Brief Summary

Unjust Enrichment — Claim for payment of expenses — Plaintiff sought recovery of expenses incurred under an unlawful contract — Plaintiff claimed R155,733,925.00 based on unjust enrichment after the Electricity Management Contract was set aside — Defendant raised defences including res judicata and lack of enrichment — Court held that the plaintiff's claim for unjust enrichment was valid and not barred by previous judgment, allowing the claim to proceed.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings concerned the second phase of litigation between the parties following an earlier determination that the underlying contract was invalid. The matter came before the Free State Division of the High Court, Bloemfontein, as a trial in which the plaintiff pursued monetary relief on the basis of just and equitable relief following judicial review, framed primarily as a claim founded on unjustified enrichment, and alternatively on negotiorum gestio.

The plaintiff was Rural Maintenance (Pty) Limited. The first defendant was Maluti-a-Phofung Local Municipality. The second defendant was the Premier: Free State Province N.O., although the trial and ultimate relief in this “second leg” focused on the municipality’s alleged enrichment and liability to compensate the plaintiff.

The procedural history was central to the posture of the dispute. In the previous trial, the validity of the parties’ Electricity Management Contract (EMC) was litigated. In that earlier judgment, the court held that the EMC was unlawful and set it aside ab initio, which disposed of the plaintiff’s contractual damages claim while leaving an alternative claim based on enrichment-type relief for later determination. This judgment accordingly dealt with the surviving claim and the defences raised to it.

The general subject-matter of the dispute was whether, notwithstanding the EMC’s invalidity, the plaintiff was entitled to recover expenses incurred and liabilities assumed in performing and implementing the EMC (including preparatory work and operational expenditure), to the extent that the municipality was enriched or ought, as a matter of just and equitable relief under constitutional and administrative-law remedial provisions, to compensate the plaintiff.

Material Facts

A significant portion of the material facts were admitted in pre-trial proceedings. The parties recorded that, as at about April 2011, the municipality’s electricity distribution network was in a severely deteriorated state, described as being “on the brink of collapse”. Major transformers suffered oil leaks; circuit breakers were damaged beyond repair; outages were frequent; live electricity distribution points were unsecured and posed electrocution risks; and extensive upgrading and replacement of infrastructure was required. These facts formed the factual backdrop to why the EMC was pursued and why the plaintiff undertook extensive preparatory and implementation work.

It was also common cause by agreement that the plaintiff performed work and incurred expenses or liabilities as pleaded (including as amplified by further particulars), and that the municipality admitted the supporting vouchers for those expenses or liabilities. The parties further agreed that evidence led in the first trial would form part of the evidentiary material in the second trial, and that various expert reports and underlying financial documents were admitted. An affidavit by a former senior municipal official, Mr Ungerer, was admitted by agreement.

Chronologically, the plaintiff’s evidence (particularly through Mr Bosch) described extensive activity before and after the EMC’s takeover date. The plaintiff undertook preparatory work to enable it to be operational by takeover, including mapping and plotting infrastructure, locating customers, planning outlet points, obtaining and installing systems and software, training personnel, replacing transformers, repairing and building lines, fencing substations, improving metering, and establishing operational facilities such as a control room, warehousing, and staff accommodation. The plaintiff also procured vehicles and specialised equipment after the EMC was concluded, to be used for implementation.

A further material aspect was the plaintiff’s state of mind and the surrounding circumstances regarding the EMC’s procurement regularity. The plaintiff accepted that statutory procurement requirements existed but contended that it had been assured by the municipal manager and the then executive mayor that requirements and formalities had been met. The plaintiff’s evidence was that the municipality’s stance changed after a new executive mayor was appointed, at which point allegations of invalidity intensified. National Treasury suggested that any uncertainty about authorisation could be addressed by submitting a new proposal to the municipal council for approval, and the plaintiff prepared such a submission, but it did not resolve the dispute.

