Introduction
Advice on the legality of so-called “quasi-fiscal” activities carried on by the Reserve Bank of Zimbabwe.
In recent years the Zimbabwean Government has faced almost insuperable financial problems. Hyperinflation has made it increasingly difficult to prepare realistic annual budgets, so Ministries and Departments regularly exhaust their appropriations long before the end of each financial year, and a chronic shortage of foreign currency has limited the Government’s ability to purchase the necessary equipment and supplies to keep essential services running.
As a result the Government has turned to the Reserve Bank. The Bank’s remedy has been to issue vast quantities of Zimbabwean currency with which it has purchased foreign currency on the so-called “parallel” or black market; this foreign currency has been used to finance the Government’s expenditure, in part through the Bank’s quasi-fiscal activities. What this means is that the Bank has used the foreign currency to purchase equipment and supplies for the Government and has issued them to the Ministries and Departments that need them. Some years ago, for example, the Bank purchased a large quantity of fertilizer from South Africa and passed it on to the Ministry of Agriculture for issue to resettled farmers; due to the ineptitude of the Bank’s purchasing agents, much of the fertilizer was found to be useless. More recently the Bank has purchased groceries for resale to poor people at subsidised prices; it has bought tractors and agricultural equipment for issue to farmers before the 2008 general election, and has purchased vehicles for issue to senior government officers. Some of these purchases, I understand, have been effected by the Reserve Bank itself, but in many cases the Bank has acted through “special purpose vehicles”, i.e. companies which it has set up for the purpose.
It is not clear whether the Reserve Bank pays for the foreign currency with money which it withdraws from the Consolidated Revenue Fund (which, as I shall point out later, is held in an account with the Bank) or whether it pays for the currency out of its own funds. And if the latter is the case, it is not clear how, or even if, the Government repays the Bank for the equipment it receives as a result of the Bank’s quasi-fiscal activities.
As I have said, I have been asked to advise whether these quasi-fiscal activities are lawful and, if they are not, what the legal consequences are for the parties involved.
The legal capacity of the Reserve Bank
The first question to be answered is whether the Reserve Bank has the legal capacity to engage in the activities I have described above.
The Reserve Bank is a body corporate established in terms of the Reserve Bank of Zimbabwe Act [Chapter 22:15]. Under section 4 of the Act the Bank is capable of “performing all acts that bodies corporate may by law perform”. These words are not as wide as they sound, because like all statutory bodies the Bank’s powers are limited by the functions assigned to it under its enabling statute: in other words, the Bank can exercise its powers only in furtherance of its statutory functions, which are set out in section 6(1) of the Act, as follows:
“(1) The functions of the Bank shall be—
(a) to regulate Zimbabwe’s monetary system; and
(b) to achieve and maintain the stability of the Zimbabwe dollar; nd
(c) to foster the liquidity, solvency, stability and proper functioning of Zimbabwe’s financial system; and
(d) to advance the general economic policies of the Government; and
(e) to supervise banking institutions and to promote the smooth operation of the payment system; and
(f) subject to Part VII, to formulate and execute the monetary policy of Zimbabwe; and
(g) to act as banker and financial adviser to, and fiscal agent of, the State; and
(h) whenever appropriate, to represent the interests of Zimbabwe in international or intergovernmental meetings, multilateral agencies and other organisations in matters concerning monetary policy; and
(i) to provide banking services for the benefit of—
(i) foreign governments; and
(ii) foreign central banks or other monetary authorities; and
(iii) international organisations of which Zimbabwe is a party;
and
(j) to participate in international organisations whose objective is to pursue financial and economic stability through international monetary co-operation; and
(k) to undertake responsibilities and perform transactions concerning the State’s participation in or membership of international organisations; and
(l) to exercise any functions conferred or imposed upon it by or in terms of any other enactment.”
None of these functions seems to cover quasi-fiscal activities of the kind the Bank has engaged in. The activities have nothing to do with Zimbabwe’s monetary system or the stability of the country’s currency, nor do they foster the stability of the financial system. Hence paragraphs (a), (b) and (c) of section 6(1) do not cover them. Supplying vehicles and television sets to senior government officials cannot in any way advance the Government’s general economic policies, nor does the provision of groceries to poor people, however beneficent the Bank’s intentions may have been. Even the supply of agricultural equipment to farmers is questionable, since it would tend to advance the Government’s agricultural or social projects rather than its economic policies. So those activities are not covered by paragraph (d) of section 6(1).
