. On 20 June 2005 Mr Man Fu Wan and Mr Man Luk Sing (both with significant connections to the container industry) wrote to the Chairman of the Yuen Long District Council protesting about the likely unveiling of the two traffic signs.  This letter asserted that the affected district bodies had never been consulted by the Government about this traffic arrangement.  This was of course simply incorrect.  Before the agreement was made the District Council had been actively involved in that process.  Then on 28 June 2005 the TD wrote to the plaintiff’s solicitors stating that in accordance with decisions made by the Yuen Long District Council on 23 June 2005 the TD had decided to postpone, until further notice, the commencement of the operation of the two signs, to allow relevant Government Departments to resolve some legal issues and to conduct further consultations.  A few days later the Messrs Man wrote to the TD, this time on behalf of the San Tin Rural Committee, stating that container trucks had used the Boulevard for more than 12 years and requesting that this convenience should be allowed to continue.  Some assertion of a right-of-way was lightly made.  There followed correspondence with the Government in which despite their best efforts, the plaintiff’s repeated enquiries about the operation of the signs were stymied or fobbed off.  The writ then issued. 

25. The container yard operators in the vicinity of the Boulevard continue to use the Boulevard to the torment of the plaintiff which had sought by contract to obtain the result that no container vehicle could either turn onto the new public road from the Boulevard or from the public road onto the Boulevard.  These proceedings are only about whether the plaintiff has an enforceable right in contract — nothing else.  This is not a case (as the plaintiff tried to expand it to become) about whether there is or is not compliance with such existing use rights as may be held by the various container industries in the vicinity of Fairview Park. 

Oral witnesses

26. The plaintiff called two witnesses to give oral testimony.  The defendant, although having filed witness statements from a number of Government officials significantly involved in the events leading up to, during and after the agreement, elected to call no evidence at all at the trial. 

27. Dr Margaret Wong, a director, stated that even by 1998 the Boulevard “was already overburdened” with heavy road traffic.  The plaintiff therefore considered erecting its own traffic signs on its own private land to prohibit entry into the Boulevard by large vehicles.  But the huge disadvantage would be that the enforcement burden in relation to the prohibition would then fall on the plaintiff. 

28. At the junction of Ha San Wai Road and Beer Lane there are a number of container yards.  If the container trucks could not enter into or exit from Beer Lane off the Boulevard then they were practically landlocked, having no alternative but to use the “very narrow” Ha San Wai Road.  She stated that in a defiant attempt to protect its private property that in early February 2007, in accordance with the wishes of the Fairview Park residents, the plaintiff erected a barrier off the Boulevard on its land at Beer Lane which prevented container trucks from exiting the Lane into the Boulevard.  Within no time at all the barrier was ripped out and destroyed “by villagers”.  There was some real commotion and 50 police officers had to attend the scene to restore law and order.  Around this time too a young person was fatally injured on the Boulevard after impact by a container truck.  Emotions were running very high for all concerned.  Dr Wong said the plaintiff felt powerless and that the Government’s conduct was inexcusable in its failure to protect the sanctity of the plaintiff’s private property.  She said it was “common sense” that the Government was bound by the agreement.  However, she accepted that at no stage until very recently had the plaintiff’s solicitors ever advised the plaintiff about the doctrine of ultra vires in relation to contracts with the Government. 

29. Mr Tse Ka Hoo worked for the plaintiff as a senior manager.  He confirmed that open storage and container parking were significant uses of the land in the vicinity of the Boulevard.  Some containers were destined for the border crossing at Lok Ma Chau.  With the 2007 opening of the new Kwong Sham Western Highway to the Mainland this was likely to increase traffic flows to the south and west of the Boulevard.  Castle Peak Road is a single lane carriageway in each direction, with junctions with other roads commonly controlled by traffic lights.  If the Boulevard was closed to lengthy vehicles then necessarily there would be a considerable increase in the usage of Castle Peak Road.  He confirmed that to the north and east of Beer House Lane are extensive storage areas regularly frequented by container trucks.  That Lane does not allow two lorries to pass side by side, without one pulling over to the side.  He stated that Ha San Wai Road was a one lane road with some laybys, such that if two heavy vehicles crossed in opposing directions it could be “quite dangerous”.  Even Beer Lane is quite narrow only just wider than one heavy vehicle.  While Dr Wong accepted that container trucks had been a fact of life since the mid-1980s she asserted that the intensity and scale of their usage was massively beyond the position at that time.  She acknowledged that the specific intention of the plaintiff was that by the agreement the Government would be locked into assisting in the enforcement of prohibiting container trucks into the Boulevard. 

The pleaded causes of action and defences

30. The plaintiff claims (i) a Declaration that there was a binding agreement between the Government and the plaintiff in terms of the agreement or the alternative agreement; and (ii) an order for specific performance of the agreement or the alternative agreement.  The only relief claimed by the plaintiff is contractual and private law relief.  There is no prayer for any public law relief.  Indeed, it would, as a general rule, be contrary to public policy and an abuse of the process of the court for a plaintiff complaining of an infringement of public law rights to seek redress by ordinary action : O’Reilly v. Mackman [1983] AC 237, 285D-E per Lord Diplock  . 

31. The major defence pleaded is that the CT’s discretion to cause or permit to be erected or placed on or near any road a traffic sign, is conferred upon him by regulation 3(1) Road Traffic (Traffic Control) Regulations (Cap. 374G) (“the Regulations”).  This discretion is given for him to regulate road traffic and the use of roads.  Hence, any agreement prescribing how to exercise (or proscribing) this discretion is ultra vires (beyond lawful authority or power).  The argument continues that the CT must be able to exercise his statutory discretion at all times, before or after the completion of Kam Pok Road.  To be constrained by contract irregardless of other circumstances, constitutes an unlawful fetter of this discretion, and is therefore ultra vires and void.  The defendant also says there was in any event no contract only an “honourable assurance” : In re Staines Urban District Council’s Agreement [1969] 1 Ch 10, 19 C-D.

32. In the plaintiff’s reply, it is said that the Government was estopped from denying the binding nature of the agreement or the alternative agreement.

Legal Regulation of Traffic : Traffic Signs : Private Roads

33. In a densely populated and compact society like Hong Kong the importance of efficient and rationed traffic flows is self-evident.  The unconstricted circulation of traffic to the economy is as vital as the unconstricted circulation of blood to the heart. 

