New councils to revise contracts

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“Honourable business people have nothing to fear”

After the municipal elections, a significant number of municipalities are now under new reign. The largest of these are Nelson Mandela Bay and Tshwane, who now have DA mayors with the help of smaller parties.

Johannesburg was at the time of writing this article still balancing on the edge of a knife with the DA or the ANC who could take the lead.

The question is: What does this mean to companies who do business with these councils or deliver services to the councils?

Normally, the existing rights and responsibilities of the previous council is transferred as is to the new council regardless of which party wins the election. However, the chief negotiator of the DA, Ryan Coetzee and the EFF’s national chairman, Adv. Dali Mpofu, made it clear that where they have control, an audit will be conducted on all existing municipal contracts with service providers. Both parties strongly expressed their stance against corruption and therefore they want to thoroughly peruse the existing contracts rather than merely continue with corrupt contracts.

In Tshwane, the DA specifically highlighted the controversial electricity smart meter contract, the broadband contract and the public-private partnership for the construction of the new municipal head office, Tshwane House as contracts which will be placed under the magnifying glass with the aim of cancelling the contracts.
Where does this leave the people who are doing business with these municipalities?

Adv. Werner Zybrands, a municipal management expert, says those people who do business in an honest and honourable way have nothing to fear. The municipalities should simply honour existing contracts and if that is not the case, there are enough mechanisms to ensure legal protection to wronged contractors.
“There are, however, two instances which could lead to the rightful termination of a contract with a service provider”, Zybrands says.

Firstly, the municipality may set aside an irregular contract where legal requirements have not been met. He emphasises that the burden of proof rests on the municipality to convince the court of such irregularity. If the municipality succeeds, the legal implications of the setting aside will be handled by the court. “If the irregularity is on the side of the municipality and it happened without the contractor’s knowledge, e.g. where the municipality did not follow its own approval processes, the innocent contractor can rely on the estoppel legal principle”, Zybrands said. This entails that the municipality is bound to its own misrepresentation (that it did comply with the necessary legal requirements) and the contract will remain intact.

Secondly, according to Zybrands, the other scenario which can lead to the termination of a contract, is poor performance on the side of the contractor. He says there are several measures in place in existing Acts which require performance evaluation. If the contractor, for example, had to build a total of 1 000 houses, but delivered only 40, he is open to action by the municipality. However, there are prescribed processes for the termination of such a contract. The municipality must notify the contractor that he is in breach of the contractual requirements and he must be given a chance to rectify the matter. If the contractor then fails to rectify the matter, the municipality may terminate the contract.

Zybrands does not expect a wave of litigation in reaction to the auditing of contracts by new councils. He says if the councils tackle one or two big cases and follow through with civil action to recover the money paid out in terms of doubtful contracts, the relevant businesses will quickly realise their pockets are not so deep as those of the municipality and they will either settle or retreat.

Lex Middelberg, DA council member and party spokesman in the city before the elections, said if the DA cancels the Tshwane House contract, the contractor, a consortium under the leadership of the listed construction group, Group Five, is expected to be compensated according to the legal principle of enrichment for the construction work which has already been done. This means that the contractor is compensated to the amount of which he has been impoverished or to the amount of which the municipality has been enriched, which ever amount is the smallest of the two.