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2024
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[2024] ZAECMKHC 89
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Amathole District Municipality v Betram (Pty) Ltd and Another (CA151/2023) [2024] ZAECMKHC 89 (20 August 2024)
FLYNOTES:
MUNICIPALITY – Authority of official –
Settlement
agreement
–
Legality
– Grounds for rescission of compromise agreements restated –
Contended that conduct of municipal manager
was illegal and ultra
vires resolution and that he lacked authority to conclude
agreement – Explanation proffered for
delay in filing notice
of appeal is unsatisfactory – Unless impropriety in conduct
of legal practitioners is established,
or settlement is shown to
be unlawful on another basis, municipality is bound by it and
order of court – Appeal dismissed
–
Local Government:
Municipal Systems Act 32 of 2000
,
ss 59
and
109
(2).
IN
THE HIGH COURT OF SOUTH AFRICA
(EASTERN
CAPE DIVISION, MAKHANDA)
CASE
NO. CA 151/2023
In
the matter between:
AMATHOLE
DISTRICT MUNICIPALITY
APPELLANT
and
BETRAM
(PTY) LTD
FIRST RESPONDENT
THE
SHERIFF OF THE HIGH COURT,
EAST
LONDON
SECOND RESPONDENT
JUDGMENT ON APPEAL
Rugunanan
J
[1]
The central question in this appeal is whether it
would be appropriate for this court to rescind an earlier court order
which had
incorporated a compromise or settlement agreement concluded
between the appellant (the municipality) and the first respondent
(the
respondent) in the course of contested proceedings.
[2]
The second respondent does not feature in this
appeal.
[3]
The
consent order between the parties emanated from a defended action
instituted by the respondent (as plaintiff) against the municipality
(as defendant), and was made an order of court by Rusi J on 2 August
2022.
[1]
Subsequent thereto and
on 26 June 2023, Makaula J dismissed the application by the
municipality to have the consent order rescinded.
Following that
dismissal he granted the municipality leave to appeal to this court.
[4]
The appeal concerns the legality of the settlement
agreement.
[5]
The
grounds for rescission of compromise agreements under the common law
are fraud,
justus
error
,
or any other just cause.
[2]
The
test is stringent
[3]
, the
rationale being that a settlement consensually entered into and made
an order of court is
res
judicata
as
between the parties and has binding effect in regard to the matters
covered thereby.
[4]
[6]
At the commencement of the matter three
preliminary applications were filed – one of them being an
application for condoning
the late filing of the notice of appeal and
the other two were applications for relief under uniform
rule 30.
Each of the applications was opposed. I do not intend dwelling much
on them save for what is mentioned at the conclusion of this
judgment. Relevant to the condonation sought by the municipality the
approach adopted is that the outcome on the merits of the
appeal will
be dispositive of the condonation issue.
[7]
The crux of the case for rescission is that the
acting manager of the municipality, Mr Mosala, acted contrary to a
council resolution
to defend the action instituted by the respondent
against the municipality and by concluding the settlement agreement
the municipality
became obliged to incur expenditure otherwise than
in accordance with an approved or adjusted budget.
[8]
Hence, in concluding the agreement the conduct of
the municipal manager was illegal and
ultra
vires
the resolution.
[9]
The municipality posits that the legality issue is
underpinned by the lack of authority of its manager to have concluded
the agreement
which the municipality maintains renders the consent
order liable to be set aside. The municipality contends that the
issue goes
to the root of the matter and constitutes just cause for
seeking rescission.
[10]
It is nowhere apparent from the notice of appeal
or anywhere else in the record, that the appeal is advanced on the
aforementioned
basis. Counsel for the municipality stated that this
is evident from the
extempore
judgment of the court
a
quo
that granted leave to appeal –
but the judgment is not included in the record, nor is the order in
terms of which leave was
granted. The respondent drew on the fact
that the legality issue, amongst others, was abandoned by the
municipality when the rescission
application was argued before
Makaula J. I will revert to this later in this judgment when dealing
with the approach adopted by
this court on appeal.
History
[11]
In
April 2018 the respondent instituted action against the municipality
in which it claimed an amount of R39,7 million
[5]
.