34. Under s 11(a) RTO the Secretary for the Environment, Transport and Works is empowered in wide terms to make regulations to provide for the “…erection, placing, operation, maintenance, alteration and removal of permanent, temporary and variable traffic signs …”. Under s 11(aa) the regulations made can also provide for the imposing “whether by the Commissioner or otherwise, of requirements on owners of private roads” including the erection and removal of traffic signs “on or near such roads”.  By s 11(ab) regulations can be made permitting the CT to recover from “the owner of a private road” the costs, as a civil debt, of any steps under s 11(a).  Other sub-sections further widen the regulation-making powers in relation to the regulation of traffic by traffic signs. 

35. Part XIII of the Ordinance “Private Roads” contains six sections.  It made specific provision in 1988 for the first time, for the application of traffic laws to private roads.  It was introduced as a consequence of the decision in Attorney General v. Ng Kwan [1987] 1 HKC 183 (CA) where the issue of what constituted a private road was closely considered.  Section 118 RTO in that Part provides :  

“(1) Subject to any regulations made in pursuance of subsection (2), all regulations made under this Ordinance (except section 12) shall apply to private roads as they apply to roads and, for that purpose —

(a)   the other provisions of this Ordinance which relate, in any way, to such regulations which apply to private roads; and

(b)   the provisions of any other Ordinance which relate, in any way, to such regulations which apply to private roads or to the provisions referred to in paragraph (a),

shall apply accordingly.”

Section 118(2)(b) RTO states that any power to make regulation includes the power to “modify or qualify the application to private roads of all or any regulations made in pursuance of that power”.

36. Regulation 3 Road Traffic (Traffic Control) Regulations, Cap. 374 provides :

“(1) The Commissioner may cause or, by permit in writing (which permit shall be subject to such conditions as the Commissioner thinks fit and are specified therein), permit to be erected or placed on or near any road a traffic sign, and in the case of a prescribed traffic sign the meaning of that sign shall be in accordance with its content and the note relating to the Figure of that sign in Schedule 1, 3 or 4.

(2)   The Commissioner may be the erection or placing of an appropriate sign revoke, amend or temporarily suspend the operation of any traffic sign erected or placed under subregulation (1).

(3)   The Commissioner of Police may be the erection or placing of an appropriate sign amend or suspend the operation of any traffic sign erected or placed under subregulation (1) for a period not exceeding 72 hours.”

It should be noted that regulation 3(1) applies to “any road” while regulation 3(2) expressly provides a discretion for the CT having caused or permitted the erection of a traffic sign to revoke it completely.

37. Regulation 3A(1) provides additional discretion in relation to private roads :

“(1) The Commissioner may, by notice in the Gazette, declare that such traffic signs as are specified in that notice may be erected or placed on or near any private road, by or with the permission in writing of the owner of that road, subject to such conditions as are specified in that notice.” 

38. By regulation 15B(1) :

“(1)	The Commissioner may, by notice in the English and Chinese languages given in accordance with subregulation (3) or (4) to the owner of a private road, require the owner to —
	(a)	place or cause to be placed on or near that road a traffic sign or road marking specified in that notice; or
	(b)	remove or cause to be removed from a place on or near that road a traffic sign or road marking specified in that notice, subject to such conditions as are specified in that notice, not later than one month, or such longer period as is specified in that notice, after such notice is so given.”

Therefore reg 3 empowers the CT to erect or cause the erection of a sign on any road.  Reg 3A is a process in which the CT authorises someone else to erect a sign on a private road.  Reg 15B is a compulsory process if all else fails.

39. Figure No. 132 in Schedule 1 to the Road Traffic (Traffic Control) Regulations provides for the design of the two relevant signs.  Finally, and not unimportantly, by regulation 59 it is a criminal offence for a driver of a vehicle on a road to fail to comply with the requirement of a traffic sign.  Regulation 61 provides that any person convicted “is liable on first conviction to a fine of $5,000 and imprisonment for 3 months and on second or subsequent conviction to a fine of $10,000 and imprisonment for 6 months”.

Contract: Defence of no intention to create legal relations

40. The Government contended that there was no contract in place as there was no intention to create legal relations.  It was expressly accepted though that the Government officials had ostensible authority to enter such an agreement.

41. The plaintiff only withdrew the objection to the resumption of its land in exchange for the written agreement of the Government to erect the two signs.  Its side was represented by solicitors and the Government side by very senior officials with considerable powers and responsibilities.  For a contract to exist there must be both (1) an agreement on essentials with sufficient certainly to be enforceable and (2) an intention to create legal relations.  The correct approach is to take the requirements in that order and to recognise their potential interrelationship.  Both requirements are judged objectively: Baird Textiles Holdings Ltd v. Marks & Spencer plc [2002] 1 All ER (Comm) 737, 756 e–j (CA) per Mance LJ (now Lord Mance).  Here there was an express written agreement.  It was sufficiently certain; the erection of two particular traffic signs at designated places upon a defined event.

“If there is no sufficient agreement on essentials, that is on any view fundamental, and it may well also reflect an absence of intention to create legal relations.” per Mance LJ at 757b

There was no express term as to how long the signs had to be erected — it was an obligation of indefinite duration.

42. It is the plaintiff’s case that the agreement would therefore remain in force for as long as the plaintiff owned the Boulevard.  That is, it was in force, perpetual, as long as the status of the plaintiff enured, irrespective of any other material change of circumstance.  In short, the public discretion was to be trapped in a private law time warp.  “In the field of public law the time-frame will often be decisive” : per Callaway JA in L’Huillier v. State of Victoria [1996] 2 VR 465, 479 (CA).  However, the implied term that the plaintiff contends for, does not meet the test in BP Refinery (Westernport) Pty Limited v. President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266, 283 (PC)

“In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied : (1) it must be reasonable and equitable : (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.:

The best it could have bargained for (on its own alternative case) was that as a contract of indefinite duration it existed subject to reasonable notice of termination : Chitty on Contracts (29^th ed 2004) vol. 1 para. 13-026.  At no stage in the pre-contractual negotiations did anyone for either side specifically refer to reg 3 in the mutual correspondence.

43. The intention to create legal relations was clear.  The parties both wanted a formal agreement, one to allow the statutory resumption to move speedily forward in the absence of subsisting opposition; the other to secure regulation under the criminal law of the entry points to its private road so as to exclude container trucks.  A contract existed in fact.

General power of the Government to enter contracts

44. The Government never needs to have statutory authority to enter into any contract.  By the Basic Law it is a special juridical person possessed therefore with both prerogative and common law powers apart from any statutory powers that may be conferred.  See : The Banker’s Case in Cam Scacc (1700) Skinner 602, 90 ER 270; Philip Joseph “The Crown as a legal concept” [1993] NZLJ 179, 183; BV Harris The “Third Source” of Authority for Government Action (1992) 108 LQR 626, 645; which also demonstrate that while the Government has full contractual capacity this cannot entitle it to make contracts incompatible with law. 

