Government contracts: When to rely on estoppel

August 1st, 2020
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Section 216(1) of the Constitution provides that national legislation must establish a national treasury and prescribe measures to ensure both transparency and expenditure control in each sphere of government, by introducing generally recognised accounting practice, uniform expenditure classifications and uniform treasury norms and standards.

In addition, s 217(1) of the Constitution provides that when an organ of state in the national, provincial or local sphere of government, or any other institution in national legislation, concludes an agreement for the rendering of goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-
effective.

The Public Finance Management Act 1 of 1999, as amended (the Act) was enacted to ‘regulate financial management in the national government and provincial governments; to ensure that all revenue, expenditure, assets and liabilities of those governments are managed efficiently and effectively; to provide for the responsibilities of persons entrusted with financial management in those governments; and to provide for matters connected therewith’.

The Act is, therefore, the national legislation envisaged in s 216 of the Constitution and seeks to give effect to, among others, the values underpinning ss 217 and 195 of the Constitution.

Section 38(1)(a)(iii) of the Act provides that an accounting officer for a department, trading entity or constitutional institution must ensure that that department, trading entity or constitutional institution has and maintains an appropriate procurement and provisioning system, which is fair, equitable, transparent, competitive and cost-effective.

The importance of, and the rationale behind, these processes and regulations was outlined in the unanimous judgment by the Supreme Court of Appeal (SCA) in Eastern Cape Provincial Government and Others v Contractprops 25 (Pty) Ltd 2001 (4) SA 142 (SCA). This matter involved the validity of two lease agreements of immovable property concluded without any reference to the Provincial Tender Board and thus in contravention of the prescribed statutory tender procedure.

The SCA held (at para 8) that both leases were concluded in contravention of the prescribed tender process and were, therefore, invalid. Speaking for the Full Bench, Marais JA held as follows:

‘As to the mischief which the Act seeks to prevent, that too seems plain enough. It is to eliminate patronage or worse in the awarding of contracts, to provide members of the public with opportunities to tender to fulfil provincial needs, and to ensure the fair, impartial, and independent exercise of the power to award provincial contracts. If contracts were permitted to be concluded without any reference to the tender board without any resultant sanction of invalidity, the very mischief which the Act seeks to combat could be perpetuated’.

As to the perceived harsh consequences of visiting such a transaction with invalidity, Marais JA remarked at para 9 that ‘the consequences of visiting invalidity upon non-compliance are not so uniformly and one-sidedly harsh that the legislature cannot be supposed to have intended invalidity to be the consequence. What is certain is that the consequence cannot vary from case to case. Such transactions are either all invalid or all valid. Their validity cannot depend upon whether or not harshness is discernible in the particular case’.

As an alternative contention, the respondent in the Contractprops case also relied on estoppel. However, Marais JA held, at para 11 – 13, that such reliance was misplaced:

‘It remains to consider an alternative contention advanced by counsel for respondent: Estoppel. There are formidable obstacles in the way of a successful invocation of estoppel. However, even if it be assumed in favour of respondent that estoppel was pertinently raised in the papers (the matter came before the court a quo by way of motion proceedings) and that all the necessary factual requirements for the doctrine to be applicable were canvassed, this is not a case in which it can be allowed to operate. It is settled law that a state of affairs prohibited by law in the public interest cannot be perpetuated by reliance upon the doctrine of estoppel. (See Trust Bank van Afrika Bpk v Eksteen 1964 (3) SA 402 (A) at 411H – 412B.)

This is such a case. It was not the tender board which conducted itself in a manner which led respondent to act to its detriment by concluding invalid leases of property specially purchased and altered at considerable expense to suit the requirements of the department. It was the department. If the leases are, in effect, “validated” by allowing estoppel to operate, the tender board will have been deprived of the opportunity of exercising the powers conferred upon it in the interests of the taxpaying public at large. Here again the very mischief which the Act was enacted to prevent would be perpetuated. (Compare Strydom v Die Land – en Landboubank van Suid-Afrika 1972 (1) SA 801 (A) at 815E – F.)

