Country Cloud Trading CC v MEC, Department of Infrastructure Development

• Jurisdiction: South Africa
• Judge: Mogoeng CJ, Moseneke DCJ, Cameron J, Froneman J, Jafta J, Khampepe J, Madlanga J, Majiedt AJ, Van Der Westhuizen J and Zondo J
• Judgment Date: 03 October 2014
• Docket Number: 185/13 [2014] ZACC 28
• Hearing Date: 20 May 2014
• Counsel: LM Morrison SC (with X Stylianou and O Ben-Zeev) for the appellant. V Notshe SC (with B Shabalala) for the respondent.
• Court: Constitutional Court

Khampepe J (Mogoeng CJ, Moseneke DCJ, Cameron J, Froneman J, G Jafta J, Madlanga J, Majiedt AJ, Van der Westhuizen J and Zondo J concurring):

Introduction

[1] This matter concerns a delictual claim for pure economic loss, and H involves complex issues of legal responsibility and public policy. It comes before us by way of an application for leave to appeal against a judgment of the Supreme Court of Appeal which, in turn, dismissed an appeal against a decision of the South Gauteng High Court, Johannesburg (the high court). The appellant is Country Cloud Trading CC (Country I Cloud) and the respondent is the member of the executive council (MEC) for the Gauteng Department of Infrastructure Development (the department). The MEC represents the department in these proceedings. The appeal originates from a building contract between the department and a construction company, iLima Projects (Pty) Ltd (iLima). In virtue of the allegedly unlawful termination of this agreement, Country Cloud, J which had lent money to iLima, suffered a loss of R12 million.

Khampepe J (Mogoeng CJ, Moseneke DCJ, Cameron J, Froneman J, Jafta J, Madlanga J, Majiedt AJ, Van der Westhuizen J and Zondo J concurring)

Facts A

[2] The history that preceded this dispute commenced in May 2006 when the department awarded a tender to build the Zola Clinic in Soweto (original contract). This 300-bed district hospital was to be constructed by a joint venture of four companies, including iLima, at a contract price of around R335 million. [1] The deadline for completion was May 2008. B

[3] But the joint venture foundered. In March 2008 — when only 20% of the hospital had been completed — iLima's three partners abandoned it. The rescue operation fell to Mr Buthelezi, the then head of department, who was tasked with finding a contractor to complete the project. C

[4] Mr Buthelezi was presented with two options. On the one hand, the departmental acquisition council (DAC), responsible for the procurement of goods and services for the department, recommended a competitive tender process to select a contractor. In contrast, senior officials in the department suggested that the contract be awarded immediately to D iLima, the last surviving entity in the joint venture. Mr Buthelezi took the latter course on the basis that to delay the project further would have negative consequences for the community and for service delivery.

[5] iLima, however, was in no position to complete the project, absent immediate financial assistance. The department thus agreed to make an E initial 'remobilisation' payment of R21,5 million to iLima, being 5 % of the contract price, within 30 days of the conclusion of the construction contract. But iLima needed financing before this time. To this end, Mr Lupepe, the founder and chief executive officer of iLima, approached Mr Dement, the managing director of one of iLima's principal suppliers under the original contract. Mr Lupepe informed him that iLima did not F have the capacity to repay its debts to his company because of the breakdown of the original contract. It also could not return the supplier's equipment, which was under the department's control. However, he advised that iLima anticipated being awarded the contract to complete the hospital if it could get the necessary bridging finance. If this materialised it would be in a position to repay its debt as soon as it G received the remobilisation fee. In the light of this Mr Dement decided to find a way to help iLima. The conduit was Country Cloud, a close corporation in which his wife was the sole member.

[6] Discussions commenced between Country Cloud and iLima about the loan agreement's terms. The agreement — which was finally H concluded on 18 July 2008 — required Country Cloud to advance R12 million to iLima. The amount was to be repaid by 31 August 2008, six weeks later. In addition a 'service fee' of R8,5 million was to be paid to Country Cloud in monthly instalments, so that it would be fully repaid by 1 May 2009.

