Today the Constitutional Court delivered an important judgment dealing with the exercise of executive power and the setting of performance standards for the leadership of state‑owned entities. The judgment concerns the Minister’s supervisory control and the standards to be applied  when holding a Minister accountable in exercising powers of oversight in relation to state-owned entities.   As pointed out by the Court the questions are important for any democracy that values the principles of accountability and good governance.

In Minister of Defence and Military Veterans v Motau  (CCT 133/13) [2014] ZACC 18 (10 June 2014)  the majority partly upheld an appeal against a judgment and order of Justice Legodi in the North Gauteng High Court, Pretoria.

Media summary

This is the media summary issued by the Constitutional Court [slightly edited].

“The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.

In August 2013 the Minister of Defence and Military Veterans terminated General Motau and Ms Mokoena’s (the first and second respondents) membership of the Board of the Armaments Corporation of South Africa SOC Ltd (Armscor).   General Motau and Ms Mokoena had served as Chairperson and Deputy Chairperson respectively.   The termination of their services was undertaken in terms of section 8(c) of the Armaments Corporation of South Africa Limited Act (Armscor Act), which permits the Minister to remove board members on good cause shown.

In justifying her decision, the Minister cited

  • various procurement projects which had failed to progress timeously as a result of the Board’s decisions or inaction;
  • Armscor’s failure to conclude a service level agreement with the Department of Defence as required by the Armscor Act; and
  • certain complaints which she had received about Armscor from the defence industry, indicating that the relationship between the two had broken down.

General Motau and Ms Mokoena successfully challenged their dismissal in the High Court, which ordered their reinstatement.

The High Court held that the Minister’s decision was administrative action, and thus subject to the Promotion of Administrative Justice Act (PAJA).   The decision was reviewable under that Act as the Minister had

  • made an error of law;
  • taken the decision in a procedurally unfair manner; and
  • acted for an ulterior purpose.

The High Court also held that the Minister’s decision to terminate Ms Mokoena’s services was irrational.

The Constitutional Court granted the Minister leave to appeal to it directly and upheld the appeal in part.   The majority judgment, written by Khampepe J (Moseneke ACJ, Skweyiya ADCJ, Cameron J, Dambuza AJ, Froneman J, Majiedt AJ and Van der Westhuizen J concurring), concluded that the Minister’s decision amounted to executive, rather than administrative, action.   This was in part because the Minister’s power to terminate the services of Board members is closely related to the formulation of policy and is an adjunct of her policy-making power.   The decision could not, therefore, be reviewed under PAJA.

The majority also found that the Minister had the necessary good cause to terminate the services of General Motau and Ms Mokoena and that her decision was rational.   Under their leadership, Armscor and its Board had failed to fulfil effectively its statutory mandate.   However, the majority held that in making her decision, the Minister was required to comply with the process for the dismissal of directors as set out in the Companies Act.   Her failure to do so rendered her decision unlawful.   Nevertheless, the majority held that it would not be just and equitable in these circumstances to set aside her decision.

The dissenting judgment, written by Jafta J (Madlanga J and Zondo J concurring), concluded that the Minister’s decision amounted to administrative action and that PAJA applied.   It held that the decision had been taken in a procedurally unfair manner because General Motau and Ms Mokoena’s membership was terminated without a hearing.   The minority concluded that the decision was unlawful and would have set it aside.”

Extracts from the majority judgment [footnotes omitted]

[8]          On 8 August 2013, by letter, the Minister terminated General Motau and Ms Mokoena’s membership of the Board in terms of section 8(c) of the Armscor Act.   Section 8(c) provides that “[a] member of the Board must vacate office if his or her services are terminated by the Minister on good cause shown.”

The letter to General Motau explained that―

“the manner in which you exercised your powers, through your managerial style and the decisions you took . . . has resulted in a situation where [Armscor] has not been able to meet the defence matériel requirements of the Department effectively, efficiently and economically.”

[9]          The Minister justified her decision on three bases.

. . . .

[14]        The Minister concluded her correspondence by stating that, in her opinion, General Motau and Ms Mokoena had “not acted in the best interests of the Department” and that their services as Chairperson and Deputy Chairperson of the Board were therefore terminated.

. . . .

