Brief Summary

Contract — Municipal procurement — Invalid service level agreements — Plaintiff claimed payment for pothole repairs under two service level agreements (SLAs) with the municipality, both deemed invalid due to non-compliance with procurement regulations — Court found that the municipality was captured by officials, leading to unlawful contracts — Plaintiff's claim dismissed as no valid agreement existed, and the municipality's counterclaim for unjust enrichment upheld.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned a main action for payment arising from services rendered to a municipality, accompanied by a counterclaim and third-party proceedings. The plaintiff, Imvusa Trading 1581 BK (“Imvusa”), sued the defendant, Oudtshoorn Municipality (“the Municipality”), for R4 352 481.73 (noting that Imvusa’s heads of argument reflected a reduced amount after a deduction) plus interest and costs, said to be owing for pothole repair work performed during 2014/2015. The Municipality resisted the claim on the basis that the underlying procurement process and contractual instruments were unlawful and invalid.

In addition to defending the main claim, the Municipality advanced a counterclaim framed as an unjustified enrichment claim, alleging that Imvusa had been enriched because the Municipality paid substantially more than a fair price for the services. The counterclaim amount was R3 975 896.08.

The Municipality also joined six third parties. Claims against the first to fourth third parties, who were former municipal officials, were brought under section 32 of the Local Government: Municipal Finance Management Act 56 of 2003 (“MFMA”), described by the court as creating a form of “statutory delict” for irregular expenditure. Claims against the fifth and sixth third parties, who were members of Imvusa, were advanced on a basis “broadly speaking” akin to piercing the corporate veil to hold them accountable for Imvusa’s conduct.

Procedurally, the court recorded that before the hearing the second third party passed away and the Municipality did not join the executor of that estate; accordingly no relief was sought against the deceased third party. The first and fourth third parties did not participate in the proceedings. The third third party (Bezuidenhout) opposed the claim against her. The fifth and sixth third parties, who were also Imvusa’s members, participated insofar as they were directly implicated by the issues in the main action and the Municipality’s case.

The general subject-matter of the dispute was municipal procurement and accountability for expenditure, arising from a purported “mayoral” or “empowerment” pothole repair project implemented through service level agreements and an asserted procurement deviation, which the court found to be invalid.

2. Material Facts

The material facts were described as mostly common cause. During or about early August 2014, Imvusa became involved with the Municipality through engagement by the then Acting Mayor and Acting Municipal Manager regarding a proposal that Imvusa repair potholes in Oudtshoorn and surrounding areas. The court noted that it was unclear which party first approached the other, but stated that nothing turned on that uncertainty.

Imvusa’s members were the fifth third party, Angeline Lekay, and the sixth third party, Eva Gxowa. Ms Lekay had previously served as a municipal councillor and had been an executive deputy mayor for a substantial period. The court accepted that she had a fair understanding of basic principles of public procurement law and recorded that she conceded that the service level agreements in issue were invalid in light of the evidence.

Two service level agreements (“SLAs”) were concluded between the Municipality and Imvusa. The first SLA was signed on 13 August 2014 by the late Mr Human (second third party) in his capacity as acting municipal manager and purported to appoint Imvusa to repair potholes from 1 August 2014 to 31 October 2014. The second SLA was signed on 13 November 2014 by Mr Lionel Prins (fourth third party) and was supported by a deviation approved by Mr Ronnie Lottering (first third party), who purported to act as municipal manager/accounting officer. The second SLA covered the period 1 November 2014 to 31 May 2015. Imvusa relied only on the second SLA for its claim.

The court found it important that the last time the municipal council appointed Mr Lottering as Acting Municipal Manager expired at the end of June 2013 and that no proper appointment in terms of the Local Government: Municipal Systems Act 32 of 2000 was made thereafter. Mr Lottering then appointed Mr Prins for one day (13 November 2014) to enable the second SLA to be signed. The court recorded that it had previously ruled that both the purported deviation and the SLAs were invalid due to failure to follow due process, and that the evidence showed that at least Mr Lottering and Mr Prins were aware of the unlawfulness. The court further recorded evidence of later attempts to regularise matters by backdating approvals, including backdating of a deviation approval to June 2014.