The action was instituted pursuant to a public tender awarded by the
municipality to the respondent during March 2014 for the
supply of
precast concrete pit latrines. The claim was for specific performance
of the contract, alternatively enrichment. The
amount was uniformly
claimed on both causes of action – it being based in the first
instance on the municipality’s
failure or refusal to pay the
balance on the contract price; and in the alternative, the
municipality’s enrichment at the
expense of the respondent’s
impoverishment.
[12]
It is not in dispute that after negotiations that
extended over a two-day period, commencing on 1 August 2022 (being
the date of
trial), the respondent’s claim was settled on 2
August 2022. The settlement was initiated by an offer made at the
instance
of the municipality represented at the time by its then
acting municipal manager, Mr Mosala, who had at all material
times instructed their attorney and senior counsel – all of
whom, on the version of the respondent, had the ostensible authority
to do so.
[13]
The respondent contended that Mr Mosala’s
presence and involvement meant that he knew that settlement
negotiations were being
conducted on behalf of the municipality, that
he allowed the legal representatives accompanying him to do so, and
that he conferred
upon them the authority to settle.
[14]
As a result, the respondent accepted the offer.
The acceptance constituted a settlement in terms of which the
municipality would
pay the respondent the amount of R19 140 000
and culminated in the order taken by consent before Rusi J.
[15]
The order recorded that the settlement shall, by
agreement between the parties, be made an order of court and that it
shall constitute
a judgment of the court entitling the respondent to
proceed to execution in the event of the municipality’s failure
to comply
therewith.
[16]
At the outset, Mr Monwabisi Somana, who had
succeeded Mr Mosala as acting municipal manager and was the main
deponent to the founding
papers in the rescission application, did
not dispute that the order was taken by consent. For purposes of this
appeal the issue
for the municipality is Mr Mosala’s alleged
lack of authority, which it contends detracts from the legality of
the settlement
agreement.
[17]
In the course of events following the consent
order the municipality proposed a structured payment plan. The
respondent declined
acceptance and caused a writ of execution to be
issued, whereupon the sheriff attached movable property to the value
of R862 600.
[18]
On 14 October 2022 the municipality launched an
urgent application to stay the execution proceedings pending an
investigation into
the circumstances surrounding the conclusion of
the settlement agreement pending the institution of the rescission
application.
Mr Somana averred that the basis on which the settlement
was concluded remained unknown. The basis of the complaint was that
the
absence of a memorandum setting out the ingredients for the
settlement constituted a material omission that for all intents and
purposes warranted the grant of a rescission order.
[19]
In the appeal the primary contention regarding the
settlement agreement was that Mr Mosala did not have the authority to
conclude
it. It was argued that no valid agreement can flow from a
settlement amount that was not budgeted for by the municipality, and
that the public interest requires the courts to guard against the
misappropriation of public funds. In summary, the municipality
contended that once it was shown that the settlement agreement was
invalid on any of these grounds, the consent order fell to be
set
aside on the basis of just cause. The respondent, on the other hand,
argued that the legality issue had been abandoned, along
with several
other grounds, when the rescission application was argued in the
court
a quo
and
could not be revived on appeal. The basis for this argument was that
the case advanced on appeal is an entirely new one for
which this
court would impermissibly be acting as a court of first instance in
respect of an issue that the municipality now seeks
to build, on
grounds not previously raised.
[20]
It is
unnecessary to deal with each of the specific grounds set out in the
founding affidavit in the rescission application, or
to mention those
that were abandoned. What is evident, however, is that the affidavit
alludes to the legality issue – and
although it does so on
limited facts, I consider that it is an issue flowing fairly from the
record and in relation to which this
court can make a finding.
[6]
Lack of authority
[21]
Foundational
to our constitutional order is the doctrine of legality. It stresses
that state organs and public officials can never
act beyond or
contrary to their powers as are prescribed by law.
[7]
[22]
The
crux of the municipality’s case for rescission was that the
acting municipal manager, Mr Mosala, acted contrary to the
council
resolution to defend the action instituted by the respondent and by
concluding the settlement agreement it became obliged
to incur
expenditure that was not in accordance with an approved or adjusted
budget, in terms of its approval process and the Local
Government:
Municipal Finance Management Act
[8]
(the MFMA). Hence, in concluding the agreement the conduct of the
municipal manager was illegal and
ultra
vires
the
resolution.
