clr/1982/1982_3_419.pdf

(1)of the Interpretation Law, Cap. 1. Contract—State party to a contract—Is not in a different position from any other party to a contractual transaction. 419 Republic τ. Menelaou

(1982)ConstitutionalLaw—Freedom of contract—Article 26.1 of the Consti­ tution—Section 2of Law19/76interfereswithfreedomofcontract safeguarded by the above Article. The respondent held up to the 16th August, 1960, the day of the coming into operation of the Constitution,thepermanent 5 andpensionable post of master attheTeachers'Training College. After, the independence of Cyprus, as from the 16th August, 1960, his post came under the Greek Communal Chamber and he ceased to be a civil servant by operation of Article 87.1(b) of the Constitution. Under Article 192.3 of the Constitution 10 he was entitled to just compensation or pension on abolition of office terms. For the purpose of promoting the application of Article 192.3 of the Constitution there was enacted theCom­ pensation (Entitled Officers) Law, 1962 (Law 52/62) by virtue of which entitled pensionable officers, such as the respondent, 15 weregiven an option tochoose between two species ofcompen­ sation, a pension and a gratuity, both calculable in accordance with the piovisions of the Pensions Law, Cap.

1. Applicant elected compensation by way of pension instead of gratuity. Section 8 of Law 52/62 laid down that all payments under the 20 Law, both a pensionandagratuity,would beexempt fromincometax. In 1976 therewasenactedLaw 19/1976whichpurported to render pensions payable to entitled officers subject toincome tax; and thereafter the Commissioner of Income Tax taxed thepension payable to theapplicant under Law 52/62in accord- 25 ance with the provisions of the Income Tax Law. The res­ pondent challenged the validity of the decision of theCommis­ sioner, whereby his pension was taxed, by meansof arecourse. The trial Judge annulled the decision of the Commissioner mainly on the ground that the respondent was not an entitled 30 pensionable officer and consequently the provisions of Law 19/76 were inapplicable in his case and even if applicable, Law 19/76 could not divest him of his rights conferred under and safeguarded by Article 192.3 of the Constitution,implemented thereafter by Law 52/
2. 35 Upon appeal by the Commissioner of Income Tax: Held,

(1)that the pension that the Commissioner sought to tax derived directly from the application of the provisions of Law 52/62and became payable to therespondent in his capa­ city as an"entitled pensionable officer"; thathewas re-employed 40 420 3 C.L.R. 5 10 15 20 25 30 35 40 Republic v. Menelaou in the public service, makes no difference and does not alter or qualify thenature of theright;that, consequently, theamendment of s.8, by virtue of the provisions of s.2 of Law 19/76, had a direct impact on hisrights and unless vulnerable on some other ground, it altered them to his detriment by making his pension liable to income tax; that the wording of the amending lawwasclear totheextentofleavingnodoubt astotheintention of thelegislature to remove the exemption of a pension payable under Law 52/62from liability toincome tax; that section 12

(1)of the Interpretation Law, Cap. 1, requires that the amending law must, in the absence of an indication to the contrary, be read together with the provisions of the law it aims to amend; that reading the twoprovisions together, the inescapable conclusion is that the exemption from income tax, conferred by s.8, is taken away; that, therefore, this Court is unable to uphold the view of the trial Judge that Law 19/76 is inapplicableinthe caseoftherespondent based ontheviewthat heisnotanentitled pensionable officer for, manifestly, he is.

(2)That Article 192.3 of the Constitution broadly defined the benefits to whichcivil servants of thecolonial administration would be entitled to, if not reappointed in the civil service; that they do not includeexemption from income tax; that, therefore, theimmunity granted bys.8 ofLaw 52/62,had no constitutional sanctionand likeanyother statutory provisionitcould beamended, piovidec·, of course, such amendment did not offend any other constitutional provision; that, therefore, this Court is in disagreement with the ruling of the trial Judge that theexemption was constitutionally guaranteed; it was not and it could, other considerations apart, be taken away.