Issues

[25]        . . . . we are required to determine the following in order to resolve this dispute:

(a)          Does the Minister’s decision to dismiss General Motau and Ms Mokoena constitute administrative or executive action?

(b)          Has the Minister shown good cause for her decision to terminate the services of General Motau and Ms Mokoena, as required by section 8(c) of the Armscor Act?

(c)           Was the Minister bound by any procedural constraints in exercising her section 8(c) power?

The distinction between administrative and executive action

[37]        Executive powers are, in essence, high-policy or broad direction-giving powers.   The formulation of policy is a paradigm case of a function that is executive in nature.   The initiation of legislation is another.   . . . .   Administrative powers are in this sense generally lower-level powers, occurring after the formulation of policy.   The implementation of legislation is a central example.   . . . .     Put differently, the exercise of administrative powers is policy brought into effect, rather than its creation.

[38]        In determining the nature of a power, it is helpful to have regard to how closely the decision is related to the formulation of policy, on the one hand, or its application, on the other.   A power that is more closely related to the formulation of policy is likely to be executive in nature and, conversely, one closely related to its application is likely to be administrative.   . . . .

[39]        As further assistance, a number of pointers can be extracted from previous decisions which are helpful in assessing the nature of a particular power.   First, it may be useful to consider the source of the power.   Where a power flows directly from the Constitution, this could indicate that it is executive rather than administrative in nature, as administrative powers are ordinarily sourced in legislation.   . . . .

[40]        . . . .

[41]        Second, the constraints imposed on the power should be considered.   . . . .

[42]        Again, caution is required when reliance is placed on the absence of constraints or the level of discretion afforded to a functionary.   This factor’s utility is that, when a discretion is particularly broad, it suggests that the exercise of the power is akin to the formulation of policy.   . . . .

[43]        Third, it should be considered whether it is appropriate to subject the exercise of the power to the higher level of scrutiny under administrative-law review.   . . . .

[44]        In summary, the important question in this context is whether the power is more closely related to the formulation of policy, which would render it executive in nature, or the implementation of legislation, which would make it administrative.   Underpinning this enquiry is the question whether it is appropriate to subject the power to the more rigorous, administrative-law review standard.   The other pointers – the source of the power and the extent of the discretion afforded to the functionary – are ancillary in that they are often symptoms of these bigger questions.

Was the Minister’s decision administrative or executive action?

[45]        In order to determine the nature of the Minister’s section 8(c) power, we must have regard to the legal framework imposed by the Armscor Act.   The Minister’s powers under the Act are fairly broad.   . . . .

[46]        . . . .

[47]        In the light of the aforegoing and for the reasons that follow, I am of the view that the Minister’s decision is executive rather than administrative in nature.   First, the Minister’s section 8(c) power is an adjunct of her power to formulate defence policy.   . . . .

[48]        . . . .    While the appointment and dismissal of Board members is not the formulation of policy as such, it is the means by which the Minister gives direction in the vital area of military procurement, and is therefore an adjunct to her executive policy formulation function.

[49]        Second, and relatedly, the exercise by the Minister of her section 8(c) power is not a low-level bureaucratic power which merely involves the application of policy in the discharge of the daily functions of the state, which is the ordinary remit of administrative law.   . . . .

[50]        Third, under the Armscor Act the Minister need only demonstrate good cause in order to justify the termination of the services of a Board member.   . . . .

[51]        For these reasons, I am persuaded that the impugned decisions are not subject to review under PAJA.   Because section 8(c) of the Armscor Act is an adjunct of the Minister’s power to make defence policy, and thus more closely related to the formulation of policy than its application, the decision to terminate the services of Board members amounts to the performance of an executive function in terms of section 85(2)(e) of the Constitution, rather than the implementation of national legislation in terms of section 85(2)(a).

Compliance with the requirement of good cause

[52]        . . . .

[53]        . . . .

[54]        Good cause may be defined as a substantial or “legally sufficient reason” for a choice made or action taken.   Assessing whether there is good cause for a decision is a factual determination dependent upon the particular circumstances of the case at hand.   It goes without saying that what constitutes good cause must be understood in the context of the Armscor Act as a whole, with a particular focus on the objectives and functions of Armscor and the important role played by the members of the Board.