The fact that [the] respondent was misled into believing that the department had the power to conclude the agreement is regrettable and its indignation at the stance now taken by the department is understandable. Unfortunately for it, those considerations cannot alter the fact that leases were concluded which were ultra vires the powers of the department and they cannot be allowed to stand as if they were intra vires’. (We deal in more detail hereunder with estoppel within this context.)

From the aforesaid, it is clear that agreements, concluded with a department, trading entity or constitutional institution for the delivery of goods or services to it that do not comply with the requirement that they are the result of an appropriate procurement and provisioning system, which was fair, equitable, transparent, competitive and cost-effective, are ab initio null and void. The rationale for nullifying transactions that do not comply with applicable procurement and provisioning systems, is that they deprive the public of the benefit of an open and fair competitive process, and that they are, therefore, not in the public interest.

Extensions versus new agreements

A distinction must be drawn between new agreements concluded with a department, trading entity or constitutional institution for the procurement of goods or services, on the one hand, and the extension of an existing procurement agreement, on the other.

In the matter of MEC for Health, Gauteng v 3P Consulting (Pty) Ltd 2012 (2) SA 542 (SCA), a High Court order declaring a services agreement between the parties duly renewed and ordering specific performance in terms thereof, was assailed by the department (the appellant) on the grounds that the purported renewal of the services agreement for three years – one year longer than previously agreed and at an increased contract value – occurred without following a further public bidding process and in a manner which therefore, so it was contended, fell afoul of the statutory procurement provisions referred to above.

In addition, the appellant also relied on the provisions of s 76(4)(c) of the Act, which provides that the National Treasury may make regulations or issue instructions applicable to all institutions to which the Act applies concerning ‘the determination of a framework for an appropriate procurement and provisioning system which is fair, equitable, transparent, competitive and cost-effective’ (para 15 of the 3P Consulting case).

Pursuant to the aforesaid, the appellant referred to the Framework for Supply Chain Management, which was promulgated in GN R1734 GG25767/5-12-2003 as Treasury Regulations. In terms of this framework, National Treasury is required and authorised to issue instructions to accounting officers/authorities in respect of the appointment of consultants. This it does by way of practice notes. In this regard, National Treasury Supply Chain Management Practice Note No SCM 3 of 2003 provides that ‘[c]onsultants should be appointed by means of competitive bidding processes, whenever possible’.

Based on these statutory requirements, the appellant argued that, despite the fact that 3P Consulting’s proposal was for a contract duration of two years, renewable for a further period of two years, it had, after a due and proper tender process, given approval for a two-year contract only. Thus, according to the appellant, any attempt by the parties to circumvent that approval by concluding a contract for a longer period was unlawful.

Speaking for the court, Van Heerden JA held, firstly, that it was clear from the evidence that the original decision to approve the initial award to 3P Consulting was taken by the Departmental Acquisition Council (DAC), the procurement decision-making body of the appellant. The original services agreement was, therefore, validly concluded.

The SCA also held that, as there was no new services agreement but merely an extension of the original services agreement, there was no new procurement of goods or services, and it was, therefore, not necessary to follow a further competitive public bidding process in this regard. As a result, it held that the appellant’s attack on the validity of the renewal of the services agreement on public law grounds was without merit.

It, therefore, follows that in the case of a renewal of an existing and legally constituted procurement agreement, a further public bidding process is not required, as long as there had been compliance with internal procurement processes when the original procurement agreement was concluded.

Sections 66 and 68 of the Act

In the matter of Road Traffic Management Corporation v Waymark Infotech (Pty) Ltd 2019 (5) SA 29 (CC), the applicant, the Road Traffic Management Corporation (RTMC), a national public entity, conducted a lawful tender process and contracted with the respondent company (Waymark) to provide it with information technology services over three financial years. However, the RTMC then repudiated the agreement, and Waymark cancelled it and instituted an action for its damages. The RTMC counterclaimed for an order that the agreement was invalid because of non-compliance with s 66(3) of the Act, which provides that a national public entity ‘may only through the [Minister] … enter into any … transaction that binds … that public entity to any future financial commitment’.