(3)Thatthecompensationthatbecame payable to the respondentasa result of theapplicationoftheprovisionsofLaw52/62, crystallized after the exercise of a statutory option by him, an arrangement that had all the characteristics of a contract between the subject and the State, creating rightsandimposing liabilities in the domain of private law; that it was a statutory condition precedent that the benefits conferred thereunder would be enjoyed free of income tax and it wasnot legitimate onthe part of theStateto take away this advantage to thedetriment of thesubject; that theState,as a party to an arrangement of this kind,isnot inanydifferent position from any other party 421 Republic v. Menelaou

(1982)to a contractual transaction; that a proper application of the rule of law, enshrined in our Constitution, requires that all subjects of the law do observeits provisionswithout distinction; that whenever the Stateis a party to an agreement creatingcivil law rights, it should be implicit that it would not use its power 5 to modify to its advantage obligations undertaken thereunder; that section 2 of Law 19/76 aimed to redefine the background to the arrangements following the enactment of Law 52/62, and to that extent extinguish conditions precedent to entry into the arrangement; that in such circumstances, the freedom 10 that the respondent had to choose between two alternative courses was taken awayand with it the freedom he had to enter into the one or the other anangement; that, consequently, s.2 ofLaw 19/76interfered withthefreedom ofcontract safeguarded by Article 26.1 and took away, retrospectively at that, the right 15 therespondent had to determine thenature of his private rights; that if it is permissible to redefine the right of compensation of the respondent, it would beequally permissible to do likewise in the case of entitled officers who opted for a gratuity bytaxing the money they received; accordingly the appeal should be 20 dismissed but for reasons different from those relied upon by the trial Court. Held,further, that the conclusion reached is,also, consonant with the proper application of the concept of the rule of law that requires adherence tobasicstandards ofjustice, substantive 25 and procedural; that it would be offensive to common sense and norms ofjustice to allow the demolition of the foundations of a basically contractual arrangement, injecting thereby an element of uncertainty and mistrust in the management and conduct of the affairs of citizens. 30 Appeal dismissed. Cases referred to: Papapetrou v. Ministry of Finance

(1968)3 C.L.R. 502; Papaneophytouv.Republic

(1973)3C.L.R. 191;

(1973)3C.L.R. 527 (C.A.); Economidesv. Republic

(1972)3 C.L.R. 506; Paschali v. Republic

(1966)3 C.L.R. 593 at p. 607; Frangouv. Greek CommunalChamberand Others

(1966)3 C.L.R. 201; 422 35 3 C.L:R. 5 10 Republic ν,Menelaou New Orleans GasCo. v. LouisianaLight Co.

(1885)115 U.S. 650, 29 L. ed. 516,6 S. Ct. 252; Fletcher v. Peck (1810, U.S.) 6 Cranch 87,3 L. ed.162; Trusteesof Dartmouth Collegev. Woodward

(1819)U.S.4 Wheat 518,4 L. ed. 629; AtlanticCoastLine R. Co.v. Phillips

(1947)332 U.S. 168, 67 S. Ct. 1584, 91L.ed. 1977, 67S.Ct.1584,173A.L.R. 1; Asylumv. NewOrleans, 105 U.S.368(Bk.26, L. ed. 1130); Homeofthe Friendless, 8Wall.430 (75 U.S.Bk. 19,L.ed. 495); NewJersey v. Wilson, 7Cranch,166(11 U.S.Bk. 3, L.ed. 303); Bankof Ohiov. Knoop,16 How. 376(57 U.S. Bk. 14,L.ed. 980); Chimonides v. Manglis

(1967)1 C.L.R.125; Burmah OilCo.v. Lord Advocate [1965] A.C.