Ms Bezuidenhout (third third party) testified that during 2015 she was asked to complete an application for a deviation because it was required by the Auditor-General, and that she was asked to complete similar deviations that would be backdated in an attempt to deceive the Auditor-General. The court treated this as supporting the conclusion that deviations were not properly obtained prior to incurring expenditure and were presented after the fact.

As a result of the arrangement, the Municipality paid R19 747 637.61 for the pothole project. R11 205 148.55 was paid directly to Imvusa, with the balance paid to suppliers for materials used. Based on square metre pricing, Imvusa claimed to have repaired 56 477 m² of potholes. Imvusa nevertheless claimed further amounts above what had been paid, relating to the last portion of work done during 2015, and this last amount remained unpaid.

The court accepted evidence that Lekay and Gxowa, although controlling minds of Imvusa, had little knowledge of the precise quantities and calculations, and that measurements were taken by municipal officials and Imvusa was paid per square metre. Additional amounts were charged, including for worker transport, and VAT was charged although it was not included in the quote. The court recorded that the members conceded that a profit was made, though less than anticipated.

By the time the final claim was submitted mid-2015, the Municipality was heavily indebted (approximately R110 million) and was placed under administration, with a process to negotiate debt payment over an extended period.

The Municipality led evidence from Mr Paulse (acting municipal manager from January 2016) about the consequences of maladministration, including reliance on reports by the Auditor-General (30 October 2015) and a Western Cape government forensic report (February 2016), both indicating the deviation and SLAs were invalid. The Municipality’s position was that no separate step to invalidate the SLAs was necessary because invalidity would be raised as a defence when Imvusa litigated.

The Municipality also led expert-type comparative costing evidence from Mr McKay, an experienced engineer, who compared what was paid to what would have been a fair price under competitive procurement, using figures of another contractor. He concluded Imvusa’s prices were highly inflated, and that proper procurement would have saved R7 885 244.68. Evidence was also led through Mr Ladouce regarding the Municipality’s supply chain management policy and transgressions of urgent/emergency/unsolicited bid procurement processes, including backdating attempts and his exclusion from the appointment process despite being supply chain manager.

3. Legal Issues

The central legal questions concerned the legal validity and consequences of municipal procurement decisions and contracts concluded without compliance with constitutional and statutory procurement requirements, and the extent to which financial consequences should be adjusted through constitutional remedies and/or private-law doctrines.

The dispute required determinations primarily about the application of law to largely common-cause facts, coupled with evaluative judgments about remedy. The key issues were whether the second SLA and the deviation were unlawful and invalid; whether Imvusa could nonetheless succeed on estoppel or unjustified enrichment/just and equitable relief despite invalidity; whether the Municipality could recover amounts from Imvusa on an enrichment theory; and whether certain municipal officials were personally liable under section 32 of the MFMA for unauthorised and irregular expenditure.

A further issue arose as to whether the third third party (Bezuidenhout) should be held liable under section 32 given her evidence of pressure and working conditions, which the court treated as relevant to assessing liability in her case.

4. Court’s Reasoning

The court located the dispute within the constitutional framework governing public procurement. It applied section 217(1) of the Constitution, which requires organs of state, when contracting for goods or services, to do so under a system that is fair, equitable, transparent, competitive and cost-effective. The court emphasised that municipal procurement is further governed at local government level by chapter 11, part 1 of the MFMA, the Municipal Supply Chain Management Regulations and the Municipality’s supply chain management policy adopted under the MFMA.

On the facts, the court found that there was no compliance with the regulatory framework; instead there was a “total disregard” of it. The deviation was not properly approved before the conclusion of the SLAs, and the court accepted evidence that deviations were presented long after expenditure had been incurred, as part of an attempted cover-up, including backdating to mislead oversight processes. The court treated the defect as not merely technical but going to the heart of constitutionally compliant procurement.

