Brief Summary

Constitutional Law — Division of Revenue — Entitlement of Category C municipalities to equitable share of revenue — Three Category C municipalities challenged the constitutionality of section 5(1) of the Division of Revenue Act 1 of 2001, which excluded them from receiving an equitable share of national revenue — High Court declared the section unconstitutional — Applicants sought confirmation of the High Court's order despite the repeal of the 2001 Act by the Division of Revenue Act 2002 — Court held that confirmation proceedings would have no practical effect due to the repeal and the settlement reached between the parties, thus exercising discretion not to confirm the order.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned constitutional litigation arising from an order of the Natal High Court declaring part of a national fiscal statute unconstitutional, and an ensuing application to the Constitutional Court for confirmation of that declaration in terms of section 172(2)(a) of the Constitution.

The applicants were three Category C municipalities (district municipalities) in KwaZulu-Natal, namely Uthukela District Municipality, Zululand District Municipality, and Amajuba District Municipality. The principal opposing respondents were the President of the Republic of South Africa, the Minister of Finance, and the Minister of Provincial and Local Government, all organs of state in the national sphere. Numerous additional respondents were cited, including KwaZulu-Natal provincial office-bearers and other municipalities, though only the first three respondents opposed the relief in both courts.

The procedural history was that the three district municipalities brought separate applications in the Natal High Court challenging the constitutionality of section 5(1) of the Division of Revenue Act 1 of 2001 on the basis that it omitted provision for district municipalities to receive an equitable share of nationally raised revenue allocated to the local sphere. The matters were consolidated, and the High Court granted an order declaring section 5(1) unconstitutional and invalid to the extent that it excluded Category C municipalities from the local government equitable share.

Before the Constitutional Court, the applicants sought confirmation of the High Court’s order and also sought payment of their equitable shares. By the time the Constitutional Court heard the matter, the Division of Revenue Act 1 of 2001 had been repealed by the Division of Revenue Act 5 of 2002, and during argument the parties reached a settlement on the monetary aspects, leading to the withdrawal of the claim for payment. The remaining question was whether the Constitutional Court should nevertheless determine the confirmation application, given the repeal and the settlement.

The general subject-matter of the dispute was the constitutional entitlement of district municipalities to an equitable share of nationally raised revenue, and, procedurally, the Constitutional Court’s discretion to decide confirmation proceedings where the impugned legislation has been repealed and where intergovernmental dispute-resolution duties arise.

2. Material Facts

The Constitutional Court treated as common cause that the Constitution establishes three spheres of government—national, provincial, and local—which are “distinctive, interdependent and interrelated”, and that municipalities constitute the local sphere. The Constitution also recognises categories of municipalities, including Category B (local municipalities) and Category C (district municipalities), and the case was concerned with the position of Category C municipalities in the system of fiscal allocations.

It was undisputed that sections 214(1)(a) and 227(1)(a) of the Constitution require an Act of Parliament to provide for the equitable division of nationally raised revenue among spheres of government, and that local government is entitled to an equitable share of such revenue to enable it to provide basic services and perform its allocated functions. It was also not in dispute that Parliament annually enacts a Division of Revenue Act to implement these constitutional requirements.

The relevant statutory provisions were that section 3(1) of the Division of Revenue Act 1 of 2001 divided nationally raised revenue among the spheres of government, and section 5(1) dealt with the determination of allocations to individual municipalities. The applicants’ complaint (accepted by the High Court’s order as framed) was that section 5(1) made no provision for payment of an equitable share to Category C municipalities, providing only for Category A and B municipalities.

The procedural position at the Constitutional Court hearing was materially altered by two developments. First, the 2001 Act was repealed by the Division of Revenue Act 5 of 2002, which did not expressly exclude district municipalities from receiving an equitable share. Second, during the hearing, the parties stood the matter down and reached a settlement on payment issues under which the respondents agreed to pay specified amounts, subject to certain verification and withholding arrangements relating to the applicants’ 2002 equitable share. The settlement was not made an order of court, and following it the applicants withdrew the application for payment of their 2001 equitable share. The application for confirmation of the High Court’s constitutional invalidity order, however, was not withdrawn.

