Author: Maryna Botha
14 May 2021
ACCEPTING A COMMITMENT DOES NOT CONSTITUTE A RESOLUTION TO CONTRACT
Merifon (Pty) Ltd v Greater Letaba Municipality and Another (1112/2019)  ZASCA 50 (22 April 2021)
When spending R52 million or R5 on a property, semantics are important, especially where it relates to spending of public funds. As was illustrated here, the Municipal Finance Management Act has various rules in place to ensure that municipalities only spend that which had been budgeted for whilst upholding rules of transparency and good governance. This is very important for third parties entering into agreements with local authorities to keep in mind.
For a long time, the Greater Letaba Municipality (the Municipality) had been in dire need of land for human settlement within its area of jurisdiction. Yet it did not have the money to acquire land for this purpose.
In order to extricate itself from this predicament the Executive Mayor at the time, in April 2011, wrote a letter to the provincial Member of the Executive Council (MEC) of the Department of Local Government and Housing (the Department) in which he proposed that the Department purchase three farms – identified in the letter – for the Municipality for low cost housing. The department expressed its willingness to assist. To this end, it engaged the Housing Development Agency (the HDA) for assistance. The intervention of the HDA yielded positive results. Land was identified and negotiations with a representative of the prospective seller for the purchase of a farm known as Mooiplaats in the Limpopo Province (the Property) commenced. The negotiations bore fruit. In the result, in March 2013, the Head of the Department addressed a letter to the Municipality stating that they confirm: “that the Department … has budgeted the required R52 Million excluding VAT required to acquire the above mentioned property required for human settlements development. The funds will be paid into the trust account of the transferring Attorneys after the Deed of Sale between the Municipality and the Seller has been concluded. The Department will furthermore pay the applicable transfer and registration costs …”.
The letter from the Head of the Department was placed before the municipal council for adoption at its special meeting held on 22 March 2013. Amongst the various resolutions adopted at this meeting was one under the caption ‘COUNCIL RESOLUTION A. 1038/ 22/03/2013 / ACQUISITION OF REMAINING EXTENT AND PORTION 5 AND 6 OF THE FARM MOOIPLAATS 434-LT’. The resolution adopted by the council in relation thereto provided that “the commitment letter from Department of Cooperative Governance, Human Settlements and Traditional Affairs to purchase … the farm Mooiplaats … is approved.”
Pursuant to the adoption of the resolution, Merifon (Pty) Ltd (‘Merifon’) concluded a written agreement of sale in respect of the property. It turned out, however, that before committing itself to pay the purchase price for the propertyon behalf of the Municipality, the Department had, on 18 October 2012, applied to the Provincial Treasury seeking authorisation to disburse the amounts. But, on 27 March 2013, the Provincial Treasury declined the Department’s request on the grounds that, amongst others, the purchase price was excessive. This had the effect of scuppering the transaction because it meant that the Department could no longer pay over the funds that it had committed for the purchase price.
Merifon was determined to enforce the agreement it had concluded with the Municipality. To that end, its attorneys addressed a letter of demand to the Municipality giving the latter 14 days within which to pay the purchase price and transfer costs or, failing that, face legal proceedings enforcing the agreement. This notice was not heeded.
During 2014, Merifon instituted an action in the Limpopo High Court against the Municipality and the HDA. Merifon claimed payment, as against the Municipality only, of the purchase price and transfer costs, based on the agreement of sale.
The Municipality resisted the claim on several grounds and argued, amongst other things, that: (i) its representative did not have the requisite authority – whether actual, ostensible or otherwise – to enter into the agreement; (ii) the agreement was ‘illegal and null and void’ for want of compliance with section 19 of the Local Government: Municipal Finance Management Act 56 of 2003 (the MFMA) because the subject-matter of the sale constituted a capital project; (iii) the municipal council ‘never approved the purchase of the property including the total costs thereof’; and (iv) the Municipality was precluded from incurring expenditure otherwise than in accordance with ‘an approved budget and within the limits of the amounts appropriated . . . in the approved budget’.
