Recovering of Damages from The Employee

Is the recovery of damages from senior employees lacking to perform their fiduciary duty and due diligence the future?  I am referring to the judgement in Mogale and Another v The National Health Laboratory Services (delivered 13 September 2024) Johannesburg Labour Court.

Introduction

First Applicant (Ms Mogale) was appointed as the CEO of the Respondent from 1 September 2015 and Second Applicant was appointed as CFO of the Respondent from 16 March 2015.  Both were subjected to a disciplinary hearing where they were found guilty of charges including:

• Exceeding their Financial Delegation of Authority in concluding Service Level Agreements;
• Contraventions of the PFMA;
• Contraventions of the employer’s procurement policy;
• Incurring Fruitless and Wasteful expenditure;
• Failure to perform their duties diligently, carefully and to the best of your ability;
• Irregular payments to a service provider;
• Irregular appointment of a service provider;
• Contravention of a Treasury Regulation.

Both were summarily dismissed on 2 May 2019.

The Respondent obtained an order from the CCMA to combine the unfair dismissal cases (by the two Applicants) and have it referred to the Labour Court.  While the Applicants contested the fairness of their dismissal at the Labour Court, the Respondent lodged a counter claim for damages, premised on the alleged breach of the Applicants’ employment contracts.

For determination was whether Ms Mogale and Mr Zulu acted in breach of their contracts of employment; and if so, whether the NHLS suffered the contractual damages claimed, as a result of the alleged breach(es).

The Unfair Dismissal Claim

In respect of the unfair dismissal claim the court found that the Applicants did not provide detail informing the respondent of the material facts and the legal issues arising from those facts upon which applicant will rely to succeed in its claims – see Harmse v City of Cape Town [2003] ZALC 53; (2003) 24 ILJ 1130 (LC) at paras 6 – 7 and South African Breweries (Pty) Ltd v Louw [2017] ZALAC 63; (2018) 39 ILJ 189 (LAC).  The pre-trial minutes did not assist the court as the Applicants there merely repeated the claim that their dismissal was procedurally and substantially unfair.

In the Harmse matter (par 8 & 9) the court held: “The rules of this court do not require an elaborate exposition of all facts in their full and complex detail – that ordinarily is the role of evidence, whether oral or documentary. There is a clear distinction between the role played by evidence and that played by pleadings – the pleadings simply give the architecture; the detail and the texture of the factual dispute are provided at the trial. The pretrial conference provides an occasion for the detail or texture of the factual dispute to begin to take shape. In terms of rule 6(4)(b) the parties in the pretrial conference must attempt to reach consensus on facts that are common cause, facts that are in dispute, the issues that the court is required to decide and the precise relief claimed.

Accordingly, the rules of this court anticipate that the relief claimed might not have been precisely pleaded in the statement of claim filed. The rules of this court further anticipate that the factual matters at issue will be dealt with more fully and precisely in the [pretrial] conference. The rules therefore anticipate that the parties at the pretrial conference will have dealt in much more detail not only with the factual matters but also the legal issues. The statement of claim and response thereto foreshadow this activity but are not a substitute for it. It is for this reason that the rule on pretrial conferences provides for reaching consensus on the issues that the court is required to decide.”

In this matter the court found that no evidence was adduced to shed light on the Applicants’ claim that their dismissal was procedurally unfair and given the fact that no detail relating to procedural (or substantive) unfairness was pleaded or introduced in the pre-trial minute, this Court cannot find any procedural unfairness.

The Damages Claim

The counterclaim was in respect of contracts awarded to:

• Blue Future Internet and Surveillance CC (Blue Future)
• Afrirent (Pty) Ltd (Afrirent); and
• DV8 Consulting CC (DV8).

Mr Zulu reported to Ms Mogale who reported to the board of which she was a member by virtue of her office.  The decisions and the directions of the board could not be overridden.

As Mogale was headhunted to turn around the entity her contract of employment (which set the tone for the contract of the other senior officials) was specific in that it was required from her to:

• ensure the effective and efficient running of the employer’s business
• exercise due diligence and care in the performance of the functions
• maintain the degree of efficiency which may reasonably be required by the employer and shall endeavour to keep herself up to date with all relevant developments in relation to the functions
• be loyal and faithful to the employer and shall not do anything that may be seen to be against the interests of the employer
• not conduct herself in a manner which discredits the employer.

With effect from 13 September 2016, Ms Mogale was not authorised to incur operational expenditure in excess of Rb15 million without Fincom and Board approval and she was not authorised to approve capital expenditure above R 5 million without the Board’s approval.

