City of Cape Town v Khaya Projects (Pty) Ltd

Witsand, an informal settlement in Atlantis near Cape Town, was developed into a formal township for lower income residents. The City of Cape Town appointed Peer Africa (Pty) Ltd as developer to oversee the project. Peer Africa contracted Khaya Projects (Pty) Ltd to construct houses. The City's development agreement with Peer Africa provided that the City would not accept responsibility for execution or rectification of defects. After houses were handed over, severe defects allegedly became apparent, including a house collapse and defective roofs. Khaya disputed the extent of defects. Peer Africa issued final completion certificates accepting the houses. Khaya instituted arbitration against Peer Africa in 2009 for outstanding payment of R1,069,535.67. The arbitration remained incomplete for five years. Any contractual claims had prescribed. The City sought a constitutional declarator that Khaya failed to comply with constitutional obligations under section 26 (right to adequate housing), despite not being party to the contract with Khaya and not being party to the arbitration.

• Whether a private construction company building state-funded low-cost housing bears constitutional obligations under section 26 of the Constitution independent of contractual or statutory obligations
• Whether Khaya constituted an 'organ of state' within the meaning of section 239 of the Constitution
• Whether the principle of constitutional subsidiarity requires parties to exhaust statutory and contractual remedies before seeking direct constitutional relief for socio-economic rights
• Whether the horizontal application of the Bill of Rights under section 8(2) imposes constitutional obligations on private contractors in state housing projects
• Whether the City had locus standi to seek a declaration that the arbitration between Khaya and Peer Africa had lapsed under section 23(a) of the Arbitration Act 42 of 1965
• Whether the appeal had any practical effect given completed work and prescribed claims
• Whether costs should be awarded to an amicus curiae

1. Save as set out below, the appeal is dismissed with costs, including the costs of two counsel. 2. The order of the court a quo that the appellant is to pay the costs of the amicus curiae is set aside.

A private construction company contracted to build low-cost housing as part of a state-funded project does not thereby become an organ of state or assume constitutional obligations under section 26 of the Constitution independent of its contractual and statutory obligations. The principle of constitutional subsidiarity requires that where legislation and regulations exist to give effect to constitutional rights (such as building regulations and standards), litigants must rely on those instruments or challenge them as unconstitutional before seeking direct constitutional relief. To constitute an organ of state under section 239, an entity must exercise public power or perform a public function of such significance that it can be described as the operational arm of government administration (as in Allpay 2), not merely be a subcontractor on a single government project. Constitutional obligations cannot be imposed ex post facto on contractors who tendered without such obligations being specified, as this would violate procurement principles under section 217. A party not privy to an arbitration agreement has no locus standi to seek a declaration that the arbitration has lapsed. The state cannot divest itself of constitutional responsibility and accountability for rendering public services by outsourcing to private contractors.

The court noted concerns about the widespread problem of defective low-cost housing construction in South Africa, but observed this must be addressed through proper contractual management, statutory enforcement, and active state oversight rather than by imposing retrospective constitutional obligations on private contractors. The court commented that the City's conduct required criticism - it cannot remain supine during projects and outsource all obligations to developers like Peer Africa, then seek to hold subcontractors constitutionally accountable when things go wrong. The court observed that care must be taken to distinguish contractual provisions imposing obligations from mere preambles and recitals which do not create obligations (following Absa Bank v Swanepoel). Victor AJA noted that even if an entity could be the 'operational arm' for a single project (which was doubted), on these facts only Peer Africa, not Khaya, could qualify. The court emphasized that imposing constitutional obligations would have far-reaching implications for contractors' rights to freedom of trade and fair procurement, and the construction industry should have opportunity to address such obligations before contracts are concluded, not during or after execution.

This judgment clarifies important principles regarding the constitutional obligations of private parties contracting with the state to deliver socio-economic rights. It establishes that private construction companies building state-funded housing do not automatically assume constitutional obligations beyond their contractual and statutory duties merely by participating in government housing projects. The decision reinforces the principle of constitutional subsidiarity in socio-economic rights litigation, requiring parties to exhaust existing legislative and contractual remedies before seeking direct constitutional relief. It distinguishes entities that are genuine 'organs of state' (like Cash Paymaster in Allpay 2, which controlled nationwide social grant distribution) from ordinary private contractors. The case emphasizes that the state cannot evade its constitutional accountability by outsourcing functions to private parties, and must remain actively involved in overseeing projects. It also confirms principles regarding amicus curiae costs. The judgment has significant implications for procurement, construction contracts, and the enforcement of housing rights in South Africa.