1. 15 Appeal. Appeal against thejudgment* of a JudgeoftheSupremeCourt (Sawides, J.) given on the 24th November, 1980 (Revisional Jurisdiction Case No. 419/78) whereby appellant's decision to assess applicants income for the years 1976-1977, relying on 20 theprovisions of Law 19/76, was annulled. A. Evangelou, Senior Counsel of the Republic, for the appellant. L. Papaphilippoit, for the respondent. Cur. adv.vult. 25 30 35 HADJIANASTASSIOU J.; The judgment of the Court will be delivered by Pikis, J. PIKIS J.: Charalambos Menelaou was a civil servant, a master at the Teachers' Training College when the Republic of Cyprus was established on 16thAugust,
2. Thereupon, public educationceased tobeadepartmentofthecentral govern­ ment and becameabranchoftherespective communalchambers. Consequently, Mr. Menelaou became entitled to the benefits of Article 192.3 providing forthecompensationof officers whose appointment inthe public service wasterminated. They should becompensated asin theevent ofabolition ofpost. Compensa­ tion wasof two kinds, pension or gratuity, whichever was more advantageous to the officer entitled thereto. Forthe purpose of implementing Article 192.3, a law was enacted in 1962, * Reported in

(1980)3 C.L.R.599. 423 Pikis J. Republic v. Menelaou

(1982)Law 52/62, regulating the discharge of the obligations of the Republic in the area under consideration. It is unnecessary to pronounce whether the aforementioned provisions exhaust the obligations of the Republic under Article 192.3, a question left open in Papapetrou v. Ministry of Finance

(1968)3C.L.R. 5

1. We shall confine ourselves to an examination of the implications of those provisions of the statute, directly relevant to the outcome of the appeal. The definition of an "entitled officer", supplied by s.2, covers officers who were entitled either to a pension or a gratuity. An entitled pensionable officer 10 isone who held a permanent pensionable position in the public service on 15.8.
2. Mr. Menelaou held such a position and, therefore, he qualified as an "entitled officer". The benefits to which he was entitled were specified in section 2 of the law. Entitled pensionable officers were given an option to choose 15 between two species of compensation, a pension and a gratuity, both calculable in accordance with the provisions of the Pensions Law, Cap.
3. Sub-sections 2, 3 and 4, made detailed provision for the computation of the compensation and the payment of interest for the period following 15.8.
4. 20 The option envisaged by s.4(l), involving a choice between a pension and a gratuity, had to be exercised within three months. This period was extended to nine months by a law enacted shortly afterwards, Law 68/62 (see section 2(A) ). Lastly, and this is the area of contention, section 8 of Law 25 52/62 laid down that all payments made under the law, both a pensicn and a gratuity, would be exempt from income tax. As one may surmise, exemption from income tax was conferred because payments made under the law were in the form of compensation for loss of career, and, therefore, a capital pay- 30 ment, and not income derived for services rendered. The interpretation of section 8 came up for consideration in the case of Papaneophytou v. The Republic

(1973)3 C.L.R. 191, particularly the compass of the exemption granted. Hadjianastassiou, J. held, on a literal construction of section 8, that the 35 exemption was limited to emoluments that became payable under the law for the period preceding the enactment of the law. On appeal, the Full Bench held that the exemption from income tax provided by s.8, was all embracive, extending to all payments made under the law, past, present and future. 40 Michalakis Papaneophytou (No. 2) v. The Republic

(1973)3 424 3 C.L.R. Republic v. Menelaou Pikis J. C.L.R. 527. Thus, a pension payable to an entitled officer under s.4(