The Court accepted that, notwithstanding the repeal, section 34(2) of the 2002 Act preserved certain effects of the repealed 2001 Act for outstanding duties or obligations, which meant that a determination on the constitutional entitlement to the 2001 equitable share could potentially have consequences beyond the immediate parties. The Court nevertheless assessed whether any practical effect remained, and whether the dispute ought to have been dealt with through intergovernmental mechanisms rather than litigation.

3. Legal Issues

The central legal question before the Constitutional Court was not the merits of whether section 5(1) of the 2001 Act was unconstitutional, but whether the Court should, in the exercise of its discretion, decide the confirmation application at all, given that the impugned provision had been repealed and the parties had settled the immediate financial dispute.

This required the Court to determine the nature and extent of any practical effect that confirmation (or refusal to confirm) might still have on the parties or others, and to evaluate whether the matter should be left to political resolution in light of the constitutional duty of co-operative government.

The dispute thus primarily concerned a value judgment and discretionary decision about justiciability and institutional propriety (practical effect and co-operative government), informed by constitutional and statutory frameworks for intergovernmental dispute resolution, rather than a determination of contested facts. It also involved the application of constitutional norms (Chapter 3 duties) to the procedural posture of the case (repeal, settlement, and incomplete argument).

4. Court’s Reasoning

The Court started by locating the matter within the constitutional structure of government and fiscal arrangements, noting the constitutional requirement for equitable division of nationally raised revenue and the entitlement of local government to an equitable share. It observed that Parliament gives effect to these obligations through annual Division of Revenue legislation, and that the High Court’s order had declared section 5(1) of the 2001 Act unconstitutional to the extent that it excluded district municipalities.

The Constitutional Court then addressed whether, after repeal of the impugned statute, it should nevertheless determine confirmation. It applied the principle that where legislation declared invalid has been repealed, the Constitutional Court has a discretion whether to deal with the matter, and that an important consideration is whether an order would have any practical effect on the parties or others. If no practical effect remains, the Court will not decide confirmation proceedings.

On practical effect, the Court reasoned that, as between these parties, the settlement and repeal meant that confirmation would have no practical effect for the applicants. At the same time, the Court noted the potential relevance of section 34(2) of the 2002 Act, which preserved the effect of the repeal for outstanding obligations under the 2001 Act. This suggested that a ruling might affect broader fiscal obligations if district municipalities were indeed constitutionally entitled to an equitable share for 2001. The Court therefore did not treat the matter as automatically moot solely because of repeal, but assessed whether it should exercise discretion to reach the merits.

A decisive consideration was the constitutional framework of co-operative government. The Court emphasised that municipalities and national government actors are organs of state, and Chapter 3 requires them to foster co-operative government, including a duty to avoid legal proceedings against one another and, in terms of section 41(3), to make every reasonable effort to settle intergovernmental disputes through available mechanisms and to exhaust other remedies before approaching a court. The Court linked this duty to the constitutional design that disputes should, where possible, be resolved at a political level rather than through adversarial litigation, and it noted the court’s supervisory role under section 41(4), which allows a court to refer a dispute back to the organs of state if not satisfied that section 41(3) has been complied with.

The Court identified a specific dispute-resolution mechanism relevant to fiscal disputes: Part 2 of the Intergovernmental Fiscal Relations Act 97 of 1997, which establishes a Local Government Budget Forum where national government, provincial governments, and organised local government consult on fiscal and budgetary matters affecting the local sphere. The Court also referred to section 31(1) of the 2001 Act, which contemplated recourse to such structures before litigation in respect of intergovernmental disputes regarding allocations under that Act. Although the applicants contended that section 31(1) did not apply because their complaint was the absence of an allocation, the Court found it unnecessary to determine that point, because the broader constitutional duty to avoid litigation applied irrespective of whether specific statutory mechanisms existed.

Applying these principles, the Court held that, if municipalities were aggrieved by the omission of district municipalities from the 2001 equitable share, they could and must use the dispute-resolution procedures, and if unresolved, approach the relevant national minister directly. The Court found nothing in the papers to suggest that national organs of state were unwilling to address the issue politically; an extract placed before the Court indicated that the Minister of Finance had acknowledged in Parliament that the system was sufficiently flexible to address unintended consequences of section 5(1).