45. A.W. Bradley and K.D. Ewing “Constitutional and Administrative Law” (14^th ed : 2007) at p.801 emphasise that : “The government, formerly the monarch, has long met many of its needs by making contracts in the market.”   In some jurisdictions the purposes for which Government contracts are used have considerably expanded, with privatisation and in public-private partnerships and financial initiatives.  In relation to supplies and services :  

“The techniques of public administration have been refashioned in the mould of the private commercial sector … Contract has replaced command and control as the paradigin of regulation.” — M Hunt in M Taggart (ed) The Province of Administrative Law page 21. 

46. The full contractual capacity of the Government is though limited by the general law of Hong Kong.  The Government too is bound by the law — that is what the Rule of Law means.  Any incompatibility will usually arise from an irreconcilable clash with a statutory power, with the outcome that the contract becomes void as being ultra vires, but it can also result where a contract is violative of prerogative power or the common law powers and functions of the Government. 

47. The Government is bound by constitutional law not to enter a contract which is incompatible with the future exercise of public law powers.  Such a contract would impermissibly constrain or fetter valid public law decision-making.  It would bind now for the future : so that it amounted to an unlawful predetermination of the outcome, in relation to factors that must be genuinely evaluated at the very time whenever such a  decision must properly be made.  The Government official in law would have wrongly abdicated his statutory duties by a prior agreement.  A contractual provision that divests the Government official from exercising a public law discretion in the future, irregardless of the circumstances, is incompatible with genuine commitment to proper statutory purpose and is therefore void.  The Government official would have wrongly and unwittingly sacrificed the public interest, as the contract would sanction a breach of the irrefragable duty to always exercise a power or discretion in accordance with the law. 

48. The Government cannot by contract bind its future freedom to govern through the use of executive power any more that it can agree by contract not to legislate in the future in a manner which may thwart the contract : Comalco Power (New Zealand) Ltd v. Attorney General [2003] NZAR 1, 12–15 per Heron J.   

49. Under the Rule of Law there cannot be a valid futures contract for the guaranteed outcome of the exercise of statutory powers or duties, whatever may happen.  While past acts and omissions may be the subject of lawful contract or compromise by the Government, actuated by the public interest, the future cannot be so purchased.  The liberty of the Government and its public officials to re-evaluate and to keep an open mind in relation to the exercise of powers and discretions “is inherent in our constitutional form of government” : Hughes v. Department of Health and Social Security [1985] AC 776, 788 (HL) per Lord Diplock. 

50. Any rule which permitted the Government to exempt itself from contractual obligations through unilateral act would impede rather than assist the proper and efficient administration of public affairs.  See: Nicholas Seddon Government Contracts: Federal, State and Local (2 ed 1999) pp.167–191; ACL Davies Accountability : A Public Law Analysis of Government by Contract (2001 OUP) pp.9–16; Peter Hogg and Patrick Monahan Liability of the Crown (3 ed 2000) pp.209–236.  The effect of such a rule would be to place the Government at a significant competitive disadvantage in relation to private enterprise, since the Government would be prevented from effectively binding itself as to its future activity or performance.  The law does not produce that result.  Since the original decision to enter into a contract is entirely voluntary, it is clearly a benefit rather than a hindrance for the Government to have the legal capacity to effectively bind itself in the future.  In its private sphere it has every such right.  Even in the public law sphere some discretions may be exercised by the making of a contract.  In that situation the discretion is not fettered by the contract but duly exercised when the contract is made.  For it to be otherwise would deny to the public sector (and to society generally) a legal capacity which is enjoyed by the private sector and which would benefit society as a whole.

General contractual liability of the Government

51. The Government (just like a statutory corporation, company or person) cannot avoid its contractual responsibilities by claiming that a contract it has entered has turned out to be “an imprudent one” where, for example, on second thoughts the agreed price for services is now thought to be “much too large — and that it might have been contracted for at a far lower rate of remuneration” : Attorney General v. Lindegren (1819) 6 Price 287, 303.  Richards LCB emphasised at 304 :

“Undoubtedly on principles of public policy, it would not be right to disturb contracts made by the public with persons in the situation of the defendant [who was contracted to procure in modern day Latvia critical supplies for the British Navy— supplies for which the French Navy were actively competing.]  Public confidence, in the dealings of the Government with persons in the character of this defendant, is of the first importance, and should be regarded above all other considerations; and that confidence ought not to be shaken in consequence of the result of any subsequent calculation and inquiry by the Commissioners of a public board, shewing that their contract has been injurious to the public merely on the ground of too great liberality in remunerating the service required and performed.”

52. A claim by the Government or a corporation that a contract it had entered was now financial terms “a bad one” provides no basis for holding it to be ultra vires : Municipal Mutual Insurance (Limited) v. Pontefract Corporation (1917) 33 TLR 234, 235.  In The Power Co. Ltd v. Gore District Council [1997] 1 NZLR 537 (CA) a 1927 contract in which a company agreed to supply electricity to the borough at the fixed rate of one penny per unit “for all time hereafter” was held to remain enforceable. The Government benefits no less than private citizens from the principle that its contractual undertakings should be reliable.

53. It is important to also emphasise that Government contracts carry a significant difference from other contracts.  The officials or civil servants entering such contracts for and on behalf of the Government, stand in a very different position from a private sector party to the contract, in that the officials and civil servants have by contrast, no private or individual interest in the transaction, only the public interest of managing and superintending the business of Government. 

54. When the Government enters a contract it may do so in a private capacity or under public law capacity.  Ever since Hang Wah Chong Investment Co. Ltd v. Attorney General [1981] HKLR 336 (PC) it has been authoritatively established that the Government acts in its private capacity as landlord in concluding Government leases.  In such case the Government acts as landlord, in its private capacity, exercising commercial functions.  Such contracts are ineluctably binding on the Government.  So it follows that a decision by the Director of Land to refuse to modify the terms of a Government lease under certain conditions is insusceptible of judicial review.  The Director in that landlord context is not exercising a public function constrained by public law.  The dichotomy between private and public law functions is crucial.  The present plaintiff (using its earlier name) already had the experience of wrongly seeking judicial review of such a private law decision : Canadian Overseas Development Co. Ltd v. Attorney General [1991] 1 HKC 288, 294 I — 295A (CA) per Bokhary JA .  See now SH Bailey “Judicial Review of Contracting Decisions” [2007] PL 444, 463.  

