No Profit, No Loss? When Service Providers May Benefit From Invalid Government Contracts

When a government entity awards a contract through a flawed procurement process, the contract may be declared invalid by a court. A key question then arises: can the service provider who performed the work still claim some benefit (including profit) for the goods or services provided under the contract? This article examines recent court decisions that have shaped the answer to this question.

Section 172(1)(b) of the Constitution empowers courts, after declaring a government decision invalid, to make any order that is just and equitable. This may include an order limiting or suspending the effects of invalidity – even to the point of allowing the contract to continue beyond the date of the court order.

The so-called ‘no profit, no loss’ principle is a remedial tool which was first used by the Constitutional Court in the 2014 judgment of Allpay Consolidated Investment Holdings (Pty) Ltd and Others v Chief Executive Officer of the South African Social Security Agency and Others 2014 (4) SA 179 (CC) (“Allpay 2”). In Allpay 2, after declaring invalid the contract award for the nationwide payment of social grants, the Court held: “It is true that any invalidation of the existing contract as a result of the invalid tender should not result in any loss to Cash Paymaster. The converse, however, is also true. It has no right to benefit from an unlawful contract. And any benefit that it may derive should not be beyond public scrutiny.” This became known as the ‘no profit, no loss’ principle, which was subsequently clarified by the Supreme Court of Appeal in Special Investigating Unit v Phomella Property Investments (Pty) Ltd and Another 2023 (5) SA 601 (“SCA”) (“Phomella”). The SCA in Phomella confirmed that the absence of a right to benefit from a contract does not mean courts are barred from permitting benefit, including profit, in the exercise of their discretion to grant just and equitable orders.

In another recent SCA decision, Mafoko Security Patrols (Pty) Ltd and Others v Mjayeli Security (Pty) Ltd and Others [2025] ZASCA 179 (“Mafoko”), , the SCA endorsed Phomella’s interpretation of the so-called “no profit, - no loss rule”, overturning the High Court judgment which had found that the interim board of the SABC had acted unlawfully in awarding a contract for security services to Mafoko Security, despite the SABC’s bid adjudication committee and group executive Committee recommending another bidder. The High Court had declared the contract invalid, holding that although Mafoko Security was innocent and should not suffer loss, it also “should not profit at the expense of the public purse.” The High Court had set aside the tender award, granted the disgorgement relief requested by the Special Investigating Unit and ordered Mafoko Security to pay the costs of the litigation. This meant that, once Mafoko Security’s statement of expenses had been independently verified, it had to pay back the profit it made to the SABC.  

On appeal, the SCA in Mafoko held that the High Court was wrong because a declaration of invalidity does not automatically strip a blameless service provider of all benefit. The SCA emphasised that profit is itself a form of benefit that courts may permit in appropriate circumstances. In public procurement, the normative benchmark is that the state secures services at a competitive price, which includes a reasonable return to the service provider. Therefore, a blameless service provider should not be excluded from enjoying that return simply because the contract was found to be unlawful.

The proper approach to the ‘no profit, no loss’ principle was confirmed by the Constitutional Court in Black Sash Trust v Minister of Social Development [2026] ZACC 12 (“Black Sash Trust”), delivered on 8 April 2026. This judgment is the latest in a decade-long dispute, relating to the countrywide payment of social grants. The central question in Black Sash Trust was whether Cash Paymaster Services should repay the profits earned under the contract, which had been declared invalid in 2014. The Court ordered Cash Paymaster Services to repay approximately ZAR81 million in certified profits to the South African Social Security Agency. Critically, the Court endorsed the approach in Mafoko that an innocent contractor may, depending on the facts, be entitled to retain profits accrued in the execution of an invalid public contract. However, in Black Sash Trust, the Court found that the service provider was not an innocent contractor which had performed under an invalid contract which was executed fully, in good faith and without blame on their part.

Practically, the combined effect of these decisions is significant. Courts will not automatically deny a service provider all profit from an invalid contract. Instead, profit is treated as a form of benefit to be weighed in the court’s broader assessment of what is just and equitable under section 172(1)(b) of the Constitution. Key factors in this assessment include: the service provider’s blameworthiness (or lack thereof); whether there are constitutional obligations arising from the contract; whether profit accrued; and how closely that profit aligns with what a competitive market would have yielded. This assessment is fact-specific and there is no blanket rule which determines the outcome.

For service providers who find themselves caught up in a flawed procurement process through no fault of their own, these developments offer meaningful reassurance. If an innocent service provider has performed its work in good faith the courts now recognise that even if the contract is legally invalid, stripping the service provider of all benefit (including a reasonable profit) may itself be unjust. For Government, these decisions underscore that public accountability remains paramount, and that procurement contracting is subject to judicial scrutiny. A just and equitable remedy ultimately requires a value judgement that balances fairness to the affected parties with the effective vindication of the rule of law.

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