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Law and the economy

by Lewis Evans

Whether you are buying a loaf of bread, building an offshore gas plant or signing an employment contract, all your economic actions are governed by laws.


Setting the framework

An inherited legal system

Many of New Zealand’s laws, including the ones that govern economic activity, were inherited from Britain. In 1858 a law was passed that applied all English law to the colony. This was backdated to 1840, the year New Zealand was annexed by Britain. This law effectively overrode any Māori customary law of that time, despite the fact that the Treaty of Waitangi was signed in 1840.

New Zealand also embraced English common law – law that developed from customary practice and judges’ decisions, rather than from written statutes.

Parliament’s role in creating law

Parliament makes New Zealand’s laws. New Zealand’s Parliament has only one chamber or house, so there is no scrutiny of the decisions of one chamber by another. Unlike in some other countries such as the US, in New Zealand the law courts are not superior to Parliament. There is no external check on Parliamentary legislation in New Zealand, whereas, for example, the actions of parliaments of European Union member states are reviewed by the European Court of Justice.

Property rights in economic activity

Economic activity involves interactions such as the exchange of goods and services among individuals, groups and entities such as companies. These interactions usually involve money, but economic activity also includes non-commercial activities.

English common law addressed a wide range of conflicts between individuals, groups and other entities. Common law came to embrace the idea that individuals have a right of action over their own property, and so developed a system of property rights.

Property rights mean the right to use that property, to benefit from income generated from legally permitted rights, to exclude others from using these rights, and to transfer control of some or all of the property rights to other owners for payment. Property rights need not entail ownership. They can apply to transactions involving intangibles such as intellectual property, ideas, and creative works; and tangibles such as physical assets.

Human property rights

Article 17 of the United Nations’ Universal Declaration of Human Rights states that ‘Everyone has the right to own property alone as well as in association with others’, and ‘No one shall be arbitrarily deprived of his property.’

Property rights are included as a human right in the United Nations’ Universal Declaration of Human Rights and many countries take this stance in their constitution or human rights legislation. New Zealand is the only OECD country that has not enshrined recognition of property rights in legislation.

Legislation versus common law

New Zealand’s Parliament has generally been sceptical of judicial interpretation and so has restricted the ‘common-law’ approach, by setting its own legislation to govern the legal framework for economic activity. This is well illustrated by the legal framework for contracts, regulation and employment in New Zealand.


Contract law

Contracts allocate responsibilities, rewards and property rights among parties to the contract.

Transaction costs

Transaction costs are the costs involved in managing any economic activity. In the case of contracts it includes costs involved in gaining information about the subject of the transaction, searches relating to potential contractual parties, negotiating with and monitoring other parties to the contract, and the costs of enforcing the contract.

For standard contracts that are frequently repeated – such as the purchase of a car or a house – these costs are relatively low as templates have been developed through many previous transactions. These can be tweaked to fit specific transactions.

Small, frequently repeated transactions, such as buying a loaf of bread, also involve contracts. However, they do not usually require written contracts – in the case of poor performance, the buyer will probably just choose to make their next transaction with another party.

For large one-off contracts – for example building an offshore gas extraction platform – transaction costs can be very high. In circumstances such as this it is important for the parties to be able to enforce the contract.

Duration of contracts

Typically contracts cover a period of time and so are usually designed to be able to cope with variations in hard-to-predict factors. Some contracts may be for very long periods of time, for example a contract to supply gas from the Kapuni gas field covered 30 years. Others may be perpetually renewable and so at the time they are entered into they need to specify how to manage future situations. For example leases with a perpetual right of renewal specify how the rent is to be determined at dates in the future, and other long-term contracts include procedures defining how prices should be set.

Disputes

Only a few key factors can be anticipated in a contract document, and contract disputes often arise over changed circumstances, as well in cases of deliberate breach.

Disputes are settled in various ways, including negotiation, arbitration and court determination. In the settlement process the courts interpret the contracts, and may add terms into the contract to reduce ambiguity. New Zealand courts widely apply the common law approach to contract disputes, but many acts of Parliament have had the effect of reducing the influence of common law.

Contracts and statute law

Parliament has passed a substantial amount of legislation aimed directly at influencing contracts, including:

  • the Frustrated Contracts Act 1944, which made provision for compensation where a party to a contract suffered loss through no fault of their own, for example if the contract was cancelled by the other party
  • the Contracts Enforcement Act 1956, which stipulated that no contract was enforceable unless it was in writing
  • the Public Bodies Contracts Act 1959, which standardised the terms under which officers of local councils or other public entities could enter into contracts
  • the Illegal Contracts Act 1970, which stipulated that contracts were not void even if at some point they led to an illegal action
  • the Contractual Mistakes Act 1977, which standardised the law that applied when mistakes in contracts occurred that were accepted as such by both parties
  • the Contractual Remedies Act 1979, which allowed a party to a contract to go to court in respect of disagreement over statements made in the course of negotiating a contract.

For particular economic activities, such as employment, legislation is especially prescriptive.


Regulation of economic activities

Regulation influences economic activity in a wide variety of ways, in such diverse areas as prices, company takeovers, exchange of information, health and safety, the environment and planning.

Parliament does not itself make regulations, but many laws Parliament passes make provision for regulations. For example a price control law might set up a board to regulate price changes.

Price regulation

Price regulation has had a long history in New Zealand, and has impinged widely on economic activity.

Board of Trade Act 1919

Rising prices are often a wartime phenomenon. The Board of Trade Act 1919, passed at the end of the First World War, continued some wartime price control measures. It assigned wide powers to government and contained provisions intended to limit profiteering. It authorised the establishment of fixed, minimum or maximum prices for any goods or services.

When prices dropped in the depression of 1921–23, the provisions of the act fell into disuse.

