SHOULD BUSINESS PAY THE PRICE?

Public procurement remains one of the most significant opportunities for South African businesses, yet it is also one of the areas of greatest uncertainty. Government departments regularly spend billions of rand procuring goods and services from the private sector, but when procurement processes are later found to be unlawful, contractors often find themselves caught in the crossfire.

A landmark Constitutional Court judgment delivered in May 2026 has provided important clarity on this issue. In Department of Military Veterans v Zeal Health Innovations, the Court considered whether a contractor that had performed its obligations in good faith should be entitled to payment, including a profit margin, after the contract itself was declared invalid because of procurement failures by the state. The case centred on a R198 million contract awarded to Zeal Health Innovations (ZHI) to provide healthcare and wellness services to approximately 16 000 military veterans over three years. Acting on the awarded tender, the company invested heavily in establishing a nationwide managed healthcare network of doctors, specialists, pharmacies and other healthcare providers before commencing service delivery in June 2015.

Only weeks later, however, the Department refused to pay its invoices. A change in political leadership resulted in the Minister questioning the affordability of the contract and instructing that payments be withheld while the Department sought to have the procurement process reviewed. Ultimately, the courts agreed that the tender process had not complied with public finance legislation and declared the contract invalid.

Ordinarily, the setting aside of a contract raises difficult questions for both government and the private sector. While the state has a constitutional obligation to ensure that procurement is lawful, transparent and competitive, businesses also need certainty that they will be paid for work honestly undertaken in reliance on a government award.

Strike a Balance

The Constitutional Court sought to strike a balance between these competing interests. Importantly, the Court rejected the Department’s argument that an innocent contractor should recover only its actual expenses and never earn a profit from an invalid contract. Instead, it held that there is no blanket “no profit, no loss” rule in South African law. While there is no automatic entitlement to profit, courts have the discretion to preserve a contractor’s contractual rights where fairness and justice demand it.

In exercising that discretion, the Court identified several important considerations. These include whether the contractor was entirely innocent of any procurement irregularities, whether it actually delivered the contracted services, whether the state benefited from those services, whether the contractor incurred substantial costs in preparing and performing the contract, and whether the conduct of the state itself contributed to the contractor’s expectation that it would be paid. The Court also considered whether the government continued to allow performance before challenging the contract and whether alternative arrangements ultimately proved more expensive or less effective.

Collectively, these factors recognise that procurement failures are often caused by administrative shortcomings within the state rather than misconduct by private sector suppliers. Perhaps the most significant aspect of the judgment is the distinction the Court drew between work performed and work not performed. Zeal Health was entitled to pursue payment at the agreed contractual rate, including its profit margin, for the period during which it delivered healthcare services. However, once the company suspended its services after learning that the Department intended challenging the contract, it could not claim profits for the remainder of the three-year contract.

The Court concluded that compensation must reflect actual performance and value delivered, rather than anticipated future earnings. For businesses operating in sectors such as infrastructure, healthcare, construction, engineering and professional services, the judgment offers welcome certainty. It confirms that companies acting honestly should not automatically bear the financial consequences of procurement failures beyond their control. At the same time, it reinforces that public money remains subject to rigorous judicial oversight, and courts will carefully scrutinise any claim for payment where a contract has been declared unlawful.

The decision also carries practical lessons for every organisation that contracts with government. Comprehensive record keeping has never been more important. Contractors should retain detailed evidence of services rendered, milestones achieved, costs incurred, subcontractor payments, approvals received and all communications with the contracting authority. If the legality of a procurement process is later challenged, that evidence may determine whether payment can be recovered. The judgment further serves as a reminder that strong governance is not solely a public sector responsibility.

Businesses should conduct appropriate due diligence before accepting major government contracts, understand the procurement framework under which appointments are made and ensure that their own conduct remains beyond reproach throughout the project. Ultimately, the Constitutional Court has reinforced an important principle for South Africa’s business environment: companies that act in good faith should not automatically become casualties of defective public procurement.

While unlawful contracts cannot simply be enforced as though nothing went wrong, fairness requires that innocent contractors who have delivered real value to the state should, in appropriate circumstances, receive the benefit of the bargain they honestly believed they had concluded. For the private sector, the decision represents more than an important legal precedent. It strengthens confidence in doing business with the state by recognising that commercial fairness and constitutional accountability can, and should, exist side by side.

Full the full text visit: www.coxyeats.co.za/legal-update/what remedy-is-available-to-an-innocent contractor-when-a-state-contract-is declared-invalid

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