1. l)was exempt from any income tax liability. Somethreeyearslater,alawwasenacted,purportingtorender pensions payable to entitled officers, subject to income tax, 5 that is,Law 19/76. Section 2of the newlaw that repealed and replaced s.8 of Law 52/62, specifically provided that pensions payable to entitled officers were liable to income tax. In a sense,thelegislaturereversedthestateofthelaw,asitwasfound to be by the Supreme Court, in Papaneophytou (No. 2), supra. 10 Thereafter, the Commissioner of Income Tax taxed the pension payable to the applicant under Law 52/62, in accordance with theprovisionsof theIncomeTax Law. Mr. Menelaouchallenged the validity of the decision and made the present recourse to the Supreme Court for its review. Sawides, J., held the 15 sub-judice decision to be null and void, mainly because he took the view that— (
2. a)Mr. Menelaou was not an entitled pensionable officer and consequently the provisions of section 2 of Law 19/76 were inapplicable in his case, and 20 (
3. b)even if applicable, Law 19/76 could not divest him of rights conferred under and safeguarded by Article 192.3 of the Constitution, implemented thereafter by Law 52/62. To avoid confusion, it must be stressed that the authorities 25 never attempted to place a retrospective construction on the provisions of Law 19/76; they sought to apply it prospectively to earnings derived after its enactment, notably 14.5.1976. To the extent that Law 19/76 aimed to take away those rights, the law was found to be unconstitutional. 30 An appeal was taken on behalf of the Attorney-General, contesting the correctness of the decision of the trial Court on the constitutionality of Law 19/76 and the ruling that applicant was not an entitled pensionable officer in the context of Law 19/76. It was submitted before us that Article 192.3 35 does not confer to entitled officers immunity from income tax and that any rights bestowed in this respect by Law 52/62 could, without constitutional hindrance be taken away by a subsequent enactment, such as Law 19/76. Further, theview 425 Pikis J. Republic τ. Menelaou

(1982)of thetrial Courtthat Mr.Menelaouwas notanentitled pension­ able officer, is based on a misconception of the relevant provi­ sions of the law. Mr. Menelaou would have no right to a pension under Law 52/62 had he ceased to be an entitled officer in accordance with Law 52/

1. The fact that applicant was employed afresh as from September, 1963, in the public service, did not qualify in any way his position under Law 52/
2. 5 That was a new appointmentmade independently of the provi­ sions of Law 52/62, in no way a continuation of his previous service. Mr. Papaphilippou invited us to uphold thejudgment 10 at first instance and argued in support that a statute, such as Law 52/62, intended to implement constitutional provisions, ranks in pari passu, in all its width to constitutional provisions and any attempt to interfere with rights conferred thereunder, must be struck down as an infringement of the enabling provi- 15 sions of the Constitution. Another argument, central to his sub­ mission is that the Court should not, under any circumstances, countenance any legislative or executive act undermining faith in the law, such as the enactment of Law 19/76, purporting to take away rights that vested as far back as
3. Reference 20 was made to a treatise of Dhelikostopoulos on the protection of good faith in the domain of administrative law. (See pages 17, 21, 22, 23, 47 and 51). The trial Judge cited with approval a passage from the judg­ ment of A. Loizou, J., in Economides v. The Republic

(1972)25 3 C.L.R. 506, supporting the view that it is impermissible, according to administrative law, to take away vested rights. We examined the rival submissions with care. We decided thereafter to invite further argment, on an aspect of the case, of paramount importance in our view, that did not attract 30 the attention of either side, that is, the implications arising from the option exercised, particularly the relationship between the State and the'subject that came into existence as a result thereof, examined in juxtaposition with freedom of contract safeguarded by Article 26. In response, Mr. Evangelou submitted there 35 is little room in administrative law for the creation of a contra­ ctual relationship and referred us to a number of decisions, establishing that arrangements akin to contractualones,inciden­ tal to the implementation of an administrative act, create no rights in the domain of private law and must be examined within 40 426 Λ 3 C.L.R. Republic τ. Menelaou Pikis J. the context of the administrative act giving rise thereto (Fro Paschali v. The Republic