The court further reasoned that the circumstances showed that Imvusa, through Lekay and Gxowa, must have known that a project of this nature could not lawfully be awarded without a competitive process. The court relied on Lekay’s prior senior municipal roles and her admitted knowledge of procurement processes, and it considered the vagueness and incompleteness of the SLA and quote (including the absence of an operational plan and scope of works) as indicative of irregularity. This context fed into the court’s later assessment of whether it would be just and equitable to afford Imvusa any relief despite invalidity.

In addressing Imvusa’s alternative reliance on estoppel, the court applied settled authority that estoppel cannot be used to perpetuate a state of affairs prohibited by law in the public interest. It relied specifically on Eastern Cape Provincial Government and Others v Contractprops 25 (Pty) Ltd 2001 (4) SA 142 (SCA), which refused to invoke estoppel to uphold a contract awarded contrary to legally required procurement processes. The court treated the present facts as analogous and held that estoppel could not sustain Imvusa’s claim.

In addressing the possibility of relief on an enrichment basis, the court analysed the remedial discretion under section 172(1) of the Constitution, noting that once conduct is found inconsistent with the Constitution, a court must declare it invalid and may grant any order that is just and equitable. The court referred to Constitutional Court jurisprudence describing the default “corrective principle” in procurement cases: the consequences of invalidity should generally be reversed, commonly by setting aside implicated contracts, subject to a departure where justice and equity require it. The court identified factors drawn from the authorities, including delay, prejudice, and the extent of a service provider’s blameworthy conduct (including complicity or turning a blind eye), with innocence potentially favouring departure from the corrective position.

Applying those factors, the court held that there was no room on the facts to grant Imvusa relief on a just-and-equitable/enrichment basis. It reasoned that the procurement failures were profound, coupled with political interference and unlawful conduct, and that Imvusa had in any event made a profit. It further held that an enrichment claim was not specifically pleaded and proven. The evidence from McKay that a proper process would have resulted in savings exceeding the amount claimed, together with the court’s view that Imvusa’s prices were exorbitant and above market rates, supported dismissal of the plaintiff’s alternative enrichment claim.

Turning to the Municipality’s counterclaim framed as an enrichment claim against Imvusa, the court held that this claim was not proven on the evidence and could not be sustained. It therefore dismissed the Municipality’s enrichment claim against Imvusa, but made no order as to costs on that component.

The court then addressed the MFMA section 32 claims against municipal officials. It set out the statutory scheme imposing liability on an accounting officer and other political office-bearers or officials who deliberately or negligently commit, make, or authorise unauthorised, irregular, or fruitless and wasteful expenditure, and requiring the municipality to recover such expenditure from the person liable unless written off after investigation and certification as irrecoverable.

On the evidence, the court found that Mr Lottering, acting as accounting officer, deliberately committed unauthorised and irregular expenditure without regard to the budget, and attempted to cover his conduct by backdating the deviation. It found Mr Prins liable because he was involved in the signature of the second SLA pursuant to a contrived one-day appointment, the documentation was vague and incomplete, and he made no enquiries as to regularity. The court treated their non-participation in the proceedings as consistent with liability on the proved case.

The quantum of overspending was linked to McKay’s evidence. The court found that Lottering and Prins were liable for R7 885 244.68, but also held that Prins was involved only in the second SLA period and therefore his liability should be limited accordingly. The court fixed Prins’s liability at R1.18 million.

By contrast, in respect of Ms Bezuidenhout (the only third party who opposed), the court accepted that the prevailing atmosphere and working conditions during the period of municipal “capture” were relevant. It took into account her reliance on duress exerted by seniors when considering liability and concluded that no order should be made against her.

As to claims against the deceased second third party (Human) and against Lekay and Gxowa (fifth and sixth third parties), the court held that the claims were not proven, and it granted absolution from the instance in their favour.

5. Outcome and Relief

The court dismissed Imvusa’s contractual claim with costs and also dismissed Imvusa’s enrichment claim with costs. It dismissed the Municipality’s enrichment counterclaim against Imvusa, but made no order as to costs in respect of that counterclaim.

The court dismissed the section 32 claim against the third third party, Bezuidenhout, with no order as to costs. It granted absolution from the instance regarding the Municipality’s claims against the second, fifth and sixth third parties (Human, Lekay, and Gxowa), with no order as to costs.