Executive necessity : A narrow exemption from liability under contract

55. In extreme circumstances the Government, always acting by constitutional entitlement and imperative for the exclusive benefit of the Region or the State, retains, unlike the private sector, a supervening power to be unshackled from threatening contractual obligations.  This exceptional power is self-referential of the very existence of the Region or State, to protect themselves.  The exigencies which activate this reserve power need not be delimited and will vary with time and circumstance.  In Rederiaktiebolaget Amphitrite v. The King [1921] 3 KB 500 Rowlatt J, without citation of authority enunciated this general principle, although in such open-ended terms that it was capable of almost limitless expansion and of abuse.  In Amphitrite a Swedish ship was not permitted to leave a British port, notwithstanding a formal communication from the British Legation to Sweden (a neutral country) that the vessel would be permitted to return if it first shipped approved goods to England.  The judge at 503 appears to have concluded that no contract existed because :

“… it is not competent for the Government to fetter its future executive action, which must necessarily be determined by the needs of the community when the question arises.”

56. However, that general statement must be conditioned by the other statements in the judgment namely that such a contract must not limit future action in matters relating to safety and the “welfare of the State”.  

Rowlatt J acknowledged that :

“No doubt the Government can bind itself through its officers by a commercial contract, and if it does so it must perform it like anybody else or pay damage for the breach.  But this was not a commercial contract …”

57. That distinction is therefore fundamental to that judgment — but it is a very elusive differentiation.  While contracts of procurement for the supply of goods and services for the daily operation of the HKSAR can be easily understood as a general class of commercial contract, the very commitment of any contract, necessarily causes some limitation of the freedom of action of the parties to it.  The ‘commercial’ character of a contract cannot be a valid bright line test. 

58. Amphitrite was a case of national security.  The control over the entry and departure of ships belonging to neutral States, was plainly of crucial importance.  The principle derivable from it should be confined to extreme situations consonant with the demonstrable necessity to protect or guarantee the critical working of the Region or the State, imperilled as to their welfare or security.  In L’Huillier v. State of Victoria [1996] 2 VR 465, 479 (CA) Callaway JA (Charles JA concurring) roundly rejected a submission that the Amphitrite doctrine is unsound in principle or that it was only a rule of construction.  A court is entitled to refuse to enforce a public sector contract that is “contrary to the national interest” or to the interest of the Region : Philip Joseph Constitutional and Administrative Law in New Zealand (2 ed 2003) at p.805.  The plaintiff’s counsel was correct in distinguishing Amphitrite — the executive necessity doctrine has no application here.  The proper approach narrowly confines the Amphitrite doctrine of executive necessity to scenarios when the Region or State is at risk.  Ordinary commercial misjudgment is therefore well outside the executive necessity exception.

Implied Term in Government Contracts

59. Apart from the executive necessity doctrine and the ultra vires doctrine there is a third facet to a wider principle that synthesises all three components.  All Government contracts embody an implied term that the Government cannot disable itself from the future exercise of powers and duties imposed upon it in its executive capacity by statute.  Mason J in Ansett Transport Industries (Operations) Pty Ltd v The Commonwealth of Australia (1977) 139 CLR 54, 78 adopted this proposition as consonant with fundamental public power principles.  In Commissioner of Crown Lands v. Page [1960] 2 QB 274, 287 (CA) Devlin LJ said :

“When the Crown, or any other person, is entrusted, whether by virtue of the prerogative or by statute, with discretionary powers to be exercised for the public good, it does not, when making a private contract in general terms, undertake (and it may be that it could not even with the use of specific language validly undertake) to fetter itself in the use of those powers, and in the exercise of its discretion.”

There a lease which would normally contain an implied covenant for quiet enjoyment had to give way to the supervening exigency of the governmental need to requisition land.  This principle of law contracts also trumps an attempt by a private contractor to imply a term into a contract which is incompatible with a statutory power: Board of Trade v. Temperly Steam Shipping Co. Ltd (1926) 26 Ll L Rep 76, 78 per Roche J, affd (1927) 27 Ll L Rep 230 (CA); William Cory and Son Ltd v. London Corporation [1951] 2 KB 476.  In C Czarnikow Ltd v. Centrala Handlu Zagranicznegs Rolimpex [1979] AC 351, 364B (HC) Lord Wilberforce accepted that this ability of the Government to extricate itself was concomitant with an understanding of the dynamic of executive power and was very much a part of “constitutional law”. 

Ultra vires: The incompatibility test : Origin and Development

60. In Ansett Transport Industries (Operation) Pty Ltd v. The Commonwealth of Australia (1977) 139 CLR 54, 74 (HCA)Mason J (as he then was) said :

“There is a general principle of law that a public authority cannot preclude itself from exercising important discretionary powers or performing public duties by incompatible contractual or other undertakings.” 

The quest must begin with the language of the statutory power or duty as much as the character of the particular subject matter.

61. As Government must often operate by and under contracts what is required is an approach that permits commerce but did not also stultify the exercise of intersecting public power under statute.  In The King v. The Inhabitants of Leake (1833) 5 B & Ad 469 the King’s Bench (Denman CJ and Parke J; Littledale J dissenting) concluded that certain Commissioners empowered by statute to acquire and hold land for general drainage purposes could dedicate a bank at the side of a main drain as a highway.  But the carrying out of the dedication of highway would mean that other powers given under the Act for drainage purposes — in particular the power to make cuts through the bank communicating with the main drain — would be incapable of being exercised.  However, as the public had enjoyed the road for many years and no drainage purpose had yet required the construction of cuts or other works on the bank, the majority took the view that such a dedication was not inconsistent with the objects of the Act — namely to secure drainage of the district. 

62. Parke J (later Lord Wenslydale) at 478 identified the general principle of incompatibility which has become the test for evaluating the success or otherwise of the reconciliation between the conduct or agreement and the statutory power or duty :  

“If the land were vested by the Act of Parliament in commissioners, so that they were thereby bound to use it for some special purpose, incompatible with its public use as a highway, I should have thought that such trustees would have been incapable in point of law, to make a dedication of it; but if such use by the public be not incompatible with the objects prescribed by the Act, then I think it clear that the commissioners have that power.”

63. Denman CJ concurring recognized at 487 that the Commissioners were entitled to use the banks for “any purpose whatever not inconsistent with the trust of draining the district”.  While the “incompatibility” test had been identified “inconsistency” was also interchangeably employed. 