Price Investigation Tribunal

In June 1939, after a period of rising prices, a Price Investigation Tribunal was established. When the Second World War broke out two months later, price stabilisation emergency regulations were passed to fix prices. The administration of price levels was delegated to the price tribunal in December 1939.

In 1942 the approach was extended to stabilise all prices, including wages, rents and salaries. The cumulative effect of the price regulation was that the government of the day, without recourse to Parliament, had wide powers to enforce rules related to price setting. These rules became very intrusive of transactions among individuals and companies, and restrained economic activity.

Post-war price regulation

The Economic Stabilisation Act 1948 sought to institutionalise controls over prices and other economic indicators, particularly wages, in peacetime. In the 1970s price increases of all manner of goods, services and commodities were debated at price-control hearings.

In 1982–84 Robert Muldoon, who was minister of finance (and prime minister), extended regulation to setting interest rates in an effort to control rising inflation.

Regulation and the rest of the world

For most the period between 1938 and 1984 import and currency controls regulated New Zealand economic activity with the rest of the world. These controls did not much affect the import of raw materials, but they restricted imports of finished goods, limited purchases by New Zealanders of foreign goods, assets and travel. Controls were abandoned in the 1980s in an effort to improve economic performance and because it was increasingly difficult to operate financial controls.

End of direct regulation

The Labour government elected in 1984 believed too much state intervention in the economy impaired economic performance. In 1986–87 Parliament repealed price-control statutes, ending government’s authority to directly regulate prices. They were replaced by laws that were more selective and were designed to be administered by bodies at a remove from ministerial discretion.

The Commerce Act 1986

The Commerce Act 1986 set up a separate body – the New Zealand Commerce Commission – to administer competition law and the Fair Trading Act. The commission was also given the power to apply price regulation to industries that were assessed as natural monopolies.

The Commerce Act had an objective of good economic performance over time. Where competition law operated, the act sought to promote competition. Where there was less competition and regulation was stipulated, it sought particular outcomes in respect of such things as prices and profits.

A return to regulation

After the election of a Labour-led government in 1999, regulation of industry grew significantly in most areas of economic activity, including electricity, gas pipelines, telecommunications, banking, finance, housing construction and planning, education and insurance.

After 2000 the commission's role included administration of:

  • the Dairy Restructuring Act 2001, which regulated the New Zealand market dominance of the dairy cooperative Fonterra
  • the Telecommunications Act 2001, which regulated prices – particularly of Telecom
  • electricity lines businesses since 2001
  • gas pipelines since 2005.

The criteria the Commerce Commission used to decide on regulation of prices broadened. Controversy about these criteria and concern about the effect of regulation on investment, particularly in infrastructure, prompted a revision of the Commerce Act in 2008.

Regulation versus property rights

Regulation by statute can reduce both the property rights of individuals and the role of common law. Regulatory bodies such as the Commerce Commission are at the centre of such processes, adjudicating the reallocation, and often the reduction of individuals' rights in furthering statutory goals.

This tension between the objectives handed down by Parliament by statute and the property rights of individuals is addressed in some jurisdictions by placing limits on the extent to which property rights can be over-ridden and by providing for compensation and appeal mechanisms on regulatory decisions.

Since the late 1980s New Zealand’s regulatory arrangements have been evolving, reflecting this tension.


Employment law

Industrial Conciliation and Arbitration Act 1894

The Industrial Conciliation and Arbitration (I. C. and A.) Act 1894 addressed a situation where arbitration decisions brought down by an existing Arbitration Court were ignored by employers. Under the act it was voluntary for unions to register with the court, but it was compulsory for employers. Any registered union could bring any employer before the Arbitration Court, and the court's decisions were legally binding.

Many disputes concerned wages; and the I. C. and A. Act enabled compulsory wage setting. Minimum wage legislation was also developed in New Zealand in the 1890s. In 1936 the I. C. and A. Act was amended to provide a 40-hour work week and compulsory union membership.

Centralised wage setting, where minimum wages for an entire industry were set by a single arbitrator, was common practice until 1973. However, it was abandoned at times of employer pressure, notably between 1932 – the low point of the 1930s economic depression – and 1937.

This framework came under pressure as inflation gained momentum in the late 1960s, and it was replaced in a sequence of five acts, beginning with the Industrial Relations Act 1973, which relaxed the statutory restrictions on employment relationships.

Employment acts 1991 and 2000

The employment acts of 1991 and 2000 had differing philosophical bases, reflecting differences in the outlook of the governments which introduced them.

National’s Employment Contracts Act 1991 stipulated that employment should be managed by contracts between employer and employee, who could set whatever terms and conditions they agreed on.

Labour’s Employment Relations Act 2000 placed limits on the kinds of arrangements that could be entered into between employer and employee, for instance unions alone were allowed to negotiate collective contracts with employers.

Other factors affecting employment law

Employment law varies amongst nations, and differences between the employment rates of OECD countries have been attributed to different employment laws.

Employment law is affected by other related laws, such as those that set liquor and shop trading hours. In the 1960s New Zealand employers had to pay additional wages for any employment engaged in outside the five-day 40-hour working week. This was supported by the regulation of shop trading hours, which were limited by law to little more than these hours.

In the later 20th century employment legislation changed, in large part because of social change. Women once had low participation rates in the paid labour force, reflecting the social mores of the day, which were buttressed by employment and trading laws. Laws passed in the 1970s and 1980s ended such restrictions. The development of employment legislation thus illustrates that the legal framework of economic activity is responsive to social change.


External links and sources

More suggestions and sources


How to cite this page: Lewis Evans, 'Law and the economy', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/law-and-the-economy/print (accessed 25 January 2020)

Story by Lewis Evans, published 11 Mar 2010