Member of the Executive Council for the Department of Housing, Safety and Liasion: Eastern Cape v King William's Town Housing Association (2451/2008) [2009] ZAECGHC 10 (19 March 2009)

FORM A

FILING SHEET FOR EASTERN CAPE HIGH COURT, GRAHAMSTOWN JUDGMENT

PARTIES: MEMBER OF EXECUTIVE COUNCIL FOR DEPARTMENT OF HOUSING, SAFETY AND LIAISON, EASTERN CAPE PROVINCE Applicant and KING WILLIAM’S TOWN HOUSING ASSOCIATION Respondent [1] Registrar: Case No: 2451/2008 [2] Magistrate: [3] High Court: EASTERN CAPE HIGH COURT, GAHAMSTOWN DATE HEARD: 26 February 2009 DATE DELIVERED: 19 March 2009 JUDGE(S): Kroon J LEGAL REPRESENTATIVES – Appearances: for the Appellant(s): Adv R G Buchanan SC Adv M H Sishuba for the Respondent(s): Adv RWN Brooks Instructing attorneys: Appellant(s): Whitesides Attorneys Respondent(s): Netteltons Attorneys CASE INFORMATION - Nature of proceedings : Application for an Order

IN THE HIGH COURT OF SOUTH AFRICA

(EASTERN CAPE, GRAHAMSTOWN)

CASE NO : 2451/2008

Date heard: 26 February 2009

Date delivered: 19 March 2009

In the matter between: MEMBER OF EXECUTIVE COUNCIL FOR DEPARTMENT OF HOUSING, SAFETY AND LIAISON, EASTERN CAPE PROVINCE Applicant and KING WILLIAM’S TOWN HOUSING ASSOCIATION Respondent

JUDGMENT

KROON J:

[1] The applicant (whose department is the legal successor to the Provincial Housing Board) seeks an order in terms of s 31 of the Arbitration Act 42 of 1965, that an arbitrator’s award in its favour against the respondent be made an order of this Court. The respondent, which does not dispute the validity of the award, filed a counter-application in which it seeks an order that the applicant’s application be stayed pending the payment by the applicant to it of certain sums of money and the happening of certain other events, to be referred to below.

[2] The dispute between the parties arises out of four agreements in terms of which the respondent undertook to develop housing projects under the Institutional Housing Subsidies Scheme in the following areas: King William’s Town Central, Breidbach Plateau, Ginsberg West and King William’s Town Golf Course (a total of 2447 houses). The respondent acquired the land on which the houses were to be constructed from the local municipal authority and the required subdivision of the erven followed.

[3] In terms of the agreements the respondent was inter alia obliged to develop and complete the projects according to certain specifications and to rent the units constructed to persons who

potentially qualified as beneficiaries (ie who in due course would qualify as purchasers of the units).

[4] The Provincial Housing Board was in turn obliged to pay certain institutional subsidies to the respondent in respect of the houses to be constructed by it. It did so.

[5] During the course of the project the applicant advised the respondent that she was cancelling the agreements by reason of the respondent’s alleged breach thereof, and she demanded repayment of certain subsidies that had been advanced to the respondent.

[6] The respondent disputed the validity of the applicant’s cancellation of the agreements and denied that it was liable to pay the applicant the sums claimed. The respondent further required these issues to be referred for arbitration as provided for in the agreements.

[7] In its statement of claim in the arbitration proceedings the applicant founded its cancellation of the agreements on the following allegations:

(a) The respondent had failed to develop and complete the project as stipulated in the agreements and had only completed a total of 783 houses.

(b) Despite being given notice as provided for in the agreements the respondent had failed to remedy the said defective performance.

[8] The applicant accordingly sought an award declaring that the agreements had been validly cancelled and that the respondent was liable to make payment of the sum of R23 627 165, 00 being the total of the institutional subsidies it had advanced to the respondent in respect of the houses that had not been constructed by it.

[9] In a second claim the applicant alleged that in breach of the agreements the respondent had sold 88 of the units completed by it to persons who did not qualify as purchasers in terms of the project. These persons therefore became obliged to buy the units at market value and were not entitled to the benefit of the applicable subsidy.

