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         REPUBLIC OF SOUTH AFRICA

                IN THE HIGH COURT OF SOUTH AFRICA

     (NORTH GAUTENG HIGH COURT, PRETORIA)     

                                                                          
                                                      Case No: 56868/2012

27/11/2019

In the matter between:

 

M W Asset Rentals (Pty) Ltd                                       Plaintiff

 

 

and

 

DR Kenneth Kaunda District Municipality                    Defendant    

JUDGMENT

Maumela J.

1.  This case the plaintiff is M W Asset Rentals (Pty) Ltd, a private company with limited liability, incorporated in terms of the Companies Act 1973: Act No 61 of 1973, read with Item 2 of Schedule 5 of the Companies Act 2008: Acts No 71 of 2008. Its Principal place of business is at 1^st Floor, West Court, Sandown Village, Cnr Maude Street and Gwen Lane, Sandton. The plaintiff sues as cessionary of the claim ceded to it by Bakopane Information Systems CC; trading as Toshiba Office Systems and Technology (“Toshiba”)

2.  The defendant is Kenneth Kaunda District Municipality, a Municipality established in terms of the Local Government Municipality Structures Act, with its domicilium citandi et executandi at Civic Centre, Patmore Road, Orkney.

3.  The parties agreed to present three questions to the Court for adjudication by means of a stated case as provided for under Rule 33(1). In a document titled “Stated Case in Terms of Rule 33(1)’’, the issues for the court’s adjudication are listed. The questions which the parties are presenting to the Court for adjudication are set out in this document which councils for the parties signed.

4.  The parties agreed that the proceedings in this matter shall focus on a stated in which the court shall make a determination concerning three aspects or questions.

5.  The first question reads as follows: “What is the effect of the Defendant's non-compliance with the statutory provisions (set out in paragraph 1.4 of the “Stated Case in Terms of Rule 33(1)") on the appointment of Toshiba and on the validity of the Master Rental Agreement and specifically on whether it was null and void ab initio?” The second question is: “In the event of the Court agreeing with the Defendant, i.e. that the Master Rental Agreement was invalid and null and void ab initio, the next question is: What is the effect of the invalidity and nullity of the Master Rental Agreement on the subsequent cessions to Merchant West and the Plaintiff?”

6.  The following is the third question: “In the event of the Court agreeing with the plaintiff, i.e. that the Master Rental Agreement was not invalid and null and void ab initio, the question is: “Is the Master Rental Agreement valid, binding and enforceable?”

BACKGROUND.

7.  On 28 October 2009, the Dr. Kenneth Kaunda District Municipality concluded a Master Rental Agreement with Toshiba. In terms of the agreement, the Municipality was to lease certain office equipment from Toshiba for 36 months at a cost of R36,480 per month. The Municipality complied with its contractual obligations and paid the monthly instalments until, approximately 30 months into the contract. On the 2^nd of November 2011, the Municipality it wrote to Toshiba telling them that the Master Rental Agreement was invalid, null and void ab initio because the Municipality did not follow a lawful procurement process when it concluded the agreement. On that basis, the Municipality stopped paying the monthly instalments.  

8.  The following are the background facts obtain in this matter:
8.1. The Municipality concluded an agreement with a private
      company pursuant to a tender process;
8.2. However, the tender process was unlawful because of
       non- compliance with mandatory public procurement
       laws;
8.3. The Municipality took the view that the agreement was
       “invalid and null and void ab initio” because of the non-
       compliance;
8.4. The Municipality unilaterally stopped paying monthly
       instalments to Toshiba in compliance with the agreement.

9.  The chronology of events outlined above gave rise the questions listed under paragraphs 5 and 6 above. The defendant argues that for any procurement contract to be valid, all provisions applicable to procurement have to be complied with and failure thereof visits such contract with nullity and therefore, lack of enforceability.

10. The defendant cites the case of Municipal Manager: Quakeni Local Municipality & Another v FV General Trading CC[1], where the Supreme Court of Appeal held as follows: “I therefore have no difficulty in concluding that a procurement contract for municipal services concluded in breach of the provisions dealt with above which are designed to ensure a transparent, cost effective and competitive tendering process in the public interest, is invalid and will not be enforced.”

11. In his book[2], Bolton states the following: “Where a contract is concluded as a result of an exercise of an organ of state's constitutional or statutory powers, this must be done within the confines of such powers. In other words, the conclusion of a contract must be a valid exercise of powers; if not, it will be ultra vires and invalid.” In casu, the defendant submits that the plaintiff cannot be allowed to enforce a contract which is invalid.

