In a refreshing turn of events, the Supreme Court of Appeal has upheld a ruling that holds municipal officials personally responsible for unlawful tender awards, offering a new level of accountability.

The court reports are replete with cases involving unlawful tender awards and concomitant irregular expenditure on the part of government entities.

Whilst not often proven, in many of these cases there has been a strong whiff of corruption.

Historically, the costs and losses arising from these unlawful contracts have redounded on taxpayers who have ended up as the ultimate funders of the costs and losses concerned.

The officials involved have generally escaped with nothing more than some criticism by the court.

In November 2024 there was a refreshing turn of events when the Supreme Court of Appeal upheld a decision of the Eastern Cape Division of the High Court which held municipal officials personally liable for irregular expenditure connected with an illegal tender award.^[1]

BACKGROUND

In February 2014 the Nelson Mandela Bay Metropolitan Municipality (the Municipality) appointed Erastyle (Pty) Ltd (Erastyle) as a consultant for the purposes of developing a communication and marketing strategy for the Municipality’s integrated public transport system.

The appointment for a contract price of R6 million was made without a proper public tender process having been followed and was in contravention of the Municipality’s Supply Chain Management Policy (SCM Policy).

The evidence established that Erastyle’s appointment had been promoted by certain officials in the Municipality and made by the acting City Manager despite advice by the Municipality’s acting Chief Financial Officer (CFO) that the appointment would be unlawful unless the Municipality followed a valid tender process. Flying in the face of this warning, the officials deliberately and/or negligently proceeded with the appointment of Erastyle without going out to tender.

In the two years following the conclusion of the contract with Erastyle, the Municipality paid it approximately R7,5 million. The payment of the excess over the contract price was itself irregular and not properly authorised.

LEGAL PROCEEDINGS

In December 2015 a new Municipal Manager was appointed at the Municipality.

The unlawful appointment of Erastyle came to his attention and he decided, in February 2016, to take appropriate legal steps to remedy the situation.

The Municipality instituted legal action in the High Court for the setting aside of the contract award to Erastyle and for repayment of the money paid out under the contract.

The Municipality’s claim for repayment of the money was directed at Erastyle and the various implicated municipal officials who were sued on a joint and several basis.

The grounds for the relief sought by the Municipality in the action were that:

• The tender was awarded without a proper tender in violation of section 217 of the Constitution and the Municipality’s SCM Policy, justifying the setting aside of the contract.

• In light of the contract being unlawful, there was no legal basis for the amounts which had been paid to Erastyle which fell to be repaid based on the principles of unjustified enrichment. In support of this leg of its case, the Municipality relied on section 32(1)(c) of the Local Government: Municipal Finance Management Act, 56 of 2003 (MFMA), which deals with unauthorised, irregular or fruitless and wasteful expenditure by a municipality.

• The municipal official who had misrepresented to the Municipality that the appointment would be lawful had done so fraudulently, alternatively negligently, rendering him liable to compensate the Municipality for the unlawful payments made to Erastyle.

Section 32 of the MFMA provides that:

• Without limiting liability in terms of the common law or any other legislation, the accounting officer and relevant officials of a municipality are liable for unauthorised or irregular expenditure which is deliberately or negligently incurred.

• A municipality must recover unauthorised, irregular, fruitless and wasteful expenditure from the person liable unless it is irrecoverable.

The Municipality’s case was that the municipal officials had deliberately or negligently allowed and/or authorised irregular payments to be made to Erastyle. As such, the Municipality was not only entitled to but obliged to seek recoupment of that unlawful expenditure from them.

COURT’S FINDINGS

The court found that:

• The payments to Erastyle pursuant to the illegal contract with it indeed constituted unauthorised, irregular, fruitless and wasteful expenditure.

• The reference in section 32 to an accounting officer or official being “liable”, meant personally liable from a monetary point of view and not merely “accountable” as argued by the officials’ counsel.

• On its plain wording, section 32 makes it clear that recovery of unauthorised, irregular, fruitless and wasteful expenditure by a municipality is not optional. A municipality is enjoined to recover such expenditure from the person liable for it.

• The argument by the officials that the Municipality had not suffered any loss because it had received services in return for the expenditure was irrelevant as section 32 made no provision for the right of a municipality to recover irregular expenditure being diminished or forfeited in such circumstances.

• Section 32 makes it clear that personal liability on the part of municipal officials arises as soon as an official intentionally or negligently incurs unauthorised, irregular, fruitless and wasteful expenditure.

• Liability under section 32 is not limited to municipal officials but also extends to political office bearers who are not involved in the day-to-day running of a municipality.

CONCLUSION

The case puts municipal officials and political office bearers in municipalities on their guard and will hopefully result in a decline in dubious tender awards by municipalities.

At the end of the day, however, whether a municipality takes appropriate action in cases where it should will depend on political will.