[55]        . . . .    What is immediately apparent from this excursus is that Armscor does not interact with the Department as it might with any other player in the defence industry or a commercial third party.   Rather, it procures at the instance of the Department and exists primarily to serve the military’s defence matériel needs.   The Department is in the driving seat.   With this in mind, I am satisfied that the Minister advanced ample and cogent reasons to disclose good cause as required by section 8(c) of the Armscor Act.

[56]        First, in terms of section 5(1)(a) of the Armscor Act, the Corporation is obliged to enter into a service level agreement with the Department.   . . . .

[57]        . . . .

[58]        Second, the Board failed to complete a number of procurement projects efficiently and timeously.   . . . .

[59]        . . . .

[60]        From the above, it is perspicuous that Armscor was not discharging its statutorily prescribed mandate.   The delays in question amounted to a failure to procure much-needed equipment in accordance with the Department’s needs.

[61]        The Board is empowered to manage the affairs of Armscor.   It controls the decisions made and the actions taken by the Corporation.   It follows that Armscor’s widespread and systemic failures outlined above are attributable to the Board, which must account and ultimately take responsibility for its conduct.   I am also compelled to point out that the non-executive members of the Board (General Motau and Ms Mokoena included) are highly skilled specialists who were appointed on account of their knowledge and experience, with a view to ensure that Armscor’s affairs are properly and effectively managed.   As seasoned professionals in their field, they had to show diligence and professionalism.   They are remunerated from the funds of Armscor  and are expected not only to act in the interests of the Corporation but also to ensure that the affairs of the Board are in order.   There is no adequate explanation for the unsatisfactory state of affairs at Armscor.   The Minister therefore had good cause to take action.

[62]        But did she have good cause to single out General Motau and Ms Mokoena for removal?  The respondents say no.   Relying on the collective responsibility of the Board for the management of Armscor’s affairs, they contend that the Minister acted unfairly in differentiating between the leadership of the Board, on the one hand, and the remaining members of the Board, on the other.

[63]        I am constrained to disagree.   First, as the directors appointed to lead the Board in the discharge of its duties, General Motau and Ms Mokoena must bear a special responsibility for its failures.   . . . .

[64]        . . . .

[65]        . . . .

[66]        Second, the Minister’s response as to why she dismissed only General Motau and Ms Mokoena was resoundingly sound and logical.   . . . .

[67]        The Minister’s choice not to dismiss the day-to-day management structure of Armscor (particularly the CEO and the CFO) can also not be impugned.   . . . .

[68]        In conclusion, the Minister was not prompted to act by one or two poor managerial decisions, but by the continued failings of the Armscor Board under the leadership of General Motau and Ms Mokoena.   Given this, the facts do not admit of any other conclusion but that the Minister had good cause to terminate their services.

Rationality

[69]        . . . .     I take the view that the Minister not only showed the necessary good cause required to dismiss General Motau and Ms Mokoena, but that her decision was also rational.   The principle of legality requires that every exercise of public power, including every executive act, be rational.   For an exercise of public power to meet this standard, it must be rationally related to the purpose for which the power was given.   It is also well-established that the test for rationality is objective  and is distinct from that of reasonableness.

[70]        . . . .

[71]        A rational link therefore exists between the need to address the failures of Armscor and the termination of the services of General Motau and Ms Mokoena: with them at the helm, the Corporation was not operating in an efficient or effective manner and was not properly fulfilling its statutorily prescribed mandate.   Section 8(c) was properly used by the Minister, in the exercise of her executive oversight, to abate the problems that had set in at Armscor.   Given this, I believe that the Minister’s decision was rational.

Procedural constraints on the exercise of the Minister’s section 8(c) power

[72]        General Motau and Ms Mokoena contend that, should this Court find against them on the question whether the Minister’s decision constituted administrative action, we should nevertheless conclude that the Minister had to comply with section 71(1) and (2) of the Companies Act  when she exercised her power in terms of section 8(c) of the Armscor Act.   It is not disputed by any of the parties that the Minister did not comply with those provisions.   The Minister’s answer is that she was not required to comply with them.

[73]        Section 71 reads, in relevant part:  . . . .

Section 71(1) and (2) is the mechanism under the Companies Act through which shareholders may dismiss a director whom they have elected.   Importantly, section 71(2) requires that a shareholder must give a director notice and a chance to make representations before a resolution is adopted to dismiss him or her.

