Can The State Invoke A Defence Of “No Budget No Pay”?

18 September 2015 | Construction, Engineering and Infrastructure Law

This question was addressed by the Supreme Court of Appeal ("SCA") in a recent case involving the Free State Department of Police, Roads and Transport ("Roads Department"). The case also touched on the interesting question as to whether a subcontractor of the main contractor can take action against an employer to enforce payment of amounts due to the subcontractor for work done. In its opening remarks the SCA gave the Roads Department a verbal lashing, accusing it of having behaved unconscionably, without any integrity and with a total lack of transparency and accountability as enjoined by our Constitution.


The Roads Department decided to embark on a road infrastructure programme, the stated aim of which was to promote accessibility, mobility and a safe road infrastructure network in the province that would be environmentally sensitive and would stimulate socioeconomic growth. The programme encompassed 23 roads located throughout the province.

The Roads Department called for tenders to be submitted for the necessary engineering services required in respect of the programme.

The SSI/Tshepega Joint Venture ("SSI") submitted a tender which culminated in it being awarded the contract on 19 April 2010.

SSI's appointment entailed it acting as the Project Manager for the programme for a contract value of approximately R69m.

The contract made provision for SSI to appoint selected subconsultants or subcontractors as required by the Roads Department, with the amounts payable by SSI to the subconsultants to be paid by the Roads Department to SSI over and above SSI's contract value.

One of the subconsultants selected by the Roads Department was an environmental subconsultant by the name of Terra Graphics (Pty) Ltd ("Terra Works") who was appointed by SSI as the environmental subconsultant on 22 October 2010 following a tender process approved by the Roads Department.

SSI performed its obligations in terms of its contract. By October 2010 the Roads Department had paid SSI approximately R13,7m for project management services rendered.

Terra Works also performed services in terms of its subcontract to the value of approximately R1,5m. However, since SSI had not been paid by the Roads Department for this work, it could not pay Terra Works.

Terra Works instituted legal proceedings against the Roads Department for an order that:

  • the Roads Department pay SSI the R1,5m payable in respect of its subcontract works; alternatively
  • the Roads Department pay Terra Works directly the amount concerned.

Whilst conceding that it had called for tenders and that the relevant work had been performed by Terra Works, the Roads Department opposed the Terra Works legal action on the grounds that:

  • there was no privity of contract between it and Terra Works, and Terra Works's claim lay only against SSI with whom it had contracted; and
  • the province had made no budgetary allocation for the road rehabilitation programme and as such it was precluded in terms of the Public Finance Management Act ("PFMA") from making the payment being claimed by Terra Works.

The Free State Division of the High Court in Bloemfontein brushed both defences aside and granted an order directing the Roads Department to pay the R1,5m directly to Terra Works

The Roads Department appealed this decision to the SCA which also sits in Bloemfontein.

The SCA examined the evidence that had been put up by the Roads Department and concluded that the statement by the Roads Department that no budgetary allocation had been made for the road rehabilitation programme was disingenuous and factually wrong. The SCA recorded that the deponent to the Roads Department's affidavit had been deliberately vague and evasive in this regard.

The Court found that on the strength of evidence put up by Terra Works in its replying affidavit the Roads Department had specifically approved both the SSI contract and the Terra Works contract.

The Roads Department tried to argue that any payment under the SSI and Terra Works contracts would be "irregular expenditure" prohibited under the PFMA.

The SCA explained the difference between "irregular expenditure" and "unauthorised expenditure" in terms of the PFMA.

"Irregular expenditure" is expenditure that is not in accordance with any applicable legislation and as such has not been legally and properly incurred.

"Unauthorised expenditure" on the other hand is expenditure in circumstances where a legal obligation has been properly incurred but the budgetary vote from which the expenditure is to be met has become exhausted.

In such circumstances either parliament or the relevant provincial legislature may appropriate additional funds to the relevant vote. Failing that, the expenditure must be met as a first charge against the funds allocated to the relevant vote in the next financial year.

The Court found therefore that in a case such as this one there was a legal obligation on the Roads Department to pay, even if it meant that payment might be delayed until the province's next financial cycle.


The SCA upheld the Free State High Court's ruling that the Roads Department be directed to pay Terra Works R1,5m.

In reaching this decision, the SCA relied inter alia on the following facts:

  • Terra Works was a subconsultant that had been selected and approved by the Roads Department;
  • the work performed by Terra Works was for the benefit of the Roads Department;
  • in terms of the main contract, the Roads Department had expressly undertaken to pay the environmental subconsultant's fees to SSI for on payment to the appointed subconsultant;
  • the Roads Department is a government department which in terms of constitutional prescripts is required to be accountable;
  • the Roads Department failed to raise any justification for its failure to pay Terra Works through the conduit of SSI. In other words, the Roads Department raised no quibble with the fact that the work had been properly done and Terra Works was otherwise entitled to payment for it.

Government departments cannot evade their legal and contractual obligations to make payment to contractors simply on the grounds that their budgeted funds have run out.

In appropriate circumstances subcontractors can take legal action against employers to enforce payment of amounts due in terms of a subcontract.



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