Tendering injustices clarified

Article 52: Tendering injustices clarified Chris Binnington
    Service delivery appears to be an ongoing complaint in respect of most of the municipalities in South Africa. Where challenges to a public tender take place from an unsuccessful bidder, it is inevitable that further delays to the award of contract are going to take place and as a consequence service delivery will be further impacted by such a challenge. Nevertheless usually a considerable amount of time and effort is expended by tenderers in the preparation of a bid and accordingly when a tenderer believes that it has been wrongfully disadvantaged by the outcome of the tender process such tenderers are likely to seek recourse via the Courts. These injustices cannot be dealt with by any form of alternative dispute resolution process and therefore the appropriate course of action is an application to the High Court of South Africa.

Various reported judgments in both the High Court and the Supreme Court of Appeal have now created clarity on the situation and in this article I thought it would be worth highlighting some of these cases. In Steenkamp N.O. v Provincial Tender Board, Eastern Cape 2006 (3) SA 151 (SCA), Steenkamp was a liquidator of a company that had, upon invitation by the tender board, successfully submitted a tender for the provision of certain services to the Province. At the time of submission of the tender, as well as the time of close of the tenders, the company had not yet been incorporated. Pursuant to the award of the contract to the company, the Province placed an order with the company as a result of which the company incurred expenses in an amount of R4.35 million. Thereafter the tender award was set aside on review to the High Court, at the instance of one of the unsuccessful tenderers. Steenkamp instituted action in the High Court for recovery from the tender board of the company’s out of pocket expenses incurred after the award. Steenkamp’s case was that the board had owed a common law duty to the company and that it had negligently, albeit bona fide, acted in breach of that duty in awarding the contract to the company. The High Court held that, because the company had not been incorporated at the time of submission of its tender or at the time of close of the tenders, its tender had been void, that the board could therefore not have owed a duty of care to the company and that it had, accordingly, not acted wrongfully in making its award.

The board exercised a discretion or value judgment in awarding a contract and, in general, public policy considerations did not favour the recognition of damages claims for the wrongful exercise of a discretion negligently made.

The majority of members of the board were lay persons who had not necessarily been able to understand the technicalities of tender requirement and documents. They had to rely on, but were not bound by, advice.

A disappointed tenderer had no action for damages for loss of profits flowing from his not being awarded the contract. There was no reason in principle to distinguish between various types of pure economic loss and to afford him an action for damages for his out of pocket expenses flowing from his not being awarded the contract. While accountability was an important public policy factor, if delictual liability were imposed in a young democracy with limited resources such as South Africa, the potentiality of a claim by every successful tenderer would cast a shadow over the deliberations of a tender board on each tender that might slow down the process or even bring it to a grinding halt. While the availability of other remedies was often taken as an indication of whether or not a claim for damages should be recognized, the availability of review to an unsuccessful tenderer could hardly be an argument for conferring a damages claim on the successful tenderer. To allow the successful tenderer an action for damages where the disappointed tenderer had none would imply that, during the consideration process, the board owed a legal duty to the successful tenderer but not to the other tenderers. Policy considerations did not justify such discrimination. The board owed a legal duty to a class of persons and not to one or two members of the class and, if their breach did not justify a damages claim in one instance, it was difficult to justify in another.

The Supreme Court of Appeal after weighing up the various policy considerations found that the existence of an action by tenderers, successful or unsuccessful, for delictual damages that were purely economic in nature and were suffered because of a bona fide and negligent failure to comply with the requirements of administrative justice could not be inferred from the relevant statute. Accordingly the Supreme Court of Appeal dismissed the appeal and upheld the decision in the High Court which thus precluded the liquidator recovering the R4.35 million expenses incurred after the award of the contract.

This does not mean that all claims arising out of public tender procurement will be refused. In Darson Construction (Pty) Ltd v City of Cape Town and another 2007 (4) SA 488 (C), Darson had unsuccessfully tendered for a civil engineering contract which had been awarded by the City of Cape Town to another tenderer. The City of Cape Town had delegated its power to make decisions about the tenders to its Chief Financial Officer in consultation with its director of legal services and an appointed staff member. However the decision had in any event been made by a committee and the Chief Financial Officer had failed to consult with both the required parties. Darson sought an order to claim it was entitled to have been awarded the contract and claimed compensation for loss of profit in terms of the promotion of the Administrative Justice Act, 3 of 2000 (PAJA). By the time the matter was heard, the successful contractor was already far advanced with the work under the contract and half the contract period had already run.

