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[2017] ZAFSHC 30
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VIP Consulting Engineers (Pty) Ltd v Mafube Local Municipality (4888/2013) [2017] ZAFSHC 30 (16 February 2017)
I
N
THE HIGH
COURT OF SOUTH AFRICA,
FREE
STATE DIVISION, BLOEMFONTEI
N
CASE
NO: 4888/2013
In
the matter between:
VIP
CONSULTING ENGINEERS (PTY) LTD
[Registration
number:
1
997/005608/07]
Plaintiff
and
MAFUBE
LOCAL
MUNICIPALITY
Defendant
CORAM:
MBHELE, J
HEARD
ON:
26, 27, 29 JULY 2016
1
and 2 NOVEMBER 2016
JUDGMENT
BY:
MBHELE, J
DELIVERED
ON:
16 FEBRUARY 2017
INTRODUCTION
AND BACKGROUND
[1]
This is an action based on 4 claims by the plaintiff
emanating from alleged services rendered by the plaintiff to
the
defendant.
The
claims are for the payment of the following amounts: Claim 1: R556
542.30,
Claim
2: R328 833.00,
Claim
3: R164 680.13,
Claim
4: R799 258.33
[2]
It is alleged that the plaintiff was given written letters of
appointment to perform Preliminary engineering services for the
defendant. The appointment letters were accepted by Mr Graeme Ambrose
on behalf of the plaintiff.
[3]
At all times, material to the transactions, the defendant was
represented by one Isaac Radebe (Radebe) and the Plaintiff by
Graeme
Ambrose (Ambrose) who was the director then.
[4]
The letters of appointment related to 4 projects and contained the
following:
"Claim
1:
Risk Appointment: Solid Waste Disposal
Sites
and
Rehabilitation
of
Existing Sites in Mafube
towns:
Mafube
Municipality hereby appoint your firm at risk to undertake the
preliminary design stage with the view to preparing the feasibility
study, technical report and approval from DWAF and registration of
the above project.
Upon
securing DWAF approval and funds of the project your firm should then
proceed with detail design, preparation of necessary
documents and
the project management of the project during implementation phase of
the project.
Please
note that the project implementation is subject to approval by the
National Department of Finance.
Claim
2:
Risk
Appo
i
ntment:
NAMAHADI- Sewerage
Reticulation
Network and Toi
l
et
Structures
in
Qalabotjha for 697 stands
;
Mafube
Municipality hereby appoints your firm to undertake the preliminary
design stage with the view to preparing the feasibility
study,
technical report and MIG 1 registration documents required to secure
the registration of MIG funding for the project, sewer
reticulation
network and toilet structures in Qalabotjha for 697 stands.
Upon
securing DWA approval and MIG registration and availability of funds
your firm should then proceed with detail design, preparation
of
tender documents and the project management of the project during
implementation phase of the project.
Please
note that the project implementation is subject to approval by the
Municipal Infrastructure Grant and availability of funds'.
Claim
3:
Risk Appo
i
ntment:
Sewerage
Reticulation
Network
and
Toi
l
et
Structures
in
Ntswanatsatsi/
Cornel
i
a
for
393
stands
Mafube
Municipality hereby appoints your firm to undertake the preliminary
design stage with the view to preparing the feasibility
study,
technical report and MIG 1 registration documents required to secure
the registration of MIG funding for the project, sewer
reticulation
network and toilet structures in Ntswanatsatsi
I
Cornelia
for 393 stands.
Upon
securing DWA approval and MIG registration and availability of funds
your firm should then proceed with detail design, preparation
of
tender documents and the project management of the project during
implementation phase of the project.
Please
note that the project implementation is subject to approval by the
Municipal Infrastructure Grant and availability of funds'.
Claim
4:
Risk
Appointment:
Extension
of
Bulk
Water Supply
for Namahadi/
Frankfort
and
Ntswanatsatsi/
Cornelia;
Mafube
Municipality hereby appoints your firm to undertake the preliminary
design stage with the view to preparing the feasibility
study,
technical report and MIG 1 registration documents required to secure
the registration of MIG funding for the project, extension
of bulk
water supply for Namahadi/ Frankfort and Ntswanatsatsi/ Cornelia.