64. The succeeding early cases tended to consider the rights of railway companies and their innovative use of land.  However, Paterson v. Provost of St Andrews (1881) 6 App Cas 833 concerned the home of golf.  A proposal to create a road along the outside boundary of the golf links was objected to on the basis that it would interfere with the famous golf links.  The defence was that the proposed road was the proper exercise of the powers of administration and management over the links and expert evidence confirmed that it would not interfere : “there is no substantial interference with that obligation, and that the road may be reconciled with its due observance”, per Lord Selborne LC at 843.  It was argued that the proposal was “beyond the power” of the town council to create the road, but Lord Blackburn at 848 held that the proposal did not interfere with the primary purposes for which the lands are held, namely, golfing and recreation, “in which case I [would] agree that they should not be done”.  Lord Watson accepted at 851-852 held that the town council could not grant a right of law to the public over a portion of the golf course “because they would have vested in others a right which might become inconsistent with the rights of the inhabitants at some future time”.  This test of whether a contract or an agreement “might become inconsistent” has proved to be too austere and is no longer in vogue. 

65. Two years later in Ayr Harbour Trustees v. Oswald (1883) 8 App Cas 623, harbour trustees constituted by statute for the improvement and management of a public harbour were empowered to acquire certain land compulsorily and use it for the purposes of an Act.  The trustees, however, were prepared to take a conveyance of the land subject to a restriction on their use of it — namely that the vendor’s right of access from his remaining land to the harbour should not be interfered with.  (If the trustees could validly restrict their user of the land in this way, the vendor would sustain less damage by the enforced sale of part of his land and so would be entitled to claim less compensation.)   However, the vendor raised an action for a declarator in the Scottish courts that the trustees, despite a restriction in the conveyance, would have unrestricted rights of user of the land conveyed.  His action was upheld by the House of Lords on the grounds — in the words of Lord Blackburn at 634 that :

“… where the legislature confer powers on any body to take lands compulsorily for a particular purpose, it is on the ground that the using of that land for that purpose will be for the public good … [Such] powers … are intrusted to them and their successors to be used for the furtherance of that object which the legislature has thought sufficiently for the public good to justify it in intrusting them with such powers; and consequently … a contract purporting to bind them and their successors not to use those powers is void.”

66. The whole object in passing the Act was to bring about a modernization of the layout of the harbour and an improvement in its facilities; and yet, before the trustees even got down to planning the operation, indeed in the very conveyance granting them the land necessary for improvement and modernization, they were prepared to bind themselves not to alter the then layout of the harbour so radically as to interfere with a particular access to it from this neighbouring land.  As the efficacy of the Act would be frustrated by such an undertaking the House of Lords held that the trustees had no statutory power to enter into a covenant of this nature.  This was an obvious outcome but from this decision there emerged the erroneous and over-general proposition that it is not possible to contract to use statutory power.  However, Lord Fitzgerald concurring, more narrowly stated in Ayr Harbour Trustees at 640 : “they have no power in law to preclude themselves or their successors from the exercise of their statutable powers over it, as should be from time to time required for the purposes of the harbour”.  This refinement is much more illustrative of the real modern principle.  

67. In Stourcliffe Estates Company Limited v. Corporation of Bournemouth [1910] 2 Ch 12 (Ch D & CA) Parker J (later Lord Parker of Waddington) held that where a corporation purchases land by agreement for purposes authorised by an Act, that it is not ultra vires for the corporation to enter into covenants with the vendor restricting the erection of buildings upon the land purchased (which it could erect pursuant to other statutory powers given to it for the public benefit), provided that the restrictions do not prevent the primary user of the land for the particular purposes for which it was acquired. 

68. The Court of Appeal affirmed the decision.  It follows that although an ancilliary purpose of legislation may be prevented the primary purpose remained intact, so that only an inconsistency existed but not such an incompatibility as to qualitatively render the agreement ultra vires. 

69. The illustration of a philanthropist agreeing to give land to the Government for a public park on the express condition that no alcohol should ever be sold in the park, is in point.  Upon acceptance of that agreement the contract conditions are binding and the contract would not be ultra vires because the general scheme for the sale of alcohol under primary legislation or secondary regulations would have otherwise permitted, on a discretionary basis, the sale of alcohol there.  The contract or gift does not conflict with that legislation, it is compatible with it.

70. So the restrictive covenant in Stourcliffe and the easement in South Eastern Rly Co. v. Cooper [1924] 1 Ch 211 (CA) were found to be compatible.  Only agreements that have “a more fundamental disabling effect” than that of mere inconsistency are invalid as being ultra vires : SH Bailey Cases, Materials and Commentary on Administrative Law (4 ed 2005) p.496. 

“If the rule were that no contract could stand if it were hypothetically to be a fetter on another of the body’s powers then very few contracts could subsist.  This would be disadvantageous to the public body as well as the contractor, since the former needs to make contracts where it might be acting qua an ordinary commercial undertaking,” : Paul Craig “Administrative Law”  (5 ed 2003) p 541 

The early language of the decisions was suggestive of a stricter test, to the effect that whenever a statutory power and a contract touched upon the same subject-matter the latter would inevitably be void.  Decisions of the House of Lords relaxing the original approach were to follow. 

71. In Birkdale District Electricity Supply Co. Ltd v. Southport Corporation [1926] AC 355 the House of Lords refused to hold ultra vires a contract by Birkdale Electricity Supply Co. Ltd that it would not increase the price for electricity higher than that charged by Southport Corporation.  The contract was held to be not incompatible with a statutory power to charge what it wished up to a certain maximum.  The Ayr Harbour Trustees case was distinguished.  The Earl of Birkenhead at 363 considered that the terms of the deed demonstrated “rather an enforcement of the company’s powers than a denudation of them”.  Lord Sumner at 372 emphasised :

“… there may be cases where the question of competence to contract does not depend on a proved incompatibility between the statutory purposes and the user, which is granted or renounced, but is established by the very nature of the grants or the contract itself.  It was not proved in the Ayr case that there was any actual incompatibility between the general purposes of the undertaking and the arrangement by which the particular proprietor was to be spared a particular interference with the amenities or the advantages of his back land.  I think the case was supposed to speak for itself and that, in effect, the trustees were held to have renounced a part of their statutory birth-right.”