On appeal, the SCA ruled that the High Court misconstrued the provisions of s 66 of the Act and held that a term contract does not fall under these provisions. As a result, the SCA held that the contract is ‘a present commitment to pay for professional services as they were rendered, albeit over a three-year period’ and not a future financial commitment.

The Constitutional Court (CC) concurred with the reasoning of the SCA and, among others, held that: ‘A contextual reading of ss 66 and 68, given the chapter in which they are located, and the relation of that chapter to other chapters of the [Act], lends itself to the interpretation that the phrase “any other transaction that binds or may bind that public entity to any future financial commitment” as referred to in s 66, must mean a transaction that is somehow similar to a credit or security agreement’.

From the aforesaid, it is clear that ‘future financial commitment’ as contemplated in s 66(3)(c) of the Act, means a financial commitment beyond the present moment and that ‘transaction’ as referred to in s 66, must mean a transaction that is somehow similar to a credit or security agreement.

However, we hasten to add that the RTMC never impugned the validity of the procurement process that culminated in the award of the tender to Waymark and accepted the procurement process without question. The CC held that the SCA’s conclusion, therefore, represents the best fit, having regard to the text, context and purpose of s 66. That being the case, the CC did not find it necessary to deal with s 68 of the Act whose ultimate relevance was predicated on the applicability of s 66.

Estoppel

Does the Contractprops case exclude a reliance on estoppel in all cases? We are of the view that it does not.

Firstly, we submit that Marais JA’s judgment does not provide authority for the contention that it has closed a possible reliance on estoppel in all instances:

  • In para 11 of the Contractprops case, Marais JA concluded that the case was one in which estoppel cannot be allowed to operate.
  • In para 12 Marais JA was also at pains to point out that it was not the tender board, but the department, which led Contractprops to act to its detriment. This justifies the inference that, were this not to have been the case, Contractprops’ reliance in estoppel may very well have been justified.

Secondly, in the matter of City of Tshwane Metropolitan Municipality v RPM Bricks (Pty) Ltd 2008 (3) SA 1 (SCA), Ponnan JA remarked as follows regarding RPM Brick’s attempt to rely in estoppel (at para 11-13):

‘It is important at the outset to distinguish between two separate, often interwoven, yet distinctly different “categories” of cases. The distinction ought to be clear enough conceptually. And yet, as the present matter amply demonstrates, it is not always truly discerned. I am referring to the distinction between an act beyond or in excess of the legal powers of a public authority (the first category), on the one hand, and the irregular or informal exercise of power granted (the second category), on the other. That broad distinction lies at the heart of the present appeal, for the successful invocation of the doctrine of estoppel may depend upon it. (See TE Dönges & L de van Winsen Municipal Law 2ed (1953) 38 – 41.)

In the second category, persons contracting in good faith with a statutory body or its agents are not bound, in the absence of knowledge to the contrary, to enquire whether the relevant internal arrangements or formalities have been satisfied, but are entitled to assume that all the necessary arrangements or formalities have indeed been complied with (see for example National and Overseas Distributors Corporation (Pty) Ltd v Potato Board 1958 (2) SA 473 (A); Potchefstroom se Stadsraad v Kotze 1960 (3) SA 616 (A)). Such persons may then rely on estoppel if the defence raised is that the relevant internal arrangements or formalities were not complied with.

As to the first category: Failure by a statutory body to comply with provisions which the legislature has prescribed for the validity of [a] specified transaction cannot be remedied by estoppel because that would give validity to a transaction which is unlawful and therefore ultra vires. (See for example Strydom v Die Land- en Landboubank van Suid-Afrika 1972 (1) SA 801 (A); Abrahamse v Connock’s Pension Fund 1963 (2) SA 76 (W); and Hauptfleisch v Caledon Divisional Council 1963 (4) SA 53 (C).)’

Based on the aforesaid, we submit that the following appears to be the legal position regarding a possible reliance on estoppel in instances where agreements have been concluded without proper compliance with the relevant statutory procurement provisions –

  • service providers falling within Ponnan JA’s ‘second category’ may rely on estoppel if the defense raised is that the relevant internal arrangements or formalities were not complied with;
  • it must be the actions of the relevant procurement decision-making body of the department that led the service provider to act to its detriment; and
  • all the other requirements for a successful reliance on estoppel must be present.
Absent a possible successful reliance on estoppel, does this render the innocent service provider without a remedy?