Upon
securing DWA recommendations, MIG registration and availability of
funds your firm should then proceed with detail design,
preparation
of tender documents and the project management of the project during
implementation phase of the project.
Please
note that the project implementation is subject to approval by the
Municipal Infrastructure Grant and availability of funds'.
[5]
Defendant resists the claims on the basis that the
contract it entered into with the plaintiff was on
risk
basis and dependent on the availability of funds to be allocated
through MIG, further that the contract was concluded in breach
of
prescribed procurement laws.
[6]
Plaintiff prepared the preliminary design reports for all four
projects and submitted the defendant's applications to
Department of Water Affairs (DWA) for
MIG
funding.
The
costs of the projects were estimated as follows: Claim 1: R 31 736
700. 00
Claim
2: R 13 532 085. 00
Claim
3: R 6 394 300
Claim
4: R 30 524 750
[7]
The applications for funding were not approved by DWA for
MIG
allocation.
Around
August 2012 Plaintiff terminated its services in the Free State and
Ambrose resigned as its director to take over Plaintiffs
operations
in the Free State under a new company called FLAGG.
Flagg
would complete all outstanding projects defendant awarded to
plaintiff.
Ambrose
gave the Defendant an agreement entered into between Flagg and the
Plaintiff. Upon receipt of the agreement the Defendant
terminated all
the appointments awarded to the Plaintiff.
It
is common cause that the Plaintiff worked with the Defendant as the
only consultant for infrastructure engineering work since
1990.
[8]
The relationship between the Plaintiff and the
Defendant developed to a point where the Plaintiff would
identify a need and advise the defendant on how to meet the needs of
the municipality in alignment with the relevant IDP.
Plaintiff
used this approach as its marketing drive to most municipalities in
the Free State.
PLAINTIFF'S
CASE
[9]
The Plaintiff party called Stephanus Prinsloo (Prinsloo) in support
of its case. Prinsloo testified to
inter
alia,
the effect that he is a professional engineer and a Director of
VIP Consulting Engineers (Plaintiff). He started working for the
Plaintiff since 1989 and assumed the position of a director during
1994-95. Plaintiff is a civil engineering company engaged,
inter
alia,
in municipal infrastructure projects
involving sewer networks, roads, storm water drainage and bulk
services supply which entails
building of reservoirs.
[10]
The projects undertaken by plaintiff often involve civil engineering
designs. It starts with the concept and viability and
proceeds to
preliminary design reports, and
then detailed designs
and
execution of projects. The Plaintiff does designs and drawings for
such projects.
[11]
The Plaintiff has been doing civil engineering for the Defendant
since 1990 and they were the only consultant until recently.
Plaintiff
received appointment letters from defendant instructing the Plaintiff
to perform Engineering preliminary designs in respect
of the
aforementioned projects. The preliminary design reports would be
submitted to DWA in support of funding from the MIG. Upon
securing
approval from the Department of Water Affairs, the Plaintiff would
proceed with the implementation phase of the project.
[12]
The Plaintiff would, according to Prinsloo, be entitled to submit its
invoices upon completion of preliminary design report
and such
invoices were payable within 30 days of submission. He further
testified that plaintiff was aware that all these projects
were not
budgeted for by the defendant and the general practise in the past
would be to wait for the approval of the MIG before
invoices could be
submitted for payment. This was mere courtesy extended to the
defendant owing to the long standing relationship
between the
parties, but it did not preclude plaintiff from demanding payments
immediately.
[13]
When asked how would the Municipality pay for work not
budgeted for, his response was that defendant can
easily redirect
funds from its budget as the preliminary designs are being used to
source huge sums of money from the MIG.
[14]
He is aware that the funding applied for was not approved and that
work has commenced on 3 of the projects. Babereki is the
consultant
in all these projects. Babereki has appointed Flagg as its
Subcontractor to perform work that would have been performed
by the
Plaintiff.
[15]
It is his evidence that the preliminary designs used by the
contracted service providers were done by the Plaintiff and the
Plaintiff is entitled to payment for its completed work. The
Plaintiff appointed Flagg as a subcontractor for all the outstanding
projects in the Free State when it closed down its operations in the
Province.
[16]
His understanding of risk appointment is that the 25% of
engineering work did not form part of risk appointment. According
to
him, risk would only kick in on the phase two of the projects which
were dependent on approval of MIG funding.
