Does the popular South African phrase ‘Pay back the money’ also apply to municipal officials?

In a recent judgment in the matter of Mbambisa and Others v Nelson Mandela Bay Metropolitan Municipality (Case No. 272/2023) [2024] ZASCA 151 (8 November 2024), the Supreme Court of Appeal considered whether municipal officials, who have acted either intentionally or negligently, may be held financially liable for the unauthorised, irregular or fruitless and wasteful expenditure incurred by a Municipality.

Facts

In February 2014, the Nelson Mandela Bay Metropolitan Municipality (“the Municipality”), through decisions made by its respective senior managers, appointed Erastyle (Pty) Ltd as the lead consultant in the development of a comprehensive communication and marketing strategy for the Integrated Public Transport System (“IPTS”) of the Municipality. The contract was initially valued at R6 million.

Numerous issues arose from the appointment, namely, (i) the appointment was made outside of a public tender process, (ii) it was in breach of the Municipality’s Supply Chain Management Policy, (iii) the City Manager irregularly approved an R984 197.22 increase in the contract price and (iv) the Municipality made several payments to Erastyle amounting to R7 638 117.10, which far exceeded the contract value and the ‘approved’ increased.

Section 32 of the MFMA

Section 32 of the MFMA provides that a municipality must recover unauthorised, irregular or fruitless and wasteful expenditure from the person liable for that expenditure, which person includes the political office bearer, accounting officer and municipal official.

An exception to this obligation applies only in circumstances where the unauthorised expenditure is approved in an adjustment budget or following an investigation by the council committee, the expenditure is certified by the municipal council as irrecoverable and written off.

The Claim and Defence

The Municipality sought orders declaring the decisions and/or conduct of certain senior managers who facilitated the appointment and the appointment itself as unlawful and invalid in terms of Section 217(1) of the Constitution and void ab initio. Further, that the pursuant payments made to Erastyle constitute unauthorised and irregular expenditure.

The Municipality also claimed repayment of the amounts paid to Erastyle on the grounds of unjustified enrichment, and sought recovery from Erastyle and the senior managers in terms of Section 32 of the Local Government: Municipal Finance Management Act 56 of 2003 (“MFMA”), jointly and severally.

Interestingly, one of the Municipality’s claims was founded on delict. This claim was based on the misrepresentation by two of the senior managers who compiled and approved the memoranda which (i) misrepresented the appointment of Erastyle as lawful to the Municipality, and(ii) led the Municipality to believe that exceptional circumstances existed which justified the increase of the contract value. Coupled, the memoranda induced the Municipality to make the unlawful payments to Erastyle.

The Defendants denied that the appointment was unlawful, however, it failed to adduce evidence in substantiation of that denial.

Mr. Burt Botha, a forensic investigator who testified on behalf of the Municipality, lead evidence and the findings from the investigations into the impunged appointment and payments. The investigation revealed that the invoices submitted by Erastyle were overinflated, with one invoice being overinflated by approximately R3.2 million.

The High Court granted orders in favour of the Municipality. Disgruntled by the Judgment, the Municipality’s senior managers obtained leave to appeal from the SCA.

Main contentions in the SCA

The senior managers argued that the High Court erred in its finding that Section 32 of the MFMA is a self-standing penalty provision enjoining the Municipality to recover the prescribed expenditure from municipal officials irrespective of whether the Municipality sustained any damage or loss and the extent thereof.

They argued further that the liability in terms of Section 32 should be interpreted to mean that the municipal officials are only legally answerable or accountable, but not personally financial liable.

The SCA rejected this interpretation and found that the plain wording of Section 32 makes it clear that the recovery of the prescribed expenditure is not optional for the Municipality. The interpretation that Section 32 requires the Municipality’s claim to be based on loss or damages sustained, would require words to be read into the provision, and therefore, must fall.

The SCA also rejected the senior managers’ reliance on Section 176(1) of the MFMA as the basis of their argument that a Section 32 claim should fail where significant value has been received for the work done by the service provider, irrespective of the unlawful appointment.

Section 176(1) functions to protect a Municipality and its officials against liability to third parties for loss and damage which may arise from the bona fide exercise of a public function under the MFMA. This section is not applicable to the circumstances of this case. Therefore, Section 32 is not conditional upon a municipality sustaining loss or damage.

Review Application as a Precondition to Section 32 Claim

Notably, the SCA clarified the Court’s position by stating that claims founded on Section 32 of the MFMA need not be preceded by a review application setting aside the impugned appointment.  

In any event, the SCA confirmed that the appointment of and subsequent payments to Erastyle were unlawful and were rightfully set aside by the court a quo. The SCA further granted orders against Erastyle and the senior managers for payment of R7.7 million including interest and the legal costs of two counsel.

Commentary

This Judgment confirms that municipal managers, officials and political office bearers can be held financially liable for their negligent or intentional conduct at the expense of the municipality. This should serve as a caution and reminder that they are required to be diligent and thorough in the exercise of their public functions, particularly in the wake of the countless instances of contravention of procurement processes, which end in costly and time-consuming litigation.

Additionally, this case reminds us that there are other mechanisms available to municipalities, outside of a review application, for them to set aside irregular appointments of service providers. Further, that even after unauthorised, irregular or fruitless and wasteful expenditure is written off as irrevocable by the municipal council, this cannot be used as an excuse when criminal or disciplinary proceedings are instituted against them.

Clearly, former President Jacob Zuma is not the only public servant who will called by the nation to ‘pay back the money!’.