[23]
In its
answering affidavit the respondent raised as defences, an interplay
between estoppel and the Turquand Rule
[9]
(also known as the indoor management rule
[10]
).
These are at the heart of the decision in
Merifon
(Pty) Ltd v Greater Letaba Municipality and Another
[11]
on which the municipality, in argument, placed significant store in
attempting to counter the respondent’s reliance on the
ostensible authority of Mr Mosala and the legal representatives of
the municipality in concluding the settlement.
[24]
At the outset
Merifon
is distinguishable on the facts since it concerned
the acquisition of a capital asset contrary to the prescripts of s19
of the MFMA.
The section applies to capital projects and the
provision for the approval by a municipal council for appropriation
in a capital
budget of monies to be spent on such projects. In
argument it was submitted, for the first time, that s19 was
applicable. This
is new matter. It was not canvassed in the founding
affidavit in the rescission application and, in any event, I am not
persuaded
that the section finds application to this matter. I shall
revert to this issue.
[25]
However,
Merifon
underlined
the settled proposition that estoppel and the indoor management rule
cannot operate in a way that brings about a result
not permitted by
law. Put otherwise, they cannot cure an action that is
ultra
vires
[12]
or
illegal.
[13]
It follows that
the defences will not avail the respondent in the event of the
municipality making out a case on legality.
[26]
The municipality premised its submissions on the
council resolution to defend, which resolution, so it was argued, did
not authorise
settlement by Mr Mosala. I emphasise that it is
not the case for the municipality that its legal representatives were
not
authorised to settle. Since the legality issue lies squarely with
the terms of the council resolution, proof thereof assumes
significance
in the appeal.
[27]
In
support of its case the municipality placed reliance on
Kunene
and Others v The Minister of Police
[14]
,
and
Saldhana
Bay Municipality v SAMWU obo Wilschut N.O. and Others
[15]
.
In dealing with the legality argument this judgment makes the
following observations – the first of which deals with the
legislation pertaining to local government, and the second will
address the cases referred to.
[28]
The
Constitution confers the executive and legislative authority of a
municipality on its municipal council.
[16]
Under the Local Government: Municipal Systems Act
[17]
(the MSA), a municipality is a statutory entity that has a separate
legal personality. It can therefore sue and be sued. The municipal
manager is the head of the administration of a municipality who
performs functions subject to the policy directions of the municipal
council
[18]
. The resolution to
defend the action instituted by the respondent is not attached to the
founding affidavit in the rescission application
and is therefore not
in the record before us. It is evident from a supporting affidavit by
an incumbent, Mr Makhaya Dungu,
who acted as municipal manager
prior to the appointment of Mr Somana, that the existence of the
resolution is not denied by the
municipality. The extent of the
mandate and authority conferred on Mr Mosala in respect of the
litigation can only be determined
by the terms of the resolution.
[29]
In the absence of any indication by Mr Dungu that
he has personal knowledge of its contents, this court has no
objective evidence
of its terms. However, it was common ground that,
pursuant to the resolution, a mandate was given to attorneys to
defend the claim
and counsel were instructed to conduct the trial.
[30]
In
emphasising the necessity of proof that a municipal official has the
authority to act on behalf of a municipality, the court
in
Kouga
Municipality v South African Local Government Bargaining Council
and
Others
[19]
approved of the following
dictum
in
Pretoria
City Council v Meerlust Investments (Pty) Ltd
[20]
.
‘
[S]ince
an artificial person, unlike an individual, can only function through
its agents, and can only take decisions by passing
of resolutions in
the manner prescribed by its constitution, less reason exists to
assume, from the mere fact that proceedings
have been brought in its
name, that those proceedings have in fact been authorised by the
artificial person concerned. In order
to discharge the
above-mentioned onus, the petitioner ought to have placed before this
court an appropriately worded resolution.’