[17]
He explains that the appointment was termed risk appointment in order
to accommodate an eventuality where funds may not be
made available
from the Municipal Infrastructure Grant for implementation phase.
DEFENDANT'S
CASE
[18]
Defendant called Graeme Ambrose and Nkabi Andrew Hlubi. Ambrose
testified to
inter
alia,
the effect that he is a consulting civil engineer attached
to Flagg. He got employed by the Plaintiff in 1998 as a resident
engineer
for various projects including Mafube. He became a director
in 2004. At the time of issuing of the appointment letters in the
current
matter he was still a director and project leader for the
work performed by plaintiff in the Free State.
[19]
He was instrumental in the discussions that led to the defendant
issuing the relevant appointment letters. The appointment
letters
came as a result of Plaintiff's marketing exercise in terms of which
plaintiff would study the defendant's Integrated Development
Plan,
identify gaps and offer assistance to the defendant on how to meet
its delivery objectives.
[20]
The aforementioned engagements resulted in the defendant entering in
various contracts with the plaintiff including those that
are at the
centre of the current matter. According to him, there was no
agreement reached in relation to costs payable for the
first stage of
the process, which would normally constitute 25% of engineer's fees
in each project. As per the guidelines the
Plaintiff was only
entitled to invoice the client after the funds were approved and
detail designing was complete. That process
comes just before the
tender process for actual construction work.
[21]
The understanding was that the Plaintiff would only be paid upon
funding being obtained through the Municipal Infrastructure
Grant
(MIG). There would be no fee payable if funding was not obtained.
[22]
Appointment letters were accepted on the basis that Plaintiff
would do work stipulated in paragraph
1
of the letters for the projects to be accepted by the
Department of Water Affairs and become eligible for MIG.
[23]
Before
2004
the appointments were done verbally
and later it was agreed that they be reduced to writing to avoid
exposing municipality to unnecessary
disputes. All appointments were
based on risk for that purpose.
[24]
He denied that Flagg was a subcontractor for the Plaintiff.
According to him, the plaintiff ceded all its rights and obligations
to Flagg when it terminated its services in the Free State. Flagg had
to take over all outstanding projects that plaintiff was
involved in.
[25]
He confirmed that Babereki has been appointed by National Government,
from the Presidential budget, to carry out similar projects
within
Mafube. The appointment of Babereki is under the Presidential bucket
eradication programme and it has nothing to do with
Mafube.
[26]
He omitted certain sections of the agreement he entered into with the
Plaintiff because, in his view, the financial arrangements
between
them were of no concern to the defendant.
[27]
Nkabi Andrew Hlubi testified to the effect that he is the Acting
Municipal Manager and accounting officer for the Plaintiff.
He is
permanently employed as the Chief Financial Officer.
[28]
The incumbent in the position of the Municipal Manager, Radebe, is on
special leave since January 2015. He is aware that the
Plaintiff was
appointed on risk for all the projects.
[29]
All the projects relevant to this matter were not budgeted for as
such the defendant would not have committed funds they did
not have
to finance these projects.
[30]
His understanding of risk of appointment is that the plaintiff
agreed to do preliminary design report, which in
his view, is a desk
top exercise aimed at helping the Municipality secure MIG funding.
Most information is gathered from the Municipality's
Integrated
Develop Plan.
[31]
He confirms that the Plaintiff would have benefitted
by being given preference during the implementation
phase
of the projects.
Their
duties would involve drawing of detailed designs, evaluating bidders
for the actual construction work and monitoring each
project in its
totality.
[32]
The National government through the Presidential bucket eradication
programme appointed Babereki Consultants to do work similar
to the
one the Plaintiff got appointment letters for.
[33]
Babereki was appointed by National government to oversee business
plans of all Municipalities that had backlogs. This was a
Presidential intervention to clear Municipal backlog based on the
reports submitted by each Municipality. Babereki appointed
Flagg as a subcontractor and the relationship between the
subcontractor and Babereki is not regulated by the defendant.