The court found that (par 57), “In short: The express duties of the Applicants correlate with their common law duties and as senior employees, they were required to act in good faith, to serve the NHLS honestly, faithfully and diligently, and not to work against the NHLS’ interests and not to do anything incompatible with the due or faithful discharge of their duties.  In exercising their duties, the Applicants were required to do so in terms of the express terms of their contracts and in a manner which was not in conflict with the provisions of section 217 of the Constitution and the PFMA.”

In respect of Blue Future the tender was for the provision, maintenance and support of end-user computer hardware for a period of three years.  On recommendation from the Fincom the Board awarded the tender to Blue Future for a period of three years for the total value of R 25 985 921.10.  Ms Mogale signed the service level agreement (SLA) between the NHLS and Blue Future where it was stated that the total value will not exceed R 83 902 000,63.

For the reasons set out below, the court found that Ms Mogale acted in breach of her contract of employment when she signed the SLA for R 83 million. She disregarded her obligation of due diligence and her contractual obligations, including compliance with the applicable policies of the NHLS.

• First, the text of the Board resolution of February 2016 is clear and unambiguous with regard to the category and quantum of goods and services required and it does not support Ms Mogale’s version that the Board approved a ‘basket’ of goods or that R 25 985 921.10 was to be paid to Innovent. The Board Resolution clearly approved the Blue Future tender for R 25 985 921.10, including VAT and it does not even mention the amount of R 83 902 000,63, including VAT, nor did it state anything about Innovent. It is clear from the text of the Board resolution compared to the SLA that Ms Mogale signed that she acted in breach of the Board resolution. In fact, she conceded during cross-examination that she did not comply with the Board resolution.
• Second, the fact that Ms Mogale signed the SLA, which represented that she had been duly authorised by the Board to do so, is an act of gross dishonesty. On her own version, she knew she was not authorised to sign the SLA for R 83 million.
• Third, Ms Mogale’s version, that she was exercising prudence and due diligence when she signed the SLA for R 83 902 000.63, cannot be accepted. Ms Mogale in her evidence conceded that each basket consisted of seven devices or items, wherefore 1000 ‘baskets’ would result in having 1000 of each type of device, thus a total of 7000 devices. It was undisputed that the NHLS has 6 900 employees, including cleaning staff, who did not require computers as well as night and day staff, who share the same computers used during their different shifts, in that the night and day staff would share devices with whomever was on the alternative shift. Therefore, at the time of her signing the SLA, the NHLS had only 5310 potential users of the 7000 devices Ms Mogale intended to procure, making her order in excess of more than 1690 devices. There was an excess in each category of 7000 computers as they were not needed by each category. There were only 80 managers, 20 executive managers and 2000 mobile staff at the time. There was no need to order 1000 items of each device category. There was also no need to order the same number of devices for each category, which is what the basket system contemplates.
• Fourth, Ms Mogale painted a picture of placing blind reliance on her subordinates and she merely granted their wishes and in doing so, she failed to exercise any of the oversight and due diligence required of her position. Indeed, it appears she did not even apply her mind to her contractual duties when signing an SLA that rubber-stamped an amount vastly in excess of the mandated amount and which required another Board approval. Ms Mogale in doing so, overruled an express Board instruction to her, which was to carry out the Resolution to sign an SLA for R 25 985 921.10, including VAT.
• Fifth, Ms Mogale placed the NHLS at great risk by signing an open-ended contract, as provided for in clause 4 of the SLA, which allowed for the placing of further orders and change modification or alternation of the terms without going out to tender. These clauses were highly irregular and created the basis upon which the NHLS ultimately paid Blue Future R 113 306 392.94. This amount far exceeds what the Board had approved and what Ms Mogale was instructed and mandated to implement.

In respect of Mr Zulu the court found he materially breached his contract of employment by exercising no oversight over the series of contract irregularities that he participated in as well. Mr Zulu recommended the Blue Future SLA and recommended the payments to Blue Future. As the CFO, he would have known both were irregular and in breach of his contract, his fiduciary duties, the company policies and his duty of due diligence.

Afrirent provided vehicles on a rental basis to the Respondent.  After evaluation of the tenders, Mr Rainy Makino sent a memorandum to the bid adjudication chairperson requesting approval for the award to Afrirent for a period of five years, for the amount of R 72 127 790.42.  A memorandum recommending the award of said bid to Afrirent was subsequently submitted to Ms Mogale for her approval.  The Board did not consider the recommendation.