If one goes through all the paragraphs of section 6(1) in this way, one will not find any one of them that authorises the Bank to carry out its quasi-fiscal activities. The only possible exception is paragraph (g), which empowers the Bank to act as the State’s “fiscal agent”, a curious term that is not defined in the Act. Even that paragraph, however, cannot extend to quasi-fiscal activities. “Fiscal” means “of or pertaining to the fisc or treasury of a state or prince; pertaining to the public revenue” (Oxford English Dictionary), and in the context the term “fiscal agent” must be construed as referring to the Reserve Bank’s role in keeping the Exchequer Account, which is the account, opened by the Treasury with the Reserve Bank, in which the moneys of the Consolidated Revenue Fund are held. See section 22 of the Audit and Exchequer Act [Chapter 22:03]. Not even the final paragraph of section 6(1), which allows the Reserve Bank to exercise functions “conferred or imposed upon it by or in terms of any other enactment”, gives the Bank power to undertake its quasi-fiscal activities, since there is no other applicable enactment of which I am aware that gives it such a power.
The only conclusion to be drawn, then, is that the Reserve Bank has no capacity to enter into the contracts which constitute its quasi-fiscal activities. Where the Bank is a party to those contracts, therefore, they are void. And since they are void ab initio they cannot be validated.
As indicated above, however, the Reserve Bank has established companies to carry out quasi-fiscal activities on its behalf, and presumably the companies have been given sufficient powers in their memoranda to carry out these activities. Are the contracts entered into by these companies valid? Again, probably not. The companies are controlled by the Reserve Bank and are acting on its behalf. They are the Bank’s agents. It is trite that a principal cannot confer on his agent more powers than he himself possesses. If the Reserve Bank cannot enter into the contracts, nor can its agents.
By-passing of parliamentary control over government expenditure
There is a more fundamental reason why contracts entered into pursuant to the Reserve Bank’s quasi-fiscal activities are invalid: they subvert Parliament’s control over government expenditure.
Chapter XI of the Constitution of Zimbabwe gives Parliament the right to determine how much the Government should spend and how it is to be spent. The Chapter starts by saying, in section 101, that all government revenues (with certain exceptions authorised by Parliament) must be paid into the Consolidated Revenue Fund. Section 102 goes on to provide that money cannot be paid out of the Consolidated Revenue Fund unless the payment has been authorised by an Act of Parliament. It is worth quoting the relevant provisions of section 102:
“(1) No moneys shall be withdrawn from the Consolidated Revenue Fund except—
(a) to meet expenditure that is charged upon that Fund by this Constitution or by an Act of Parliament; or
(b) where the issue of those moneys has been authorised by an Appropriation or other Act made pursuant to the provisions of section 103.
(2) Where any moneys are charged by this Constitution or an Act of Parliament upon the Consolidated Revenue Fund or any other public fund, they shall be paid out of that fund by the Government to the person or authority to whom payment is due.
(3) No moneys shall be withdrawn from any public fund, other than the Consolidated Revenue Fund, unless the issue of those moneys has been authorised by or under an Act of Parliament.
(4) An Act of Parliament may prescribe the manner in which withdrawals may be made from the Consolidated Revenue Fund or any other public fund.
(5) The investment of moneys forming part of the Consolidated Revenue Fund shall be made in such manner as may be prescribed by or under an Act of Parliament.
(6) …”
Chapter XI goes on to deal with the way in which Parliament authorises expenditure from the Consolidated Revenue Fund. At the end of each year the Minister of Finance must lay before the House of Assembly estimates of the Government’s revenue and expenditure for the coming year. The estimates of expenditure set out in considerable detail the proposed heads under which each Ministry and Department will spend money, and how much will be spent under each head. The estimates are considered by the House and, if they are approved with or without amendment, they are incorporated into an Appropriation Bill which is introduced into the House. The Bill must then be passed by the House of Assembly and the Senate in the usual way before it becomes law. When the Bill becomes law as an Act of Parliament, the various Ministries and Departments specified in the Act are allowed use the funds appropriated to them for the purposes specified in the estimates. They are not, in general, allowed to use the funds for a different purpose and they are not allowed to spend more than the amounts appropriated. If they need more money, the Minister of Finance has to approach the House of Assembly again with additional or supplementary estimates, and the House has the power to approve a Bill appropriating additional funds.
The Reserve Bank’s quasi-fiscal activities subvert this process. If the Bank purchases foreign currency with funds taken from the Consolidated Revenue Fund or any other public fund, then it is acting in direct contravention of section 102(1) or (3) of the Constitution. Even if it uses its own funds for the purpose (and, as indicated above, it has no power to do so) the funds are not brought to account in the manner required by the Constitution, and the equipment, supplies and other items purchased by the Bank and handed over to the Government are not provided for in the annual estimates of expenditure. They, and the transactions through which they are purchased, fall outside the budgetary process which is mandated by the Constitution. Parliament has no effective control over them. Hence they are unlawful.