72. This less austere approach was firmly endorsed in British Transport Commission v. Westmorland County Council [1958] AC 126 (HL).  Viscount Simonds, giving the leading judgment, endorsed the incompatibility test of Inhabitants of Leake, noting at 142 that the incompatibility test is supported “by its inherent reasonableness”.  Incompatibility was held to be a question of fact : at 143.  Viscount Simonds at 144 emphasised :

“But, after all, we live in a world in which our actions are constantly guided by a consideration of reasonable probabilities of risks that can reasonably be foreseen and guarded against, and by a disregard of events of which, even if we think of them as possible, we can fairly say that they are not at all likely to happen.  And it is, in my opinion, by such considerations as these, imprecise though they may be, that a tribunal of fact must be guided in determining whether a proposed user of land will interfere with the statutory purpose for which it was acquired.”

The other Law Lords concurred in substantive judgments, which highlighted the need for pragmatism, so that the “possibility” of incompatibility was insufficient to render in what should be demonstrated was that the agreement was incompatible by “the probable future requirements” of the person upon whom statutory powers or duties was conferred.  See : Lord Morton of Henryton at 148, Lord Radcliffe at 155, Lord Cohen at 160, Lord Keith of Avonholm at 166.  In Minister of Energy v. Petrocorp Exploration Ltd [1991] 1 NZLR 641, 652 (PC), Lord Bridge of Harwich adopted the incompatibility test. 

73. Wade and Forsyth “Administrative Law” (9^th ed. 2004) at 331 observe :

“The important question is whether there is incompatibility between the purposes of the statutory powers and the purposes for which the contract is made.  In cases where there is no commercial element the court is normally ready to condemn any restriction on a public authority’s freedom to act in the public interest.”

So an attempt by a Minister of the Crown to bind himself by contract in advance as to how he would implement a statute was an unlawful fetter by anticipatory action.  Lord Wilberforce in Cudgen Rutile (No. 2) Pty Ltd v. Chalk [1975] AC 520, 533 (PC) said :

“From this in turn it must follow that the freedom of the Minister or officer of the Crown responsible for implementing the statute to make his decisions, or use his discretions, cannot validly be fettered by anticipatory action; and if the Minister or officer purports to do this, by contractually fettering himself in advance, his action in doing so exceeds his statutory powers.”

74. The Privy Council expressly approved the decision in Watson’s Bay and South Shore Ferry Co. Ltd v. Whitfield (1919) 27 CLR 268, 277 (HCA).  There the Minister for Lands entered into a contract that, after a contemplated revocation of the dedication of certain land as a public park, the land should then be offered for sale by public auction.  Isaacs, Gavan Duffy and Rich JJ said :

“First, taken as a whole it was an attempt to fetter in advance the discretion and the public duty of the Minister of Lands for the time being.  The very ground of the claim is that the Minister was bound by the contract to exercise his statutory power, not as the expediency of doing so presented itself to him at the moment of exercise, but as predetermined by the contract.” 

Almost by definition, core discretionary powers are ambulatory and therefore must be exercised and re-exercised by reference to the public interest as the circumstances require.

75. In Ansett Transport Industries (Operations) Pty Limited v. The Commonwealth of Australia (1977) 139 CLR 54 (HCA) the Commonwealth between 1952 and 1972 entered into 5 contracts with Ansett airline, which contained a recital that “one of the objects of the parties … is to secure and maintain a position in which there are two, and not more than two, operators of trunk route airline services …”.  The agreements were approved by a statute.  In 1977 the Commonwealth proposed to grant permits to other persons to import aircraft (under The Customs (Prohibited Imports) Regulations) for use on trunk routes.  Ansett sued the Commonwealth claiming declarations and injunctions to prevent threatened breaches of the contracts.  The majority of the High Court of Australia (Gibbs, Mason and Murphy JJ; Barwick CJ and Aickin J dissenting) held that the grant of permits under the Regulations would not constitute a breach of any term of the contracts.  Because the contracts had been specifically approved by later statute Barwick CJ at 61 Gibbs J at 62 and Aickin J at 114 concluded that the contracts would not constitute an invalid fetter on the discretionary power of the Secretary of the Department of Transport who exercised the powers conferred by the Customs (Prohibited Imports) Regulations.  However, Mason J (as he then was) at 74–75 identified the tensions and the correct approach to the resolution of the general issue :

“Public confidence in government dealings and contracts would be greatly disturbed if all contracts which affect public welfare or fetter future executive action were held not to be binding on the government or on public authorities.  And it would be detrimental to the public interest to deny to the government or a public authority power to enter a valid contract merely because the contract affects the public welfare.  Yet on the other hand the public interest requires that neither the government nor a public authority can by a contract disable itself or its officer from performing a statutory duty or from exercising a discretionary power conferred by or under a statute by binding itself or its officer not to perform the duty or to exercise the discretion in a particular way in the future.” 

The pre-eminent responsibility of the Government is to improve the common weal : to exercise power for the public good.  The exercise of Government power of the type which requires a continuous reappraisal of the circumstances, cannot be stultified by a cloying contract as to its fixed future use.  It would unconstitutionally surrender the power of the relevant Government official to the vicissitudes of a fortuneteller.  It would subvert public law power. 

76. In ABC Containerline NV v. New Zealand Wool Board [1980] 1 NZLR 372, 383 Davison CJ considered the exercise of a statutory power which he held permitted the making of an overtly commercial arrangement in which the Wool Board could for some years contract for all its product to be exported by a certain shipping line.  This was found to be completely in accord with the discharge of the Board’s statutory functions and therefore a legitimate, compatible exercise of them.  The making of the contract there was a valid exercise of the general power; rather than a fetter upon it.  The relevant legislation easily anticipated that such a contract would be made — in fact it would have been counterproductive to the public interest to have not done so. 

77. In many cases a commercial contract will intersect no discretionary public law implications.  But where they do collide the character of the underlying law is decisive.  What must be determinative is the character of the discretion, derived from its purpose under the executive and legislative contexts in which the contract was to operate : The Power Co. Ltd v. Gore District Council [1997] 1 NZLR 537, 548 (CA).  Whether a contract is ‘commercial’ is an unimportant label.  The issue is whether the agreement, contract or representation (for the purposes of estoppel) limits the due exercise of the statutory power so as to prevent the decision-maker from fulfilling his public duty.  Since contracts intentionally fetter freedom of action, difficult questions of degree may arise in determining how far for a future commitment may be lawful.

