Merifon (Pty) Limited v Greater Letaba Municipality and Another

Merifon (Pty) Limited (Merifon) entered into an agreement with the Greater Letaba Municipality (Municipality) on 7 March 2013 to sell a property (Portions 5 and 6 and the Remaining Extent of the Farm Mooiplaats) for R52 million for human settlement development purposes. Merifon had acquired the property from City Blox for R14.5 million in April 2012. The Municipality's Mayor had requested provincial assistance to secure land for housing development. The Department of Co-operative Governance, Human Settlements and Traditional Affairs (CoGHSTA) issued a commitment letter on 6 March 2013 stating it would fund the R52 million purchase price. The Municipal Manager signed the agreement on behalf of the Municipality. The Council passed a resolution on 22 March 2013 approving the commitment letter but not the property acquisition itself. The Provincial Treasury subsequently declined CoGHSTA's funding request on 27 March 2013, stating the price was excessive (the property was originally valued at R7.5 million, then purchased by Merifon for R14.5 million, and now being sold for R52 million). The Municipality failed to pay the purchase price. Merifon instituted action claiming specific performance and payment.

• Whether section 19 of the Local Government: Municipal Finance Management Act 56 of 2003 (MFMA) applied to the transaction
• Whether non-compliance with section 19 of the MFMA rendered the agreement null and void and unenforceable
• Whether the Municipal Manager had actual or ostensible authority to enter into the agreement on behalf of the Municipality
• Whether the doctrine of estoppel could validate an agreement that did not comply with peremptory statutory provisions
• Whether the Turquand rule protected Merifon as an innocent third party
• Whether the Municipality's Council resolution constituted approval of the capital project as required by section 19 of the MFMA
• Whether it was in the interests of justice to grant leave to appeal to the Constitutional Court

Leave to appeal was refused. Merifon was ordered to pay the Greater Letaba Municipality's costs, including the costs of two counsel.

Where a municipality enters into an agreement for the acquisition of a capital asset without complying with the peremptory requirements of section 19 of the Local Government: Municipal Finance Management Act 56 of 2003 (MFMA) - including council approval of the capital project, appropriation of funds in the capital budget, and availability of funding - such agreement is ultra vires, null and void, and unenforceable ab initio. The doctrine of legality, as a fundamental constitutional principle, requires strict compliance with peremptory statutory provisions governing the exercise of public power. Neither the doctrine of estoppel nor the Turquand rule can validate a transaction that is ultra vires or contrary to peremptory statutory requirements. A municipal council resolution that merely approves a commitment letter from a provincial department does not constitute approval of a capital project as required by section 19(1)(b) of the MFMA. The principle of legality trumps the protection of innocent third parties in contracts with municipalities where there has been non-compliance with peremptory statutory provisions.

The Court criticized the Municipality for its inordinate and inexcusable delay in taking steps to review its unlawful conduct in concluding the invalid agreement, though this delay did not cure the invalidity or deprive the Municipality of the right to raise a reactive challenge. The Court noted that following Merafong and Tasima, a reactive challenge should be available where justice requires it, and an organ of state is not disqualified from raising such a challenge merely because it is an organ of state - substance must triumph over form. The Court observed that while the matter engaged constitutional jurisdiction (interpretation of MFMA and legality principle), Merifon's primary goal was to assert a contractual claim for specific performance, which influenced the costs order and the decision not to apply the Biowatch principle. The Court also noted that the question of the Municipal Manager's authority to conclude the agreement was not determinative and would have required impermissible factual investigation by the Constitutional Court. The Court emphasized that the jurisprudence on the principle of legality in local government is settled and uncontested, particularly following Fedsure.

This case reinforces the centrality of the doctrine of legality in South African constitutional democracy, particularly in the local government sphere. It confirms that: (1) section 19 of the MFMA contains peremptory requirements for municipal capital projects that cannot be circumvented; (2) non-compliance with peremptory statutory provisions renders municipal contracts ultra vires, null and void from the outset (ab initio); (3) neither estoppel nor the Turquand rule can validate contracts that violate peremptory statutory requirements or the principle of legality; (4) innocent third parties bear the risk when contracting with municipalities if statutory formalities are not observed; (5) the principle that public authorities can only act within their statutory powers applies strictly in municipal finance matters; (6) a municipal council resolution must specifically approve a capital project itself, not merely approve a commitment letter from a provincial department. The judgment strengthens fiscal discipline, accountability and transparency in municipal governance and limits the ability of private parties to enforce contracts with municipalities that fail to comply with the MFMA's budgetary and approval requirements.