In The Special Investigating Unit v Phomella Property Investments (Pty) Ltd and Another, the Supreme Court of Appeal ("SCA") dismissed with costs an appeal from a judgment of the Gauteng Division of the High Court, Pretoria (the "High Court").

This case relates to a lease agreement that was entered into between the Department of Public Works ("the DPW") and Phomella Property Investments (Pty) Ltd ("Phomella") in respect of a building in Pretoria to accommodate the Department of Justice and Correctional Services (the "DOJ"). The building and lease were then transferred to Rebosis Property Fund Limited ("Rebosis"). The lease was concluded on 22 September 2009 for a period of nine years and 11 months.

The lease was concluded by using the procedure for a negotiated lease as opposed to an open bidding process. The requisite authority to conclude the lease was subject to the condition that, prior to signature of the lease, an assessment of the space required by the DOJ was to be conducted. However, the lease was signed without the needs assessment being completed.

In February 2017, the Special Investigating Unit ("the SIU") launched an application in the High Court. The initial relief sought was that the lease be reviewed and set aside as void ab initio. However, by the time the matter came before the High Court, the lease had run its course. Accordingly, the SIU did not persist in that relief but rather sought the following relief:

  • an order declaring the lease to be unlawful; and
  • an order that Phomella and Rebosis should jointly and severally pay the Minister of Public Works the amount of ZAR103 880 357.65. It was alleged that this amount represented wasteful expenditure incurred during the lease. The SIU contended that an area greater than what was needed by the DOJ had been leased. The figure represented the SIU's calculation of the rental which had been paid for that excess area.

The declaration of unlawfulness was sought in terms of section 172(1)(a) of the Constitution where two bases were relied on for this relief: Firstly, that the DPW had failed to follow an open bidding process in concluding the lease. Secondly, if it was found that a negotiated lease was competent, the prior requirement of a needs assessment of the space required by the DOJ had not been met.

The order for payment of ZAR103 880 357.65 was sought under the provisions of section 172(1)(b) of the Constitution. The High Court declared the lease unlawful but dismissed the relief sought by the SIU under section 172(1)(b) of the Constitution. The SIU appealed against the High Court's refusal to make this order.

The SCA rejected the argument that, where the lease was held to be unlawful, it was necessary to set it aside and declare it to have been void ab initio on the basis that the enquiries under section 172(1)(a) and section 172(1)(b) are distinct and not to be conflated.

The SCA held that the peremptory requirement of section 172(1)(a) is to declare conduct invalid. Therefore, any additional order such as setting aside a contract fell within the ambit of Section 172(1)(b). The SCA referred to the State Information Technology Agency SOC Ltd v Gijima Holdings (Pty) Ltd, where the Constitutional Court described the nature of the remedial power afforded to a court by section 172(1)(b) of the Constitution as follows:

"...[U]nder s 172(1)(b) of the Constitution, a court deciding a constitutional matter has a wide remedial power. It is empowered to make "any order that is just and equitable". So wide is that power that it is bounded only by considerations of justice and equity."

The SCA in Phomella held that an example of the exercise of that power would be setting the lease aside or declaring the lease to have been void ab initio, provided that the order made was just and equitable in the particular circumstances.

The SCA further held that such an order involves the exercise of a true discretion. Accordingly, an appeal court can only interfere with it if it is not exercised "judicially, or that it had been influenced by wrong principles or a misdirection on the facts, or that it had reached a decision which in the result could not reasonably have been made by a court properly directing itself to all the relevant facts and principles". In other words, the SCA cannot interfere with the High Court's jurisdiction simply on the basis that it would have reached a different conclusion.

The SCA also relied on Constitutional Court's judgment in the case of Allpay Consolidated Investment Holdings (Pty) Ltd and Others v Chief Executive Officer South African Social Security Agency and Others ("Allpay 2"), and explained that the important principle is the following:

"It is true that any invalidation of the existing contract as a result of the invalid tender should not result in any loss to Cash Paymaster. The converse, however, is also true. It has no right to benefit from an unlawful contract. And any benefit it may derive should not be beyond public scrutiny."

The SCA held that a contextual reading of the dictum in AllPay 2 demonstrates that:

  • The Constitutional Court did not require Cash Paymaster Services (Pty) Ltd ("Cash Paymaster") to repay amounts paid to it under what was found to be an unlawful contract;
  • In the exercise of its discretion, the Constitutional Court ordered that a new tender be issued but that if the tender is not awarded, the declaration of invalidity of the contract would be suspended until completion of the five-year period for which the contract was initially awarded; and
  • When the tender had not been awarded within the five-year period, the Constitutional Court in the case of Black Sash Trust v Minister of Social Development and Others (Freedom Under Law Intervening), granted an order further suspending the order of invalidity for a period of twelve months and requiring Cash Paymaster to continue its services for that period.

In light of the above, the SCA in Phomella held that a contextual reading of AllPay 2 shows that the Constitutional Court did not hold that a party could not derive any benefit from an unlawful contract and that the SCA's approach in AllPay 2 of allowing a party to retain payments, and thus to benefit under an unlawful contract has been echoed in several matters including the Constitutional Court case of Buffalo City Metropolitan Municipality v Asla Construction (Pty) Limited, where it was held that:

"I therefore make an order declaring the Reeston contract invalid, but not setting it aside so as to preserve the rights to that the respondent might have been entitled. It should be noted that such an award preserves rights which have already accrued but does not permit a party to obtain further rights under the invalid agreement."

The SCA in Phomella held that the discretion under Section 172(1)(b) should be exercised on a case-by-case basis. The SCA considered the grounds relied upon by the SIU and held that none of the findings of the High Court could be faulted and that the exercise of the High Court's true discretion was not subject to interference by an appeal court. The SCA therefore agreed with the High Court regarding the ruling not to order Phomella and Rebosis to pay the almost ZAR104 million. Consequently, the appeal was dismissed with costs, including those of two counsel.

It is therefore clear from Phomella that a claim for repayment of monies paid under a contract is not an automatic consequence of a contract being declared unlawful. The SIU has filed an application for leave to appeal to the Constitutional Court. It will be interesting to see whether the Constitutional Court agrees with the SCA's reading of the dictum of AllPay 2.

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