The Special Investigating Unit v Phomella Property Investments (Pty) Ltd and Another

The Department of Public Works (DPW) concluded a lease on 22 September 2009 with Phomella Property Investments (Pty) Ltd for the SALU building in Pretoria to accommodate the Department of Justice and Correctional Services (DOJ) for a period of 9 years and 11 months. The lease was concluded through a negotiated process rather than an open bidding process. Approval to conclude the lease was subject to the condition that a needs assessment of the space required by the DOJ be conducted prior to signature. Despite this requirement not being met, the lease was signed. The building and lease were subsequently transferred to Rebosis Property Fund Limited, both entities being part of the same group controlled by Mr Ngebulana. Phomella cleared the building of some 100 tenants and spent more than R81 million refurbishing it. The DOJ occupied the entire building for the duration of the lease at a market-related rental. In February 2017, after the lease had run its course, the Special Investigating Unit (SIU) launched an application seeking a declaration that the lease was unlawful and an order that Phomella and Rebosis jointly and severally pay R103,880,357.65 to the Minister of Public Works, representing wasteful expenditure for excess space allegedly not required by the DOJ.

• Whether the high court correctly declared the lease unlawful under section 172(1)(a) of the Constitution
• Whether the high court erred in refusing to grant equitable relief under section 172(1)(b) of the Constitution ordering repayment of approximately R104 million
• What is the test for appellate interference with the exercise of a discretion under section 172(1)(b) of the Constitution
• Whether there is a principle that 'even an innocent tenderer has no right to retain what it was paid under an invalid contract'
• Whether the respondents were complicit in any malfeasance by DPW officials
• Whether the high court misdirected itself on the facts regarding the needs assessment

The appeal was dismissed with costs, including the costs of two counsel where so employed. The declaration of unlawfulness of the lease stood (as there was no appeal against it), but the high court's refusal to order repayment of approximately R104 million under section 172(1)(b) of the Constitution was upheld.

The exercise of remedial discretion under section 172(1)(b) of the Constitution constitutes a discretion in the true sense and may be interfered with on appeal only if it was not exercised judicially, was influenced by wrong principles or misdirections of fact, or if the court reached a decision which could not reasonably have been made by a court properly directing itself to all relevant facts and principles. There is no inflexible principle requiring an innocent contractor to repay all amounts received under an unlawful contract. The appropriate remedy following a declaration of invalidity under section 172(1)(a) must be determined on a case-by-case basis under section 172(1)(b), considering what is just and equitable in the particular circumstances. Section 172(1)(a) requires only a declaration of invalidity to the extent of inconsistency with the Constitution; any remedy beyond such declaration falls under section 172(1)(b). The wide remedial power under section 172(1)(b) is bounded only by considerations of justice and equity and must be exercised considering factors such as the innocence or complicity of parties, whether obligations were performed, whether benefits were undue, and whether the price was market-related.

The Court observed that the so-called 'no-profit-no-loss principle' articulated in some cases (including Central Energy Fund) is not a binding principle and should not be followed as it derives from a misreading of the Allpay 2 judgment. Courts have allowed contractors to retain payments and even profit under unlawful contracts in appropriate circumstances. The Court noted that the dictum in Mott MacDonald conflated the requirements of sections 172(1)(a) and 172(1)(b) of the Constitution, treating setting aside and declaring voidness as mandatory consequences under section 172(1)(a) when they are actually discretionary remedies under section 172(1)(b). The Court emphasized it is unwise to attempt to lay down inflexible rules in determining just and equitable remedies following declarations of unlawful administrative action. The Court distinguished between 'true discretions' (where a court has a wide range of equally permissible options) and 'loose discretions' (where the court must have regard to disparate and incommensurable features), applying different tests for appellate interference in each case. The Court noted that businesses restructure portfolios for various legitimate commercial reasons and restructuring alone cannot lead to an inference of complicity in wrongdoing.

This judgment is significant for clarifying the proper application of section 172(1)(b) of the Constitution in procurement cases. It confirms that the remedial discretion under section 172(1)(b) is a 'true discretion' subject to limited appellate interference. The judgment decisively rejects the notion that there is an inflexible principle requiring contractors to repay all amounts received under unlawful contracts, even when they are innocent parties. It emphasizes that remedies must be determined on a case-by-case basis considering what is just and equitable in the particular circumstances. The case provides important guidance on the distinction between section 172(1)(a) (which mandates a declaration of invalidity) and section 172(1)(b) (which provides wide remedial powers bounded only by considerations of justice and equity). It also distinguishes between complicit and innocent third parties in procurement irregularities, confirming that innocent parties who have performed their obligations in good faith may be entitled to retain payments even where the underlying contract is declared unlawful. This has significant implications for procurement law in South Africa and the consequences of irregular tender processes.