Innocent South African tenderers entitled to relief from unlawful government contracts

The SCA applied a ‘no-profit-no-loss principle’ to the case, deciding that innocent parties who find themselves out of pocket in such cases should be compensated – but those complicit in maladministration or corruption will not be protected from loss. 

Background to the case

The appeal to the SCA was brought by the Central Energy Fund (CEF) and the Strategic Fuel Fund (SFF) against an order by the Western Cape Division of the High Court of South Africa. The High Court granted energy company Contango, investment bank Natixis and commodities trader Vitol compensation for their out-of-pocket expenses, after agreements they had entered into with CEF and SFF were set aside due to corrupt conduct.

In 2015 SFF, through its CEO, entered into a purchase and sale agreement for 4 million barrels of crude oil. These transactions were financed by Contango and Natixis. The SFF also entered into a further purchase and sale agreement with Vitol for 3 million barrels of crude oil, under which SFF would also lease its storage facility in Saldanha Bay to Vitol for a period of three years. 

In 2017 SFF and CEF successfully applied to the High Court to set aside the agreements in relation to these transactions.

The High Court found SFF’s CEO had accepted bribes from another party to the agreements, the Minister of Energy had acted on misrepresentations from the CEO, and the SFF board had failed to perform adequate oversight. It also found SFF failed in its constitutional duties to follow a fair, equitable, transparent and competitive process and the minister failed to apply her mind when taking the decision to approve the sale. 

The High Court also made an order granting Contango, Natixis and Vitol and two other respondents compensation for their out-of-pocket-expenses including hedging losses, insurance, letters of credit, and the costs of inspections. The issue in the appeal before the SCA was whether that order was appropriate.

Just and equitable relief

In its judgment, the SCA applied established constitutional law in determining that a court in review proceedings has a wide discretion to craft an appropriate remedy as determined in the South African constitution, as long as the remedy is fair to all those affected while vindicating the rights that have been violated. 

The Promotion of Administrative Justice Act (Act No. 3 of 2000) gives effect to this principle by allowing a court to grant any order that is just and equitable. When it comes to unlawful and invalid contracts which are to be set aside, the law aims to ensure that no party – innocent or not – benefits from the contract. However, innocent parties should not suffer any loss at the expense of others. 

The SCA noted that the appeal was based on the misconception that the High Court’s award of out-of-pocket expenses to the five tenderers amounted to compensation for the loss of the contracts in question. Properly understood, the SCA said requiring SFF to repay the expenses merely restored the status quo, and was in accordance with the guiding principles for ensuring appropriate relief. 

SFF and CEF said the compensation order was neither competent nor appropriate. They argued that the High Court had not given enough attention to the public interest in preventing parties from benefiting from unlawful and corrupt contracts; that Contango and Vitol should have brought a counter-application for just and equitable relief; and the order for compensation infringed the principle of subsidiarity.

The SCA dismissed the second and third points as being “insupportable in law and on the facts”.

On the first point, the SCA said Contango and Natixis were not accused of nor did they engage in any wrongdoing. Instead, they acted as reasonable credit providers, by ensuring that the contracts they had concluded were regular.

Vitol had also provided a full account of its conduct, and although it had sought to promote its own interests it acted properly.

The SCA added that a person contracting with an organ of state in good faith is entitled to assume that the latter has complied with its internal arrangements and formalities. The no-profit-no-loss principle required Contango and Vitol to be compensated for their out-of-pocket expenses incurred, but not for lost profits. 

This compensation put the companies back in the position in which they would have been had they never contracted with the SFF.

The SCA stressed that this compensation was not damages for loss of the contract, and said that public interest dictated that innocent parties should be protected in instances such as these, to ensure that other entities and financial institutions are not frightened off from dealing with the state. 

Impact of the case

Requiring innocent parties tendering for contracts with organs of state to suffer losses at the expense of unlawful conduct of organs of state in the tender procurement process would result in a chilling effect on financing and development which is crucial to the South African economy. 

The SCA judgment is a welcomed reminder that parties complicit in the unlawful conduct will not find protection from losses whereas innocent parties will be protected if their dealings with the state and the conduct of civil servants are tainted by improper and illegal motives in respect of which they had no part. 

The judgment also reiterates that a party, innocent or otherwise, cannot benefit under an unlawful contract and that there will be limitations on the protection or compensation granted to an innocent party.

Co-written by Muhammed Somrey and Kyle Melville of Pinsent Masons