Court invalidates an unlawful contract and holds officials personally liable for unauthorised and irregular expenditure

Background
The Municipality signed an agreement with the Imvusa to repair potholes in its municipal area. The signing of this agreement was not preceded by a competitive bidding process as required by legislation. Instead, the Municipality deviated from this process. The deviation was endorsed by Mr Ronnie Lottering in his capacity as acting Municipal Manager (MM), although, at the relevant time, he was no longer the acting MM. Mr Ronnie Lottering, acting without the necessary authority, appointed Mr Lionel Prins for one day to sign the contract with Imvusa.

The relevant legal provisions
Public procurement is regulated by section 217 of the Constitution of South Africa. The provision sets out minimum requirements for the procurement system under which public procurement contracts are concluded. The system must be fair, equitable, transparent, cost-effective and competitive. The MFMA gives effect to the foregoing constitutional provision in Chapter 11. Section 32 of the MFMA requires that municipal officials who contravene relevant legal procurement provisions must be held personally liable for any losses a municipality may incur as a result of their irregular conduct. Each municipality must have a supply chain management policy enacted in terms of section 217(3) of the Constitution to direct its procurement.  

Claims by Imvusa
The main claim, in this case, was the alleged contractual claim by Imvusa against the Municipality. Having signed the service level agreement (the agreement), Imvusa proceeded to repair potholes on behalf of the Municipality and was paid an amount of R11 205 148,73 for this service. Subsequently, the company alleged that the amount paid by the Municipality was short of a sum of R4 352 481,73. Imvusa, therefore, claimed the alleged outstanding balance in line with the contractual agreement it had signed with the Municipality.  In Court, Imvusa also relied on either estoppel or unjustified enrichment in the alternative to the main claim.

Claims by the Municipality
The Municipality instituted a counterclaim against Imvusa’s main claim and a separate claim against six third parties. The counterclaim, which was based on unjustified enrichment, was to the effect that Imvusa had been unjustly enriched at the expense of the Municipality. The claim against the six third parties is separated into two. The first leg of this claim is against the first four third parties (Ronnie Lottering, Francois Human, O Bezuidenhout and Lionel Prins) who are all former employees of the Municipality. The claim is that of statutory delict based on section 32 of the MFMA, as explained above. The second leg of the claim is against the fifth and sixth third parties (Angeline Lekay and Eva Gxowa) who are members of Imvusa. The claim is based on the corporate law principle of “piercing of the corporate veil” to hold Angeline Lekwa and Eva Gxowa personally liable for the conduct of Imvusa.

Evidence received by the Court
The Court had held previously that the deviation and the agreement between Imvusa and the Municipality were unlawful and invalid. In the current case, the Court received evidence that Ronnie Lottering tried to both regularise the appointment of Lionel Prins and to backdate the deviation to deceive the Auditor-General. Mr Allen Paulse (acting MM of the Municipality from January 2016) gave evidence to the effect that “the Municipality was captured by officials including Ronnie Lottering, Human, O Bezuidenhout and Lionel Prins” when the agreement was concluded. The Auditor-General’s Report of 2015 and the Western Cape Government’s Forensic Report of 2016 both found the deviation and the agreement to be invalid. Elroy Mckay, a qualified engineer who worked for the Municipality for a period of three years conducted a cost comparison between the amount spent by the Municipality for the pothole project under the existing agreement and what would have been a fair price if a competitive bidding process was followed. Mckay revealed that if a competitive bidding process was followed, the Municipality would have spent R7 885 244,68 less than the R19 747 637,61 that it spent on the pothole project. Claude Ladouce who was (at the time of the conclusion of the relevant agreement) the Municipality’s supply chain management officer testified to the fact that there were several provisions of the existing Municipality’s supply chain management policy that were contravened.

