The Gauteng Department of Infrastructure Development (GDID) has suffered a major setback in a long-running dispute over the supply of natural gas to public hospitals.
This comes after the Johannesburg High Court ruled that the department unlawfully repudiated a contract with Virtual Gas Network (VGN).
In a judgment handed down on Thursday, high court Judge SDJ Wilson ruled that the department had no right to terminate the agreement, declaring that VGN is entitled to claim damages arising from the breach.
The damages claim is potentially worth more than R200-million, although the exact amount will only be determined at a later trial.
Dispute centres on hospital gas project
The case stems from a contract concluded in September 2015 under which VGN agreed to install gas infrastructure and supply natural gas to four Gauteng hospitals.
In November 2016, the agreement was expanded to cover a further six hospitals. The extended project involved the installation of additional gas-powered infrastructure and “daughter stations” used to store and distribute natural gas.
To fund the expansion, VGN secured a R39-million loan from the state-owned lender Industrial Development Corporation (IDC).
At the heart of the dispute was whether the contract remained in force after January 2023, when GDID informed VGN that it regarded parts of the agreement as having expired and purported to terminate the entire arrangement.
Court rejects department’s interpretation
The department argued in court that the contract expired no later than November 2021, five years after the addendum was signed.
VGN maintained that the agreement remained valid until five years after the completion and certification of the last infrastructure project at the hospitals covered by the expansion agreement.
Judge Wilson rejected the department’s interpretation.
Read more: Shell loses Concourt battle over exploration of oil, gas in Eastern Cape
“It makes no business sense,” the judge said, finding that the extended contract period was linked to the completion of infrastructure works rather than a fixed five-year period from the date the addendum was signed.
The court ruled that the agreement remained in force when GDID issued its termination notice on January 19 2023.
“It follows that GDID was not entitled to terminate the contract when it did and that its notice of termination was, in fact, a repudiation of the agreement,” the judgement stated.
Government review bid dismissed
The department launched a counter-application seeking to have the 2016 addendum declared unlawful.
It argued that the addendum improperly expanded the original contract and exceeded limits set out in a National Treasury instruction governing variations to government contracts.
The court dismissed both arguments.
Judge Wilson held that GDID had failed to establish that the additional hospitals fell outside the scope of the original procurement process.
The court also found that the treasury instruction relied upon by the department did not have the force of law and could therefore not be used as a basis for a legality review.
“The review application must fail,” the judge ruled.
Damages still to be determined
While the court found that GDID breached the contract, it stopped short of awarding the more than R200-million sought by VGN.
A key unresolved issue is the interpretation of a clause in the 2016 addendum that appears to remove the original “take or pay” requirement, under which GDID had agreed to pay for a minimum quantity of gas regardless of actual consumption.
The judge found that the clause is central to calculating VGN’s losses and that its meaning cannot be properly determined on the existing papers.
READ: Sharp diesel, paraffin price hikes overshadow petrol, LP gas relief
Instead, the question of damages will proceed to trial, where oral evidence will be heard.
The court ordered GDID to pay VGN’s legal costs, including counsel’s fees.
Judge Wilson declared that the department breached the contract by purporting to terminate it when it had “no right to do so” and that VGN is entitled to recover whatever damages it can prove resulted from that breach.
- The Johannesburg High Court ruled that the Gauteng Department of Infrastructure Development (GDID) unlawfully repudiated a contract with Virtual Gas Network (VGN) for the supply of natural gas to public hospitals.
- The contract, initially signed in September 2015 and expanded in November 2016, involved installing gas infrastructure and supplying natural gas to ten Gauteng hospitals.
- The court rejected GDID's argument that the contract expired by November 2021 and ruled the agreement remained valid when GDID issued its termination notice in January 2023.
- The court dismissed GDID's counter-application to declare the 2016 contract addendum unlawful and found the department failed to prove the expansion exceeded procurement limits.
- The claim for damages exceeding R200-million remains unresolved and will proceed to trial, while the court ordered GDID to pay VGN's legal costs.
In a judgment handed down on
In
To fund the expansion, VGN secured a R39-million loan from the state-owned lender
At the heart of the dispute was whether the contract remained in force after January 2023, when GDID informed VGN that it regarded parts of the agreement as having expired and purported to terminate the entire arrangement.
VGN maintained that the agreement remained valid until five years after the completion and certification of the last infrastructure project at the hospitals covered by the expansion agreement.
Judge Wilson rejected the department's interpretation.
Read more:
"It makes no business sense," the judge said, finding that the extended contract period was linked to the completion of infrastructure works rather than a fixed five-year period from the date the addendum was signed.
"It follows that GDID was not entitled to terminate the contract when it did and that its notice of termination was, in fact, a repudiation of the agreement," the judgement stated.
It argued that the addendum improperly expanded the original contract and exceeded limits set out in a National Treasury instruction governing variations to government contracts.
Judge Wilson held that GDID had failed to establish that the additional hospitals fell outside the scope of the original procurement process.
"
While the court found that GDID breached the contract, it stopped short of awarding the more than R200-million sought by VGN.
A key unresolved issue is the interpretation of a clause in the 2016 addendum that appears to remove the original "take or pay" requirement, under which GDID had agreed to pay for a minimum quantity of gas regardless of actual consumption.
READ:
Instead, the question of damages will proceed to trial, where oral evidence will be heard.
Judge Wilson declared that the department breached the contract by purporting to terminate it when it had "no right to do so" and that VGN is entitled to recover whatever damages it can prove resulted from that breach.
