Bad advice not a basis to set aside an agreement

In Ephraim Mogale Local Municipality v Hlongwane NO and Another [2023] 9 BLLR 898 (LC), the employee was employed by Ephraim Mogale Local Municipality (the Municipality) as municipal manager. 

The Local Government: Municipal Finance Management Act 56 of 2003 (the MFMA) imposes several responsibilities on municipal managers to ensure that effective and transparent systems of financial risk are maintained. 

In particular, the MFMA prohibits the Municipality from opening a bank account with a bank that is not registered in terms of the Banks Act 94 of 1990 and imposes a duty on the municipal manager to enforce compliance with this obligation.

During her employment, the employee had requested and approved the transfer of R 80 million in municipal funds from FNB to VBS Mutual Bank, a bank which was not registered in terms of the Banks Act. 

This resulted in the loss of the entire amount when VBS folded. 

As a result, the Municipality charged the employee with several counts of gross misconduct. 

The employee pleaded guilty to all charges and accepted that the misconduct was serious and warranted dismissal. 

Notwithstanding this, the presiding officer of the disciplinary hearing imposed a sanction of three months’ suspension without pay after finding that the Municipality had failed to prove that she was grossly negligent.

The Municipality filed an application to review and set aside the disciplinary outcome, but before the review application came before the court, the Municipality elected to enter into a settlement agreement with the employee. 

In terms of the settlement agreement, the employee would resign on signature of the agreement, and the Municipality would pay her a year’s salary (nearly R 1,3 million) in full and final settlement within 30 days of conclusion of the agreement. 

The Municipality, however, subsequently declined to pay the employee.

As a result, the employee approached the Labour Court (LC) to have the settlement agreement made an order of court. 

A month later, the Municipality filed an application to have the settlement agreement declared unlawful and set aside and, if so, for the court to determine the review application.

The LC noted that this was one of the many cases that had produced litigation over what had become known as ‘the Great Bank Heist’ resulting from the spectacular collapse of VBS. 

This was also a case where the applications before the court displayed unimaginable levels of incompetence and disregard of what is expected of municipal officers, who now approached the court to fix the consequences.

The court noted that the proper approach was to first consider the application to set aside the settlement agreement, which agreement had been approved by the Municipality’s Council. 

The purpose of settlement agreements is to put an end to litigation. 

The parties were bound by the signed agreement. 

The Municipality sought to resile from the agreement on the grounds that it was based on poor legal advice, which had resulted in a waste of taxpayers’ money. 

While this was true, the Municipality had displayed utter incompetence by not only accepting the poor advice, but also by acting on it. 

The fact that the Municipality realised late that it was ill-advised by its legal representatives or that after signing the agreement, experienced some sense of ‘buyer’s remorse’, did not render the agreement unlawful.

The Municipality further submitted that the settlement agreement was unlawful on the basis that it was contrary to good governance and accountability and argued in its heads of argument that it was contrary to public policy. The fact that the agreement was contrary to good governance again did not render the agreement unlawful.

In the court’s view, the proper course would have been to approach the court to set aside the Council resolution in terms of which the settlement agreement was approved. 

The court, accordingly, held that the agreement could not be set aside in the circumstances.

Turning to the employee’s application to have the agreement made an order of court, the court noted that the Municipality had opposed the application on the basis that the payments to VBS were unlawful, that to pay the employee an exorbitant amount of money would reward her at the expense of the public purse and that the enforcement of the agreement would perpetuate the unlawfulness.

The court noted that it had a discretion to make any settlement agreement an order of court, and in exercising that discretion, the relevant facts and circumstances must be considered, such as are necessary to satisfy the demands of law and fairness. 

The court is not merely a rubber stamp. The court has a duty to ensure that enforcement is equitable and in the public interest, especially where the legitimacy of the agreement is challenged.

In the court’s view, it would have been contrary to public policy to make the agreement an order of court as the payment of one year’s salary to the employee, in circumstances where she acted unlawfully, would offend public policy. 

Enforcing the settlement agreement would constitute wasteful and irregular expenditure on the part of the Municipality and would certainly send the wrong message. 

Accordingly, the court declined to make the settlement agreement an order of court.

As to the Municipality’s application to review the disciplinary proceedings, the court held that because of the settlement agreement, which agreement could not be set aside, the dispute had been fully and finally settled. 

Both the Municipality’s and the employee’s applications were accordingly dismissed.

Nadine Mather