SUBMISSION
FOR THE PLAINTIFF
[34]
Mr Venter painstakingly contends for the Plaintiff to ,
inter
alia
, the
effect
that the Plaintiff
entered into a partly oral and partly written contract for the
drawings of preliminary design reports in all
4 claims constituting
25% of the engineering work in each project. He further contends that
the evidence shows that the Plaintiff's
payment of the completed work
in each project did not depend on approval of funds through MIG. He
contends further that the defendant
derived benefit out of the work
done by the plaintiff and defendant was enriched
at the expense
of the plaintiff. He
further submits that the principle of fairness dictates that the
plaintiff be compensated for
its loss.
SUBMISSION
FOR THE DEFENDANT
[35]
Mr Louw on behalf of the Defendant submits, with reference to
authority to
inter
alia,
the effect that the
appointments were made on a risk basis, with an understanding that
the plaintiff would be entitled to payment
once projects are approved
by (DWA) and funds allocated through MIG. He further contends that
the agreements relied upon by Plaintiff
are unlawful as they violated
provisions of Section 217 of the Constitution of the Republic of
South Africa or regulation 12 (1)
of the Municipal Supply Chain
Regulations.
[36]
He contends, further, that the agreements are void and unenforceable
and do not afford the Plaintiff a right of action.
He
further contends that enrichment claims cannot succeed on behalf of
the Plaintiff as the defendant's estate was not enriched,
but that of
Babereki Consultants who are carrying out the Presidential project,
alternatively Ambrose through FLAGG.
LEGAL
PRINCIPLES
[37]
The approached to be followed where a question of illegality is
raised was laid down in
Yannakou
v
Apollo
Club
1
974
(1)
SA
(A)
at
623
where the following was
said:
"It
is the duty of the court to take the point of illegality
mero
motu,
even if the defendant does not plead or raise
it, but it can and will only do so if the illegality appears
ex
facie
the transaction or from the evidence before it."
[38]
When an organ of State in the National, Provincial or Local sphere of
government, contracts for goods or services, it must
to do so in
accordance with a system which is fair, equitable, transparent,
competitive and cost effective.
See
Section
217
of
the Constitution of
the Republic of South Africa.
[39]
Supply Chain Management Policy of a municipality must comply with a
prescribed regulatory framework for Municipal Supply Chain
Management. See Section
1
1
2
(1)
of
the
Municipal Finance
Management Act 56
of
2003,
"A
contract or agreement procured through the Supply Chain Management
system of a Municipality must:
(a)
Be in writing;
(b)
Stipulate the terms of
the contract which must
include:
(i)
The termination of
contract in case of non or under performance
(ii)
Dispute resolution
mechanisms
to
settle the disputes.
See
Section
116 of the
Municipal
Finance Management
Act.'
[40]
Procurement contracts by state organs concluded without complying
with prescribed competitive processes are invalid.
See
Municipal
Manager:
Qaukeni
Local
Municipality
and
another
v FV General Trad
i
ng CC
2010 (1) SA 356
SCA.
[41]
Procurement laws are peremptory and give public authorities no
discretion. They seek to eradicate patronage and promote fairness,
openness and equity. Adherence thereto ensures good governance
and accountability.
Eastern
Cape Provincial Government Contract props
25 (PTY)
LTD
2001
(4)
SA
142
(SCA)
APPLICATION
OF THE LEGAL PRINCIPLES AND FINDINGS
[42]
It is patent from the undisputed evidence and submissions by the
parties that the Plaintiff was awarded appointment letters
in terms
of which it would perform consulting engineering services for various
projects. It is clear that the Plaintiff did perform
the preliminary
designs on each project with the defendant contending that the
preliminary designs were done on risk basis in that
the plaintiff
would only be entitled to payment for the work done once projects
have been approved by DWA for funding and MIG approval
number has
been allocated.
[43]
The factual dispute between the parties is limited to whether the
plaintiff was entitled to payment upon completion of preliminary
designs and feasibility study.
[44]
The validity of the contracts emanating from the appointment
letters is also in dispute.
[45]
It is apparent from undisputed evidence before me that the
relationship between the plaintiff and the defendant saw the
plaintiff
as the sole provider for engineering services within Mafube
and Phumelela Municipalities since 1990 until 2012 when the plaintiff
decided to terminate its services in the Free State. The lines were
so blurred that plaintiff never had to submit quotations nor
tender
for the services it rendered for the defendant.
[46]
The evidence further shows that some appointment letters were issued
long after the work was completed by the plaintiff.