[10] The applicant accordingly claimed payment of the sum of R2 494 168, 52 in respect of the subsidies it had advanced to the respondent in respect of the said units, calculated in accordance with a formula set out in the agreements.

[11] The respondent raised various defences to the claims. In the light of what is set out in the following paragraph it is not necessary to set out the nature of the defences.

[12] In the result, the parties reached a settlement at the arbitration proceedings, with the respondent effectively conceding the validity of the applicant’s claims, and on 17 September 2008 the arbitrator made the following award:

“(A) By agreement between the parties the Arbitrator is requested to make the following award:

1.

It is declared that the four (4) contracts set out in paragraph 3.1 of the statement of claim have been validly cancelled.

2.

The Respondent is indebted to the Claimant and is required to make payment of the following:-

2.1. R23 627,165.00

2.2. R2, 039,739.00

2.3. Interest on the above sums at the legal rate a tempore morae.

2.4. Costs of the Arbitration as taxed or agreed to be paid by the Respondent.

(B) The Claimant undertakes that it will not make this award an order of the High Court for a period of four (4) weeks from the date hereof.

(C) To facilitate the Claimant resuming immediate control of the four (4) projects, the Respondent undertakes to cooperate in the handing over of the four (4) Projects in respect of the aspects as set out in the Annexure hereto marked “A”.

(D) This award is in full and final settlement of all the issues between the parties arising from the matters submitted to Arbitration.

(E) It is recorded that the amount of R2, 039 739.00 as set out above is an amount agreed for the purposes of this award only and is not to be construed as an abandonment of the relevant formula applicable to other projects.”

[13] The control referred to in paragraph (C) of the award related in effect to the administration of houses allocated to qualified beneficiaries. There was no provision that the applicant would acquire ownership of any of the land in question or be entitled to sell any of the land to beneficiaries.

[14] On 27 November 2008 the applicant launched the present proceedings. The founding affidavit adverted to the fact of the arbitrator’s award and further alleged that no payment had been made by the respondent. The applicant sought an order for costs only in the event of opposition to the application.

[15] The respondent filed a composite document which constituted both its answering affidavit in the application (in which it disputed the applicant’s entitlement to the relief sought) as well as its founding affidavit in support of the counter-application filed by it. The deponent thereto was Mr Hetem, the chief executive officer of the respondent. The substantive relief sought by the respondent in the counter-application was worded as follows:

“2. That the application brought by the Applicant by way of notice of motion dated 27th November 2008 issued out of this Honourable Court under case No. 2451/2008 be and is hereby stayed pending:

2.1 Payment by the Applicant to the Respondent of the sum of R28 321 695.45;

2.2 Payment by the Applicant to the Respondent of the sum of R13 567 816.10, being in respect of undeveloped land;

2.3 The independent valuation of the five hundred and seventy one (571) housing units which were completed in terms of the four projects which formed the subject matter of the arbitration between the parties and the determination of the amount due and payable by the Applicant to the Respondent.

2.4 The independent valuation of the cost of servicing of the undeveloped land forming part of the four projects. “

The respondent further sought an order that the costs of the applicant’s application be reserved and an order that the applicant pay the costs of the counter-application in the event of her opposing same.

[16] During argument Mr Brooks, for the respondent couched his submissions as follows:

(a) He affirmed that the respondent did not dispute the validity of the arbitrator’s award and therefore, subject to what follows, he did not oppose the grant of the substantive relief by the applicant.

(b) What the respondent sought, however, was a qualification of the grant of that relief in the form of an order that execution of paragraphs 2.1, 2.2, 2.3 of the award be stayed.

(c) He acknowledged that the respondent could not seek a stay on the terms set out in the notice of counter-application.

Instead, he moved for an order staying execution pending the determination of an action to be instituted by the respondent for the relief in question, the respondent to be placed on terms in respect thereof.

[17] Counsel were ad idem that where a counterclaim is raised the court has a discretion to grant judgment in respect of an admitted claim in convention, but to order that execution of that judgment be stayed until adjudication of the counterclaim. Reference was made to Rhodesia Omnibus Co Ltd v Modern Publicity Ltd 1956 (1) SA 103 (SR) and Super Soles and Upholsterers (Pvt) Ltd v Lawton 1976 (3) SA 264 (R).