(1966)3 C.L.R. 593, 607; Niovi F. Frangou v. The Greek Communal Chamber & Others

(1966)3 C.L.R. 201). Mr. Papaphilippou for his part, took a contrary 5 view, relying on a number of decisions of the French Council of State, discussed by Z>. Korsos in his diatribe on Contract in Administrative Law. In his submission, there is ample room for the creation of a contract between the citizen and the State in consequence of the enforcement of the provisions of a law. 10 We debated theissues arising at length, and shall now proceed to deliver our decision. "ENTITLED OFFICERS": The pension that the Commissioner sought to tax derived directly from the application of the provisions of Law 52/62 15 and became payable to him in bis capacity as an "entitled pensionable officer". That he was re-employed in the public service, makes no difference and does not alter or qualify the nature of the right. Consequently, the amendment of s.8, by virtue of the provisions of s.2 of Law 19/76, had a direct 20 impact onhis rights and unless vulnerable on some other ground, it altered them to his detriment by making his pension liable to income tax. The wording of the amending law was clear to the extent of leaving no doubt as to the intention of the legislature to remove the exemption of a pension payable under 25 Law 52/62 from liability to income tax. Section 12

(1)of the interpretation Law, Cap. 1, requires that the amending law must, in the absence of an indication to the contrary, be read together with the provisions of the law it aims to amend. Rea­ ding the two provisions together, the inescapable conclusion 30 is that the exemption from income tax, conferred by s.8, is taken away. Therefore, we are unable to uphold the view of of learned trial Judge that Law 19/76 is inapplicable in the case of the applicant based on the view that he is not an entitled pensionable officer for, manifestly, he is. 35 STATUTORY PROVISFONS FMPLEMENTFNG CONSTFTUTFONAL DFCTATES: Where the Constitution frames the policy of the law in a given area, it is customary for one or more statutes to be enacted for the purpose of implementing this policy. Such legislation, 427 PiUa J. Republic v. Menelaou

(1982)though it must conform to the constitutional norms, it need not be confined to thefour corners of theconstitutional framework. It may make further provision supplementary or additional to that earmarked by the Constitution. Contrary to the submission of Mr. Papaphilippou, there is no rule that a 5 legislation, intended to give effect to constitutional provisions, is of a different character compared to any other enactment. And certainly to the extent to which it does not reproduce constitutional provisions, it is, in every sense, similar to every other law. Constitutionality is an issue directly referrable to 10 theinfringement of oneor moreoftheprovisionsof theConstitution. For a case of unconstitutionality to be made out, the Court must be persuaded convicingly beyond doubt that a given enactment is contrary to or inconsistent with one or more of tne provisions of the Constitution. 15 Article 192.3 of the Constitution broadly defined the benefits to which civil servants of the colonial administration would be entitled to, if not reappointed in the civil service. They do not include exemption from income tax. So, the immunity granted bys.8 of Law 52/62,had noconstitutional sanction and 20 likeanyother statutoryprovisionitcouldbeamended,provided, of course, such amendment did not offend any other constitutional provision. Wefind,therefore, ourselves in disagreement with the ruling ofthelearned trialJudgethat theexemptionwas constitutionally guaranteed; it was not and it could, other 25 considerations apart, to which we shall refer later, be taken away. VESTED RIGHTS: The concept of vested rights, straight forward at first sight, is sufficiently elusive to be susceptible to a number of interpre- 30 tations. The expression "vested rights" primarily connotes rights that accrued in law. Rights may accrue both in civil and public law. A right may be deemed to vest if the process of the law for its acquisition has been completed. The right crystalhzes thereafter and vests in the subject who becomes 35 its beneficiary in law. Certainty in the legal process and respect for the law, require that rights acquired under the law should remain undisturbed. Inevitably, interference with such rights undermines certainty 428 3 CX.R. Republic v. Menelaou Pikis J. and reduces respect for the laws. The need to sustain vested rights found expression in the Interpretation Law in the form of a presumption that subsequent laws are presumed, but not deemed, to leave unaffected vested rights. Section I0