[31]
By parity of reasoning, where a party seeks to
make a case that an official has exceeded the mandate conferred on
him by a resolution
of the municipal council it is incumbent on it to
provide the resolution. While conceding that the resolution to defend
is not
included in the papers, in argument, counsel for the
municipality argued that, in any event, Mr Mosala did not have the
authority
to conclude the settlement agreement because no budget was
approved. The respondent disputed this.
[32]
Section 109(2) of the MSA provides as follows:
‘
A
municipality may compromise or compound any action, claim or
proceedings, and may submit to arbitration any matter other than
a
matter involving a decision on its status, powers or duties or the
validity of its action or by-laws.’
In addition, s59(1)
(b)
read with s59(2)
(b)
of the MSA confers upon the municipal
council the authority to delegate powers or functions in writing to,
inter alia,
a municipal manager. In its heads of argument the
municipality referred to its system of delegations (developed in
terms of s59
of the MSA) in which the municipal manager is permitted
to settle litigation subject to an approved budget. The municipality
contended
that Mr Mosala was precluded from incurring expenditure for
an amount that had not been budgeted for in terms of s15 of the MFMA.
Section 15 of the MFMA deals with the appropriation of funds for
expenditure. And so, the rescission is intended to protect public
funds for purpose of ensuring that the muncipality is able to comply
with its constitutional obligations to provide services to
the
community.
[33]
Reverting to the facts, as I have said, the
respondent’s main claim in the action was for specific
performance of the contract
that flowed from the award of a tender.
While admitting that it had purported to contract with the respondent
the municipality
denied that a lawful contract had resulted. It filed
a counterclaim in which it sought an order that the purported
contract was
unlawful and void
ab
initio
. In respect of the alternative
claim, it tendered to pay to the respondent such sum as may
ultimately be determined as constituting
any enrichment enjoyed by
the municipality, as a consequence of goods and services delivered to
the municipality pursuant to the
purported agreement.
[34]
On the
morning of the first day on which the trial was set down the
municipality was represented by Mr Mosala, and a legal team
comprising of an attorney and senior counsel. They proposed that the
matter be settled and ultimately suggested an amount of R19 140 000.
The amount was indicated in a handwritten note handed by its legal
representatives to the respondent’s attorney and was tendered
in circumstances where the parties were fully prepared for trial
based on the pleadings and the documentation discovered. Thus
they
were aware of the issues and the facts relating to the matter. I
accept, for purposes of this judgment, as the parties did
in
argument, that the contract concluded was unlawful and of no force or
effect. However, as I have explained, the issue in dispute
in the
alternative claim related to the alleged enrichment of the
municipality at the respondent’s expense. The municipality
had
taken a resolution to oppose the claim, and pursuant thereto
attorneys and counsel had been instructed to conduct the trial.
From
this point on, in law, the conduct of the case at the trial was in
the hands of counsel. The mandate given to counsel includes
the
authority to compromise the action or any matter in it, unless he has
received instructions to the contrary.
[21]
This did not amount to incurring “expenditure” as
envisaged in s15 or s19 of the MFMA. It merely involved the
determination
of the extent of a pre-existing liability. Unless some
impropriety in the conduct of the legal practitioners is established,
and
none was suggested, or the settlement is shown to be unlawful on
another basis, the municipality is bound by it, and by the order
of
court.
[35]
The municipality had known that it was exposed to
the risk of a judgment for a large amount claimed against it when
they resolved
to instruct legal representatives, and the settlement
that they subsequently concluded, which resulted in an order, was for
a substantially
reduced sum. The municipality acquiesced in the order
by their proposal for a structured payment plan. It was only after
the sheriff’s
attachment that the municipality initiated the
rescission proceedings to stave off payment of the judgment debt.
[36]
In
terms of Chapter 8 of the MFMA the financial administration of a
municipality resorts under the control of its accounting officer,
the
municipal manager. His responsibilities include
inter
alia
:
(a)
the
duty to ensure that the municipality has and maintains effective,
efficient and transparent systems of risk management and internal
control
[22]
;
(b)
the
management of the liabilities and assets of a municipality
[23]
,
including its revenue
[24]
and
expenditure
[25]
;
(c)
the
duty to assist the mayor in the preparation of the municipal budget,
and
(d)
the
duty to report in writing to the municipal council any impending
shortfalls in budgeted revenue, as well as overspending of
the
municipality’s budget
[26]
.