[18] In the former case, at 104D et seq, the court adverted to authority to the effect that in the absence of cogent reason to the contrary, it is generally speaking obviously desirable that the process of the court should not issue until all claims and counterclaims between the parties have been determined (to obviate the situation where a defendant is later successful on a counterclaim but might find that he cannot recover from the plaintiff what he has already paid under the claim); the court nevertheless had the discretion to proceed as set out in the preceding paragraph.

[19] The court was persuaded that the plaintiff was entitled to judgment, particularly in view of the fact that there were no details of the defendant’s counterclaim before the court in that in preceding exception proceedings all the relevant paragraphs in the defendant’s papers dealing with the counterclaim were struck out; the defendant accordingly did not have a counterclaim properly pleaded before the court to enable the court to assess its merits. This factor, so the court noted, was important because one of the instances when a court will not stay proceedings on an admitted claim is where it considers the counterclaim to be frivolous. In the result, the court granted the plaintiff the judgment it sought, but ordered that execution of the judgment be stayed until the defendant’s counterclaim had been adjudicated upon. (It is to be inferred that despite the striking out of the defendant’s allegations relating to its counterclaim the court was nevertheless persuaded, presumably on the strength of what those allegations had set out, that the counterclaim was not a frivolous one).

[20] In the latter case the defendant sought rescission of a default judgment granted against it in favour of the plaintiff, reliance being placed on an alleged counterclaim it proposed to institute which would excuse it, in whole or in part, from paying the judgment amount. The court refused rescission because the claim was not disputed and because of the defendant’s fault in not defending the plaintiff’s claim. It was ordered, however, following the approach in Rhodesia Omnibus, that execution of the default judgment be stayed pending the determination of the counterclaim, the defendant being placed on terms in respect of the institution thereof. It was noted that “there is no suggestion that the proposed counterclaim is frivolous, but it has not yet been properly formulated or pleaded”.

The judgment reflects, however, that the cause of action founding the proposed counterclaim was identified.

[21] The status of the counterclaim invoked by the respondent in the present proceedings was then the subject of debate at the Bar.

[22] The relevant allegations made by Hetem in the founding affidavit may be stated as follows:

(a) It is his understanding that the arbitration process, and the resultant award, did not concern “residual issues such as the process of transfer of developed and undeveloped land registered in the name of the Respondent to the Applicant, the costs attendant thereon and the resolution of outstanding legal issues between the Respondent and third parties”. The developed land referred to is serviced land with housing units. In amplification Hetem annexed a letter addressed by the respondent’s attorneys to the State Attorney on 4 November 2008 (annexure CH1), which read as follows:

“re: KWTHA – DEPARTMENT OF LOCAL GOVERNMENT AND HOUSING

Your letter dated 3rd instant refers.

Our instructions are that client has submitted all information required by your client in order for it to take control of the four projects, which form the subject matter of the arbitration. In this regard we attach a letter addressed to the Department c/o its representative Nadia Baker. We also attach the flash disk referred to in the letter for your records and same will be delivered by hand. Please advise if your client holds the view that further information is needed. If so, please provide the details thereof.

The indebtedness of our client is set out in paragraph 2 of the award.

Our instructions are to bring to your attention the following:

a) Your client has taken control of 571 housing units;.

b) In terms of the Institution subsidies granted by your client, our client had to provide gear up funding in an amount of R19,565,065.00.

c) Our client also had to pay VAT on the aforesaid amount in the sum of R2,739,109.10.

d) Our client further had to pay various amounts to Buffalo City Municipality, maintenance costs and insurance on the properties. The arrear amount not recovered from the tenants amounts to R6, 017,521.35.

The total amount due to our client would amount to R28, 321,695.45.

Our client therefore holds the view that there is no need to have the order made an award of court as on its calculations, there is no amount due to your client once it has taken possession of the properties.

We shall be pleased if you could obtain instructions from your client and revert to us as a matter of urgency.”

