The Supreme Court of Appeal (SCA) has dismissed an application for reconsideration brought by Caledon River Properties (Pty) Ltd t/a Magwa Construction and Profteam CC, who sought to retain profits from contracts declared invalid due to procurement irregularities during the Covid-19 national state of disaster.
The judgment, delivered on January 16, reaffirmed the principle that no party should profit from unlawful conduct and upheld the lower court’s decision to limit the applicants’ recovery to reasonable and proven expenses.
The construction of a 40km border fence at the Beitbridge Border Post was commissioned under emergency procurement measures authorised by the public works and infrastructure minister on March 16, 2020.
Contracts declared invalid
The applicants were selected without a competitive bidding process, in violation of Section 217 of the Constitution, which mandates that government procurement must be fair, equitable, transparent, competitive, and cost-effective.
The contracts were declared invalid by the Special Tribunal, a decision later upheld by the Pretoria High Court.
The applicants sought to challenge the high court’s ruling, arguing that they should be allowed to retain the full contract price, including profit, as the fence was constructed according to specifications and delivered within the stipulated timeframe.
However, the SCA found no merit in their arguments and dismissed the application.
In its judgment, the SCA noted the importance of Section 172(1)(b) of the Constitution, which grants courts the discretion to determine a “just and equitable” remedy when a law or conduct is declared unconstitutional.
The court stated: “The central question is whether the full court properly exercised the discretion vested in it by s 172(1)(b) of the Constitution.
“That discretion is not mechanical, nor is it circumscribed by rigid rules. It is a discretion in the true sense, requiring a value-laden judgment informed by all the relevant facts and by constitutional principle.”
Applicants’ conduct criticised
The court noted that the applicants were not innocent parties in the procurement irregularities.
“The applicants cannot be characterised as innocent tenderers. While there is no finding of fraud or corruption, they were experienced participants in public procurement.
“Profteam acted as principal agent, a role carrying professional obligations to ensure regulatory compliance.
“The acceptance of advance payments amounting to approximately 60 percent of the contract value, within days of appointment and before any meaningful performance, occurred in circumstances where the prohibitions contained in the PFMA [Public Finance Management Act] and the Treasury regulations were well known,” the judgment stated.
The court further criticised the applicants’ conduct, describing it as “indicative of at least acquiescence in an irregular process.”
It added: “To accept such payment on the mere assurance of ‘offices closing’, when electronic banking remained functional during lockdowns, constitutes, at best, willful blindness.”
The applicants argued that the advance payments were a “practical solution” to the operational difficulties posed by the Covid-19 lockdown.
However, the court rejected this argument, stating: “A ‘practical solution’ to a lockdown does not override statutory prohibitions on the use of public funds.”
The SCA also addressed the applicants’ reliance on the case of State Information Technology Agency v Gijima Holdings, where the Constitutional Court allowed a contractor to retain profits from an invalid contract to prevent manifest injustice.
Unlawful procurement process
The SCA distinguished the present case, stating: “In Gijima, the contractor relinquished pre-existing and otherwise valid rights pursuant to a settlement agreement later declared invalid.
“Preserving those rights was necessary to avert manifest injustice. In the present matter, the applicants had no pre-existing entitlement to construct the border fence.
“The project arose from an unlawful procurement process that stood apart from any prior contractual relationship.”
The court reiterated the principle established in Buffalo City Metropolitan Municipality v Asla Construction, which states that “no party should profit from unlawful conduct”.
While an innocent tenderer acting in good faith may, in appropriate circumstances, be permitted to retain some benefit, the “no profit, no loss” approach often represents the proper balance between compensating for actual expenditure and vindicating the constitutional requirements of legality and fiscal discipline.
The SCA concluded that the full court had exercised its discretion judicially and appropriately, stating: “The discretion under s 172(1)(b) was exercised judicially, on correct principle, and with proper regard to all relevant considerations.
“No grave failure of justice has been shown, and there are no reasonable prospects that another court would reach a different conclusion.”
The court dismissed the application for reconsideration and ordered the applicants to pay the costs of the first respondent, the Special Investigating Unit, including the costs of two counsel where applicable.