It was also material that the municipality, at a point, instructed the plaintiff to refrain from implementing and executing the EMC. The plaintiff’s case, as accepted in part in the reasoning, was that by then substantial work and expenditure had already been incurred and that withdrawing at that stage risked a breakdown in electricity supply.

On the expert and affidavit evidence, the plaintiff’s work resulted in the electricity distribution system being described as overhauled and functional. Mr Ungerer stated that the municipality lacked manpower, skills, tools, funding, and structures necessary to operate and maintain the network at the time, and that the plaintiff performed a vast amount of work prior to takeover. He expressed the view that the value of improvements and work was in the region of R185 million, though the court later assessed the evidentiary adequacy of that valuation.

The municipality’s financial position in relation to Eskom also formed part of the factual matrix. The municipality owed Eskom more than R100 million when the EMC was concluded, and the debt later escalated significantly. The plaintiff paid the municipality’s Eskom account for seven months, totalling more than R120 million, and the court treated the nature and effect of those payments as relevant when addressing enrichment and the defences.

Legal Issues

The central legal questions were whether the plaintiff, after the EMC had been declared invalid and set aside ab initio, was entitled to monetary relief under section 172(1)(b) of the Constitution read with section 8(1)(c)(ii)(bb) of PAJA, and if so, on what juridical basis and to what extent. The plaintiff pleaded the claim as one of unjustified enrichment, alternatively as negotiorum gestio “to the extent that the First Defendant has been unjustly enriched”.

A further set of issues concerned the municipality’s defences, including whether the second trial was barred by res judicata, whether implementation was premature or reckless, whether the plaintiff proceeded with knowledge of invalidity and thereby assumed the risk of non-recovery, and whether the municipality was not enriched (or not unjustly enriched), including the contention that Eskom, rather than the municipality, was enriched by payments made.

The dispute therefore involved a mixture of the application of legal principles to largely admitted factual performance and expenditure, evaluative judgments about excusable error and the appropriateness of compensatory relief as a just and equitable remedy, and a quantification enquiry determining which categories of expenditure could properly be treated as representing the municipality’s enrichment (or saved expenditure) rather than merely the plaintiff’s costs of performance.

Court’s Reasoning

The court first addressed the pleaded defences. The res judicata defence was rejected on the basis that the earlier judgment expressly left open a claim founded on enrichment-type relief after setting aside the EMC. The court held that the present claim was indeed advanced on enrichment/negotiorum gestio grounds, and that the question whether particular items constituted enrichment was a matter for determination in the present proceedings rather than a bar to them.

On the “red flags” and knowledge-based defences (premature implementation, reckless conduct, proceeding with knowledge of invalidity, and assumption of risk), the court treated the municipality’s argument as asserting that the plaintiff’s conduct amounted to an inexcusable error that should preclude recovery. The court declined to examine every alleged warning sign in isolation and instead assessed them against the broader context. Specific points addressed included that the signing of the EMC away from the municipality’s offices was not viewed as inherently suspicious on the evidence, and that certain reactions from provincial structures (including the Premier’s stance) were linked to an alleged lack of National Treasury knowledge, which the court accepted was “patently false” to the plaintiff’s knowledge. The appointment of Amber consultancy after conclusion of the EMC was treated as capable of causing concern, but also as potentially consistent with an intention to implement the EMC.

The court emphasised contextual factors reinforcing the plaintiff’s belief that it was entitled to proceed. These included the plaintiff’s reliance on assurances of compliance by the municipal manager and executive mayor, the municipal manager’s prior experience with a similar contract at another municipality, the municipality’s supportive stance in Labour Court litigation arising from the EMC, and the municipality’s non-opposition to an interim interdict obtained by the plaintiff when opposition to the EMC peaked. The court accepted the plaintiff’s explanation that preparing a submission for a new council resolution was intended to remove doubt following a Treasury suggestion, and did not necessarily show acceptance of invalidity.