(b) Financial issues between the parties relate to the respondent’s having provided initial funding in an amount of R19 565 065,00 “in terms of institutional subsidies granted by the Applicant”, together with the VAT liability thereon, and the recovery of the respondent’s payments to third parties relating to rental, rates, taxes, specific service charges, administrative fees and existing insurance cover for the projects.

(c) A further issue relates to undeveloped land, ie serviced land upon which no housing units have been constructed. The arbitration award includes the applicant’s contribution to serviced land. The respondent’s contribution was R13 567 816,10.

(d) The respondent’s attorneys had attempted to resolve the above issues with the applicant’s attorneys by way of two letters, dated 4 and 18 November (annexures CH1 and CH2). The content of the first letter has been set out above. The second letter repeated that the respondent had paid municipal rates and insurance premiums in respect of the properties in question. No response to either letter was received.

(e) In the light of the applicant’s indebtedness to the respondent, the latter would be prejudiced if the former is allowed to obtain the order it seeks. Set off of the parties’ indebtedness to each other would determine the final amount owing by either party.

[23] The comment that immediately falls to be made is that the affidavit merely sets out the respondent’s claims. Conspicuous by its complete absence is any description of the legal basis for the alleged claims.

[24] The applicant’s replying affidavit in the application and its answering affidavit in the counter-application also comprised a single document. It is not the applicant’s contention that the arbitration award precludes the respondent from raising the claims in question. It is her contention that there are no residual issues between the parties because there is no legal basis for the alleged indebtedness of the department to the respondent. She points out that in terms of the agreements the department’s only obligation was to advance subsidies to the respondent according to an agreed formula and on the basis of agreed terms. The purpose of the subsidies was to assist the respondent in its development of the projects. Whatever costs the respondent, as developer of the projects, may have incurred were for its account to be recovered from the proceeds of

the onward sale of the properties to approved beneficiaries. (In this regard Mr Buchanan, who with Mr Sishuba appeared for the applicant, referred to Chapter 6 of the National Housing Programmes, a copy of which is annexure CH5 to the replying

affidavit filed on behalf of the respondent. Paragraph 6.2.1.3 thereof provides as follows:

“ Financial viability of the institution

a. Institutions must have the necessary capacity to undertake the project: An institution will be required to demonstrate that it is financially viable and that it has the necessary managerial expertise in order to implement any proposed project successfully. Once the institutional subsidies have been paid to the institution, the institution will be required to fund the ongoing management and maintenance of the properties out of its own resources. The institution must demonstrate that its management structure and systems are in accordance with said business principles.

b. The very purpose of granting institutional subsidies is, to enable institutions to combine the subsidies with their own funds in order to provide residential products, which would otherwise be beyond the reach of beneficiaries. For that reason, projects will only be approved if institutions make capital contributions towards projects over and above the institutional subsidies to be allocated in respect of qualifying beneficiaries. Such capital contributions must result in that beneficiaries, who will obtain occupation of residential properties contained in the project, will be required to pay a consideration that is in excess of a consideration equal to the subsidy amount received by the institution in respect of the amount relevant to the beneficiary.”

Finally, the applicant stresses that the founding affidavit in support of the counter-application failed to set out the legal basis on which the respondent’s claims are founded.

[25] I deal below with portions of the respondent’s replying affidavit. At this stage it may be recorded that Mr Buchanan’s submission that the last point referred to in the preceding paragraph is sufficient to non-suit the respondent in its counter-application,

has merit. As counsel pointed out, a party seeking relief in motion proceedings must set out its cause of action in its founding

papers and will not be permitted to make out its case for the first time in its replying papers. Mr Brooks’s submission that the respondent’s founding affidavit disclosed the skeleton of the respondent’s cause of action and that the replying affidavit merely fleshed out that skeleton did not have any merit.

[26] The relevant allegations in the replying affidavit bearing on the legal bases invoked by the respondent for its claims, and which were canvassed by Mr Brooks, will be considered seriatim below. The prefatory comment that falls to be made is that the allegations are both contradictory and singularly lacking in clarity.

