High Court rejects unwarranted deviation from strict procurement rules in Nelson Mandela Bay Metro

In Nelson Mandela Bay Metropolitan Municipality v Erastyle (Pty) Ltd, the Court had to decide whether Erastyle (Pty) Ltd (Erastyle, the first defendant of eight defendants) was lawfully appointed to provide a service to Nelson Mandela Bay Metropolitan Municipality (the Metro). Secondly, whether the payments received by Erastyle from the Metro amount to irregular expenditure in terms of section 32 of the Local Government: Municipal Finance Management Act (MFMA).

Background

This case concerns the lawfulness of the appointment of Erastyle for the development of a communication and marketing strategy for the Metro’s Integrated Public Transport System (IPTS).

Section 217 of the Constitution provides minimum requirements for a valid procurement process which include a competitive bidding procurement process. A municipality must ensure that the conclusion of a contractual agreement-between the municipality and a service provider, for the supply of goods and services, is preceded by a competitive bidding procurement process. The Metro adopted its SCM policy according to section 217(1) of the Constitution and section 111 of the MFMA.

Paragraph 4 of the Metro’s SCM policy gives all powers and duties relating to the supply chain management to the accounting officer of the Municipality who is the municipal manager (MM). Paragraphs 12 and 20 to 27 of the SCM policy provide that the supply of goods and services in excess of R200 000 can only be done through a competitive bidding process. Paragraph 39 of the policy provides for occasions that allow the Municipality to deviate from this, such as where it is impractical or impossible to follow the official procurement processes.

Section 32 of the MFMA regulates the liability of employees for unlawful expenditure. In particular, section 32(1)( c) holds liable, any political office-bearer or a municipal official for authorising irregular expenditure. Irregular expenditure is defined in section 1 of the MFMA as expenditure incurred by contravening the provisions of the MFMA or the requirements of the supply chain management policy.

Arguments of Nelson Mandela Bay Metropolitan Municipality

The Metro brought before the court four claims against its former employees - the MM, Executive Director: Public Health, Project Manager: IPTS, Chief Financial Officer (CFO), Chief Operating Officer (COO), Executive Director: Communications and Executive Director: Infrastructure and Engineering.

The First Claim

The first claim was pleaded in accordance with section 172 of the Constitution against the second and third defendants, being the MM and the Executive Director: Public Health respectively. The Metro prayed for a declaration of invalidity ab initio (i.e from the start) of several decisions made by the MM, Executive Director: Public Health, Project Manager: IPTS, Chief Financial Officer (CFO), Chief Operating Officer (COO), Executive Director: Communications and Executive Director: Infrastructure and Engineering that resulted in the appointment of Erastyle as lead consultant of the Metro’s IPTS project. The declaratory relief sought by the Metro would render the appointment of Erastyle inconsistent with the Constitution and therefore, unlawful, void from the start, and invalid under section 172(1) of the Constitution.

The Metro argued that the decision of the Executive Director: Public Health, that led to the appointment of Erastyle without having followed a competitive bidding process was invalid because the procurement process followed by the Executive Director was not fair, equitable, transparent, competitive, and cost-effective and that it did not fall under the exceptions provided in paragraph 39 of the Metro’s SCM policy. The Metro further argued that the approval of the first payment (R5 263 179.89) of Erastyle was unlawful due to the illegal appointment of Erastyle. Moreover, it was argued that the decision of its MM to increase the value of the contract which led to the second payment (R1 390 800.00) made to Erastyle was illegal. The initial contract value was capped at R6m but was increased to R7 638 155.11. The Metro contended that the unlawfulness of the appointment of Erastyle makes the payment an irregular expenditure in terms of section 32 of the MFMA as it was done in contravention of the SCM policy and that the increase of the value of the contract occurred in the absence of competitive bidding requirements. Lastly, the Metro argued that the decision of the MM that led to the third payment of Erastyle was illegal as it arose pursuant to an illegal appointment of Erastyle. As such, the payment was an irregular expenditure as it was made in contravention of the SCM policy and none compliance with competitive bidding requirements.

Second Claim

The second claim, based on section 217(1) of the Constitution, was against Erastyle, MM, CFO and Executive Director: Public Health. The claim was pleaded by the Metro as follows:

Against the MM, the claim was in relation to the three payments made to Erastyle. These payments are said to have amounted to irregular expenditure and that they were authorised by the MM.
Against the CFO, that he acted negligently in relation to the first, second and third payments by the Metro to Erastyle in terms of section 32(1)( c) of the MFMA, and he was similarly bound to the Code of Conduct being aware of the background and circumstances relating to the unlawful and irregular appointment of Erastyle as lead consultant for the IPTS project.
If the above claim against the MM and CFO were unsuccessful, the Metro claimed against the Executive Director: Public Health on the basis that she ought to have known that her appointment of Erastyle would result in irregular expenditure in contravention of the SCM policy or not having undergone a competitive bidding process as required in the SCM policy.

