Government contracts with no money to pay for them are unlawful, court rules

Government departments cannot enter into contracts which exceed the amount appropriated for a particular service as this renders the contract unlawful and constitutionally invalid, the Supreme Court of Appeal has ruled. 

The chairperson of parliament’s standing committee on public accounts (Scopa), Songezo Zibi, said the judgment handed down electronically on Friday by acting judge Gerald Bloem was significant and far-reaching as government departments repeatedly enter into contracts for which they have no money. “This is a regular occurrence,” he said. 

Zibi gave the example of the department of public works & infrastructure in the Eastern Cape, which informed all landlords in November that it would not be able to meet its payment commitments between November and March 2025, but expected the provision of services to continue. 

Another example was that of the department of health in the Eastern Cape, which Zibi said ran out of money after six months, could not pay suppliers and had multiple judgments against it because it entered into contracts knowing it did not have the money for them. 

The appeal was brought by Zeal Health Innovations against the department of defence & military veterans and its former acting director-general Tsepe Motumi. It related to the award by the department of a R198m tender over three years to Zeal Health to provide healthcare and wellness services to 16,000 military veterans between June 2015 and end-May 2018. 

The appeal court upheld the judgment of the Pretoria high court on the invalidity of the contract, but ruled that the department was obliged to pay for the services already provided under the contract by Zeal Health. 

Zeal Health began providing the services from June 1 2015 but the department failed to pay for them. The company went to court urgently to secure payment, but the department successfully won an order declaring the award of the contract unconstitutional and invalid. Zeal Health then approached the Supreme Court of Appeal for payment of services already rendered which the department opposed. 

The appeal court noted that in terms of the Public Finance Management Act (PFMA), accounting officers must ensure their departments do not overspend their budgets, stating that “an accounting officer may not commit a department, trading entity or constitutional institution to any liability for which money has not been appropriated.” 

According to departmental data, only R34.2m was available at end-June 2015 for the provision of healthcare and wellness services and it argued that the contract was unlawful because the contract price of R198m far exceeded the department’s budget.

Zeal Health argued that the R198m was for three years — R70m for the first year and R64m each for the second and third years. The number of veterans was reduced from 16,000 to 14,346, with the result that the department was required to pay R5m a month to Zeal Health at a rate of R365.48 a person.

The department argued that the budget for the 2015/2016 financial year for the services was R38.7m; R40.6m for the 2016/2017 financial year; and R42.7m for the 2017/2018 financial year. When the tender was awarded, the contract price of R198m exceeded the cumulative budgets for the three financial years (R122m) by R76m. 

Zeal Health contended that the budget was revisited in 2016, resulting in an increase of the budget to R218.2m over the medium-term, being 2016 to 2019. It adopted the stance that the increased budget was sufficient to cover the contract price.

The appeal court said that whether the department was required to pay R70.1m or R52.4m (uncertainty over amount) to Zeal Health during the 2015/2016 financial year was irrelevant because both amounts were above the budget of R38.6m.

“The fact that, in Zeal Health’s version, the budget was increased over the medium-term after the 2015/2016 financial year is also irrelevant. What is important is whether the contract price fell within the budget when the tender was awarded.

“The evidence shows irrefutably that the acting director-general committed the department to a liability, being the difference between what was left in the budget (R34.2m) and the portion of the contract price that was allocated to the 2015/2016 financial year (either R70.1m or R52.4m), when such difference had not been appropriated for services in respect of that financial year,” the judgment said.

“The acting director-general did not have the power to commit the department to a liability for which money had not been appropriated. That is exactly the conduct that the PFMA prohibits. The acting director-general had the responsibility of ensuring that the department did not overspend its budget. He acted unlawfully. The awarding of the tender to Zeal Health was clearly unlawful and invalid.”

But the court also ruled in the interests of justice and equity that Zeal Health, as an innocent party, should be paid for services rendered, the amount for which still has to be determined. Court proceedings are apparently under way between the company and the department in this regard. 

Zibi noted that the department of defence was chronically underfunded and had no money to fulfil its obligations, which resulted in billions of unauthorised expenditure due to overexpenditure.

This was partly due to the defence force being deployed on operations such as in the DRC and Mozambique for which no budget had been appropriated. 

ensorl@businesslive.co.za