The Constitutional Court has partly upheld an appeal by Minister Angie Motshekga and the Department of Military Veterans, clarifying that innocent contractors may be compensated for work done but not for unperformed portions of cancelled state contracts.
Image: Parliament of SA
The Constitutional Court has partly upheld an appeal by the Minister of Defence and Military Veterans, Angie Motshekga, ruling that a private healthcare provider can be paid for services it actually delivered under an unlawful state contract but cannot automatically claim damages for the rest of the three-year agreement.
In a majority judgment written by Justice Mbuyiseli Mathopo, the court clarified how innocent contractors should be compensated when government procurement contracts are later declared unconstitutional.
The case involved the Department of Military Veterans and Zeal Health Innovations (Pty) Ltd (ZHI), which was awarded a tender in 2015 to provide healthcare and wellness services to about 16,000 military veterans.
The apex court granted leave to appeal and partly overturned a Supreme Court of Appeal (SCA) ruling that broadly preserved ZHI's contractual rights even though the contract had been declared invalid. Instead, the court ruled that ZHI is entitled to contractual payment only for services provided between June 1 and August 12, 2015.
Any claim for the period after it stopped providing the full range of services is limited to its actual out-of-pocket expenses for maintaining its capacity or providing emergency treatment. Those claims must be decided separately or agreed to by the parties.
The court also ordered each side to pay its own legal costs.
The dispute began in January 2015 when the department advertised a tender for healthcare and wellness services under the Military Veterans Act. ZHI was awarded the three-year contract on May 21, 2015, valued at R198.16 million.
The agreement used a capitation model, under which the company would receive a fixed monthly fee for every registered military veteran, regardless of how many sought treatment.
The contract started on June 1, 2015, and required ZHI to build a nationwide network of doctors, specialists, pharmacies and other healthcare providers.
Within weeks, the department questioned ZHI's invoices after the company billed more than R5.24 million for June 2015.
Although the outgoing Director-General approved the payment on his last day in office, it was never processed.
After new departmental leadership took over, the department said it intended to review the procurement process, while Motshekga reportedly considered the contract too expensive.
After not being paid, ZHI suspended most of its services in August 2015, continuing only emergency treatment where legally required. None of its three invoices, totalling more than R15.76 million, was ever paid.
Angie Motshekga’s challenge to a disputed military veterans healthcare contract has succeeded in part, with the Constitutional Court ruling that an invalid government agreement cannot automatically guarantee future payments to a service provider.
Image: Phando Jikelo / Independent Newspapers
The department later approached the courts to have the procurement process reviewed and set aside.
In 2022, the High Court declared both the interim and main contracts unconstitutional and invalid from the outset after finding that the R198 million agreement exceeded the department's available budget in breach of the Public Finance Management Act.
Although the court found no evidence that ZHI had been involved in any procurement irregularities, it made no order protecting the company's financial interests.
ZHI appealed, arguing that it was an innocent contractor that had provided valuable services and should not suffer because of the department's failures.
The SCA agreed in part and preserved what it described as ZHI's contractual rights despite the contract being declared invalid.
The department then appealed to the Constitutional Court, arguing that the order was so broad that it could allow ZHI to claim about R73 million in lost profits for the remaining period of the contract, even though it had stopped performing after about two and a half months.
Justice Mathopo said the SCA had not explained why it preserved contractual rights beyond the period during which ZHI actually performed.
He found the order unclear because it could be interpreted as preserving not only payment for services already delivered but also damages for the remaining 33 months of the contract.
The Constitutional Court held that the appeal court had failed to properly distinguish between the periods of performance and non-performance.
The majority found that different remedies should apply to different periods.
For the period from June 1 to August 12, 2015, the court ruled that ZHI should be paid according to the contract because it was an innocent contractor that had established healthcare networks, treated military veterans, incurred significant costs and provided services accepted by the department.
The court also noted evidence that the department had initially approved payment before changing its position after a change in leadership and concerns about the contract's cost.
The Constitutional Court also rejected the department's argument that innocent contractors should never make a profit from unlawful state contracts.
Justice Mathopo said the "no profit, no loss" principle developed in earlier cases applies only in limited circumstances and is not a general rule preventing contractors from earning profits on work they actually completed. Instead, courts must consider the facts of each case when deciding what is a just and equitable remedy.
The court held that preserving ZHI's contractual rights for services it had already delivered included the agreed profit margin because the department itself had chosen the capitation pricing model.
However, it found that preserving contractual rights for services that were never provided would give ZHI an unjustified windfall.
Meanwhile, Justice Kollapen dissented, finding that the Constitutional Court did not have enough factual evidence to determine the appropriate remedy.
He would have referred the matter back to the High Court to hear further evidence before deciding what compensation, if any, ZHI should receive.
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