The Court found that the contract was indeed reviewable under the relevant section of PAJA since the committee that took the decision was not authorized to take it and the person who was authorized had failed to consult as he was required to. This meant that the proper authority had never taken a decision. Where an unauthorized administrator acted, its actions were clearly reviewable and could not be upheld. The incorrect administrator vitiated the process and all the actions and decisions of that administrator were invalid.

However in deciding whether compensation should be awarded in terms of PAJA, each case should be assessed on its own facts. The relevant section empowered the Court to grant constitutional damages by way of compensation when there had been a breach of administrative justice rights. It was apparent that an award of compensation was not intended to be the norm in cases where administrative action was reviewed. Further, Darson could have brought an interdict immediately after the contract had been awarded to the successful contractor, which would in all probability have highlighted that the decision to award the contract was invalid. Such an application could have prevented the loss that Darson now sought to recover had Darson been able to show that it was the rightful beneficiary of the award of the contract.

However practical considerations behind the policy which has lead the Courts to decline to recognize the delictual claims of unsuccessful tenderers for loss of profits carried considerable weight in deciding whether an award of loss of profits was an appropriate remedy. The Court found that to grant Darson its claim for loss of profits would not result in a just and equitable order. However the Court did allow Darson some compensation for the manner in which the City of Cape Town had breached its right to administrative justice, since Darson had incurred cost as a result of the invitation to tender only to have the tender considered by an unauthorized administrator. It was accordingly just and equitable for the City of Cape Town to compensate Darson for its out of pocket expenses.

Finally, in one of the most recent judgments dealing with such situations, in South African Post Office v De Lacy and another 2009 (5) SA 255 (SCA), De Lacy took cession of a claim by an unsuccessful tenderer, Cornastone, in respect of a contract with the Post Office. They instituted action in the High Court for recovery of the profit they alleged Cornastone would have made had it been awarded the contract consequence upon the alleged dishonest award of the contract by the tender board to a third party (Kumo). The High Court found that the contract had indeed been awarded through “dishonest manipulation and corruption” and upheld Cornastone’s claim. The Post Office appealed this judgment.

In the appeal the Supreme Court of Appeal found that irregularities falling short of dishonesty, incompetence on the part of those who evaluated the tenders, and even conduct that amounted to negligence, would not create an entitlement to claim damages at the hand of an unsuccessful tenderer. Such a claim could be created only if it were established that the award of the contract to the rival was brought about by dishonest or fraudulent conduct on the part of one or more of the officials for whose conduct the Post Office was vicariously liable and but for which the contract would have been awarded to Cornastone. The onus rested upon De Lacy to establish, as a matter of probability, that the award of the contract was brought about by conduct of that kind and, if that onus were not discharged, the claim would have to fail.

De Lacy was unable to demonstrate evidence of manipulation or dishonesty on the part of any of the members of the review panels involved in the tender process. The evidence also did not disclose dishonest manipulation in the course of the deliberations of a reporting by the evaluation committee, nor on the part of the tender board.

The Court considered that there might well have been irregularities, incompetence and negligence and Cornastone might even have been the more worthy bidder, but none of that was enough.  De Lacy bore the onus of establishing that the contract was awarded to Kumo in consequence of dishonesty on the part of one or more of the officials concerned and they had failed to discharge that onus.  The Supreme Court of Appeal found that Cornastone’s claim should be dismissed.

Whilst Courts are clearly willing to act robustly to interfere with a tender process which is flawed and where a potentially successful bidder has been deprived of the award of contract, it is clear that the Courts are very reluctant to award any form of damages to unsuccessful bidders and whose bid has been disallowed as a result of incompetence or negligence.  Only if fraud or dishonesty can be established, and the onus will be on the unsuccessful bidder to establish these allegations, would there be any possibility of an action for damages.  Clearly a difficult onus to discharge.