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BY Pippa Reyburn , Yana van Leeve , Vivienne Jonker , Alexandra Maree AND Lwandile Msimanga
Constitutional Court upholds the rights of innocent service providers who fulfil obligations under invalid public contracts
South African courts are inundated with disputes concerning commercial arrangements between organs of state and their service providers. The scenario in a recently handed down Constitutional Court judgment, Greater Tzaneen Municipality v Bravospan 252 CC [2024] ZACC 20 (“Greater Tzaneen”), is unfortunately ubiquitous. The judgment bears lessons for both organs of state and their service providers.
The Greater Tzaneen Municipality contracted with a service provider following a procurement process. The contract was later extended however it was done so without adhering to the Municipality’s procurement policy and procedures. Notwithstanding, the service provider continued to perform. Instead of paying for the services, the Municipality claimed it was not liable to pay because the extension was invalidly concluded.
To sure up its escape from contractual liability, the Municipality duly instituted judicial review proceedings and was granted an order setting aside the extended contract. The service provider brought a counter claim for compensation, which it was granted, initially on the basis of unjustified enrichment in the High Court, but then ultimately as a just and equitable remedy in the Supreme Court of Appeal (“SCA”). The Municipality then unsuccessfully appealed to the Constitutional Court.
The importance of the Constitutional Court’s judgment is, firstly, that organs of state are not entitled to use self-review proceedings to escape their contractual obligations to service providers. Secondly, the Court accepted the innocent service provider’s right to claim compensation. Whether that claim for compensation is pleaded under the common law of unjustified enrichment or under the court’s wide remedial powers in the Constitution was a matter of some debate among the Justices.
Self-review does not immunise contractual obligations
The use of self-review applications by organs of state as a means to evade their contractual obligations has been widely criticised by South African courts. In an unreported High Court judgment, Newlyn Investments (Pty) Ltd v Transnet SOC Ltd and Another (11446/21) [2022], it was held that, “the proliferation of late self-review by organs of state is becoming a whimsical trait, fanciful and out of step with commercial and socio-economic realities. It camouflages inefficiencies by hiding under the protective shield of the Constitutionally mandated procurement procedures… [t]his is an impermissible Get Out of Contract Free card to avoid its carefully struck bargain under the [agreed upon contracts]’’ (para 1).
Similarly, the SCA, in Transnet v Tipp-Con (Pty) Ltd and Others [2024] ZASCA 12, refused to grant an organ of state’s self-review order, holding that it “did not initiate the review because it sought to vindicate clean and open governance, but rather to evade its contractual obligations” (para 55).
In Greater Tzaneen, the Constitutional Court has now confirmed this position. It refused leave to appeal based on the interests of justice and firmly held that doing so “will send a clear message to… organs of state that they must pay for services that are provided to them by an innocent contractor. This is not a case where there is any pleaded allegation, still less evidence, of corruption or other wrongdoing on the part of [the service provider] that would justify the Municipality’s refusal to pay it. Instead, the Municipality is opportunistically raising its own irregular conduct to avoid paying [the service provider] … the Municipality’s unconscionable conduct in the present case is part of a broader phenomenon of organs of state seeking to rely on their own unlawful conduct to avoid compensating innocent contractors for services that those contractors have provided to them. This Court must make clear that conduct of this sort will not be tolerated” (para 60).
Compensation as a just and equitable remedy
The case law prior to Greater Tzaneen indicated that a service provider might have a claim for compensation based on unjustified enrichment, where a procurement contract under which it has performed is set aside for legal invalidity. In Greater Tzaneen, the SCA determined that South African law does not recognise a general claim for unjust enrichment (para 15). The court instead ordered the organ of state to compensate the service provider, as a just and equitable remedy based on section 172(1)(b) of the Constitution. Given that this issue was not pleaded before the Constitutional Court, it could not make a determination on this issue and the SCA’s reasoning therefore stands (Greater Tzaneen para 62).
Pippa Reyburn
Executive | Public Law
Yana van Leeve
Executive | Public Law
Vivienne Jonker
Senior Associate | Public Law
Alexandra Maree
Candidate Legal Practitioner | Public Law
Lwandile Msimanga
Candidate Legal Practitioner | Public Law