[7] Given iLima's precarious financial circumstances, Country Cloud I also insisted on certain protections. First, Mr Lupepe was listed as one

Khampepe J (Mogoeng CJ, Moseneke DCJ, Cameron J, Froneman J, Jafta J, Madlanga J, Majiedt AJ, Van der Westhuizen J and Zondo J concurring)

A of the parties to the loan agreement, and stood as surety and co-principal debtor for the loan. Second, the whole agreement was made conditional upon iLima being awarded the completion contract. Finally — and importantly — the loan agreement was subject to the condition that the Tau Pride/Moteko Consortium (Tau Pride), the department's official B managing agent for the contract, 'agree in writing to the payment of the sum of R12 million to Country Cloud from the initial remobilisation fee payable [by the department] to iLima'. Aware of the need for safeguards, the department had appointed Tau Pride to manage and supervise the building project. Tau Pride's mandate included the management, by means of a joint bank account, of iLima's financial transactions relating C to the project.

[8] The agreement between Country Cloud and Tau Pride was concluded on 21 July 2008. Tau Pride undertook to ensure that the R12 million would be paid to Country Cloud from the initial remobilisation fee received by iLima under the contract and to authorise D irrevocably the release of both that payment and the service fee from the joint bank account. Thereafter the contract for the completion of the hospital (completion contract) was concluded between the department and iLima on 4 August 2008.

[9] In execution of the loan agreement, Country Cloud paid R12 million E to iLima in two tranches: one directly before, and one shortly after, the conclusion of the completion contract. The department's principal agent for the completion contract, Tsiya Developments (Pty) Ltd, sent the department a payment certificate, tax invoice and recommendation for the payment to iLima of the initial R21,5 million. And iLima submitted to Tau Pride an invoice for the same amount. So all seemed well as far F as Country Cloud was concerned.

[10] But the semblance of stability was short-lived. Mr Buthelezi came under pressure from the media, through a query from the City Press newspaper on 15 August 2008, and the department itself, for failing to G follow the DAC's recommendation to go to tender. He eventually cancelled the completion contract on 4 September 2008, before any payment had been made under it. Mr Buthelezi relied on two alleged misrepresentations in doing so: iLima's tax clearance certificate, submitted as a precondition for the conclusion of the contract, allegedly could not be trusted, as information from the South African Revenue Service H (SARS) showed it had considerable outstanding tax; and the authenticity of iLima's building accreditation was apparently 'questionable'.

[11] The cancellation of the completion contract was the beginning of iLima's end. In a last-ditch attempt to salvage its financial position it launched a contractual claim for R1,4 billion against the department. I The claim was referred to mediation, which broke down. Unable to meet its financial obligations to its creditors, iLima was placed in liquidation in March 2010.

High court

[12] Before the high court Country Cloud claimed R20,5 million from J the department in delictual damages. According to Country Cloud the

Khampepe J (Mogoeng CJ, Moseneke DCJ, Cameron J, Froneman J, Jafta J, Madlanga J, Majiedt AJ, Van der Westhuizen J and Zondo J concurring)

department owed it a duty not to repudiate the completion contract prior A to the payment of the initial remobilisation fee to iLima. The department had repudiated the contract notwithstanding this duty, but for which iLima would have been able to pay Country Cloud the loaned amount (R12 million) and the service fee (R8,5 million).

[13] But the high court did not get to the issue of wrongfulness in delict. [2] B It disposed of Country Cloud's claim by holding that the completion contract was void from its inception because Mr Buthelezi had no authority to depart from the DAC's recommendation to retender. There was no valid contract for the department to repudiate at all and therefore no question of its breach being delictually wrongful. C

Supreme Court of Appeal

[14] Country Cloud appealed to the Supreme Court of Appeal, where the question of delictual wrongfulness became a focal issue. That D court, in a judgment written by Brand JA, swiftly dispensed with the issue that had preoccupied the high court. [3] It held that Mr Buthelezi, as the department's accounting officer, had the authority to deviate from the prescribed tendering procedure, despite the DAC's advice. The court also accepted Mr Buthelezi's assertion that the urgency of completing the hospital justified deviation in this case. E

[15] The department's defence that the completion contract was validly cancelled — on the basis that iLima had presented a false tax clearance certificate (the department had conceded that iLima had the necessary accreditation) — was also dismissed. While the evidence suggested that iLima was indeed heavily indebted to SARS, the department's own expert, F a SARS employee, conceded that iLima could have made a repayment arrangement with SARS and that, as a consequence, the certificate could be valid.

[16] The only issue left was the department's defence that its cancellation of the completion contract was not delictually wrongful. The court G accepted, on the facts, that the department breached its contract with iLima, and caused loss to Country Cloud, acting with intent, at least in the form of dolus eventualis. But, it said, the case did not fall under the established delict of intentional interference with a contract. Nor were there...