By Brandon Cole (10 August 2024)
On 2 October 2024, the Constitutional Court handed down a significant judgment addressing a just and equitable remedy under Section 172(1)(b) of the Constitution.
The case exemplifies a broader phenomenon in which organs of state, including the applicant in this matter, the Greater Tzaneen Municipality, attempt to rely on their own unlawful conduct to avoid compensating innocent contractors for services rendered. The advantage to organs of state in this scenario is clear: they can enter into contracts knowing that their internal procurement processes, as well as potentially those mandated by the Public Finance Management Act (“PFMA”) or other legislation, have not been followed, yet still benefit from the services. When payment becomes due, they refuse on the grounds that the contract is void and unenforceable. The Constitutional Court has unequivocally stated that such conduct will not be tolerated.
In this case, the respondent was awarded a tender to provide the applicant with security services, and the initial tender was awarded for a period of 12 months. The respondent duly performed its services during this period and was compensated in full by the applicant. The parties then, seeing that the 12 Month period was coming to an end, agreed to extend the duration of the agreement for a further period of 24 months (“the extension agreement”). No additional tender process took place for this extension and it was manifestly not compliant with the applicant’s own procurement process. The respondent duly performed in terms of its obligations under the extension agreement rendering the services, however the municipality refused to make payment for the services.
Upon becoming aware that the extension agreement did not conform to its procurement processes, the applicant applied to have the agreement invalidated, and the application was successful. As a result of this invalidation, the respondent proceeded to file an unjustified enrichment claim against the applicant, which was granted by the High Court. However, on appeal, the SCA found that the respondent’s claim was not grounded in unjustified enrichment, but rather in the court’s power to make any order that is just and equitable under Section 172(1)(b) of the Constitution which discretion the SCA decided to exercise. It is this judgment of the SCA that the applicant challenged on appeal, leading to the Constitutional Court’s ultimate decision.
At this point there are a number of factors for parties contracting with organs of state to be aware of namely:
- legal due diligence should be done to ensure that contracts entered into with organs of state conform procurement process (each of which may differ) as well as any other relevant legislation such as the PFMA. The contracting party should at the least obtain a warranty or guarantee from the organ of state that its procurement process have been adhered to;
- a court setting aside an agreement with an organ of state on the basis of procurement process not being followed is not the end of the road for contracting parties, Section 172(1)(b) of the Constitution offers a potential remedy for the enforcement of a just and equitable remedy for the contracting party.
The Constitutional Court judgment underscores the constitutional obligation for organs of state to uphold and promote a high standard of professional ethics. When contracting for goods and services, organs of state are mandated to follow a system that is fair, equitable, transparent, competitive, and cost-effective. The Court issued a clear warning to organs of state attempting to evade their contractual obligations to innocent parties due to their own unlawful conduct, stating that “conduct of this sort will not be tolerated.”
Although the judgment is a positive development for contracting parties dealing with organs of state and sends a clear message, it remains advisable for such parties to seek comprehensive legal advice on the associated risks when entering into contracts with organs of state.