[27] The starting premise relied on by the respondent was stated thus:

“Now that Applicant’s right to cancel the agreement[s] has been determined upon arbitration, the remaining issues relating to the consequences of cancellation in favour of Respondent …… must still be addressed.”

This stance was echoed by counsel who coupled it with a reference to the circumstance that the department had taken control of the projects and submitted that “in that spirit” aspects that required to be addressed were the following: the expenses of developing the projects relating to both developed land (with houses) and undeveloped land (without houses but where costs in respect of the provision of services were incurred) and ongoing payments made by the respondent in respect of insurance premiums, municipal rates and maintenance.

[28] In the sentence set out at the commencement of the preceding paragraph the respondent stated that the consequences in favour of it of the cancellation of the agreements arose as a form of restitution pursuant to cancellation or resulted from the ongoing ownership of the immovable property by the respondent notwithstanding the outcome of the arbitration.

[29] The unelucidated latter alternative was not pursued by counsel.

[30] However, counsel did argue that the respondent’s claims did involve restitution if, as part and parcel of the handover of the projects to the applicant, the latter desired to take transfer of the land. (There are suggestions in the respondent’s papers that at a stage the applicant evinced such an attitude. This was in fact put forward as an important factor giving rise to the alleged obligation on the part of the applicant.)

[31] An allied aspect relates to the respondent’s reply to the applicant’s averment that whatever costs the respondent, as developer, incurred was for its own account and there was no basis on which it could seek to recover from the applicant the costs of installing services and erecting houses on its own property. In support of its denial of the averment (and after a reference to the averment being a recognition of the respondent’s ownership in the land, and the alleged consequent inability of the respondent to understand the basis of the applicant’s disregard of the counterclaims in the light of its desire to acquire the land) Hetem states that in making the prerequisite investment in the immovable property the respondent was implementing the applicant’s policy as set out in paragraph 6.2.1.3 of annexure CH5 (the terms of which I have already set out).

Hetem goes on to contend as follows:

“Quite simply, upon cancellation of the agreement, Applicant must compensate Respondent for the additional investment required of the Respondent and made by Respondent in accordance with the agreement.

Furthermore, at common law, Respondent cannot simply transfer ownership in the immovable property to Applicant without payment of an amount in recognition of the improved value of the immovable property.”

[32] All that need to be said about the last sentence is that it is simply not understood.

[33] Counsel conceded that whatever attitude the applicant might have evinced concerning the acquisition of the immovable property (and in this regard it may be noted that the applicant did state in its papers that upon execution of the judgment it seeks, and upon failure of the respondent to satisfy the judgment, the immovable property was liable to be seized and sold in execution) the papers reflect that the applicant is in fact not in any way asserting a claim to the transfer of the immovable property.

[34] The respondent in terms concedes the correctness of the applicant’s averment that its only obligation in terms of the agreements was to advance subsidies.

[35] Paragraph 6.2.1.3 of annexure CH5, quoted above, in fact supports the contention of the applicant that the costs incurred by the respondent in developing the property were to be for its own account and, indeed, despite an earlier denial that the costs it incurred in the development of the projects, were for its own account, the respondent later, again in terms, admits the correctness of the applicant’s contention that the respondent was to recover such costs from the onward sale of the properties to approved beneficiaries.

[36] The respondent attempts, however, to put a gloss on this concession. Hetem adds the following to the concession:

“Indeed, this is a fair summary of respondent’s counterclaim against Applicant as it is Applicant who is the “approved beneficiary” to whom the onward sale of the immovable property is intended”.

[37] The answer to the argument on behalf of the respondent is three-fold in nature:

(a) The difficulty with the argument that the applicant is required by law to effect restitution is that there is nothing that the applicant has received which cancellation of the agreements requires it to restore to the respondent, nor was counsel able to suggest any such benefit.

(b) It is hardly necessary to record that clearly the applicant could never be an approved beneficiary to whom the sale of the land was intended.

(c) If in the result, the parties at some stage in the future do treat with each other in respect of the remaining immovable property, the terms thereof will be a matter for negotiation between them. If in the result, agreement is not reached no sale will eventuate and it would be for the respondent to realise the land to best advantage.