12.  Further in his book[3], Bolton states: “Similarly so, Steytler et al[4], states the following: “Moreover, a contact concluded in the absence of a SCM policy and the prescribed competitive process is invalid. ... The question arises whether a municipality can rely on its own failure to comply with the MFMA, SCM Regulations or its own SCM Policy to invalidate a procurement. ... The fact that a contractor cannot hold a municipality to an invalid contract puts an obligation on them to know the rules in terms of which the municipality must operate. If they want to prevent the risk of a contract being set aside for being invalid, they cannot claim ignorance of the rules and how they have been applied. Should a contract be set aside, the contractor would not be without remedy and can claim for services already rendered on the ground of unjustified enrichment.”

12.

13.  In the case of Municipal Manager: Quakeni Local Municipality & Another v FV General Trading CC[5], a contract was entered into to which an organ of state was party. It turned out that the organ of state did not comply with all relevant provisions when it entered into the contract. Questions of the validity and the enforceability of the contract arose on which the court had to decide. In that regard, the court stated the following: “This argument cannot be upheld. This court has on several occasions stated that, depending on the legislation involved and the nature and functions of the body concerned, a public body may not only be entitled, but also duty bound to approach a court to set aside its own irregular administrative act.” See Pepcor Retirement Fund v Financial Services Board[6].  

14.  Consequently, in Rajah& Rajah (Pty) Ltd and Others v Ventersdorp Municipality and Others[7] the court held that a municipality had to act on behalf of the public and is entitled to approach a court to have its own act in granting a certificate to obtain a trading licence declared a nullity. Similarly, in Transair (Pty) Ltd \j National Transport Commission and Another[8] the court held that an administrative body which held wide powers of supervision over air services to be exercised in the public interest, had the necessary locus standi to ask a court to set aside a licence it had irregularly issued.

15.  The applicant contends that the starting point is the law’s characterization of decisions taken by organs of state in the awarding of a tender and the subsequent conclusion of a contract with a private company pursuant to a tender as constituting “administrative action”. See Cora Hoexter Administrative Law in South Africa (2ed), at page 184 to 185; including Umfolozi Transport (Edms) Bpk v Minister van Vervoer[9], Transnet Ltd v Goodman Bros (Pty) Ltd[10], Logbro Properties CC v Bedderson NO[11]. The applicant makes the point that the decision taken by Dr. Kenneth Kaunda District Municipality to contract with Toshiba on 28 October 2009, pursuant to a tender is, an administrative action and there is no controversy about it.

16.  Applicant submits that the case of Oudekraal Estates (Pty) Ltd v City of Cape Town[12] constitutes high authority for the proposition that all administrative action is to be presumed valid and enforceable until set aside by a court in competent review proceedings. At paragraph 26 Howie P and Nugent JA held as follows: “until the [administrative action] is set aside by a court in proceedings for judicial review it exists in fact and it has legal   consequences that cannot simply be overlooked”. Applicant contends that in the circumstances, the Master Rental Agreement between Dr. Kenneth Kaunda District Municipality and Toshiba entered into on the 28^th of October 2009 must be presumed to be valid and enforceable until it is set aside in judicial review proceedings.

17. There has been no review of the agreement referred to and nothing has been set aside. Applicant argues that the Master Rental Agreement is therefore, as things were after the agreement was entered into and it is valid and enforceable. Applicant contends further that the agreement exists and it has legal consequences that cannot simply be overlooked by the Municipality or anybody else.

18. The central thesis of the Oudekraal[13] case, contained in paragraphs 26 and 27, is that even if the administrative action was taken unlawfully, it nevertheless continues to produce valid and enforceable consequences until set aside in a review. Applicant submits that there is good reason for this, as was explained by Howie P and Nugent JA in para 26 where they explain that “the proper functioning of a modern state would be considerably compromised if all administrative acts could be given effect to or ignored depending on the view the subject takes of the validity of the action in question”. The Constitutional Court in MEC For Health, Eastern Cape v Kirland Investments (Pty) Ltd[14]  criticized conduct very similar to that displayed by Dr. Kenneth Kaunda District Municipality in this case when it said that if administrators are allowed to simply “disregard administrative actions by their peers, subordinates or superiors if they consider them mistaken” they would in so-doing “spawn confusion and conflict to the detriment of the administration and the public” and this would effectively be a “license to self-help”.