The High Court dismissed the action and granted judgment in favour of the Municipality, declaring the agreement ‘null and void and unenforceable’. The Court in essence found that the Municipality’s representative lacked the authority to sign the agreement because the Municipality had at no stage resolved ‘to acquire the property’.
Merifon appealed to the Supreme Court of Appeal.
- The doctrine of legality and the rule of law lie at the heart of the Constitution. The fundamental truism is that the exercise of public power derives from the law. Accordingly, no organ of state or public official may act contrary to or beyond the scope of their powers as laid down in the law.
- The central question which arises for determination in this appeal is whether it would be appropriate, in the context of the facts of this case, for the Court to grant an order of specific performance in favour of Merifon.
- This question arises because of section 19 of the MFMA holds that:
‘(1) A municipality may spend money on a capital project only if–
(a) the money for the project … has been appropriated in the capital budget …;
(b) the project, including the total cost, has been approved by the council;
(c) section 33 has been complied with …; and
(d) the sources of funding have been considered, are available and have not been committed for other purposes.
(2) Before approving a capital project …, the council of a municipality must consider–
(a) the projected cost covering all financial years until the project is operational; and
(b) the future operational costs and revenue on the project ….
(3) A municipal council may … approve capital projects …’
- Of note further is section 3(1) which provides that the MFMA applies to all municipalities, all municipal entities as well as to national and provincial organs of state to the extent of their financial dealings with municipalities.
- In support of its invocation of section 19 of the MFMA, the Municipality pleaded that: (a) the proposed acquisition of the property constituted a capital project as contemplated; (b) it could spend money on such a project only if certain requirements were met and, in addition, after the council has considered, before approving a capital project, that the projected cost covering all financial years until the project is operational and future operational costs and revenue on the project have been catered for.
- It was clear that procurement of land entails an acquisition of a capital asset and thus this was a capital project and that section 19 found application.
- Regarding the other points, Merifon argued that the Municipality had for all intents and purposes complied with the prescripts of section 19. In developing this argument, it submitted that the Department had by letter, dated 6 March 2013, confirmed the availability of the requisite funds. And, pursuant thereto, the Municipality had, on 22 March 2013, adopted a resolution to acquire the property. In support of the latter contention, Merifon relied on the council resolution adopted on 22 March 2013.
- This argument had to fail. The background to this conclusion is that the manifest underlying purpose of section 19 is to prevent municipalities from spending money on capital projects that have not been budgeted for so as to ensure that transparency, accountability as well as fiscal and financial discipline are fostered. It is a provision that intends to promote good governance within the local sphere of government.
- The resolution that Merifon relied on, did not bear out the argument that section 19 was complied with. Even on a charitable interpretation of its terms, it cannot be read to mean that the council in actual fact resolved to acquire the property. Rather, it constituted a mere recordal that ‘[t]he commitment letter from the Department of Cooperative Governance, Human Settlements and Traditional Affairs to purchase … the farm Mooiplaats … is approved’ whatever this phraseology was intended to mean. Thus a prominent feature of the resolution heavily relied upon does not support the case advanced by Merifon. In fact, all that the Municipality did was merely ‘approve’ the commitment letter from CoGHSTA. (This was in clear contrast to other similar approvals by the Municipality: Its council resolution A901/29/04/2011 adopted on 29 April 2011 in relation to the purchase of another property explicitly stated that ‘[c]ouncil approves that full settlement of R4 million for the
purchase of … in the current financial year…’, the 2013 resolution says nothing of the sort.
- It therefore followed that the High Court was correct in concluding that the agreement which was the foundation of Merifon’s claim was legally unenforceable on account of the Municipality’s non-compliance with the prescripts of section 19.
The appeal accordingly failed
The judgment can be viewed here: