No escaping contractual liability: The Constitutional Court clarifies when a public entity requires approval for incurring “future financial commitments”

Contracting in the public sector can be a risky endeavour. Organs of State are bound by a panoply of regulatory constraints that are often unclear. Worse still, non-compliance with these constraints can undermine or invalidate agreements concluded between public entities and service providers, due to circumstances that are wholly outside the control of the private service providers. Risk-mitigation strategies, such as thorough due-diligence investigations, are therefore of the utmost importance before transacting with the State.

9 Apr 2019 4 min read Dispute Resolution Alert Article

The Constitutional Court has now brought clarity to one area of the law governing public-sector contracting: the incurring of “future financial commitments”.

In Road Traffic Management Corporation v Waymark Infotech (Pty) Limited [2018] ZACC 12 (handed down on 2 April 2019), the Road Traffic Management Corporation, a public entity, sought to escape its contractual obligations under a multi-million-Rand service-level agreement with a private company, Waymark, on the basis that the Minister of Finance had not authorised the agreement in accordance with s66 of the Public Finance Management Act, No 1 of 1999 (PFMA). Section 66 of the PFMA stipulates that, in respect of certain public entities, a Cabinet Minister must authorise a transaction that incorporates “any future financial commitment”. The Corporation argued that, because the agreement made provision for payments for services rendered over several financial years, it imposed “future financial commitments” and was therefore governed by s66 of the PFMA. The absence of ministerial approval, so the Corporation argued, vitiated the impugned agreement.

The High Court found that the agreement was not binding because of the Corporation’s non-compliance with s66. Indeed, by virtue of the operation of the PFMA, the High Court concluded that the Corporation did not need to bring review proceedings to set the contract aside – the agreement could simply be ignored.

In contrast, the Supreme Court of Appeal found in favour of Waymark. It ruled that s66 of the PFMA does not apply to the ordinary procurement of goods and services, even if that procurement results in a multi-year contract which envisages payments over an extended period of time.

The Constitutional Court ultimately agreed with the Supreme Court of Appeal. Petse AJ, for a unanimous bench, reasoned as follows:

  • Generally, a public entity’s accounting authority approves its finances – “only exceptional contracts require [ministerial] approval.” Thus, in the ordinary course, ultimate financial approval lies with the entity’s board of directors rather than with a Cabinet Minister.
  • A “future financial commitment”, in the context of s66, does not entail expenditure which has yet to be budgeted for. That is too broad a reading of the PFMA, which would have impractical, inefficient and unbusinesslike results. The objective of the PFMA is not to be overly restrictive; rather, it is to balance financial discipline and oversight with efficient and effective spending and resource allocation.
  • When the PFMA refers to a “future financial commitment”, it means “a transaction that is somehow similar to a credit or security agreement” and a transaction that is “distinct from most other transactions”. The object of s66 is not to regulate ordinary procurement contracts or major corporate action – it is far narrower in scope.
  • The interpretation suggested by the Corporation, that an entire transaction is not binding without ministerial approval if even one of its severable obligations extends beyond a budgeted year, notwithstanding the value or nature of that obligation, would result in absurd, unbusinesslike results.
  • Restricting s66 to credit or security arrangements and similar transactions will not leave a legislative gap. Rather, the ordinary contracting for goods and services, the procurement of significant assets and the incurring of multi-year expenditure will be regulated by other provisions of the PFMA and the regulations thereunder.

As mentioned in a previous publication, the National Treasury admitted, in a circular issued in September 2005, that s66 of the PFMA is framed so broadly that it captures many ordinary operational transactions, which was not the legislative intention. Rather, the statutory purpose was to ensure that ministerial authorisation is obtained in respect of “transactions for which funds have not been provided [in] the budget of the… public entity”. The National Treasury indicated its intention to address “the inherent ambiguity” in s66 by means of an amendment to the PFMA, which amendment has not yet occurred.

The Supreme Court of Appeal and the Constitutional Court have thus narrowed the meaning of the otherwise broad term, “any future financial commitment”. It is now clear that s66 of the PFMA does not apply to ordinary procurement contracts, even if they have multi-year periods and payment plans. However, the courts have gone further than the National Treasury’s stated intention and found that s66 does not apply to any instance of ordinary procurement or significant corporate action, even if it entails expenditure for which no budget has been provided. It remains to be seen whether the PFMA will be amended to (re)introduce some form of oversight in respect of unbudgeted expenditure. Watch this space.

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