[38] The alternative argument raised by counsel was one which he sought to found on the principles of enrichment (also a basis suggested by the respondent).

[39] However, a similar difficulty as that relating to the issue of restitution arises here as well with reference to the question of how the applicant has been enriched. Counsel could only refer to the fact that control of the projects, where erven have completed houses, has been given, by agreement, to the applicant. That does not in law constitute enrichment.

[40] The third aspect invoked by counsel was sought to be founded on what he referred to as the applicant’s intervention in the process of the eviction of tenants of the houses constructed by the respondent, who failed to pay the rentals due by them to the respondent. The initial allegation of Hetem in this regard read as follows:

“Well prior to the referral of the issue relating to Applicant’s entitlement to cancel the contract then in existence between

Applicant and Respondent, Respondent had embarked upon the eviction of non-paying tenants who were occupying certain units developed by Respondent pursuant to the agreement between Applicant and Respondent, and Applicant directed Respondent to cease the eviction

process. The cessation of legitimate evictions effectively blocked Respondent’s ability to sell units which had been

developed, and this led to an inability to make payment of amounts due to Applicant.”

[41] In fact, the words “directed Respondent to cease the eviction” were misplaced. The relevant letter from the Superintendent General of the department dated 23 June 2005, annexure CH4, which the respondent attached to its papers reads as follows:

“REQUEST FOR PROVISIONAL SUSPENSION OF TENANTS

EVICTION: KWTHA HOUSING UNITS

We refer to our subsequent letter dated 1st June 2005 on the above subject.

Since I have not yet met with your Board of Directors due to unforeseen circumstances, I therefore make a further sincere appeal to your Board to provisionally suspend the ongoing eviction processes until we have met with your Board to resolve accommodation problems in your social rental housing development.

My office is busy interacting with you to arrange such meeting. The envisaged meeting is intended to find ways of building trust and relationship between both the tenants and landlord.

I wish to reiterate again that this appeal is not intended to undermine your commitment to your creditors.”

And Hetem himself later refers to a request from the department for a stay in the eviction proceedings, or states that the department asked for it.

[42] It would seem that the respondent complied with the request.

[43] Counsel nevertheless submitted that a claim for damages was available to the respondent, by reason of the applicant’s intervention in the eviction process. Asked if he was referring to contractual damages or delictual damages counsel replied that it was probably both. Asked what breach of contract would found the claim for contractual damages counsel referred to what he stamped as the intervention. Suffice it to say that in fact there cannot be any talk of a breach of a contractual obligation on the part of the respondent.

[44] Similarly, counsel’s submission that the same conduct amounted to an actionable wrongful act in delict, must be rejected.

[45] I should add that I do not understand what Hetem’s reference in the passage quoted above to “an inability [on the part of respondent] to make payments of amounts due to the applicant” is meant to convey. Insofar as any alleged resultant illiquidity on the part of the respondent is raised in explanation of the respondent’s failure to complete the projects as required and therefore touched on the applicant’s entitlement to cancel the agreements, that issue was disposed of by the arbitrator’s award. This is in fact conceded in terms by the respondent.

[46] No basis for the grant of the relief referred to in paragraphs 2.2 and 2.3 of the respondent’s notice of motion was set out in the respondent’s papers and counsel presented no argument thereon.

[47] My conclusion is accordingly that although the respondent has quantified certain of its alleged claims against the applicant it has laid no legal basis that is cognizable in law for the prosecution of those claims. They must accordingly be stamped as frivolous.

[48] The following order will accordingly issue:

A. On the application:

1. The arbitration award annexed to the founding affidavit and marked “A” is made an order of this Court in terms of s 31 of the Arbitration Act 42 of 1965.

2. The costs of the application will be paid by the respondent, such costs to include the costs attendant on the employment of two counsel.

B. On the counter-application:

The counter-application is dismissed with costs, such costs to include the costs attendant on the employment of two counsel.

F KROON

Judge of the High Court

19 March 2009

Appearances: For the Applicant: Adv R G Buchanan SC Adv M H Sishuba Instructed by: Whitesides Attorneys For the Respondent: Adv RWN Brooks Instructed by: Netteltons Attorneys