(2)(c) 5 of the Interpretation Law, Cap. 1, provides that it shall be presumed that the repeal of a law leaves unaffected rights, privileges, obligations or liabilities, that were acquired, accrued or incurred under the repealed law. However, the presumption is a rebuttable one and may be displaced whenever a clear inten10 tion to the contrary is evinced by the repealing law. In the face of a clear legislativeexpression to the contrary, the presumption recedes and gives way to the will of the legislature, the supreme arbiters of the law. The presumption against an intention to take away vested 15 rights, is closely associated with the rule of construction, requiring that a statute be construed prospectively. Rightly, it is considered that giving a retrospective effect to a statute, erodes confidence in the law and ii a course apt to lead to injustice. No suggestion was made that Law 19/76 had a retrospective 20 effect, nor was any attempt made to invoke it retroactively. It was applied prospectively from the date of its promulgation. The crucial question in these proceedings revolves round the nature of'the rights that vested in Mr. Menelaou by virtue of the operation of the provisions of Law 52/62, particularly the 25 rights emanating from the option he exercised to opt for a pension free from income tax. To this aspect of the case, we shall presently direct our attention. THE RIGHTS THAT VESTED FN THE APPLFCANTj RESPONDENT, BY VFRTUE OF THE OPERATION OF 30 LAW 52/62: The nature of the rights created by virtue of the operation of Law 52/62, merit special scrutiny. Such rights, as there were created, did not vest in the applicant by the automatic process of the law, but entailed his participation and the exercise, 35 on his part, of an option. He was free to choose between two courses, a gratuity and a pension. Whatever his choice, the benefit would be free of income tax. If it was not for this choice and its implications, we would, unhesitatingly, reverse thetrial Judge considering thefreedom enjoyed by the legislature 40 in the absence of constitutional constraints to change the law. 429 Pikis J. Republic v. Menelaou

(1982)The pertinent question iswhether the rights of the applicant, as fashioned after the exercise, on his part, of an option are akin to contractualrights,making their creation and enjoyment subject to the provisions of Article 26.1 of the Constitution, safeguarding freedom of contract. The problem is new to 5 Cyprus case law, in that itwas never raised before in this form. We are unable to agree with Mr. Evangelou that the rights accruing to the applicant after the exercise of his option are incidentaltohisstatusasapublicofficer and,therefore, divorced from the realm of private law that takes cognizance of contract 10 rights. Compensation for loss of career, and any agreement regulating its payment, are primarily matters of private law. More so, in a case such as the present, where the terms were defined partly as a result of the exercise of an option by the beneficiary. That the compensation is calculated by reference 15 to the provisions of the Pensions Law, does not qualify or alter the nature of the right. And heie lies, with respect, the error of learned counsel for the Republic who argued that theright of the applicant to compensation for loss of career should be treated for all purposes as a pension right. It is not so and it 20 mattersnotthatthepartyliabletothepaymentofthecompensationistheState. Also,weareunabletosubscribetotheproposition of Mr. Evangelou that, iftherightscreated bytheexercise of theoption areinthedomain of privatelaw,a revisional court lacks, under any circumstances, jurisdiction to take cognizance 25 of the matter. For, the decision to tax the applicant was, in every respect, an administrative act, liable to judicial review under Article 146. The fact thauits validity depends on the constitutionality of Law 19/76 and the issue in turn depends on the infringement, if any, by this law of private rights, does 30 not sap thecourt ofjurisdiction to entertain the recourse. The processof a recourseistheonlymeansavailableto test thevalidity of an act of taxation. The issue of constitutionality of Law 19/76 and the extent to which it interferes with rights in thedomainofprivatelaw,areofdirect relevancetotheoutcome 35 of the appeal, as it was before the trial Court. Hence, it is perfectly competent for this Court to deal with the matter and to that weshall now devote our attention. The right acquired by the applicant in 1962, was the product of the exercise of a choice on his part, a choice involving two alternative courses. 40 The fact that the option was granted by law, does not alter its character, nor does it qualify the nature of the right. It was 430 3 C.L.R. Republic v. Menelaou Pikis J. a freedom relevant to the determination of applicant's incorporeal rights. 5 10 15 20 25 3 35 40 Having made that choice, he was bound thereto, without any amenity, to resile therefrom in the same way as a party becomes bound by the terms of a contract into which he enters. Was it open for the other party to the arrangement, the State, to escape from its provisions? The question is whether the State, as a corporate entity when it binds itself to discharge obligations in the domain of private law, isin any different position from a private individual; and in particular whether it can invoke its legislative powers to modify its obligations to the detriment oftheotherpartytothearrangement. Thefact thatthearrangement wasevolved or wasgenerated within the general framework of a statute, fashioning the policy of the law in a given area, does not alter the character of the obligations of the State. In the U.S.A., private arrangements resulting from the enforcement of a statute were repeatedly held to be indistinguishable from other contractual arrangements; the terminology employed to label these arrangements was "public contracts". Thus, it has been judicially acknowledged that commitments of a contractual character, directly arising from the enforcement of a statute, are enforceable as any other contractual arrangement and bind the parties thereto. The State, as a contracting party, isin nodifferent positionfrom othersandcertainlycannot invoke the armoury of the State to modify its obligations therein. A series of decisions establish that contracts that spring from the application of the provisions of the statute and contractual freedom granted thereunder, are properly regarded as contracts for the purposes of the constitutional clauses safeguarding freedom ofcontract, a basic right under the 5th and 14th amendment, entrenching due process. Charters and grants, arising from the application of the provisions of a statute and the acceptance of inducements granted therein, were held to be subject to due process and could not be revoked in circumstances destroying freedom of contract. (See, Modern Constitutional Law by Antieau, Vol. 1, para. 3, p. 249, New Orleans Gas Co. v. Louisiana Light Co.