19. The applicant submits that this cannot be tolerated in a constitutional state which respects the rule of law. The punchline and the ratio decidendi of Oudekraal[15] at the end of para 26 reads as follows: “no doubt it is for this reason that our law has always recognized that even an unlawful administrative act is capable of producing legally valid consequences for so long as the unlawful act is not set aside”.  Kirland[16] at para 90 says something similar, ie. that “even when administrators err grossly, their actions are not nullities”. The Constitutional Court confirmed that even unlawful administrative action “exists in fact and may have legal consequences”. In the case of Kirland[17], at the end of paragraph 90, the court stated: “the solution is to challenge the decision on review”.

20. Two important points emerge from paragraphs 26 and 27 of the Oudekraal[18] case and paragraphs 89 and 90 of the Kirland[19] case:
20.1. The First is: Even if Dr. Kenneth Kaunda District
         Municipality did not comply with section 217(1) of the
         Constitution and related legislation; in other words, even
         if the underlying administrative action that produced the
         Master Rental Agreement was unlawful, the agreement
         must still be regarded as valid and enforceable until the
         decision to conclude it has been set aside by a court in
         proper judicial review proceedings; and
20.2. Secondly, Dr Kenneth Kaunda District Municipality was
         not entitled to simply treat the Master Rental Agreement
         as “invalid and null and void ab initio” even if it genuinely
         thought that the underlying tender process was unlawful
         without first bringing judicial review proceedings,
         possibly in terms of PAJA or the Constitution, to have
         the (unlawful) administrative action set aside. Until then,
         ie. until set aside, the Municipality had an obligation to
         treat the agreement as valid and binding and it had an
         obligation to keep paying Toshiba the agreed monthly
         instalments of R36,480. It was not entitled to take the
         law into its own hands by simply stopping the payment.

21. Paragraph 1.9 of the stated case confirms that the Municipality seeks “confirmation, alternatively a declaration by the court that the agreement was invalid and null and void ab initio as a result of the non-compliance with the statutory provisions”. It is trite that a declaration of rights by a court merely confirms or declares what the legal position is. A declarator does not, of itself, alter a pre-existing position. It does not create legal rights. The paragraphs dealing with Oudekraal[20] and Kirland[21] correctly set out what the legal position is. The legal position is that as matters stand, the Master Rental Agreement is valid and enforceable until set aside by a court of law in judicial review proceedings. Since no review has ever been instituted in terms of either PAJA or the Constitution, the agreement still subsists and it bears legal consequences.

22. The Applicant contends that Dr. Kenneth Kaunda District Municipality was not entitled to unilaterally treat the agreement as if it is invalid or void ab initio because it was not.  A declarator sought outside of a review, as the Municipality did in this case, can never result in “setting aside the administrative action”. That is so because setting aside is a special remedy that belongs exclusively to review proceedings. Moreover, in a review, setting aside is always a discretionary remedy; see Chairperson of the Standing Tender Committee v JFE Sapela Electronics[22] and Millenium Waste Management v Chairman of the Tender Board: Limpopo Province[23]

23. The discretion to set aside unlawful administrative action in review proceedings can only be made after all the facts have been considered, especially the consequences of setting aside and its impact on the private party and even third parties. That is why, sometimes, administrative action is not set aside even when it is found to have been patently unlawful, as has happened in various cases, most notoriously the series of SASSA cases involving social grants, see Allpay Consolidated Investment Holdings (Pty) Ltd vs. Chief Executive Officer of the South African Social Security Agency[24]

24. The question in paragraph 2.2 was as follows:
“In the event of the court agreeing with the Municipality, i.e. that the Master Rental Agreement was null and void ab initio, the next question is: “What is the effect of the invalidity and nullity of the Master Rental Agreement on the subsequent cessions to Merchant West and the plaintiff?” Applicant disputes the contention by the respondent that the Master Rental Agreement was automatically invalid and null and void ab initio. That is so because there has been no application to review and set aside the administrative action. On the authority of the SCA in the case of Oudekraal[25] and the Constitutional Court in the case of Kirland[26], even if the Municipality did not follow a lawful public procurement process, that fact alone does not render the agreement null and void ab initio. The point has already been made that unlawful administrative actions stand obtain until they are set aside.

25. There is the question about the essence of an unlawful Master Rental Agreement where it regards subsequent cessions. That question has been answered by our courts. Paragraph 26 of the Oudekraal[27] case has already been quoted. It states the following: “our law has always recognized that even an unlawful administrative act is capable of producing legally valid consequences for so long as the unlawful act is not set aside”. The Master Rental Agreement, even if unlawful, continues to connote legally valid consequences, including subsequently enforceable cessions, until it is set aside. Declaring it unlawful does not affect its legal validity. The administrative action has to be reviewed and set aside in judicial review proceedings   instituted under PAJA or as determined in Oudekraal[28] and the Kirland[29]) decisions.