[47]
It is clear from evidence before me that the plaintiff's way of doing
business put breaks on the wheels of procurement laws
long before
they could start turning.
[48]
The evidence shows that the appointment letters were issued without
taking into consideration what the laws governing procurement
in
municipalities prescribe.
[49]
The cost of each project exceeded R200 000 by far and appointment
letters were issued without competitive bidding contrary
to
procurement laws. The appointments were made based on the long
standing relationship the plaintiff had with the defendant and
put the plaintiff in a position where it
captured decision making capacity of the defendant.
[50]
Ambrose is the only witness who shed light on the circumstances that
prevailed when the relevant appointment letters were issued
and
subsequently accepted. It is clear from the undisputed evidence that
the plaintiff accepted appointment letters based on risk
as its
marketing exercise to retain its position as a preferred provider for
engineering services.
[51]
The preliminary designs were used to earn
plaintiff advantage over other potential service
providers. It is patent from the evidence that defendant was held at
ransom to the desires of the plaintiff and found no room to
implement
its supply chain management policy nor comply with the procurement
laws once plaintiff had delivered preliminary designs
and played a
role in securing funding.
[52]
The plaintiff knew that the projects were not budgeted for. It is
clear from the evidence that in all projects where plaintiff
was
appointed as a consulting engineer invoices would only be submitted
once funding was approved and allocated through MIG. This
was the
practice from 1990 when the plaintiff started doing business with the
defendant. The problem came in 2012 when plaintiff
terminated its
services in the Free State and appointed Ambrose through FLAGG to
handle all its outstanding work in the province.
[53]
I am convinced that there was no agreement to pay plaintiff for
preliminary designs before funds were approved.
[54]
It is clear that the contract between the parties was not in
accordance with the prescribed laws.
[56]
Mr. Venter's argument that there was nothing wrong in appointing
plaintiff without competitive bidding process owing to the
fact that
years before appointment letters were issued plaintiff was put on
defendant 's database is misplaced. Defendant's supply
chain
management policy provides that no procurement of services exceeding
R 200 000 .00 may be made without competitive bidding.
[57]
Municipalities, like all other government entities, have a
responsibility to act in public interest. Appointment of plaintiff
without competitive bidding process deprived defendant an opportunity
to hear alternative views or diverse estimates. It confined
itself to
one story line; the one provided by the plaintiff and had nothing
else to measure plaintiff s capacity and cost effectiveness
with.
[58]
The appointments were not in the interest of the community as a
whole. They have a potential of stifling inclusive development
and
economic empowerment within the municipality.
[59]
It is clear that the contracts that plaintiff seeks to enforce
are illegal and unenforceable.
ENRICHMENT
[60]
A claim for enrichment must meet the following requirements:
(i)
The defendant must be enriched;
(ii)
The plaintiff must be impoverished;
(iii)
The defendant's enrichment must be at the expense of the
plaintiff;
(iv)
The enrichment must be unjustified
(sine causa).
See
MC
Carthy
Retail Limited
v Short
Distance Carriers
2001 (3)
All SA
236
(A).
[61]
Plaintiff entered into the agreement knowing very well that its
payment depended on availability of funds. It gambled with
its
resources hoping to score bigger contracts. There is no proof that
defendant's estate was directly enriched by the work that
the
plaintiff performed. Funding was not approved. Babereki got appointed
by National Government. Babereki then appointed FLAGG
as its
subcontractor to do the work on projects similar to those plaintiff
was appointed for. It is FLAGG that derived benefit
out of these
projects.
[62]
I find no justification to allow an enrichment claim against
defendant. I am of the view that there exists no cause to depart
from
the general applicable practice of allowing costs to follow the
event.
ORDER
[63]
In the light of the above, I make the following order:
Plaintiff's
claim is dismissed with costs. Costs to include that of
one counsel.
___________________
N.M.
MBHELE, J
On
behalf of Plaintiff:
Adv. JA VENTER
M. VOSCHENK PHATSOANE HENNEY
MARKGRAAF
&
KELLNER STREET WESTDENE
BLOEMFONTEIN
REF: MV/SJ/WWB1/0005
On
behalf of the Defendant: Adv. M LOUW
STANDER AND PARTNERS
58 VICTORIA AVENUE
BLOEMFONTEIN
REF: HJ STANDER