On 13 October 2016, Ms Mogale signed the SLA between the NHLS and Afrirent and clause 4 of the SLA provided for a contract price of R 79 691 269.33.  Prof Buch testified that Mogale knew that she could not sign and approve contracts beyond R 10 million, for which she needed the approval of the Board.  Prof Buch also stated that the Afrirent contract was deemed to be irregular, and it was set aside by the High Court in subsequent litigation.

On 30 November 2016, Mr Motsepe signed an addendum to the SLA to amend the SLA to the following effect:

‘4.1.1. The service provider will collect and dispose of the old NHLS vehicles as and when the service provider delivers the new vehicles; and

4.1.2.  NHLS shall ensure that the vehicle titles pass to the service provider, any penalties and licensing of the said vehicles shall pass to the service provider on collection day and time without any consideration payable by the service provider to NHLS. Save for amendment in clause 4.1 above the remaining provisions of the Service Level Agreement shall continue of full force and effect.’

Prof Buch testified that the implication of the aforesaid amendment was that the service provider would dispose of old vehicles, without any consideration of the value of the vehicles to be paid to the NHLS. He explained that the ‘old NHLS’ vehicles were the assets of the NHLS, and therefore assets of a state-owned entity and they could not have been removed and disposed of without any value being paid for it.

On 13 December 2016, Ms Mogale signed a Master Rental Agreement (MRA) with Afrirent. Clause 10 of the MRA, the excess usage clause, provided for the payment of an excess usage charge if the minimum usage has been exceeded and the excess usage charge, plus VAT, was payable in respect of each excess kilometre or hour.

Prof Buch referred to the supplier payment history reports for Afrirent, which included a monthly schedule of vehicles, depicting the rate per kilometre, the number of kilometres, the monthly mileage, the excess mileage, the charges and the total cost per vehicle. The said reports indicate that the total payment made to Afrirent amounted to R 155 455 340.51.

Prof Buch testified that for the period from June 2017 until June 2022, the NHLS had paid R 15 571 867.82 for excess kilometres travelled. For the period January 2017 until December 2021, the NHLS paid R 18 346 241.05 for leased vehicles that were not used. According to Prof Buch, this figure was a reflection of the fact that more vehicles were ordered than what was actually required.

Ms Mogale, in signing the contract with Afrirent, bound the NHLS and it could not escape from the contract. Ms Mogale conceded that by the time the Board became aware of this lease, it was already committed to the payment of R 79 million.

Mr Dokie testified that from February 2017 to 30 May 2023, the NHLS paid R 155 455 340.51, including VAT, to Afrirent. He explained that for the period of five years, the total amount of penalties paid in respect of excess usage to Afrirent amounted to R 14 571 867.82 and the amount paid for vehicles with zero usage amounted to R 18 346 241.05.  Ms Mogale could not dispute the amounts to be paid to Afrirent for penalties or for the vehicles with zero usage.

In cross-examination, Ms Mogale was referred to the High Court judgment of 21 August 2020 wherein the awarding of the tender for R 72 127 790.42, including VAT, to Afrirent on 26 August 2016, the subsequent SLA of 13 October 2016, the addendum of 10 November 2016 and the MRA of 13 December 2016 were declared constitutionally invalid. Ms Mogale confirmed that she had signed the SLA and the MRA which were declared constitutionally invalid.

Ms Mogale was referred to the SCM policy, which provided that the procurement threshold for the CEO was above R 500 000 but not exceeding R 5 million, procurement above R 5 million required Board approval. Ms Mogale conceded that she was aware of the policy.

The court found that Ms Mogale acted in breach of her contract of employment when she entered into the agreement with Afrirent and signed the SLA and MRA. She disregarded her obligation of due diligence and her contractual obligations, including compliance with the applicable policies of the NHLS. This is so for the reasons set out below.

