South Africa: The Invalidity Of An Addendum That Contravened Public Procurement Prescripts

In Kunene Rampala Inc Attorneys (“KR Inc”) v North West Province Department of Education and Sport and Development (“the Department”), the Supreme Court of Appeal (the "SCA") reviewed a High Court decision which invalidated a contract addendum for failing to follow public procurement prescripts.

Background

Following a successful tender bid, a Service Level Agreement was concluded by the parties to provide services for evaluations, adjudications and supply chain management administration in the provision and delivery of the Learner Teacher Support Material (“LTSM”). The contracted price was ZAR1 243 215.60 and would be valid for 12 months.

Three days after the agreement was concluded and before KR Inc. began any work, the parties concluded an addendum to the agreement without following proper procurement processes. The addendum stated that in addition to the work that KR Inc. had to perform in terms of the agreement, they were further tasked with providing and delivering stationery to the distributors. The addendum increased the duration of the agreement from 12 months to three years, and since the scope of work increased, this resulted in an increase in the fees as well.

KR Inc fulfilled all its obligations under the agreement and received payment from the Department. However, the Department failed to compensate KR Inc for the delivery of the stationery as outlined in the addendum, leading KR Inc to issue a notice indicating their intention to initiate legal action as per section 3 of the Institution of Legal Proceedings against Certain Organs of State Act, 2002.

The Department then responded by serving a letter of cancellation on KR Inc, arguing that they had become aware that the addendum was invalid as “it encompassed new scope of work as well as new terms and conditions [which are] different from the tender [that they] responded to and were appointed for.” KR Inc. was afforded  14 days to submit reasons as to why the addendum should not be terminated but was of the view that the cancellation letter had a repudiating effect on the addendum, which they accepted. KR Inc. then subsequently instituted an action for damages against the Department for repudiating the contract.

Arguments in the court a quo

KR Inc. contended that the addendum was concluded to secure efficient urgent distribution of LTSM throughout the North West Province before the start of the 2016 school year. They further argued that the services provided in the addendum flowed from the tender that was awarded to them. As an alternative, they argued that through the addendum, a single source procurement arose, which dealt with additional work that could not be separated from the work assigned under the agreement without causing great inconvenience.

The Department then argued that the addendum was unlawful and invalid as it was concluded without compliance of the necessary procurement prescripts. Specifically, since no bidding process was followed prior to the addendum's conclusion, the Department argued that it contravened section 217 of the Constitution as well as Regulation 16A of the Treasury Regulations issued in terms of the Public Finance Management Act (“the PFMA”) and the National Treasury Instruction Supply Chain Management Instruction Notes.

The court a quo's findings

The High Court supported the Department's view and found that the appointment of KR Inc. disregarded fair, equitable and transparent processes laid out in section 217 of the Constitution. It further held that the addendum extended the agreement without an open tender process and thus contravened the Treasury's Instruction Note on Enhancing Compliance Monitoring and Improving Transparency and Accountability in Supply Chain Management. Therefore, the High Court concluded that the contract was invalid, unlawful and in breach of applicable laws and thus dismissed KR Inc.'s claim.

The appeal proceedings

The crux of the appeal was whether the High Court was correct in finding that the agreement was invalid, unlawful and in breach of the applicable prescripts, especially in the absence of a counter-application by the Department seeking to review and to set aside the addendum.

To answer this question, the SCA first considered section 217 of the Constitution, which provides that:

“(1) When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.

(2) Subsection (1) does not prevent the organs of state or institutions referred to in that subsection from implementing a procurement policy providing for –

 (a) categories of preference in the allocation of contracts; and

(b) the protection and advancement of persons, or categories of persons, disadvantaged by unfair discrimination.

 (3) National legislation must prescribe a framework within which the policy referred to in section (2) must be implemented.”

The SCA referred to the judgment in Valor IT v Premier, North West Province and Others ,which highlighted the importance of section 217 of the Constitution and stated that:

“Its purpose is to prevent patronage and corruption, on the one hand, and to promote fairness and impartiality in the award of public procurement contracts, on the other. In order to do so, statutes, such as the Public Finance Management Act 1 of 1999 ), subordinate legislation made under the PFMA, such as the Treasury Regulations, and supply chain management policies that have to be applied by organs of state, all give effect to s 217”.

With regards to the consequences of not complying with section 217, the SCA relied on Municipal Manager: Qaukeni Local Municipality and Another v FV General Trading CC  which held that “a public procurement contract concluded in breach of the legal provisions designed to ensure a transparent, cost-effective and competitive tendering process in the public interest, is invalid and will not be enforced”.

Applying these legal principles to the facts of this case, the SCA held that just on the basis that the addendum exceeded the transaction value threshold of ZAR500 000, this addendum amounted to a contravention of the requisite public procurement prescript because according to clauses 3.4.1 and  3.4.2 of the Treasury Practice Note No 8 of 2007/2008, where the public procurement transaction amount exceeds ZAR500 000, accounting officers/ authorities must conduct competitive bids. In this case, there was no such bid since the Department did not invite tenders prior to concluding the addendum. The SCA thus endorsed the High Court's judgment that the addendum did not comply with section 217 of the Constitution and found that the process was not fair, equitable, transparent, competitive and cost-effective.

The SCA also rejected KR Inc.'s arguments that the services provided in the addendum flowed from the tender that was awarded to them. The SCA stated that the addendum created additional obligations, increased the duration period of the agreement and resulted in an increase in fees.

The SCA  considered the issue of whether a declaration of invalidity and unlawfulness can be pronounced without a collateral challenge being raised to review and set aside the offensive contract, which arose because the Department did not institute a counter application to review and set aside the addendum. The SCA stated that in the South African legal system, a court can declare a contract invalid and unlawful, even without a separate challenge, when reviewing such contracts, as long as it's necessary for justice. This decision is based on the specific details of each case.

The SCA found that the invalidity of the addendum, in this case, served justice inter alia because KR Inc. issued an invoice seeking payment of ZAR46 million without work being completed as per the addendum. It would thus not be in the interest of justice to allow for this fruitless and wasteful expenditure.

Furthermore, since the Department had raised the issue of the invalidity of the addendum in its cancellation letter and its plea, KR Inc. was well aware of the case it had to meet. Therefore it would not be in the interest of justice to hold that the lack of a counter-application precludes the Department from seeking a declaration of invalidity and unlawfulness. The SCA thus concluded that the declaration of invalidity and unlawfulness of the addendum by the High Court was warranted and that justice required that the collateral challenge be entertained.

KR Inc. also sought compensation for the period that it had rendered the relevant services in terms of the addendum. However, since this relief was only sought during the proceedings in the SCA and was not raised in the High Court or in their pleadings, the SCA held that the Department would be prejudiced if this relief was upheld. KR Inc.'s appeal was therefore unsuccessful.

Conclusion

South African law is clear that if a public procurement contract is made without following the necessary rules, it is considered invalid and illegal, and it won't be enforced.

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