Third and Fourth claims

The third and fourth claims are common law claims for breach of obligations by the Project Manager: IPTS, the Executive Director: Infrastructure and Engineering, COO and Director: Communications. The basis of the claim is for damages suffered by the Metro. The Metro pleaded that these former employees unlawfully and intentionally, alternatively, negligently breached their duty to handle the Metro's affairs in utmost good faith, diligently, in a manner that is transparent and to refrain from doing anything that might prejudice or detract from the rights, assets or interest of the Metro and this resulted in the Metro suffering damages.

Arguments of the Metro's former employees

The arguments of the Project Manager, MM, CFO and the current Executive Director: Infrastructure and Engineering were similar. They argued that section 32 of the MFMA must be read holistically and interpreted in context and this provision is inconsistent with the Constitution because it results in "irrationality"; is “anomalous”, “patently unfair” and is “not just and equitable”. They also argued that the Metro unduly delayed in seeking the relief in its first claim. The COO raised several arguments including the claim that the Metro failed to prove the damages it suffered.

The Court’s findings

In relation to the first claim, the Court ruled that the appointment of Erastyle and the decisions of the MM and Executive Director: Public Health relating to the payments made to Erastyle are unlawful, invalid, and void from the start. Moreover, the Metro brought the action against the MM, Executive Director: Public Health, Project Manager: IPTS, CFO, COO, Executive Director: Communications and Executive Director: Infrastructure and Engineering without undue delay. The Court relied on the evidence given on behalf of the Metro, which indicated that the Metro asked for help from the National Treasury to investigate the ‘irregularities in the expenditure of the IPTS funds’ as soon as the Metro became aware that it could launch such an investigation. The investigation was initiated and completed within a reasonable time. Consequently, the action was also instituted timeously. Therefore, the argument regarding undue delay raised by the Project Manager, MM, CFO, and the Executive Director: Infrastructure and Engineering failed.

The second claim was also upheld. The Court ruled that the procurement of services by Erastyle together, with the three payments it received, was unlawful. Against the MM, the Court held that the three payments he authorised amounted to irregular expenditure. The Court examined the Code of Conduct for Municipal Staff Members which binds the MM to implement the policies of the Metro loyally, including the SCM policy. The Code requires the MM to carry out his duties in good faith, diligently, honestly and in a transparent manner. The Code also requires the MM to uphold the values underlying public administration and to act with integrity and in the best interests of the Metro without compromising its integrity and credibility.

The Court ruled that the MM is tasked with the responsibility to implement the Metro’s SCM policy and manage its financial administration. Therefore, the former MM ought to have taken reasonable steps to protect the resources of the Metro by preventing unauthorised, irregular, or fruitless and wasteful expenditure and other losses in accordance with sections 32 and 68 of the MFMA.

The Court held that the appointment of Erastyle was unlawful as it occurred in contravention of the SCM policy. The MM ought to have known that the payments would amount to irregular expenditure. The liability of the CFO is like that of the MM. The CFO, therefore, acted negligently.

The third and fourth claims were also upheld. The Metro's Project Manager: IPTS, COO and Director: Communications and Executive Director: Infrastructure and Engineering, led no evidence to counter the allegations raised by the Metro. The Court emphasised that the appointment of Erastyle was unlawful as it was done in contravention of the Metro’s SCM policy. As a result, the three payments made to the Erastyle amounted to irregular expenditure.

Lastly, the Court rejected the argument of the MM, Project Manager, CFO and Executive Director: Infrastructure and Engineering regarding the inconsistency of section 32 of the MFMA with the Constitution. The Court reasoned that the argument lacked proper foundation. In interpreting section 32, the Court referred to the case of Nelson Mandela Bay Metropolitan Municipality v Petuna, covered previously in the Bulletin, which held that ‘the language of the section is clear, unambiguous and had only one meaning’. The Court emphasised that the claim for irregular expenditure provided for in section 32 of MFMA is a ‘self-standing’ claim. Moreover, the obligation to recover unauthorised, irregular, or fruitless or wasteful expenditure is not limited by whether the municipality received value in return.

Commentary

This judgment is a lesson for our municipalities. The message is clear: unwarranted deviation from the strict procurement rules when procuring goods and services is unlawful. The deviation, as the Court pointed out, can be indicative of malpractices. The minimum requirements set out in the Constitution, the MFMA and a municipality’s SCM policy (among other pieces of legislation and policies) are there to minimise opportunities for corruption and mismanagement of municipal funds. These and other ills have plagued many of our municipalities as often revealed by the Auditor General. It is therefore imperative for municipalities to always adhere to these requirements when procuring goods and services to safeguard public resources. It is also crucial to accentuate that in the event that municipal officials needlessly deviate from strict procurement rules, they may be held personally liable for unauthorised, irregular or fruitless and wasteful expenditure as per section 32 of the MFMA.

By Sanelisiwe S. Ntuku, LLM Candidate: Dullah Omar Institute