By Duncan Wild on 3 October 2014

The primary question in this case was whether a third party can bring a claim against the party to a contract (where the claimant is not a party to the contract) as a result of loss suffered by the third party caused by the intentional repudiation of the contract.

The Constitutional Court, in a unanimous judgment by Justice Khampepe dismissed the appeal, finding that that cancellation of the contract in question was not wrongful as it did not fit within the existing law concerning interference with a contract, and nor was it necessary to recognise such a claim.

In this case, a Ilima Projects (Pty) Ltd (“Ilima“) entered a contract with the Gauteng Department of Infrastructure Development (“the Department“) under which it would undertake renovations to the Zola Clinic in Soweto. Ilima borrowed R8.5 million from Country Cloud Trading CC (“Country Cloud“) in order to allow it to comply with its obligations under the contract. Country Cloud stood to make a profit of R12.5 million under the loan agreemnt. After Country Cloud had paid the loan amount to Ilima, the Department cancelled the contract. This eventually resulted in Ilima’s liquidation. Country Cloud thereafter instituted a claim against the department for R20.5 million plus interest.

The Department purported to cancel the contract with Ilima based on what it claimed was an inaccurate tax clearance certificate presented by Ilima, as well as a representation by Ilima that it had received level 8 accreditation from the Construction Industry Development Board.

The claim by Country Cloud was that the Department owed it a duty not to cancel its contract with Ilima without lawful grounds to do so, and that the Department had in fact done so, causing Country Cloud not to be paid the R21.5 million that would have been owing to it.

The first question is whether the contract had been cancelled without a lawful basis to do so, and the second is whether, if the contract was cancelled without legal basis, the Department owed a duty toward Country Cloud, in other words, whether the Department’s conduct was wrongful in so far as Country Cloud’s claim was concerned.

The first question was whether the contract had been cancelled with basis. During the trial it emerged that there was in fact no issue with Ilima’s level 8 accreditation, and so the question the matter turned on the tax clearance certificate, and whether it was invalid, and if so, whether this justified the Department’s cancellation. The Department also argued that the proper procurement procedures had not been followed in the award of the contract, and therefore the contract was not validly awarded in the first place.

The SCA found that the contract was properly awarded in the circumstances, and that although there were questions about the whether the tax clearance certificate accurately reflected Ilima’s tax affairs, it could not find that the certificate was invalid.

In essence therefore the SCA found that the contract was not validly cancelled by the Department, but the question that remained was whether the element of wrongfulness, required for a successful delictual claim, had been proven. The element of wrongfulness provides a means by which the courts can determine whether it is proper to impose legal liability in the circumstances of a case, even where, for example, negligent conduct may have caused loss. Whether conduct is wrongful, and so must attract legal liability, is a question of public policy, and depends on the legal convictions of the community.

The danger that a wrongfulness requirement seeks to address, in circumstances such as those in this case, relate to the possibility of limitless liability. For example, in a case such as this, where Party A’s conduct causes loss to Party B, but as a result (e.g. the nonpayment or even liquidation of Party B), other parties suffer loss: Party C who might contract with Party B (as with Country Cloud; Party D, who might be employed by Party B; Party E who has entered a contract with Party C; or Party F, who is a dependent of Party D; and so on in a potentially never-ending chain.  The wrongfulness element of delict seeks to impose a limit at an appropriate place where the law of delict will cease to find that it is appropriate to compensate those who might have suffered harm.

In the present case, the SCA effectively found that to allow liability in these circumstances could lead to indeterminate liability, and that once you move past the immediate wronged party, the situation quickly becomes unmanageable and a potentially limitless number of potential claimants appear. In addition the SCA found that the Country Cloud could have brought a claim against Ilima, which would have had a claim a against the Department itself; or Country Cloud could also have taken over Ilima’s claim against the Department. No explanation had been given why these options were not tenable.

The Constitutional Court held that the appeal should be dismissed in a unamous judgment authored by Khampepe J and concurred in by Mogoeng CJ, Moseneke DCJ, Cameron J, Froneman J, Jafta J, Madlanga J, Majiedt AJ, Van der Westhuizen J and Zondo J.  The Court stated that the key question was whether the Department’s conduct was wrongful.  The test for what conduct will be considered legally wrongful focuses on “the conduct and goes to whether the policy and legal convictions of the community, constitutionally understood, regard it as acceptable. It is based on the duty not to cause harm – indeed to respect rights – and questions the reasonableness of imposing liability.”  A test formulated in the recent decision of Loureiro and Others v iMvula Quality Protection (Pty) Ltd 2015 ZACC 4 at para 53.

In this case the Court held that the law is generally reluctant to recognise pure economic claims, and does so only in limited circumstances including where there has been intentional interference with contractual relations. This is necessary as there is a risk of allowing indeterminate liability to an indeterminate class of people and thus a potentially inappropriate allocation of liability.

The Court held that here Country Cloud had not shown that the Department’s conduct amounted to intentional interference with the intentional interference with the contract.

Moreover the Court found that it was not necessary to expand the law to cover such a claim in this case. In doing so the Court rejected Country Cloud’s argument that it was necessary to hold the Department liable in order to promote state accountability. The court held that one can only be held accountable for doing something wrong, and only to the person wronged. In this case the Department had a contract with iLima and therefore could be held accountable under that contract.

The appeal was therefore dismissed, although no order was made as to costs as the Court found it was not inappropriate for Country Cloud to litigate the matter, and generally in constitutional litigation against the state costs should not be awarded against an unsuccessful party in these circumstances.

Download the judgment here.