[74]        In my view section 8(c) of the Armscor Act must be read together with section 71(1) and (2) of the Companies Act.   First, it is not disputed that Armscor falls within the definition of a “state owned company” in terms of the Companies Act:  as required, it is listed in Schedule 2 of the Public Finance Management Act  as a “Major Public Entity” and it is registered under the Companies Act.   . . . .

[75]        Second, the Minister is, for the purpose of section 71(1) and (2), the shareholder of Armscor.   . . . .

[76]        Third, on my reading, section 8(c) of the Armscor Act and section 71(1) and (2) of the Companies Act are perfectly compatible: the former provides the substantive criterion, and the latter the process, by which Board members may be dismissed.   . . . .

[77]        . . . .

[78]        Fourth, the Minister’s reliance on Sasol v Lambert  at the hearing as authority for the proposition that section 8(c) operates to the exclusion of section 71(1) and (2) is misplaced.   . . . .

[79]        It would not lead to an absurdity to hold that the Minister, as sole shareholder for these purposes, was obliged to comply with section 71(1) and (2) in the circumstances of this case.   . . . .

[80]        The Minister took no steps required by the Companies Act when she exercised her section 8(c) power.   She therefore failed to observe the prescribed procedure, and acted unlawfully, when she sought to terminate General Motau and Ms Mokoena’s membership of the Board without first affording them a reasonable opportunity to make representations.

[81]        Were it not for the operation of the Companies Act, would there be an obligation on the Minister to dismiss directors in a procedurally fair manner?  . . . .

[82]        This Court has also subsequently acknowledged in Albutt  that procedural fairness obligations may attach independently of a statutory obligation in virtue of the principle of legality.   In that case, the President was required, as a matter of rationality, to allow some form of participation by interested persons when issuing pardons to prisoners under a special dispensation.

[83]        However, whether the principle of legality or some other principle in this case required the Minister to act in a procedurally fair manner, does not, in the light of the applicability of the Companies Act, need to be decided here.   . . . .

Relief

[84]        The Minister acted rationally and for good cause in terminating the services of General Motau and Ms Mokoena.   However, she failed to follow proper procedure in terms of section 71(1) and (2) of the Companies Act.   It follows that the Minister acted unlawfully in that regard.   Does that mean that the High Court’s order – setting aside the Minister’s decision and confirming General Motau and Ms Mokoena as Board members – should be upheld?

[85]        To grant appropriate relief, we must determine what is fair and just in the circumstances of a particular case.   The various interests that might be affected by the remedy should be weighed up.   This should at least be guided by the objective to address the wrong occasioned by the infringement; deter future violations; make an order which can be complied with; and which is fair to all those who might be affected by the relief.   It also goes without saying that the nature of the infringement will provide guidance as to the appropriate relief.   And the right to be heard has value both instrumental and intrinsic.   One cannot excuse an unfair process because it led to the right result.

[86]        So the setting aside of the Minister’s decision and the reinstatement of the aggrieved parties or an award of compensation would usually follow from a finding that a dismissal was procedurally defective and did not comply with the relevant legislative prescripts.   But the very exceptional circumstances of this case mean that it would not be just and equitable for this Court to award such remedies here.   A declaration is sufficient to address the flaws in the Minister’s conduct, and to draw her attention to the importance of complying with the Companies Act and adopting a fair process in making such decisions.   Limiting the relief to a declaration would, at the same time, vindicate the Minister’s efforts to address the dereliction of duty by General Motau and Ms Mokoena.

[87]        First, the Minister, on a number of occasions, had expressed her dissatisfaction with their conduct.   The Minister convened three meetings with the Board to address various governance issues.   . . . .

[88]        Second, General Motau and Ms Mokoena’s terms of office came to an end in April 2014.   The Court cannot reinstate them.

[89]        Finally, despite the procedural defects of her decision, the Minister had substantively good, and indeed compelling, reasons for terminating the membership of General Motau and Ms Mokoena.  . . . .

[90]        It is evident that the relationship between the Minister, on the one hand, and General Motau and Ms Mokoena, on the other, has disintegrated irreparably.   The order of the High Court reinstating General Motau and Ms Mokoena must therefore be set aside.