• First, it is evident that Ms Mogale did not apply her own mind and that she relied on what she was told, without any process of independent verification. During her testimony in Court, she was surprised that ‘people wanted to mislead her.’ However, she conceded in cross-examination that no legal manager or SCM official had the authority to tell her to act outside her delegation of authority and that the Afrirent contract was not taken to the Fincom, where there could have been some financial oversight over the contract.
• Second, Ms Mogale conceded during cross-examination that she had indeed lacked authority to conclude the contracts with Afrirent and that her representation that she was duly authorised, had been dishonest.
• Third, Ms Mogale was reckless in concluding the penalty provision because she knew, or at least ought to have known, that the penalty clause would apply to vehicles that the NHLS needed and that would be used in excess of the penalty provision. She thus knowingly incurred substantial penalties for the NHLS. Ms Mogale sought no approval from the Board to incur such expenditure on behalf of the NHLS and acted in a grossly negligent and reckless manner. She did not consider the financial implications of the penalty clause which should have been uppermost in her mind, especially given her claim that she was headhunted by the Minister to improve the financial situation of the organisation. The evidence showed that the penalties paid by the NHLS were severe and substantial.
• Fourth, Ms Mogale conceded that she had indeed exceeded the delegation of authority granted to her and that she never took this matter to either Fincom or the Board. Neither of these authorities could exercise oversight over the transaction, let alone determine the financial implications. The effect of this was that the NHLS was left to a CEO who failed to approach the Fincom or the Board with a contract worth millions and who effectively eliminated the process of financial oversight and acted on what she accepted from her subordinates.
• Fifth, on Ms Mogale’s own version, the memorandum awarding the bid to Afrirent recommended an amount of R 72 127 790.42, including VAT, whereas she signed a contract for R 79 691 269.33, including VAT, which is R 7 563 478.91 more. The only explanation was that she did so because Afrirent set the latter amount and refused to accept anything less because they allegedly submitted a tender for the higher amount. In cross-examination, Ms Mogale conceded that a supplier is not entitled to a certain amount, just because they submitted a tender for it. The supplier is to be offered what is approved by the BAC and the Board and if the amount is not acceptable, the offer is to be rejected. Ms Mogale however acted as if she had the power to increase the amount to what Afrirent wanted, without any proof that this was proper or without any process being followed. This is a clear indication that she was motivated to enrich the supplier despite the internal approval process not authorizing her to sign for such amounts.

In short: Ms Mogale had no authority to conclude the SLA and the MRA without Board approval and she was reckless in concluding contracts with substantial penalty clauses that created financial risk to the NHLS.  Therefore, the court accepted that Ms Mogale is guilty of gross misconduct and materially breached each one of the material terms of her contract of employment in respect of Afrirent.

Equally, this Court finds that Mr Zulu materially breached his contract of employment by exercising no oversight and failing to comply with his fiduciary duties, the company policies and his duty of due diligence.  Therefore, the court accept that neither Ms Mogale nor Mr Zulu acted in the best interest of the employer, and their conduct in respect of Afrirent constituted not only serious misconduct but also a breach of contract.

DV8 was awarded the tender for the provision of MPLS WAN services to the NHLS for a period of three years.  On 24 February 2016, a submission was served at the Board meeting for consideration and approval of the award of the bid to DV8 for the amount of R 85 449 243.17.   The Board authorised Ms Mogale to sign all documents necessary to implement the Board resolution. Ms Mogale attended this Board meeting.

On 26 February 2016, a letter of award to DV8 was signed by Mr Motsepe, confirming the award of the bid. In the award letter, it was recorded that the award was for the provision of MPLS WAN service for three years for R 85 449 243.17.  On 19 October 2016, Ms Mogale entered into an addendum to the SLA, stipulating additional services for an additional amount of R 63 500 000.00.  Prof Buch testified that the addendum signed by Ms Mogale was never submitted to the Board. The annexure to the addendum provided for an open-ended description of goods and amounts.

In November 2017, the addendum was ratified by way of a settlement agreement between the NHLS and DV8. Prof Buch explained that the settlement agreement was damage control as the NHLS was in a fix because Ms Mogale had signed an irregular addendum for R 63 million.  Prof Buch referred to the supplier payment history report for DV8, which shows that the total amount paid to DV8 was R 230 909 307.41.

The court found that Ms Mogale acted in breach of her contract of employment when she entered into the addendum with DV8. The court found Mr Zulu equally culpable for recommending the additional contract without any tender process. As the CFO, he knew or must have known that this was highly irregular and at odds with his responsibilities and oversight duties.

The counterclaim, by Respondent, was for damages and was for R 236 410 971, made up as follows:

1. Blue Future: R 93 219 702.26;
2. Afrirent: R 79 691 269.22; and
3. DV8: R 63 500 000.00.

In terming the claim, the court had to decide whether the damages were caused by the breach. The NHLS pleaded that it suffered damages as a result of the material breach of contract by the Applicants because had they performed their contractual obligations, the Respondent would not have suffered the damages.