26. The validity of the cessions has not, in any event, been challenged. Only the first act, (the validity of the Master Rental Agreement), has been challenged. However the second act, (the validity of subsequent agreements including the cessions). The Second set of acts would need to be challenged because it cannot simply be assumed that second acts are automatically invalid merely because the first act is.  Paragraph 29 of the Oudekraal[30] decision deals with the apparent anomaly in our law namely that even an unlawful administrative act can spawn perfectly valid consequences. In arriving at this conclusion, Howie P and Nugent JA accepted the thesis advanced by Christopher Forsyth “The Metaphysics of Nullity”, in Forsyth & Hare (Edms); Essays on Public Law in Honour of Sir William Wade QC. This thesis, which has come to be known as the second actor principle, postulates that because an unlawful administrative act exists in fact, (albeit not in law), the mere fact of its existence may serve as the basis for another perfectly valid decision.

27. Applied to the facts of this case, it is respectfully submitted that even if the Master Rental Agreement is declared unlawful, it has not set aside and remains extant and therefore has a factual existence (even if it not legally valid). Its mere factual existence gives validity to so-called second acts, like the conclusion of the Merchant West cessions because the sessions were concluded on the basis that the original agreement was still in existence and was enforceable. It was enforceable because it had not yet been reviewed and set aside.

28. Question 2.3 was as follows:
“In the event of the court agreeing with the plaintiff, i.e. that the Master Rental Agreement was not invalid and void ab initio, the question is: Is the Master Rental Agreement valid, binding and enforceable?

29. Applicant submits that in line with submissions made, and based on the Oudekraal[31] and Kirland[32] decisions, even if the Master Rental Agreement is unlawful, it is not automatically null and void ab initio. In their nature, unlawful administrative acts are voidable and not void. In other words, even the unlawful ones must be set aside. Until they are set aside, they continue have lawful consequences despite the fact that they are unlawful.

30. In the circumstances, and to answer the question in para 2.3, applicant submits that because the administrative action has not been reviewed and set aside, the Master Rental Agreement continues to be valid and enforceable. Applicant contends that the Municipality is obliged to pay the plaintiff the outstanding monthly instalments on which it defaulted in paying. According to the authorities, the only way that this can be avoided, would be for the Municipality to institute a review of its own unlawful conduct together with an order that, if the review process reveals that the conduct is unlawful, it should be set aside. Proper judicial review proceedings have to be conducted in terms of Rule 53; see State Information Technology SOC v Gijima Holdings (Pty) Ltd[33]. Until that happens, the Municipality is bound and must, with respect, pay up. The applicant also submits that if the plaintiff is substantially successful in this stated case, it is entitled to its party and party costs.

31. In this case, it is not disputed that failure to comply with all applicable legislation visits nullity onto the Master Rental Agreement. The parties are in dispute about what the effect of the Defendant's non-compliance with the applicable statutory provisions should be. In the event where the Court agrees with the Defendant that the Master Rental Agreement was invalid and null and void ab initio, the parties are in dispute about what the effect of the invalidity and nullity of the Master Rental Agreement should be on the subsequent cessions to Merchant West and the Plaintiff.

32. The court finds that in this case, DR. Kenneth Kaunda District Municipality did not comply with relevant legislation before it entered into the Master Rental Agreement. It is for that reason that the agreement is not enforceable. Case-law shows that although the agreement is unlawful for lack of compliance with the relevant legislation, it is not void ab initio. This position was reiterated in the case of Oudekraal, Estates (Pty) Ltd v City of Cape Town [34], where the court stated: “no doubt it is for this reason that our law has always recognized that even an unlawful administrative act is capable of producing legally valid consequences for so long as the unlawful act is not set aside”.

33. Applicant submits that the case of Oudekraal Estates (Pty) Ltd v City of Cape Town[35] constitutes high authority for the proposition that all administrative action is to be presumed valid and enforceable until set aside by a court in competent review proceedings. At paragraph 26 Howie P and Nugent JA held as follows: “until the [administrative action] is set aside by a court in proceedings for judicial review it exists in fact and it has legal   consequences that cannot simply be overlooked”.

34. The court finds that although unlawful, the Master Rental Agreement was not invalid and null and void ab initio. Consequently, the court finds that the agreement remains valid and enforceable and shall remain as such unless it is subjected to review and is declared to be invalid due to its unlawfulness.  

35. Consequently, the following order is made:

ORDER.

1. The Master Rental Agreement is declared to be valid and enforceable.

2. The defendant shall pay the costs.





T.A. Maumela.
Judge of the High Court of South Africa.

                                                                 

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