Although there is no general enrichment liability in South African law, there are nonetheless basic requirements that must be met for relief to be granted under any of the recognised actions. These requirements are –

  • the defendant must have been enriched;
  • the plaintiff must have been impoverished;
  • the enrichment of the defendant must be at the expense of the plaintiff; and
  • the enrichment must be unjustified (sine causa).

It is trite that a party who has performed – whether in whole or in part – in terms of an illegal contract may reclaim performance with the condictio ob turpem vel iniustam causam. Such a party must allege and show –

  • a transfer of property or payment of money to the defendant from the plaintiff;
  • that the transaction or its performance was illegal;
  • that the defendant was unjustly enriched.

The central requirement of this condictio is, therefore, that the amount claimed must have been transferred pursuant to an agreement that is void and unenforceable because it is illegal, that is, because it is prohibited by law.

If the contract is invalid but not illegal, the cause of action is the condictio indebiti. The essential allegations for the condictio indebiti are that:

  • The transfer or payment must have been made in the bona fide and reasonable but mistaken belief that it was owing.
  • The transfer must have been made sine causa or indebiti, there must, therefore, have been no legal or natural obligation to have made it.
  • The error must have been reasonable, meaning that the mistake must be excusable in the circumstances of the case.
  • The property being reclaimed must in legal terms have been transferred to the defendant.

However, it is generally accepted by South African courts that the identification of the cause of action or the specific condictio is not of importance. In this regard, the following quote from the matter of First National Bank of Southern Africa Ltd v Perry NO and Others 2001 (3) SA 960 (SCA) at para 21 is apposite:

‘This difference of approach as to the appropriate condictio again underlines the point which I made in McCarthy Retail Ltd v Shortdistance Carriers CC [2001 (3) SA 482 (SCA)] that we spend too much of our time identifying the correct condictio or actio. Counsel frequently err. The academics say that the courts, including this court, frequently err. And to judge by the difference of opinion as to the condictio sine causa revealed in McCarthy’s case, some of the academics sometimes err too. My suggestion, in that case, accepted by two of my brethren, was that the adoption of a general action might help remedy this situation, by fixing attention on the requirements of enrichment rather than on the definition and application of the old actions.’

We are of the view that a service provider, that has duly performed in terms of an agreement, which does not comply with the relevant statutory procurement requirements, may rely on an unjust enrichment action against the department, trading entity or constitutional institution.

We furthermore submit that authority for this is to be found in the para 25 from the City of Tshwane case:

‘It follows that on this aspect, Boruchowitz J was wrong, as indeed was the learned judge in the present case. The appeal must therefore succeed. This result may well be perceived to be an unpalatable one. It is, however, not so. For it must be remembered that someone in the position of the plaintiff has, in principle, an enrichment action and will thus not be entirely remediless. In this case, as I have already mentioned, the plaintiff consciously elected at the trial not to pursue its enrichment claim. It must therefore bear the consequences of that election’ (our italics).

Conclusion

Service providers to government should ensure that as far as possible, they not only participate in procurement processes underpinned by relevant statutory provisions, but that there has been compliance with the relevant statutory procurement requirements. Should there be any doubt in this regard, we suggest that it would be prudent for a service provider to seek written confirmation from the relevant procurement decision-making body that there had been proper compliance, inter alia, with all internal processes. Should any reliance by the service provider later turn out to be misplaced, such a service provider may rely on estoppel. Where a service provider has duly performed in terms of an agreement, which does not comply with the relevant statutory procurement requirements, it may rely on an unjust enrichment action against the department, trading entity or constitutional institution.

Pieter Andrè Botha BA LLB (Stell) is a senior advocate at the Cape Bar and Nicolene Schoeman-Louw LLM (UFS) PG Dip FP (US) is a legal practitioner at SchoemanLaw Inc in Cape Town.

This article was first published in De Rebus in 2020 (Aug) DR 19.