1 February 2008

The importance of a cautious approach when dealing with Public Bodies

The recent Supreme Court of Appeal case of City of Tshwane Metropolitan Municipality and RPM Bricks Proprietary Limited [2007] SCA 28 (RSA) has once again shown the need for private business to exercise caution when contracting with public bodies. 

By way of background, RPM Bricks (RPM) obtained a High Court judgment against the City of Tshwane for payment for coal that was sold and delivered by RPM to the City of Tshwane. The City of Tshwane appealed against this judgment. The basis of their argument was that RPM sold and delivered the coal pursuant to an amended supply agreement, but that the formalities prescribed for the varying of the supply contract by section 38 of the Gauteng Rationalisation of Local Government Affairs Act 10 of 1998 had not been complied with. In response, RPM argued that the City of Tshwane should be precluded from denying the validity of the agreement as RPM had acted on the strength of the City's representations that all formalities had been complied with (called the doctrine of "Estoppel")

The Supreme Court of Appeal (SCA) accordingly had to decide whether a statutory body could be prevented from relying on its own failure to comply with prescribed legislative provisions for the validity of a specified transaction, in order to avoid being bound by that agreement.

The SCA held that a distinction had to be drawn between an act beyond, or in excess of, the legal powers of a public authority on the one hand, and the irregular or informal exercise of power on the other. According to the SCA, persons dealing in good faith with a statutory body are not bound, in the absence of knowledge to the contrary, to enquire whether the relevant internal formalities of the statutory body have been satisfied. Accordingly, in that situation estoppel could be successfully invoked. Where, however, a statutory body had failed to comply with provisions that the legislature had prescribed for the validity of a specified transaction, such failure could not be remedied by estoppel for that would give validity to a transaction that is unlawful and therefore ultra vires. The City of Tshwane's capacity to amend the supply contract should have been sought in the provisions of the statute.

As no valid amendment of the supply agreement had occurred, the SCA found that the City was not bound to perform in terms of this agreement. The court did, however, confirm that a party in the position of RPM Bricks has an enrichment claim and is thus not entirely without a remedy.

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