South Africa: The Bitter Taste Left By Non-Compliance With Procurement Legal Prescripts

Last Updated: 8 October 2013
Article by Adams & Adams

Section 217 (1) of the Constitution1requires that, when organs of state contract for goods and services, they should do so in accordance with a system which is "fair, equitable, transparent, competitive and cost-effective".   A framework within which  this constitutional requirement must be implemented has been created through various legislative measures including the Public Finance Management Act, 1999 ("PFMA"), Local Government: Municipal Finance Management Act, 2003,  the Preferential Procurement Policy Framework Act, 2000 ("PPPFA"), The Construction Industry Development Board Act, 2000,  as well as numerous regulations promulgated under these Acts, particularly the regulations promulgated under the PFMA ("Treasury Regulations").   The PFMA Regulations provide for Supply Chain Management systems2 that must be implemented by organs of state, which systems should also comply with the principles contained in section 217(1) of the Constitution. Despite the existence of such regulatory measures, all too often suppliers are confronted with non-compliance by various organs of state with one or more provisions of the above legal prescripts.   This is despite the fact that these legal prescripts have been viewed by our courts as peremptory, such that failure to comply therewith may result in a declaration of invalidity of the administrative act of the organ of state.3 

A classic case of non-compliance was seen in the TEB Properties v The MEC for Department of Health and Social Development, North West4  where a dispute arose after the Department sought to summarily terminate a lease agreement.  The lease related to office accommodation at a monthly rental of R3 241 800 and the main basis for the termination by the Department was that it failed to comply with statutory prescripts.  The agreement was concluded in November 2008 with occupation scheduled to commence almost a year later (i.e. on 1 December 2009), in order to allow the appellant time to construct the accommodation.  When the Department sought to summarily terminate the lease agreement, the Department argued that a contract of this magnitude should have been concluded through a competitive process to allow maximisation of "good value for the government and ensuring economic and effective service from the market"Michael1  in order to comply with the principles set out in section 217(1) of the Constitution as well as section 38(1)(a)(iii) of the PFMA.  However, the argument continued, the accounting officer in office at the time failed to conclude the lease agreement through a competitive bidding process under the incorrect premise that the procurement of office accommodation in this instance was urgent and that the accounting officer was entitled to enter into the agreement without limitations based on the officers interpretation of Regulation 13.2.4.

The court in TEB Properties considered that the PFMA provides, inter alia, that the National Treasury may make regulations or issue instructions in the form of practice notes that will be applicable to all institutions to which the PFMA applies.  The National Treasury has issued practice notes relating to procurement so as to ensure uniform minimum norms. The most relevant of these practice notes is Practice Note Number 8 of 2007/2008 which makes provision for four types of procurement and states that competitive bidding should be employed for contracts over R500 000.  In terms of Treasury Regulation 13.2.4 an accounting officer may enter into lease transactions without any limitations, provided that such transactions are limited to operating lease transactions.  Treasury Regulation 16A6.4, however, allows an accounting officer or accounting authority to deviate from the competitive bidding process, should it be impractical to invite competitive bids to procure the required goods or services.  These regulations prescribe that there be rational reasons for deviating from the competitive bidding process and that the discretionary powers be exercised in accordance with the law and empowering legislation. 

This meant that, while the practice notes prescribe that such a lease agreement should have been concluded after a competitive bidding process had been completed the accounting officer had discretion to depart from this in terms of Regulation 13.2.4 read together with Regulation 16A6.4, provided that there were rational reasons for doing so.  None existed in the TEB Properties case and thus the court correctly found that the lease agreement was invalid for failing to comply with the peremptory requirements.  The appellant argued, based on the Turquand rule, that the failure of the Department to follow the competitive bidding process as it was required to, was an internal formality and that it was unaware that this formality had not been complied with and thus the agreement should be allowed to stand.  The court referred to the Eastern Cape Provincial Government v Contractprops decision where it was stated that where one of the parties has no power in law to conclude a contract and has been deprived of that power (if it ever had it) in the public interest the agreement cannot be held to be valid.  That the other party was misled into believing that the Department had the power is regrettable but that this cannot alter the fact that such agreement is ultra vires the powers of the Eastern Cape Provincial government Department.

The TEB Properties decision leaves a bitter taste for any supplier as in this case the Department entered into the agreement with the full knowledge that it had failed to comply with the peremptory regulations and then sought to cancel the agreement on that very basis.  The Department in this case alleged that the appellant had entered into the lease agreement with (the previous accounting officer) aware that the Department, despite approving the lease, had expressed the view that such transactions are normally done through an open tender process.

Regulation 16A6.4 is a legally valid exception to the rule that contracts over R500 000 should be concluded through a competitive bidding process.  In CEO SA Social Security Agency (SASSA) v Cashpaymaster, non-compliance with a competitive bidding process was allowed to stand on this basis.  This case involved the awarding of a contract for the provision of banking and payment services for the South African public that receive social grants.  SASSA chose not to use the public procurement process in granting the award to the South African Post Office (SAPO).  In this case, SASSA found that using SAPO to provide the required banking services meant that it was getting greater value for money as SAPO was cheaper than the contractors previously used and the Postbank (which operated under SAPO) was more easily accessible to the citizens that received these social grants. 

SASSA stated that its intention was to meet its constitutional object of providing social assistance to the needy and this it did by delegating this duty to SAPO.  Paymaster disputed the manner in which the agreement between SASSA and SAPO was concluded on the basis that SASSA failed to comply with its own procurement policies as well as the peremptory requirements.  The court held that Paymaster had to show that the reasons that SASSA relied on for not making use of the public procurement process were irrational.  While Paymaster was able to show that the reasons were "wrong" in that they did not comply with the requirements for a competitive-process, they could not show that these were irrational and therefore did not fall within the ambit of Regulation 16A6.4.  The court stated that it also needs to consider public interest, pragmatism and practicality before choosing to invalidate an administrative act.5  In this case, the court found that the deviation from the public procurement process was justified in terms of the Regulations and therefore should be allowed to stand, much to the chagrin of Paymaster.

It is clear that a court should not concern itself with whether or not the parties were aware that an organ of state failed to comply with legal prescripts when declaring an act that does not comply with such legal prescripts invalid.  What is also clear is that suppliers in general need to be weary when contracting with organs of state.  This is the case whether the contract arises through a public bidding process or not as there are many cases where a public bidding process was implemented but the organ of state failed to comply with the principles contained in the Constitution and in legislation.  It is concerning that there are very limited cases where a remedy is available to a supplier but when weighed up against the interests of the public and legal certainty, justice is better served by protecting the latter.

Footnotes

1 The Constitution of the Republic of South Africa, 1996.

2 Can be found in regulation 16A of the PFMA Regulations.

3 See Chief Executive Officer, SA Social Security Agency NO & Others v Cash Paymaster Services (Pty) Ltd 2011 (3) ALL SA 23(SCA); Eastern Cape Provincial Government & Others v Contractprops 25 (Pty) Ltd 2001 (4) SA 142 (SCA).

4 [2011] ZASCA 243

5 CEO SASSA v Cash Paymaster para 16-29.

Michael1 Please link this with what the "statutory prescripts" required, so you can show what you say was non-compliance with the legal prescript

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