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Counter-application vs collateral challenge

Author: Ushir Ahir – Snr Associate & Clinton Mphahlele – Candidate Attorney

Can a court find that a contract is invalid and unlawful in the absence of a review application specifically requesting it to do so?

In the case of Gobela Consulting CC v Makhado Municipality (910/19) [2020] ZASCA 180 (22 December 2020), the Supreme Court of Appeal (SCA) was called upon to consider whether the high court was entitled to find that a contract was invalid and unlawful despite the municipality not having made a counter-application seeking to review and set it aside after being sued by the consulting firm (the appellant) for alleged breach of contract. The municipality had instead raised a collateral challenge, where it relied on the invalidity of the disputed contract due to prescribed procurement processes not being followed.

A collateral challenge raises the invalidity and unlawfulness of an administrative action as a defence prior to it being set aside. It is collateral because it is raised in proceedings which are not intended to decide the validity or otherwise of such administrative action.

The appeal concerned a dispute arising from a contract concluded by the municipal manager on behalf of Makhado Municipality (the respondent) with Gobela Consulting (the appellant). The contract emanated from an unsolicited proposal submitted by Gobela to the municipality to render certain services. No performance was rendered in terms of that contract. Gobela alleged that the municipality had refused and/or neglected to allow it to perform its obligations in terms of the contract and subsequently issued summons against the municipality, claiming the entire contract value as damages for alleged breach of contract.

The municipality raised a special plea disputing the municipal manager’s authority to enter into the contract. In its plea, the municipality denied liability on the basis that the contract was in contravention of the Local Government: Municipal Finance Management Act 56 of 2003 and the municipality’s own Supply Chain Management Policy, and that as a result, the contract was invalid and unlawful. Importantly, the municipality did not file a counter-application seeking the review and setting aside of the contract.

The high court found that the contract was concluded in breach of the applicable procurement prescripts which are designed to ensure a transparent, cost-effective and competitive tendering process as prescribed by section 217 of the Constitution and the provisions of the Municipal Finance Management Act. Accordingly, it dismissed Gobela’s claim on the basis that the contract was invalid and unlawful.

Aggrieved by the decision, Gobela appealed the judgement and argued in the SCA that the high court had erred in dismissing its claim, on the basis that since the municipality did not bring a counter-application to set aside the contract, it was not open to the court to sanction the municipality’s collateral challenge to the validity of the contract by declaring the contract invalid and unlawful. In support of its argument, Gobela relied on MEC for Health, Eastern Cape and Another v Kirland Investments (Pty) Ltd 2014 (5) BCLR 547 (CC) (Kirland).

In answering the question whether the high court was entitled to declare the contract invalid and unlawful in the absence of a counter-application specifically seeking that it be reviewed and set aside, the SCA referred to the Constitutional Court’s (CC) judgement in Merafong City Local Municipality v AngloGold Ashanti Limited 2017 (2) SA 211 (CC) (Merafong). In the Merafong judgement, the majority found that South African law allows for a degree of flexibility in collateral challenges to administrative action.

In Merafong, the CC reaffirmed the Oudekraal principle (Oudekraal Estates (Pty) Ltd v City of Cape Town and Others 2004 (6) SA 222 (SCA)) that a decision by an organ of state remains binding until set aside. Moreover, it provided some guidelines for assessing the competence of a collateral challenge. With specific reference to Kirland, it provided that,

“Both decisions [Oudekraal and Kirland] recognised that there may be occasions where an administrative decision or ruling should be treated as invalid even though no action has been taken to strike it down. Neither decision expressly circumscribed the circumstances in which an administrative decision could be attacked reactively as invalid. As important, they did not imply or entail that, unless they bring court proceedings to challenge an administrative decision, public authorities are obliged to accept it as valid. And neither imposed an absolute duty of proactivity on public authorities. It all depends on the circumstances.

A reactive challenge should be available where justice requires it to be. That will depend, in each case, on the facts.

The SCA held that the permissibility of a collateral challenge to the lawfulness of an administrative action depends on a variety of factors. In this case, the SCA considered firstly, that the high court took into account in its judgement that, despite the absence of a counter-application, the validity and lawfulness of the contract was raised squarely in the pleadings. Secondly, by not declaring the contract invalid and unlawful, the untenable outcome would be that the high court would be authorising the very result which section 217 of the Constitution and all other procurement-related prescripts seek to prevent. Thirdly, finding in favour of Gobela would have the equally untenable result that the municipality would be required to pay for a benefit it did not receive.

The SCA held that justice required that the municipality be allowed to raise a collateral challenge and consequently that the high court was entitled to declare the disputed contract invalid and unlawful, despite the municipality not having counter-applied for it to be reviewed and set aside.

The judgement makes it clear that a court is entitled to declare a contract invalid and unlawful where justice requires it to do so, even in the absence of a counter-application seeking the review and setting aside of the contract. However, each case will and should be decided on its own merits.


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