[37]
In
addition to those responsibilities the accounting officer has a
general obligation to report to the National Treasury, the provincial
treasury, the department for local government in the province, or the
Auditor-General such information as may be prescribed or
required.
[27]
The accounting
officer is criminally liable if found to have deliberately or in a
grossly negligent manner contravened his responsibilities
or
deliberately misleads or withholds information and may on conviction
of any specified offence be fined or imprisoned for a period
not
exceeding five years.
[28]
He
was present throughout and participated in the negotiations, which
would undoubtedly have created the impression that he was
duly
authorised to instruct counsel. Absent the council resolution
authorising the defence of the action we are bound to accept
that he
was.
[38]
I turn to consider the cases to which reference
was made during argument. It is not intended to traverse them in
specific detail
save to mention at the outset that, as correctly
pointed out by the respondent, they are distinguishable and do not
lend support
for the proposition for which the municipality contends.
[39]
In
Saldhana Bay
the issue was whether the municipality was bound
by a settlement agreement concluded by its municipal manager with an
employee while
the latter was in the midst of a disciplinary hearing.
In holding that the agreement was
ultra
vires
and not binding on the
municipality, the court found that the agreement was concluded
contrary to the provisions of a collective
agreement with the South
African Local Government Association which expressly conferred the
power of compromise or settlement on
the chairperson of the
disciplinary enquiry. This does not find application to the facts of
this case where an agreement was concluded
by counsel in the course
of litigation pursuant to their undisputed mandate to conduct the
trial, nor is there in this case an
instruction that the authority to
compromise is excluded from the mandate.
[40]
In
Kunene
,
a settlement agreement concluded by the state attorney, on behalf of
the Minister of Police in a delictual claim, was set aside
because it
was tainted by improprietary. Their conduct was found to have been
irrational and had subverted the administration of
justice. As I have
said, in this appeal the conduct of the legal representatives is not
called into question, nor has a case been
made that Mr Mosala acted
dishonestly, or with an ulterior motive, when instructing counsel.
The argument was merely that he did
not have authority.
[41]
The common denominator in these cases is that they
illustrate the principle that settlement agreements must be grounded
on principles
of legality and the rule of law. They serve to
emphasise that an act can only be found to be
ultra
vires
or unlawful where the
unlawfulness is proven. In the present case the mere assertion that
Mr Mosala did not have the authority to
settle because he acted
contrary to a resolution to defend carries no weight where the
resolution is not disclosed. The absence
of authority is a conclusion
to be drawn from primary facts that must appear from the papers. None
have been presented. Moreover,
and by itself, the assertion by Mr
Somana that the municipality does not know on what basis the
settlement was concluded does not
constitute just cause for seeking a
rescission.
[42]
In the circumstances the municipality has advanced
no persuasive argument for rescinding the order of the court
a
quo
.
Condonation
[43]
The municipality sought condonation for the late
filing of its notice of appeal which had been filed nine days beyond
the period
prescribed in the rules of court. The application was
filed on 23 June 2023. The deponent to the founding affidavit in the
application
is the attorney of record for the municipality. He
explains that he was ‘delayed’ in his ‘ability to
take instructions’
notwithstanding clear indications on his own
version that during the prescribed period he regularly met with the
municipal manager
to discuss the numerous matters in which the
municipality was litigating.
[44]
The
affidavit is terse and fails to establish good cause which in
principle requires
inter
alia
that
prospects of success on the merits of the appeal be addressed
[29]
.
I might add that the delay in filing the notice of appeal appears not
to be the only shortcoming in the prosecution of the appeal.
The
municipality did not enter into good and sufficient security before
lodging copies of the appeal record with the registrar.
The failure
to provide security was remedied a few days prior to the hearing of
the appeal, this in reaction to a rule 30 application
filed by the
respondent on 14 December 2023. In addition, the pagination of the
record comprising of four volumes amounting to
503 pages was
illegible, nor was every tenth line on every page numbered
[30]
.