In dealing with the municipality’s “assumption of risk” argument, the court distinguished between ordinary commercial risk in implementing a concluded contract and the asserted proposition that the plaintiff assumed the risk of non-recovery if the contract were later declared unlawful. The court rejected the latter as unsupported, particularly given the court’s finding that there was no basis to conclude that the plaintiff knew procurement requirements were not met.

The court also disposed of the argument that the municipality was not enriched because Eskom was paid. It reasoned that payments were made on behalf of and to the credit of the municipality, and in any event those payments were effectively recovered from electricity consumers and accounted for in the plaintiff’s computation; accordingly, they did not negate enrichment in principle on the court’s approach to the claim.

Turning to the remedial framework, the court accepted that the applicable principles were largely common cause, but it addressed the municipality’s argument that enrichment recovery required proof that the plaintiff acted under an excusable error of fact or law, and that the “red flags” rendered any error inexcusable. The court held that, viewed in isolation, proceeding in the face of mounting opposition might appear questionable, but that the broader circumstances—large-scale investment already made, substantial work already utilised, and the risk to sustainable electricity supply—supported the conclusion that continuing was justified and at least an excusable error.

The court further stated that the “just and equitable” relief under section 172(1)(b) of the Constitution read with section 8(1)(c)(ii)(bb) of PAJA was not necessarily limited to enrichment claims. It emphasised that PAJA expressly contemplates an order directing payment of compensation, and that the constitutional and statutory provisions confer a wide discretion to structure a remedy that is just and equitable in all the circumstances. While public-law relief was described as the usual form, the court considered private-law relief not excluded.

When considering whether to allow compensatory relief, the court took into account the potential effects on the parties and the community, including taxpayers. It accepted that the municipality was enriched by having an upgraded and functional electricity distribution network, achieved at the plaintiff’s expense, and that the municipality’s Eskom account had been paid for a period. However, the court did not accept the asserted enrichment valuation of approximately R185 million as usable for quantification because Mr Ungerer’s valuation lacked supporting detail and was not evaluable.

The court then approached the quantification through the pleaded list of expenses and disbursements, while noting that the claim as formulated was not based on a valuation of actual enrichment. Because the expenses were diverse and did not align neatly with a single recognised condictio, the court regarded the claim as more appropriately classified as an actio negotiorum gestio. In doing so, it also considered that the plaintiff continued operations contrary to an explicit municipal instruction to cease, which could render the plaintiff, “at the worst”, a mala fide gestor. Relying on Standard Bank Financial Services v Taylam 1979 (2) SA 383 (CPD), the court accepted that a mala fide gestor cannot claim a refund of expenses as such, but may claim to the extent of the dominus’s enrichment.

Applying these principles to the various heads of expenditure, the court largely relied on Mr McDonald’s expert report and reasoned that some costs were not appropriate measures of municipal enrichment because they were costs the municipality would not realistically have been able or likely to incur given its capacity and financial constraints. The court accepted as enrichment, in substance, amounts relating to purchases comprising bulk electricity payments and materials for repairs and maintenance, as well as repairs and maintenance costs, transport and travel costs linked to servicing and repairs, and technology and software costs necessary for operating the distribution and commercial system.

Conversely, the court rejected several categories as not constituting calculable enrichment. It rejected the salaries and wages head because of evidentiary and conceptual difficulties, including that the municipality would not have employed staff to that extent, and because permanent staff costs would have existed for the plaintiff regardless of the EMC. It rejected bad debts written off, because they remained unrecoverable on the evidence and could not amount to enrichment, and rejected depreciation because it was an accounting measure and not shown to be enrichment, with the court noting the plaintiff’s ability to deduct depreciation in its own statements. It rejected business plan (feasibility study) costs as having been incurred before conclusion of the agreement as part of the plaintiff’s own risk, and it rejected much of the “other costs of service” category as not shown probably to have been incurred by the municipality, though it accepted certain identified sub-items within that category as constituting savings/enrichment.