The unlawfulness attaching to the transactions attaches also to any contracts concluded to give effect to them, even if the contracts themselves are prima facie legal, because if performance under a contract is unlawful then the contract itself will be unlawful. And if the contracts are unlawful, the general rule is that they are void and unenforceable. As Innes CJ said in Schierhout v Minister of Justice 1926 AD 99 at 109:
“It is a fundamental principle of our law that a thing done contrary to the direct prohibition of the law is void and of no effect. … So that what is done contrary to the prohibition of the law is not only of no effect, but must be regarded as never having been done — and that whether the lawgiver has expressly so decreed or not; the mere prohibition operates to nullify the act.”
The importance of adhering to proper constitutional procedures in all matters relating to government finance was emphasised by Patel J in Chapfika v Reserve Bank of Zimbabwe HH-77-2007 (not yet reported), where he held that the Reserve Bank had no power to promise a reward to “whistle-blowers” if the reward was to be paid from public funds without having been authorised by Act of Parliament. It is worth quoting what the learned Judge said, not only because it is correct — which it undoubtedly is — but also because he has since become Acting Attorney-General, the chief legal adviser of the Government. At page 9 of the cyclostyled judgement he said:
“One of the fundamental principles of public finance is that any expenditure or disbursement of public moneys, whether under a contract or otherwise, must invariably be authorised or sanctioned by Parliament. This basic principle is derived from English constitutional law. See Churchward v R 1865 LR 1 QB 173 at 209-210; Auckland Harbour Board v R [1924] AC 318 at 326-327; Attorney-General v Great Southern & Western Railway Co. of Ireland [1925] AC 754 at 773. In the Auckland Harbour Board case, a decision of the Privy Council, Viscount Haldane expounded the principle as follows:
‘… no moneys can be taken out of the consolidated fund into which the revenues of the State have been paid, excepting under a distinct authorisation from Parliament itself. The days have long gone by in which the Crown, or its servants, apart from Parliament, could give such an authorisation or ratify an improper payment. Any payment out of the consolidated fund made without Parliamentary authority is simply illegal and ultra vires, and may be recovered by the Government if it can, as here, be traced.’
The rigour of the constitutional principle enunciated in the English cases has not in any way been diminished in our law. By virtue of section 102 of the Constitution of Zimbabwe:
[Here he quoted section 102, whose provisions I have set out above]
It follows from the foregoing that the Reserve Bank cannot, whether through its monetary policy statements or otherwise, purport or undertake to expend public moneys without parliamentary authority enabling it to do so. Whatever may be the practical exigencies of the prevailing economic environment, the Reserve Bank, like any other instrumentality of the State, is subject to the strictures of the Constitution and must perform its functions accordingly.”
The learned Judge clearly considered that any undertaking by the Reserve Bank to make a payment out of public funds would be void and unenforceable if the undertaking was given without parliamentary authority, and the same would apply to any payment made pursuant to such an undertaking — indeed that is stated expressly in the passage he quotes from the judgment of Viscount Haldane in Auckland Harbour Board v R [1924] AC 318.
For these reasons, therefore, one can conclude that the Reserve Bank’s quasi-fiscal activities, and the contracts concluded pursuant to them, are void. And this is the case whether the transactions are carried out by the Reserve Bank itself or by the companies it has created for the purpose.
Consequences of illegality
If the Reserve Bank’s quasi-fiscal activities are illegal, what are the consequences for third parties, that is to say, for parties who have dealt with the Bank or its companies in the course of those activities?
The first consequence is that the third parties cannot enforce any contracts they may have entered into with the Reserve Bank or its agents. The contracts are illegal and void, and the maxim ex turpi causa non oritur actio (no action can arise from an illegal contract) applies. The legal position is well summarised in Wille’s Principles of S.A. Law 8th ed p. 436, as follows:
“The effect of an agreement being void is that neither party can bring an action founded on the agreement. Thus one party cannot claim specific performance by the other of what the latter has undertaken in the agreement, nor can the former claim damages for breach of contract for there is no contract; nor, for the same reason, can he claim cancellation of the transaction. It makes no difference if the plaintiff has himself made performance of his own obligations, for performance does not validate the agreement.”