The index itself rendered navigation of the record problematic for
failure to contain sufficient information identifying documents
and
annexures.
[45]
The explanation proffered for the delay in filing
the notice of appeal is unsatisfactory. Viewed in the light of the
unsuccessful
outcome of the appeal on the merits, the opposition to
the application for condonation was not unreasonable.
The rule 30
applications
[46]
In the condonation application the respondent
filed its answering affidavit on 16 April 2024. This prompted an
application by the
municipality to have the answering affidavit
declared ‘an irregular step and set aside’. Considering
that none of the
parties addressed the Court on the merits of the
application, no order is made.
[47]
The other application at the instance of the
respondent arose from the failure by the municipality to provide
security. At the commencement
of argument in the appeal, counsel for
the municipality conceded that the application became moot by the
belated provision of security
but that the respondent was nonetheless
entitled to its costs.
[48]
In the result:
1.
The application for condoning the late filing of
the notice of appeal is dismissed with costs.
2.
The appeal is dismissed with costs, such costs
shall include the costs of the respondent’s rule 30
application.
M S RUGUNANAN
JUDGE OF THE HIGH
COURT
I agree.
J W EKSTEEN
JUDGE OF THE HIGH
COURT
I
agree.
A BODLANI
ACTING JUDGE OF THE
HIGH COURT
Appearances:
For the Appellant:
M
Osborne
with
N Mdunyelwa
, instructed by Y Tsipa
Attorneys
c/o
Yokwana Attorneys, Makhanda
(Ref
Ms Bulube),
Tel:
046-622 9928.
For
the First Respondent:
M
Beard
, instructed by Schoombee Attorneys
c/o
Whitesides Attorneys, Makhanda (Ref Mr Barrow), Tel: 046-622 7117.
Date
heard:
27
May 2024
Date
delivered:
20
August 2024
[1]
The action was instituted in the East London Circuit Court (formerly
the East London Circuit Local Division) under Case No 515/2018
as
between Betram (Pty) Ltd and Amathole District Municipality.
[2]
Kunene
and Others v The Minister of Police
[2021]
ZASCA 76.
[3]
Moraitis
Investments (Pty) Ltd and Others v Montic Dairy (Pty) Ltd
2017 (5) SA 508
(SCA)
paras 12-15.
[4]
Moraitis
supra
para
10.
[5]
This represented the difference between R74 852 730 less
R35 095 050.
[6]
An approach countenanced by the Supreme Court of Appeal in
Leeuw
v First National Bank Limited
2010
(3) SA 410 (SCA).
[7]
Affordable
Medicines Trust v Minister of Health
[2005] ZACC 3
;
2006
(3) SA 247
(CC) paras 49 and 75-77;
Nyathi
v MEC: Department of Health Gauteng
2008
(5) SA 94
(CC) para 80.
[8]
Act 56 of 2003.
[9]
The rule protects persons from being affected by a company’s
non-compliance with an internal formality pertaining to the
authority of its representatives.
[10]
Strydom
and Kroqwana Construction CC v MEC for Human Settlements Eastern
Cape and Another
[2017]
ZAECGHC 11 para 8.
[11]
[2022] ZACC 25.
[12]
As opposed to one that is intra vires (within one’s legal
powers) but suffers some other defect.
[13]
Merifon
(Pty) Ltd v Greater Letaba Municipality and Another
[2022] ZACC 25
para 42.
[14]
[2021] ZASCA 76.
[15]
[2015] ZALCCT 2.
[16]
Section 151(2).
[17]
Act 32 of 2000.
[18]
Section 55.
[19]
[2009] ZALC 158
para 19.
[20]
1962 (1) SA 321
(A) at 325D-E.
[21]
Hlobo v
Multilateral Motor Vehicle Accidents Fund
2001
(2) SA 59
(SCA) para 10.
[22]
Section 62(1)
(c).
[23]
Section 63.
[24]
Section 64(1).
[25]
Section 65(1).
[26]
Section 70(1)
(a)
.
[27]
Section 74.
[28]
Section 173; section 174.
[29]
Erasmus, Superior Court Practice at D1-322 [Service 17, 2021].
[30]
Rule 49(8)
(a)
.