Finally, the court deducted from the amounts treated as enrichment an amount described as income received from electricity consumers by the plaintiff, producing a net enrichment figure. The court concluded that the circumstances were exceptional and justified an award of compensation, but confined that award to the net amount it calculated as representing enrichment (or saved expenditure) on the evidence and its evaluative assessment.

Outcome and Relief

The court ordered the first defendant to pay the plaintiff R33 891 645,00. The amount was ordered to bear interest at the prescribed mora interest rate from the date of judgment to date of payment.

On costs, the court held that costs should follow the result, but it made a specific costs order relating to a postponement. The plaintiff was ordered to pay the wasted costs occasioned by the postponement on 23 May 2019, including costs of two counsel where employed. The defendant was ordered to pay the costs of suit in respect of the trial, including the costs of two counsel where employed, and including the qualifying, reservation, and attendance fees of the experts Mr R McDonald and Mr A Van der Merwe.

Cases Cited

Standard Bank Financial Services v Taylam 1979 (2) SA 383 (CPD)

Legislation Cited

Constitution of the Republic of South Africa, 1996, section 172(1)(b)

Promotion of Administrative Justice Act 3 of 2000, section 8(1)(c)(ii)(bb)

Rules of Court Cited

No rules of court were expressly cited in the judgment.

Held

The court held that the earlier decision setting aside the EMC did not render the enrichment/negotiorum gestio claim res judicata, because the earlier judgment expressly left that claim open. It held that the plaintiff did not, on the evidence and in context, proceed with implementation in a manner that rendered its conduct an inexcusable error barring relief, and that the plaintiff’s continued performance amid opposition was at least excusable given the assurances relied upon, the scale of investment already made, and the public-service implications for electricity supply.

The court held further that the municipality was enriched by the plaintiff’s performance, but that the plaintiff could recover only to the extent of enrichment, particularly because continued operation contrary to an instruction to cease could render it, at worst, a mala fide gestor who cannot recover expenses as such but may recover the measure of enrichment. The court therefore assessed the pleaded expenditure categories and allowed recovery only for those items it accepted as constituting enrichment or saved expenditure on the evidence, with a deduction for income received from consumers, arriving at a net award of R33 891 645,00, together with mora interest and the stated costs orders.

LEGAL PRINCIPLES

The judgment applied the principle that, after an administrative act or contract is set aside, a court has a remedial discretion under section 172(1)(b) of the Constitution and section 8(1)(c)(ii)(bb) of PAJA to craft a remedy that is just and equitable in all the circumstances. The court treated the statutory reference to compensation as confirming that relief is not necessarily confined to traditional enrichment formulations, although the present claim was ultimately resolved through enrichment/negotiorum gestio reasoning and quantification.

The court applied the approach that enrichment recovery (and similarly a negotiorum gestio claim in the circumstances described) is limited to the extent of the defendant’s enrichment, and that the claimant’s own expenditure is not automatically the measure of enrichment. The judgment further applied the principle, drawn from Standard Bank Financial Services v Taylam 1979 (2) SA 383 (CPD), that even where a gestor is mala fide because it acted contrary to the dominus’s expressed wishes, the gestor is not necessarily barred from recovery altogether but is confined to a claim measured by the dominus’s enrichment rather than a refund of expenses.

In quantifying enrichment, the court applied an evaluative principle that certain expense items do not constitute enrichment where they are not shown to be expenses the municipality would probably have incurred or savings the municipality would probably have realised, especially where the municipality lacked capacity and financing. On that basis, the court distinguished between categories such as infrastructure-related purchases, repairs, maintenance, transport, and operational systems (accepted as enrichment), and categories such as salaries and wages, depreciation, bad debts written off, and business plan costs (rejected as not constituting calculable enrichment on the evidence and rationale accepted by the court).

Rural Maintenance (Pty) Limited v Maluti-a-Phofong Local Municipality and Another (3447/2013) [2019] ZAFSHC 186 (17 October 2019)