In these circumstances, and in the interest of co-operative government, the Court concluded that it should not exercise its discretion to decide the confirmation issue at that stage, and that the matter should first be left to the organs of state to attempt political resolution.

The Court gave an additional reason for declining to decide confirmation. Because of the repeal and settlement, the Court did not have the benefit of full argument on the “different and complex questions” raised by the confirmation issue. It considered it inadvisable to decide such issues without full ventilation in argument.

5. Outcome and Relief

The Constitutional Court made no order in respect of the confirmation application.

No costs order was made in the Court’s final order.

Cases Cited

Ex Parte Chairperson of the Constitutional Assembly: In re Certification of the Amended Text of the Constitution of the Republic of South Africa, [1996] ZACC 24; 1997 (2) SA 97 (CC); 1997 (1) BCLR 1 (CC).

National Coalition for Gay and Lesbian Equality v Minister of Home Affairs, [1999] ZACC 17; 2000 (2) SA 1 (CC); 2000 (1) BCLR 39 (CC).

President, Ordinary Court Martial and Others v Freedom of Expression Institute and Others, [1999] ZACC 10; 1999 (4) SA 682 (CC); 1999 (11) BCLR 1219 (CC).

Independent Electoral Commission v Langeberg Municipality, [2001] ZACC 23; 2001 (3) SA 925 (CC); 2001 (9) BCLR 883 (CC).

National Gambling Board v Premier KwaZulu-Natal and Others, 2002 (2) SA 715 (CC); 2002 (2) BCLR 156 (CC).

Ex Parte Chairperson of the Constitutional Assembly: In re Certification of the Constitution of the Republic of South Africa, [1996] ZACC 26; 1996 (4) SA 744 (CC); 1996 (10) BCLR 1253 (CC).

Legislation Cited

Constitution of the Republic of South Africa, 1996 (sections 40(1), 41(1)(h)(vi), 41(2), 41(3), 41(4), 151(1), 155(1), 172(2)(a), 214(1)(a), 227(1)(a), 239).

Division of Revenue Act 1 of 2001 (sections 3(1), 5(1), 31(1)).

Division of Revenue Act 5 of 2002 (sections 5(1), 31(1), 34).

Intergovernmental Fiscal Relations Act 97 of 1997 (Part 2; sections 5, 6, 7).

Organised Local Government Act 52 of 1997 (section 2(1)).

Local Government: Demarcation Act 27 of 1998 (section 2).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The Constitutional Court held that, after repeal of the impugned legislation and settlement of the financial claim, it retained a discretion whether to determine the confirmation application, guided principally by whether an order would have any practical effect and by the constitutional demands of co-operative government in intergovernmental disputes.

It held that the circumstances, including the duty of organs of state to make every reasonable effort to resolve disputes through intergovernmental mechanisms and to avoid litigation, supported declining to adjudicate the confirmation issue at that stage. The Court also held that it lacked the benefit of full argument on complex issues due to repeal and settlement, which further weighed against deciding the confirmation.

Accordingly, it made no order in respect of the confirmation application.

LEGAL PRINCIPLES

A repeal of legislation declared invalid by a High Court does not automatically compel the Constitutional Court to proceed with confirmation; the Court has a discretion and must consider whether any order it makes will have a practical effect on the parties or others.

The constitutional scheme of co-operative government requires organs of state, including municipalities and national departments or office-bearers, to avoid legal proceedings against one another and, in terms of section 41(3) of the Constitution, to make every reasonable effort to resolve intergovernmental disputes through available mechanisms and to exhaust other remedies before approaching a court.

In disputes between organs of state, courts will rarely decide the merits unless the parties have made every reasonable effort to resolve the dispute at a political level, consistent with Chapter 3 of the Constitution; this consideration is relevant to whether a court should exercise its discretion to decide confirmation proceedings.

Where the procedural posture of a case (including repeal and settlement) results in the absence of full argument on complex issues, that absence may provide an additional, prudential basis for a court to decline to decide confirmation proceedings.

Uthukela District Municipality and Others v President of the Republic of South Africa and Others (CCT7/02) [2002] ZACC 11; 2002 (11) BCLR 1220 ; 2003 (1) SA 678 (CC) (12 June 2002)