Gauteng must pay damages over gas contract it unlawfully cancelled, court rules

The Gauteng Department of Infrastructure Development unlawfully cancelled a natural gas supply contract covering ten public hospitals and must pay damages for the breach, the Gauteng High Court in Johannesburg has found.

Judge Stuart Wilson ruled that the department was not entitled to terminate the agreement with Virtual Gas Network when it gave notice in January 2023, and that the notice itself amounted to a repudiation of the contract. The department has also been ordered to pay the company’s legal costs to date.

The amount of the damages was not decided. Wilson referred that question to trial, which means the final cost to the province, and to Gauteng taxpayers, is not yet known.

As IOL reported on 18 September, the dispute has been running for more than a decade and concerns gas infrastructure installed at hospitals across the province.

What the contract covered

The department contracted Virtual Gas Network in September 2015 to install gas storage units, known as daughter stations, and supply natural gas to four Gauteng hospitals over three years.

Under the original deal, the department agreed to pay for a minimum quantity of gas whether or not the hospitals used it. That annual quantity was just under 410 000 gigajoules.

The four hospitals did not use anything close to the volume the company had tendered to supply and the department had agreed to pay for.

In November 2016 the two parties signed an addendum extending the contract and adding six more hospitals. The intention was to expand the health system’s ability to use the gas by installing furnaces and daughter stations at the additional sites. Virtual Gas Network borrowed R39 million from the Industrial Development Corporation to finance that infrastructure.

Payment problems followed. The judgment records that the department regularly defaulted on its obligations, leading the company to obtain arbitration awards to enforce payment. Those amounts have since been paid.

The termination that ended in court

The dispute reached the High Court after the department gave notice in January 2023 that it regarded the agreement as having expired in relation to six hospitals, while describing it as either not expired or not commenced at the remaining four. The notice nevertheless purported to terminate the entire agreement.

Virtual Gas Network argued the department was not entitled to do so, because the agreement would continue until five years after the additional infrastructure at the six hospitals had been completed. It treated the termination as a repudiation and sought damages for unpaid daughter station rental, lost past and future profits, and interest related to its IDC loan.

The department argued the contract could have run for a maximum of five years after the 2016 addendum and had therefore expired by November 2021.

Wilson rejected that interpretation. He found it was inconsistent with the wording of the agreement and made no business sense, and that the contract was intended to continue until five years after the last of the required infrastructure had been completed and certified at the additional hospitals.

It follows, the judge said, that the department was not entitled to terminate the contract when it did, and that its notice of termination was in fact a repudiation of the agreement.

The department also tried to have its own decision to enter into the 2016 addendum reviewed and set aside, arguing among other things that the addendum had pushed the value of the company’s contract beyond the 15 percent variation permitted by a National Treasury instruction. Wilson rejected that challenge, finding the Treasury instruction was an internal administrative document rather than law that could support the department’s attempt to review its own conduct. He also found it had not been established that the addendum had increased the contract’s value beyond the 15 percent limit.

Why the final figure is still open

The company claimed more than R200 million, but the judgment does not mean Gauteng now owes that amount.

A central problem is a clause in the 2016 addendum stating that the original take or pay arrangement would no longer apply and that the department would instead pay for gas actually delivered each month. Virtual Gas Network argued the change did not remove the department’s obligation to purchase a minimum annual quantity of gas. Wilson found the meaning of that clause could not be resolved on the papers before him and required oral evidence.

The court therefore found the company was entitled in principle to damages resulting from the department’s breach, and referred the amount to trial.

What it means for the province

The ruling lands on a provincial government that has been open about its financial position. In March, Gauteng MEC of Finance and Economic Development Lebogang Maile said the province was operating in a constrained fiscal environment and was actively seeking alternative funding sources to meet rising public service demands at a time when economic performance is weak.

While Gauteng remains the centre of the national economy, Maile said, the province does not have limitless resources.

The ten hospitals covered by the contract include some of the busiest public health facilities in the country, among them Chris Hani Baragwanath Academic Hospital in Soweto. Gas supplied under the agreement was used for purposes including heating and cooking in hospital kitchens and laundries.

The practical effect of the judgment is that the department remains bound by the terms the court has now interpreted, and the damages trial will determine what the cancellation cost. No date has yet been set for that trial. Until it is heard, the province cannot put a final number on the bill, and neither can anyone else.

Source: IOL, Cash-strapped Gauteng faces mystery bill after gas contract loss.