(1885)115 US 650, 29 L Ed 516, 6 S Ct 252; Fletcher v. Peck

(1810), US 6 Cranch 87, 3 L Ed 162; Trusteesof Dartmouth College \. Woodward

(1819)US 4 Wheat 518, 4 L Ed 629; Atlantic Coast Line R. Co. v. Phillips

(1947)332 US 168, 67 S Ct 1584, 91 L Ed 1977, 67 S Ct 1584, 173 431 Pikis J. Republic v. Menelaou

(1982)ALR 1). The same was held to apply to tax exemptions extendedbyastatuteasaninducementtoenterintoacontractual arrangement with the State. It has been held that the State isfettered thereafter fromwithdrawingtheexemptions inasmuch asthiswould amounttoimpermissibleinterference withfreedom 5 of contract. (See, inter alia, Asylumv. NewOrleans 105 U.S. 368 (bk. 26, L. ed. 1130);Homeof theFriendless, 8 Wall. 430 (75 U.S. bk. 19, L. ed. 495); NewJersey v. Wilson,7 Cranch, 166 (11 U.S. bk. 3, L. ed. 303); Bank of Ohio v. Knoop,16 How. 376 (57 U.S. bk. 14, L. ed. 980). 10 Coming back to the facts of the case, the compensation that became payable to the applicant as a result of the application of the provisions of Law 52/62, crystallized after the exercise of a statutory option by Mr. Menelaou, an arrangement that had all the characteristics of a contract between the subject 15 and the State, creating rights and imposing liabilities in the domain of private law. It was a statutory condition precedent that the benefits conferred thereunder would be enjoyed free of income tax and the question arises whether it was legitimate onthepart of the Statetotakeawaythisadvantagetothedetri- 20 ment of the subject. We must inquire whether the State, as a partytoanarrangement ofthiskind,isinanydifferent position from any other party to acontractual transaction. Theanswer is in the negative. In the discharge of its obligations in the domain of private law, the State as a corporal entity, is in no 25 different position from any other party. A proper application of the rule of law, enshrined in our Constitution, requires that all subjects of the law do observe its provisions without distinction. Indeed, it can be argued that whenever the State is a party to an agreement creating civil law rights, it should be 30 implicitthatitwouldnotuseitspowertomodify toitsadvantage obligations undertaken thereunder. Nevertheless, the doctrine of separation of powers acknowledges supremacy to each of the three powers in their separate spheres. Therefore, the obligations of the executive branch cannot be regarded in law 53 asafetter totheexercise oflegislativepower. Thus,it becomes necessary to examine whether Law 19/76offends the provisions of Article 26.1 of the Constitution, safeguarding freedom of contract. 432 3 C.L.R. Republic v. Menelaou Pikis J. FREEDOM OF CONTRACT, ARTFCLE 26.1 OF THE CONSTFTUTFON—LAW 19/76: 5 10 15 20 25 Article 26.1 of the Constitution safeguards freedom of contract. Weneed not discussintheseproceedings the compass and ambit of the aforesaid article, a subject that divided the Full Bench of the Supreme Court in Constantinos Chimonides v. Evanthia K. Manglis