So if the third parties have performed their side of the contracts, for example by delivering equipment and supplies to the Reserve Bank or its agents, they will be unable to claim payment for what they have done, because the contracts are void. They will not even, it is submitted, have a remedy on the basis of unjust enrichment because of the rule expressed in the maxim in pari delicto potior est conditio possidentis vel defendentis (where parties are equally blameworthy, the position of the possessor or defendant is the stronger). Any relaxation of that rule is based on public policy, balancing considerations of fairness (in particular the relative blameworthiness of the parties) with the reasons for the illegality of the contract. In the case of these contracts, public policy leans strongly against a remedy even for innocent parties, because any payments that might be made to them would have to come from public revenues, and the very reason for the contracts’ illegality was that such payments have not been authorised by Parliament.
In the result, therefore, third parties who have delivered goods to the Reserve Bank or its agents will not be entitled to payment or any other form of recompense.
That may not be their only problem. As stated by Viscount Haldane in the passage already quoted from Auckland Harbour Board v R, any payment made to a third party without parliamentary authority can be recovered by the Government. So the Government may (and perhaps should) repudiate the contracts and sue the third parties for what has been illegally paid to them. If it did so it would probably have to tender return of the equipment and goods supplied by the third parties, but that would probably be easy for the Government to do and not altogether satisfactory for the third parties.
Foreign contracts
What I have said so far applies particularly to contracts entered into by the Reserve Bank and its agents with third parties in Zimbabwe. What of contracts — and there are probably some — concluded with third parties in South Africa and elsewhere?
The answer to that question depends on the law that governs the contracts concerned (the “proper law” of the contracts). To determine the proper law of a contract, one looks at the nature and form of the contract. Sometimes the parties will state the governing law in the contract itself, and then that law will be the proper law of the contract; in other cases one has to consider such factors as the place where the contract was concluded, the place where performance under the contract is to be made, and the domicile of the parties in order to decide which law should be the proper law. Each contract must be considered individually.
In the case of contracts arising out of the Reserve Bank’s quasi-fiscal activities, the result will probably be the same whether their governing law is Zimbabwean law, South African law or English law.
In regard to the Reserve Bank’s capacity to engage in quasi-fiscal activities, and to enter into contracts pursuant to those activities, the courts of South Africa and England would probably look at the law of the country in which the contracts concerned were concluded (the lex loci contractus). And since under the law of both those countries the capacity of a corporate body depends on its constitution or the enactment by which it was created, the courts would have to determine the Bank’s capacity from the provisions of the Reserve Bank of Zimbabwe Act. As I have already suggested, that would lead the courts to conclude that the Bank lacked capacity. So the result would be the same, whichever law the courts applied: the Bank would be found incapable of entering into the contracts and the contracts would be invalid for that reason alone.
The legality of the contracts, in both South Africa and England, would be determined by reference to public policy. In South Africa the categories of contracts that are regarded as void through being contrary to public policy are not fixed; it is open to the courts to declare new grounds of invalidity, though that power must be exercised sparingly. One ground of invalidity which has been accepted, certainly in England and probably in South Africa, is where performance of the contract would contravene the law of a foreign friendly State:
“According to one of the most important rules of English public policy a contract is void which is opposed to British interests of State and, in particular, which is apt to jeopardise the friendly relations between the British Government and any other government with which this country is at peace. The courts will not enforce a contract ‘made between parties to further an adventure or break the laws of a foreign State.’ ‘An English contract should and will be held invalid on account of illegality if the real object and intention of the parties necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of that country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally.’ The same applies if the parties do not intend themselves to perform the illegal act, but to procure another person to do so or to assist him in doing so.”
On this ground, the courts of both England and South Africa are likely to declare illegal any contract entered into by the Reserve Bank or its agents, where the contract requires an illegal payment to be made from public funds in Zimbabwe.
So whether the proper law of the contracts concerned is Zimbabwean law, South African law or English law, the result is likely to be the same: the contracts will be held to be illegal and void. The consequences of such a declaration of illegality would be substantially the same as those I have outlined above.
Conclusions
Conclusions are:
• The Reserve Bank of Zimbabwe lacks legal capacity to engage in quasi-fiscal activities and to enter into contracts pursuant to those activities.
• It is not open to the Reserve Bank to engage in such activities through special-purpose vehicles or companies created for the purpose, because it cannot empower agents to do what it itself cannot do.
• Contracts entered into by the Reserve Bank or its agents, pursuant to its quasi-fiscal activities, are illegal and void because expenditure under those contracts has not been authorised by Parliament.
• Even if the contracts are governed by the law of South Africa or England, the contracts will be regarded as illegal.
• A new Government of Zimbabwe will be entitled to recover from third parties whatever has been paid by the Reserve Bank or its agents under illegal contracts concluded pursuant to the Bank’s quasi-fiscal activities.
11th December, 2008