Merifon (Pty) Ltd v Greater Letaba Municipality and Another

Merifon (Pty) Ltd sold immovable property (portions of farm Mooiplaats 434 LT) to Greater Letaba Municipality for R52 million. The municipality required land for human settlements but lacked funds. The Provincial Department of Cooperative Governance, Human Settlements and Traditional Affairs (CoGHSTA) committed to pay the purchase price and transfer costs on 6 March 2013. On 22 March 2013, the municipal council adopted a resolution approving the commitment letter from CoGHSTA. A written agreement of sale was concluded between Merifon and the municipality, with the municipality represented by its municipal manager. However, on 27 March 2013, the Provincial Treasury declined the department's request for funds, stating the purchase price was excessive. Merifon instituted action for specific performance, claiming payment of the purchase price and transfer costs. The municipality defended on grounds including: lack of authority of its representative; non-compliance with section 19 of the Municipal Finance Management Act (MFMA); the council never approved the purchase of the property including total costs; and no budget appropriation for the expenditure.

• Whether the agreement for purchase and sale was valid and enforceable given alleged non-compliance with section 19 of the MFMA
• Whether section 19 of the MFMA applied to the transaction
• Whether the municipality complied with the peremptory provisions of section 19
• Whether the municipal council's resolution of 22 March 2013 constituted approval of the capital project as required by section 19
• Whether the municipal manager had actual or ostensible authority to bind the municipality
• Whether the doctrine of estoppel could validate an otherwise unlawful transaction

The appeal was dismissed with costs, including costs of two counsel. The high court's order declaring the agreement null and void and unenforceable was upheld.

A municipality may only spend money on a capital project if it complies with the peremptory provisions of section 19 of the MFMA, including: appropriation of funds in the capital budget; approval of the project (including total costs) by council; and consideration of funding sources. An agreement concluded in breach of these peremptory statutory requirements is unenforceable. No court can grant specific performance of such an agreement as this would compel a party to commit an illegality and violate the constitutional principle of legality. The doctrine of estoppel cannot validate a transaction that is ultra vires and contrary to statutory prescripts designed to promote transparency, accountability and good governance in municipalities.

The Court made important observations about the foundational importance of the rule of law and principle of legality in South African constitutional democracy, citing extensively from Nyathi v MEC for Health Gauteng and Fedsure Life Assurance v Greater Johannesburg TMC. The Court noted that in exercising judicial functions, courts themselves are constrained by the principle of legality. The Court also observed that the MFMA is intended to prevent municipalities from spending money on capital projects that have not been budgeted, in order to ensure transparency, accountability and fiscal discipline. The judgment distinguishes between cases where a third party need not enquire about internal municipal formalities versus cases where non-compliance amounts to acting beyond statutory powers, with the latter implicating the principle of legality directly.

This case is significant in South African law for several reasons: (1) It reinforces the fundamental constitutional principle of legality and the rule of law, emphasizing that organs of state may only act within their lawful powers. (2) It confirms that section 19 of the MFMA contains peremptory provisions that municipalities must comply with before spending money on capital projects. (3) It establishes that the doctrine of estoppel cannot be used to validate transactions that are ultra vires or contrary to statutory prescripts, as this would undermine legislative provisions designed to promote good governance. (4) It affirms that courts cannot grant orders for specific performance that would compel parties to act unlawfully or contrary to the principle of legality. (5) The judgment demonstrates strict enforcement of municipal finance legislation to promote transparency, accountability and fiscal discipline in local government. (6) It provides guidance on interpreting municipal council resolutions and the level of specificity required to demonstrate compliance with statutory requirements for capital expenditure.