(1967)1 C.L.R. 125. There were three currents of opinion. One expressed by Triantafyllides and Stavrinides, JJ., to the effect that the application of Article 26.1 is limited to the freedom necessary for the formation of a contract. Vassiliades, P., and L. Loizou, JJ., basically subscribed to the view of Triantafyllides J. but not all the way, inasmuch as they acknowledged a reserve power to the State, to limit the right safeguarded by Article 26.1 in an emergency, thereby, agreeing in this respect with Josephides and Hadjianastassiou, JJ., who, by their judgment, gave vent to a wider interpretation of Article 26.1 but always subject to the reserve power of the State. Lastly, Josephides and Hadjianastassiou, JJ., decided that the freedom safeguarded by Article 26.1 is all embracive, extending both to the formation and execution oftheagreement. Earlier, weindicated thatweshallnot attempt to define Article 26.1 in any definitive manner for it is unnecessary for the purposes of the present appeal. There was, on anyviewofthejudgment, uniformity ofopinion that the freedom guaranteed by Article 26.1 encompasses, as Vassiliades, P. stated in his judgment, "the right to enter into legal contracts, subject to the conditions and clarifications therein". Section 2 of Law 19/76 aimed to redefine the background to the arrangements following the enactment of Law 52/62, and 30 _to that extent extinguish conditions precedent to entry into the arrangement. In such circumstances, the freedom that Mr. Menelaou had to choose between two alternative courses was taken away and with it the freedom he had to enter into the one or the other arrangement. Consequently, s.2 of Law 19/76 35 interfered with the freedom safeguarded by Article 26.1 and took away, retrospectively at that, the right Mr. Menelaou had to determine the nature of his private rights. If it is permissible to redefine the right of compensation of Mr. Menelaou, it would be equally permissible to do likewise in the case of entitled 40 officers who opted for a gratuity by taxing the money 433 Pikis J. Republic v. Menelaou

(1982)they received. One need only state the possibility to dismiss it as totally unsound. The conclusion we have reached is, we feel, also consonant with the proper application of the concept of the rule of law that requires adherence to basic standards ofjustice, substantive 5 and procedural. It would be offensive to common sense and norms of justice to allow the demolition of the foundations of a basically contractual arrangement, injecting thereby an element of uncertainty and mistrust in the management and conduct of the affairs of citizens. We need only remind there 10 was an outcry in England when the War Damage Act of 1967 was enacted for the purpose of reversing the state of the law, as it was found to be by the House of Lords in Burmah Oil Co. v. Lord Advocate [1965] A.C. 75. In England, the doctrine of the supremacy of Parliament leaves no room for impugning 15 on grounds of constitutionality a law, but not so in Cyprus, in view of the mandatory provisions of the Constitution. The appeal is, therefore, dismissed but for reasons different from those relied upon by the trial Court. There will be no order as to costs. 20 Appeal dismissed. No order as to costs. 434