Constitutional Court grants municipalities greater scope to rectify unlawful contracts

Previously, municipalities, who wanted their own decisions and unlawful contracts set aside by a court, had to approach a court within 180 days (as prescribed in s7(1) of the Promotion of Administrative Justice Act (PAJA)). The reason for this was that a longer delay would be unreasonable. Furthermore, this time limit helps to provide certainty and finality to decision-making. So, after the 180 days has passed, a municipality could not revisit its past wrongdoings and to try and bring them into compliance with the law. Consequently, whether or not the decision was unlawful was no longer relevant. Instead, the decision became final and validated, simply because of the passing of the 180 days.

It is no secret that municipalities have in the past made headlines as a result of alleged or proven cases of tender fraud. Section 217 of the Constitution requires that the procurement process be fair, equitable, transparent, competitive and cost-effective. However, where municipalities want to approach a court, outside of the 180-day period, to have tainted procurement contracts set aside, chances of them being successful are minimal. The result is that a municipality’s opportunity to restore good governance is outweighed by the procedural requirement of section 7(1) of PAJA.  

In Buffalo City Metropolitan Municipality v Asla Construction (Pty) Ltd (Asla) [2019] ZACC 15 (Asla case), the Constitutional Court (CC) made it clear that self-review applications might be successful even if they are brought after the 180-day period has expired. This provides organs of state with a wider scope to correct past wrongdoings and to ensure clean governance. This judgment will be discussed in more detail below.

Background

In 2013, Buffalo City Metropolitan Municipality (Municipality) awarded a Turnkey contract to Asla. The contract authorised Asla to provide between 3000-5000 housing units for the Greater Duncan Village development. Another opportunity was made available for the development of 953 housing units in Reeston East (Reeston contract). The Reeston contract went on tender three times. However, each time the tender was awarded, it ultimately failed either for budgetary reasons or as a result of the contractor performing poorly. In 2014, the then city manager informed Asla that obligations envisaged in the Reeston contract would now form part of the Turnkey contract’s scope of work. Asla implemented the Reeston contract and performed satisfactorily. However, in 2015, a dispute arose when the Municipality refused to pay Asla for services rendered in terms of the Reeston contract on the basis that the contract was unlawful because no competitive procurement processes were adhered to in terms of the Local Government: Municipal Finance Management Act 56 of 2003, the Preferential Procurement Policy Framework Act 5 of 2000 and the Municipal Supply Chain Management Regulations.  The Municipality argued that the Reeston contract was concluded without competitive bidding and thus fell short of the requirements of section 217 of the Constitution. The Municipality thus launched review proceedings in the Constitutional Court, in which it sought to have the Reeston contract set aside.

The Court held that, following its finding in State Information Technology SOC Ltd v Gijima Holdings (Pty) Ltd (Gijima case), the review must be dealt with under the principle of legality and not in terms of PAJA. Before looking at the facts of the case, the Court first provided guidance on the similarities and differences between section 7(1) of PAJA and the principle of legality. Section 7(1) of PAJA and the principle of legality are both based on reasonableness. Furthermore, with respect to both tests, the proverbial clock starts running from the date that the municipality became aware or should have become aware of the action taken (that is the unlawful awarding of the tender). However, in determining whether or not the delay is reasonable, the two differ. The legality test, unlike section 7(1) of PAJA, does not prescribe a time limit. Another difference is that under the legality test, no condonation application is required. A condonation application refers to a specific application that is filed in court to condone the late filing of the respondent’s application for leave to appeal. In terms of the legality test, it is sufficient for the court to determine whether the delay was unreasonable or undue. If the answer is yes, the next question is whether the court can nevertheless overlook the delay and entertain the application. The court will, among other things, consider the explanation offered for the delay. This onus lies on the municipality. Further, a court will look at the potential prejudice to affected parties as well as the possible consequences of setting aside the impugned decision, the nature of the impugned decision, and the conduct of the applicant.  Where no basis exists for a court to overlook the delay, the court may nevertheless be constitutionally compelled to declare the state’s conduct unlawful by virtue of section 172(1)(a) of the Constitution.

Judgment

In considering the conduct of the Municipality, the CC did not overlook the delay with which the Municipality brought the self-review application but it nevertheless went on  to consider the lawfulness of the decision on the basis of section 172(1)(a) of the Constitution. The CC held that the Municipality conducted its affairs, with regard to the contract, in bad faith. The CC therefore held that the delay was unreasonable and that there is no basis to overlook the delay. The Court further stated that if a Municipality approaches a court, after the 180-day deadline, to have tainted contracts set aside and does so in an effort to rectify past wrongdoings and unlawfulness, then there is a good chance that the court will overlook the delay. 

Turning to the merits of the case, the Court held that the Reeston contract was an unlawful extension of the Turnkey contract. The Court observed that the Reeston contract was awarded to Asla without undertaking a competitive bidding process as required by section 217 of the Constitution as well as the statutory prescripts referred to above. The Court thus held that the decision to have the scope of the work in the Reeston contract form part of the Turnkey contract, is at odds with the most fundamental requirements of section 217 of openness and transparency. Thus, the Court concluded that the Reeston contract was invalid. Section 172(1)(a) of the Constitution  mandates the Court to declare invalid any law or conduct that it finds inconsistent with the Constitution. However, the Court did not set aside the Reeston contract in order to preserve the rights that Asla might have been entitled to. Although the contract was invalid and unlawful, Asla nonetheless carried out all of its obligations in terms of the Reeston contract and performed satisfactorily. Fairness demanded that the Municipality pay Asla for its performance. The Court’s decision therefore preserved the rights, which have already accrued, but it noted that the parties are not allowed to obtain any further rights under the invalid contract.

Comment

This judgment is significant as it sets the tone that the courts are willing to lend a helping hand to ensure clean governance in municipalities without municipalities having to adhere to strict time constraints. This judgment, therefore, demonstrates that the courts are prepared to assist municipalities in improving their state of accountability.  The ruling has opened the door for municipalities that have acted unlawfully in the past, to rectify their mistakes. The judgment makes it clear that while it would be slow to allow procedural obstacles to prevent municipalities from approaching a court in order to correct its wrongdoings, municipalities (including other organs of state) should nonetheless do their part to ensure that it has good grounds to convince the court that the delay is reasonable and should be overlooked. Moreover, municipalities, and other organs of state, are held to a rigorous standard and is subjected to a higher duty to respect the law. Therefore, the ruling makes it clear that merely providing flimsy explanations for non-adherence to the law would not persuade a court to overlook the delay. The judgment also emphasises that the threshold requirements in section 217 of the Constitution for the procurement of goods and services cannot be overlooked or circumvented. The courts are not hesitant to strike down tenders that are awarded in contravention of the Constitution.  However, even though such contracts may be struck down, municipalities will not be exempt from liability arising from ‘dirty’ contracts. They are still expected to fulfil their obligations to entities and individuals that have already accrued rights under those contracts.

by Jennica Beukes, Research Assistant