78. In The Power Co. Ltd v. Gore District Council [1997] 1 NZLR 537 (CA) the facts showed that 70 years earlier in consideration of the Council transferring its electricity reticulation assets to the predecessor of the power company, the company would supply electricity to the borough at the fixed rate of one penny per unit “for all time hereafter”.  The energy company argued that its statutory predecessor had acted ultra vires in entering the contract and sought a declaration that the company’s notice of termination of the old contract was valid.  The Court of Appeal (Richardson P, McKay, Henry, Keith and Blanchard JJ) rejected the ultra vires argument and upheld the enforceability of the contract.  The argument was that its predecessor, the Southland Electric Power Board, had to exercise its statutory powers for the public good, but that regardless of any change in circumstances which might make supply at the fixed charge inappropriate it had disabled itself and its successors from exercising their discretion in relation to proper charges for the council.  The very similar decision in  Birkdale District Electricity Suppply Co. Ltd v. Southport Corporation [1926] AC 355 (HL) was applied, the Court acknowledging the reality that public bodies would often need to enter into long-term contracts in order to fulfil their core public purposes.  The implied or express conferral of broad contractual powers and the creation of contracts under those powers will be lawful even if sometimes they preclude the exercise of certain other statutory powers in relation to the same subject matter :

“An examination of the cases indicates that that preventive consequence is often allowed.  Cases where contracts of public authorities have been struck down appear to be confined to the exercise of major, commonly coercive, powers, which completely or substantially disable the public authority from the further exercise of those significant powers.  They are truly cases of a sale of “part of the birthright” of the public authority.  They commonly involve, for example, undertakings not to exercise statutory powers to take land central to the function of the body, or to make bylaws in an important area of activity..”.  The Power Co. Ltd. v Gore District Council [1997] 1 NZLR 537, 548 (CA)

79. But it is plainly crucial that the Government is empowered to generally enter contracts.  The critical issue, which may be a difficult question of fact and degree is to identify the extent to which the future commitment under the contract comports with the underlying statutory purpose for the conferral of the power or duty.  Where a statutory duty is expressed in imperative language, a contract that intersects it, is even more likely to be incompatible with it : William Cory & Son Ltd v. London Corporation [1951] 2 KB 476, 484 (CA) per Lord Asquith of Bishopstone.

Unlawful fettering of public law duties by an agreement

80. Wade and Forsyth Administrative Law” (9 ed 2004) p. 330 referring to Denman Ltd v. Westminster Corporation [1906] 1 Ch 464, 476 state :

“The general principle is the same : an authority may not by contract fetter itself so as to disable itself from exercising its discretion as required by law.  Its paramount duty is to preserve its own freedom to decide in every case as the public interest requires at the time.” 

81. The principle has been consistently adopted.  Newcombe J in R. v. Dominion of Canada Postage Stamp Vending Co. [1930] SCR 500, 506 (SCC) stated :

“A Minister cannot, by agreement, deprive himself of a power which is committed to him to be exercised from time to time as occasion may require in the public interest, or validly covenant to refrain from the use of that power when it may be requisite, or expedient in his discretion, upon grounds of public policy, to execute it. … the Postmaster General should have remained free to revoke the licence as the exigencies of the case in the public interest may require.” 

Mason CJ in Attorney-General (N.S.W.) v. Quin (1990) 170 CLR 1, 17–18 is to the same effect:

“The Executive cannot by representation or promise disable itself from, or hinder itself in, performing a statutory duty or exercising  a statutory discretion to be performed or exercised in the public interest, by binding itself not to perform the duty or exercise the discretion in a particular way in advance of the actual performance of the duty or exercise of the power : …”

82. In R. v. Secretary of State for the Home Department ex parte Venables [1998] AC 407, 496G–497A (HL) Lord Browne-Wilkinson said :

“When Parliament confers a discretionary power exercisable from time to time over a period, such power must be exercised on each occasion in the light of the circumstances at that time.  In consequence, the person on whom the power is conferred cannot fetter the future exercise of his discretion by committing himself now as to the way in which he will exercise his power in the future.  He cannot exercise the power nunc pro tunc [now for then].  By the same token, the person on whom the power has been conferred cannot fetter the way he will use that power by ruling out of consideration on the future exercise of that power factors which may then be relevant to such exercise.”

83. So a public law decision-maker cannot lawfully (a) adopt an implacable, unwavering rule of policy or (b) act under the dictation of another or (c) fetter his discretion by incompatible contract or representation or (d) refuse or fail to exercise that discretion or (e) sub-delegate his powers.  The contract in the present case conflicts in essence with most if not all of these categories. 

84. It follows that a planning authority cannot bind itself by contract to grant (Ransom & Luck Ltd v. Surbiton Borough Council [1949] Ch 180, 193 (CA)); Pacific National Investments Ltd v. Corporation of the City of Victoria [2000] 2 SCR 919 (SCC) or to refuse future planning permission (Stringer v. Minister of Housing and Local Government [1970] 1 WLR 1281).     Davey JA in Vancouver v Registrar of Vancouver Land Registration District [1955] 2 DLR 709, 713 (BC:CA) said :

“A contract of a municipal corporation by which it engages in advance that its council will pass a by-law involving the exercise of a discretion such as that vested in it by the Town Planning Act is contrary to public policy.  I do not think the law will support any such prejudgment by contract of the question to be decided upon the submission of such a by-law any more than it will the judgment of a Judge delivered before he had heard the evidence.”

Time to determine ultra vires : the fact of incompatibility

85. In L’Huiller v. State of Victoria [1996] 2 VR 465, 479-480 (CA) Callaway JA emphasised :

“Subject to any applicable statute, the question is whether the discretion was properly exercised at the time the contract was made, not whether the contract would impede the due exercise of the discretion a few days later.  Whether a power is of that kind, and how far in advance it may be exercised, depend upon the nature of the power, its purpose and the terms of any relevant statute.”

86. This is entirely consistent with Southport Corporation v. Birkdale District Electric Supply Co. [1925] 1 Ch 794, 812 (CA) per Sir  Ernest  Pollock  MR approving of what Russell  J said in York Corporation v. Henry Leetham & Sons [1924] 1 Ch 557, 569 :

“If the bargain was at its date within the powers of the Corporation the fact that it turned out a bad bargain from their point of view would not convert it into an ultra vires transaction.  Conversely if it was at its date beyond the powers of the Corporation the fact that it proved a profitable one for the Corporation would not render it intra vires.”

87. The incompatibility may be within the contract itself (as in The Proprietors of the Staffordshire and Worcestershire Canal Navigation v. The Proprietors of the Birmingham Canal Navigations (1866) LR 1 HL 254, 267-268 per Lord Chelmsford LC) in contrast to its incompatibility with some statutory power (perhaps unknown to the parties) which the contract thwarts.