The court was required to establish if the damages claimed were proven and then to first establish factual and then legal causation.  In relation to establishing the damages claimed the court stated the principle as, “… , the plaintiff bears the onus to prove its damages on a prima facie basis. To the extent that the defendant claimed that the plaintiff obtained a benefit that must be taken into account in the overall quantification of the plaintiff’s damages, the benefit must be proved by the defendant, unless admitted by the plaintiff.”

The court agreed that the total amounts claimed cannot be the damages.  The Applicants’ answer to the NHLS’ plea that it suffered damages of R 236 million, was a little more than a bare denial and did not assist the court. They denied that they acted in breach of their employment contracts, they denied that the NHLS suffered the damages they claim or any damages at all and they accuse the Board of failing to take reasonable steps to mitigate against any potential damages.

Prof Buch did concede in cross-examination that it was not the NHLS’ case that it received no value from the over-expenditure with Blue Future or that it received no value from Afrirent and he confirmed that the expenditure was not declared as wasteful or fruitless expenditure, it was declared as unauthorised expenditure. Ms Mogale had the authority to sign contracts and to bind the NHLS, but in the three instances, she did not have the authority to sign the contracts because she was going beyond her delegation of authority and there was no Board resolution to authorise her to contract as she did.

The court did fond that Mogale acted in breach of her contract and evaluated the claim in respect of Afrirent against the evidence about the number of vehicles and when they were delivered and found.

Ms Mogale’s breach and conduct caused the Afrirent tender to be increased by R 7,5 million when there was no basis in law or business to increase the tender. She never pleaded or testified that the tender amount was increased because the value to be received by the NHLS was also increased and that there was a nexus between the increased amount and the value and the benefit for the NHLS. Her version was that she increased the amount because Afrirent wanted more and she believed that it would be unfair not to give them what they wanted.

There was no evidence before the Court to show that the NHLS received an increased value or benefit to the tune of R 7,5 million. The only evidence is that the amount was merely increased.  Therefore, the Court accepted that the NHLS suffered damages by paying an increased amount without receiving a corresponding increased benefit and this was caused by Ms Mogale.

Regarding the penalty clause, the court found that Ms Mogale failed to execute her duties diligently and in the best interest of the NHLS, as she contractually agreed to do, when she agreed to a penalty clause that was severely prejudicial to the NHLS. This resulted in NHLS to pay R 14 571 867.82 penalties in respect of excess usage to Afrirent over the period of the contract. This amount was not disputed by Ms Mogale.

In respect of the claim for leased vehicles that were not used, the court was not convinced that the NHLS has made out a case for damages against the Applicants. The evidence showed that Ms Mogale tried to put measures in place in January 2017 to curb the ordering of vehicles and it was undisputed that after she put the measures in place, the situation improved.

In terms of DV8, the NHLS claims damages of R 63,5 million. The claim is based on the fact that Ms Mogale signed the addendum for R 63,5 million without following any prescripts or processes and without authority. Prof Buch stated that there were several losses but that the NHLS was unable to quantify those. He further explained that the addendum was subsequently ratified and that there was a settlement agreement between the NHLS and DV8.  Based on the evidence before it, the court compared the pricing of Hewlett-Packard (HP) and Cisco and found that the cheaper should have been purchased had competitive bidding taken place.

The court found that the Applicants failed in their contractual duties and obligations and Mr Zulu, as the CFO, failed to act as the custodian of the procurement process. As a result, no competitive procurement process was followed and the addendum that was signed by Ms Mogale did not comply with the prescripts and was indeed a vague and open-ended contract, which was open to abuse and risk.

The court made the following order:

1. The Applicants’ claim for unfair dismissal is dismissed;
2. In respect of DV8, Ms Mogale and Mr Zulu’s estate are jointly liable to pay to the NHLS R 342 545,00 (three-hundred and forty-two thousand, five-hundred and forty-five rand) which is the difference between the price paid to CISCO and which could have been secured from Hewlett-Packard;
3. In respect of Afrirent, Ms Mogale is liable and has to pay the NHLS the total amount of R 22 135 346.70 (twenty-two million, one hundred and thirty-five thousand, three hundred and forty-six rand and seventy cents) made up as follows:
   • The difference between what the BAC approved and which Ms Mogale was recommended to sign and what she did sign, which was R 7 563 478.91 (seven million, five hundred and sixty-three thousand, four hundred and seventy-eight rand and ninety-one cents);
   • The penalties that were levied due to Ms Mogale’s signing of the addendum to the contract containing the penalty clause, which amounts to R 14 571 867.82 (fourteen million, five-hundred and seventy-one thousand, eight hundred and sixty-seven rand and eighty-two cents).
4. There is no order as to costs.