The court granted monetary relief to the Municipality under section 32 of the MFMA against the first third party, Lottering, ordering him liable in the amount of R7 885 244.68, with no order as to costs. It also held the fourth third party, Prins, liable under section 32 in the amount of R1.18 million, with no order as to costs.

Cases Cited

Eastern Cape Provincial Government and Others v Contractprops 25 (Pty) Ltd 2001 (4) SA 142 (SCA).

Buffalo City Metropolitan Municipality v Asla Construction (Pty) Ltd 2019 (4) SA 331 (CC).

Electoral Commission v Mhlope and Others 2016 (5) SA 1 (CC).

State Information Technology Agency SOC Ltd v Gijima Holdings (Pty) Ltd 2018 (2) SA 23 (CC).

Govan Mbeki Municipality v New Integrated Solutions (Pty) Ltd (121/2020) [2021] ZASCA 7 (April 2021).

Allpay Consolidated Investment Holdings (Pty) Ltd and Others v Chief Executive Officer of the South African Social Services Agency and Others (2) 2014 (1) SA 604 (CC).

Central Energy Fund SOC Ltd and Another v Venus Rays Trade (Pty) Ltd and Others [2020] ZAWCHC 164 (20 November 2020).

Swifambo Rail Leasing (Pty) Ltd v Passenger Rail Agency of South Africa [2018] ZASCA 167; 2020 (1) SA 76 (SCA).

Legislation Cited

Constitution of the Republic of South Africa, 1996, section 217 and section 172.

Local Government: Municipal Finance Management Act 56 of 2003, including section 32 and section 111, and the definitions in section 1 (including “unauthorised expenditure”, “irregular expenditure”, and “fruitless and wasteful expenditure”).

Local Government: Municipal Systems Act 32 of 2000.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that the procurement deviation and the SLAs underpinning Imvusa’s claim were invalid due to non-compliance with constitutional and statutory procurement requirements. It held that estoppel could not be invoked to uphold an unlawful procurement outcome, and that Imvusa had not established a basis for relief on unjustified enrichment or a just-and-equitable remedy, particularly given the nature of the unlawfulness, the absence of proper pleading and proof of enrichment, and the evidence indicating inflated pricing and profit.

The court further held that the Municipality’s enrichment counterclaim against Imvusa was not proven. However, it held certain municipal officials personally liable under section 32 of the MFMA for unauthorised and irregular expenditure, finding Lottering liable for R7 885 244.68 and Prins liable for R1.18 million. It declined to make an order against Bezuidenhout, taking into account her evidence of duress and the prevailing conditions during the relevant period.

LEGAL PRINCIPLES

The judgment applied the constitutional principle that public procurement by an organ of state must comply with section 217(1) of the Constitution, requiring a system that is fair, equitable, transparent, competitive and cost-effective, and recognised that the MFMA, the Municipal Supply Chain Management Regulations, and municipal SCM policy implement that constitutional standard at local government level.

It reaffirmed the principle that estoppel cannot be used to validate or perpetuate conduct prohibited by law in the public interest, relying on Supreme Court of Appeal authority in the procurement context.

It applied the constitutional remedial framework under section 172(1), including that invalid conduct must be declared invalid and that a court has a wide discretion to craft a remedy that is just and equitable. Within procurement disputes, the judgment accepted the “corrective principle” as the default position, namely that consequences of invalid procurement should generally be reversed, while recognising that departure may be justified by justice-and-equity factors such as delay, prejudice, and the degree of a service provider’s blameworthiness or innocence.

It applied section 32 of the MFMA as a basis for personal liability of municipal officials or accounting officers who deliberately or negligently commit, make, or authorise unauthorised or irregular expenditure, and treated evidence of backdating and failure to follow due process as supporting deliberate or negligent contravention. At the same time, it treated duress and contextual working conditions as relevant to the assessment of whether liability should be imposed on an official in the specific circumstances presented.

Imvusa Trading 1581 BK v Oudtshoorn Municipality (1708/2017) [2022] ZAWCHC 211 (20 October 2022)