88. The general time-horizon to test the validity of the contractual undertaking is to consider the point when the contract was made.  This is orthodox contract law.  See British Transport Council v. Westmorland County Council [1958] AC 126, 145 where Viscount Simonds noted the issue.  Compatibility is to be judged at the time of the making of the contract by a test of reasonable foresight: is it reasonably foreseeable that a conflict will arise between the contract and the statute?  The existence of a mere possibility that this might occur at some future date is insufficient.  Clearly, whether incompatibility does exist in a particular case will be a factual question.

Ultra vires doctrine — Effects and Consequences

89. A contract entered into which is ultra vires is unenforceable in law.  When the Government enters into a contract for which it lacked the capacity to make, it has no effect.  Such a contract :

“… exists in fact but not in law.  It is legal nullity.  The purported contract which is in truth not a contract does not confer any legal rights on either party.  Neither party can sue upon it.  This conclusion gives rise to no conflict between public law and private law principles.  The role of public law is to answer the question : what is the capacity of the local authority to contract?  The role of private law is to answer the question : when one of the parties to a supposed contract lacks contractual capacity, does the supposed contract give rise to legal obligations?” : per Hobhouse LJ in Crédit Suisse v Allerdale Borough Council [1997] QB 306 (CA) at 350 E–G

90. The effect of an ultra vires contract is that the Government “had not given and could not give the consideration which they had purported to give” per Cross J in In re Staines Urban District Council’s Agreement [1969] 1 Ch 10, 20B.  It follows that even such a contract under deed is not saved : see p 19F.  It may seem ironic to the plaintiff that the fundamental public purpose of statutory powers and discretions is the rationale for the ultra vires exception.  “The object of the doctrine of ultra vires is the protection of the public” : Hazell v. Hammersmith and Fulham London Borough Council [1992] 2 AC 1, 36 (HL).  

Ultra vires : Estoppel and legitimate expection

91. No public body or public official can extend the very limitations placed on the invocable statutory powers by an estoppel : R. (Reprotech (Pebsham) Ltd) v. East Sussex County Council [2003] 1 WLR 348, 357 - 358 (HL) per Lord Hoffman.  Private law is the exclusive home of estoppel; legitimate expectation exists only in public law.  There is an analogy between them but cross-fertilisation is prohibited.  Where a contract is void having been entered into ultra vires, any promise, representation or assumption that asserts that the contract was valid and enforceable, is equally void.  No estoppel can be generated in those circumstances.  If it were otherwise it would subvert the rationale for the ultra vires doctrine.  Clarke J (now Sir Anthony Clarke MR) encapsulated the principle in South Tyneside Metropolitan Borough Council v. Svenska International plc [1995] 1 All ER 545, 565b–d.  Even in public law, a legitimate expectation can only arise on the basis of a lawful promise, representation or practice : per Lord President (Cullen) in Fayed v Commissioners of Inland Revenue 2004 SC 745, 780.

Conclusion

92. There is something quite unedifying in the Government, having entered a contract, later disowning it on the basis that it did not have in law the competence to enter it.  But it is a lawful and indeed necessary posture to adopt : de Smith, Woolf & Jowell Judicial Review of Administrative Action (5 ed 1995) p.566; M, Supperstone, J, Goudie and Sir P. Walker Judicial Review (3 ed 2005) p.153.  While there was no pleading or evidence that the defendant acted otherwise than in accordance with complete candour and good faith in entering the contract, the outcome is bound to cause the plaintiff some disillusionment.  It is quite clear that the plaintiff’s legal advisers had not considered the issue of ultra vires until years after the contract was made and there is no reason at all to suppose that the defendant had done so too much earlier either.  This issue has not arisen before in Hong Kong in the context of a Government contract, although it has been litigated before the courts of the common law world for almost 200 years. 

93. Learned counsel for the plaintiff was sharply critical of the Government, with a good deal of invective addressed to its conduct.  However, no demerits on the part of those involved on behalf of the Government, can debar the Commissioner of Transport from the genuine exercise of the important public discretion embodied in regulation 3.  The Commissioner cannot divest himself of authority so as to become powerless to act.  This contract would in substance have the effect of transferring the exercise of the statutory discretion from the Commissioner to the plaintiff — a type of unlawful subdelegation.   In relation to delegated legislation as here :

“The recipient of these powers cannot limit or abridge these powers; only the parliament or the body conferring them can do that.   So an agreement purporting to control the future exercise of the power is ineffective to alter the power itself” : Enid Campbell Agreements about the Exercise of Statutory Powers (1971) 45 Australian Law Journal 338, 340.

94. The Commissioner’s abilities to respond to current or varying concerns would be severely circumscribed by the contract.  The contract did not impair the Commissioner’s discretion; it denied it.  It foreclosed the catalogue of relevant considerations by making the public interest subjugated to private contract.  The merits of any other competing future decision were already eliminated.  It was a dictation by the plaintiff and equally became an abdication by the Commissioner.  Neither is allowed — here there was both. 

95. The fixing by the Government of prices for goods, land or services by agreement, is wholly distinguishable from a contract in which the public official, exclusively authorised to cause or permit the erection of traffic signs (non-compliance with which has criminal law consequences), is becalmed.  Public duties are entrusted to be exercised for the welfare of the public.  The regulation of traffic is not a commodity that is for sale any more than is road safety.  These public interests simply transcend the notion of private enterprise.  They are not lawfully comestibles of commerce.  For a public law decision-maker to abdicate by contract the right to change his mind about the exercise of a public power or duty in the future, no matter what happens, is in constitutional law terms to sell your soul — the transaction of Mephistopheles.  The action is dismissed. 

Costs

96. In Stretch v. West Dorset District Council (1997) 77 P & CR 342, 353 (CA) Peter Gibson LJ said in a case where the Council successfully later relied upon its own lack of vires to grant an option to renew a lease :

“It seems to me unjust that when public bodies misconstrue their own powers to enter into commercial transactions with unsuspecting members of the public, those bodies should be allowed to take advantage of their own errors to escape from the unlawful bargains which they have made.  For a local authority to assert the illegality of its own action is an unattractive stance for it to adopt.  It is the more striking when, as in this case, the transaction in question is as mundane as a building lease; and the local authority, by taking the point against the member of the public with whom it or its predecessor contracted, thereby robs that member of the public of part of the consideration for entering into the lease.”

97. Consideration will have to be given to the extent, if any, that these sentiments or others are properly relevant to costs here.  The parties are to make submissions as to costs (preferably by an agreement that it be done in writing) to be exchanged and filed within 21 days, failing which (at the risk of costs) a hearing will be convened to determine costs.