The Court’s decision
Regarding the main claim, the Court alluded to the obvious lack of compliance with the relevant procurement rules. The Court held that concluding procurement contracts by deviating from legislated procurement requirements renders such contracts unlawful and therefore, invalid. The Court stated that Imvusa ought to have known that the contract could not be awarded if a competitive bidding process was not followed. This conclusion follows from the fact that Angeline Lekay, who is a member of Imvusa, was a councillor of the Municipality from 1995 to 2007. Moreover, Lekay served as an Executive Deputy Mayor of the Municipality for a substantial period and led evidence in court that she was aware of the process that needed to be followed prior to the conclusion of the agreement.  Turning to the deviation, the Court found that the deviation was not approved nor submitted prior to the conclusion of the agreement. Instead, it was only after the fact, that is after the officials who “captured” the Municipality had expended money, was the deviation submitted for approval as a cover up for their wrongdoing. The Court further added that the deviation would have nonetheless not been in compliance with a procurement system that is fair, equitable, transparent, competitive and cost effective. The Municipality should not have appointed another service provider (Imvusa) on an urgent basis to repair potholes when it already had a contractor appointed in accordance with its public procurement process. The Court concluded that the claim in the alternative based on estoppel was already answered in law and could not stand. Where a law prohibits a particular situation, such cannot be perpetuated by relying on estoppel. In other words, as it applies in this case, concluding a public procurement contract without following a competitive bidding process is unlawful and a party cannot challenge the unlawfulness of such a contract by raising the defence of estoppel.

Following the Court’s findings that the agreement was unlawful and invalid, the Constitution requires the Court to, therefore, make an order that is just and equitable. The Court has a discretion emanating from section172(1)(a) of the Constitution to soften the blow of the invalidity order by allowing some of the rights and obligations arising from the contract to remain standing, provided that Imvusa did not make a profit from the pothole project. However, the Court found that Imvusa did make a profit from the agreement even if the profit failed to meet Imvusa’s expectations. The Court held that Imvusa’s claim in the alternative based on enrichment was also not specifically pleaded and proven by Imvusa. Moreover, in any event, Imvusa overcharged the Municipality. It follows, therefore, that this claim had also to fail.

The claim against Francois Human, Angeline Lekay and Eva Gxowa by the Municipality was not proven and as a result, could not be sustained. I am however of the view that Lekay was aware of the irregularities in this agreement as a former employee of the Municipality and therefore ought to have been held individually liable. The claim against Ronnie Lottering, Bezuidenhout and Lionel Prins was based on a statutory delict contained in section 32 of the MFMA. On one hand, the claim against Ronnie Lottering and Lionel Prins was upheld whilst the claim against Bezuidenhout on the other failed. The Court alluded to Mr Ronnie Lottering’s “deliberate commitment of unauthorised and irregular expenditure without having regard to the budget”. Furthermore, Ronnie Lottering tried to cover up his wrongdoings by backdating the deviation. The documents relating to Lionel Prins’s one-day appointment to sign the agreement with Imvusa were found to be vague and incomplete. Both Ronnie Lottering and Lionel Prins failed to participate in the proceedings. The Court found Ronnie Lottering and Lionel Prins guilty of unauthorised and irregular expenditure as per section 32 of the MFMA to the tune of R7 885 224,68. Bezuidenhout, who participated in the proceedings had no order made against her. The reason being that Bezuidenhout led evidence to the effect that she was under duress at all material times of the conclusion of the agreement and that Ladouce’s testimony regarding the awful working conditions in the Municipality at the time of “capture” of the Municipality supported Bezuidenhout reliance on duress. Lastly, the enrichment claim against Imvusa failed because the Municipality could not prove it.

Commentary
Irregular expenditure, which is expenditure incurred in contravention of existing legal requirements, is a huge problem in public procurement. The local government sector is not immune. This case illustrates, among other things, the lack of ethical leadership in local government. For example, Ronnie Lottering went as far as trying to deceive the Auditor General by backdating the procurement deviation and therefore sanitise the illegality. Such criminal actions are common in local government and the threat of sanctions provided under section 32 of the MFMA seem not to be enough to deter municipal officials from wrongdoing.

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