South African court reaffirms that state cannot unduly benefit from invalid contracts

In its ruling, the court made clear that government departments should not be entitled to unduly benefit from the services rendered – and that in certain circumstances, the contract should not be set aside so that the service provider can receive a just and equitable remedy.

Background

The case began when Pengi Consulting Engineers and Land Surveyors (Pengi) brought a claim against the minister of water and sanitation for services rendered based on an oral contract. The minister denied that such a contract had been concluded and brought a counterclaim against Pengi. The minister requested that, should the High Court establish the existence of such contract, it be declared invalid in accordance with section 172(1)(a) of the constitution. Section 172(1)(a) provides that a court must declare any law or conduct that is inconsistent with the constitution invalid.

Pengi told the court that it had been approached in late 2017 by an official of the Department of Water and Sanitation who requested the company’s engineering services on a project. Pengi was immediately issued with access certificates to the project’s site and meeting minutes showed that Pengi had been fully briefed on the scope of work.

Correspondence exchanged between the department and AECON, the main contractor of the project, further indicated that Pengi had been appointed as the independent engineer. In September 2018, nine months after the issuance of the access certificate, Pengi was informed by the department that its services were terminated. Pengi had not received payment for invoices issued on the project prior to its termination.

The department disputed that Pengi had been appointed, arguing that it had merely recommended Pengi as an independent engineer without an official appointment or contract being concluded. It said this was due to constraints in relation to these kind of appointments in its contract with AECON. Based on the evidence provided, however, the High Court was satisfied that Pengi had proved on a balance of probabilities that an oral agreement had been concluded between the department and Pengi on the terms stipulated in the department’s letter to AECON.

The department’s counterclaim

The High Court noted that both section 217(1) of the constitution and the department’s supply chain management policy required that the bidding process for contracting service providers must be transparent, competitive, fair and cost-effective. The court found that evidence establishing the conclusion of the oral contract between Pengi and the department conflicted with both of these provisions. As a result, it declared the oral contract invalid in accordance with section 172(1)(a) of the constitution. But the High Court said that, in line with section 172(1)(b) of the constitution, it had to consider a remedy for Pengi that is just and equitable.

In doing so, the High Court turned to the principles established in the Constitutional Court judgement of Buffalo City Metropolitan Municipality v Asia Construction (Pty) Ltd. That ruling held that a contract between the parties was invalid – but added that “justice and equity” dictated that the municipality “should not benefit from its own undue delay and in allowing [Asia Construction] to proceed to perform in terms of the contract.” The Constitutional Court refused to set aside the invalid contract “to preserve the rights” to which Asia Construction “might have been entitled”.

The High Court found that the department was more than willing to utilise Pengi’s services until the end of September 2018 and – had it not raised the invalidity defence in its counterclaim – Pengi would have been entitled to payment in terms of the oral contract. Further, Pengi’s services pertained to urgently resolving a water crisis which immensely benefited the affected community. In light of this, the High Court stressed that it would be a travesty of justice to allow the department to utilise the services rendered by Pengi without paying for them. Because of this, the High Court held that a just and equitable order would dictate that the agreement by the parties should not be set aside.

Impact of the case

The judgement is another good example of the application of section 172(1)(b) of the constitution. It highlights the point that organs of state cannot unduly benefit from services rendered by a service provider. As the court made clear, this is even true when the contract between the parties is rendered invalid, particularly in circumstances where the services rendered were urgent, necessary and beneficial to a community. A just and equitable remedy in the context of the circumstances must be afforded to the service provider.

It is also a timely reminder to all service providers intending to contract with a government department, to ensure that they comply with all constitutional and other legislative requirements when doing so and to seek the necessary legal advice if required. While the courts may, at times, provide assistance, service providers would be better served ensuring that their contracts are in order from the outset.

Co-written by Brendan Whyte and Jazquelyn Govender of Pinsent Masons.