By Dean Scher and Stefan Bezuidenhout
This is an appeal against the decision of the court a quo, the North West Division of the High Court, Mahikeng, to the Supreme Court of Appeal (“SCA”). The judgement is the unanimous decision of the full bench of the SCA, Judge Plasket being the author of the decision.
In this regard a public procurement contract was awarded to the appellant, Valor IT C.C (“VIT”), by the Department of Sports, Arts and Culture in the government of the North West Province (“the Third Respondent”). In the space of three years the value of the tender had escalated from an initial value of R498 000,00 (ex. VAT) to staggering amount of R41 729 647, 00. The R41 Million Rand value included a sum of R22.8 Million in damages.
VIT is engaged in the information technology industry. In 2011, VIT submitted an unsolicited proposal to the Third Respondent concerning an enterprise content management system, to manage its records. The Third Respondent considered the proposal and had discussions with VIT. After a process of engagement, during August 2011, VIT was awarded the tender. The authorised expenditure was R498 000.00 (ex. VAT). Subsequently VIT and the Third Respondent signed an agreement that they called a service delivery agreement (“SDA”) – in respect of an enterprise content management solution for the Third Respondent.
Clause 1.1.27 of the SDA defined the scope of work envisaged to mean ‘the description of the Deliverables, timeframes and Delivery Dates of the Services, scope, plan and payment schedule/s as set out in Schedule 1’. This schedule was the only schedule that formed part of the SDA. A reference to another schedule was deleted and initialled by the parties. Clause 30 of the SDA provided that ‘this Agreement constitutes the entire Agreement between the Parties for the provision of Services by [VIT]’ and that ‘any prior arrangements, agreements, representations or undertakings are superseded’.
During October 2011, the Third Respondent paid VIT the amount owing to it from the contract that being R498 000 plus VAT. Work conducted under the original SDA had now been concluded, however this did not bring the relation between the Third Respondent and VIT to an end. The parties proceeded to sign a document purporting to be a second schedule to the agreement. It seems the third respondent and VIT wanted to create the false impression that Schedule 2 had always been part of the SDA, despite their novation to the contract and clause 30, as mentioned above.
This was not part of the SDA, having been expressly excluded. In terms of the purported Schedule 2, VIT was engaged, over a period of four months and for a fee of R9 800 000, excluding VAT, to develop various IT systems for use by the Third Respondent. During October 2013, and as a result of constant concerns being expressed by supply chain management officials about irregular expenditure, the Third Respondent cancelled the second agreement, pertaining to the Second Schedule, with VIT. The Third Respondent cancelled the contract, citing various defects and irregularities. In response to the cancellation, VIT instituted proceedings against the Third Respondent in which it claimed damages of R152 073 768,00.
These proceeding were then settled based on advice given to the Third Respondent by the Chief State Law Advisor. In February 2014, the settlement agreement was made an order of court. VIT was paid R22.8 million in terms of the order. Thereafter, VIT was paid further amounts: R213 750,00 in respect of the Second Schedule, and two amounts of R2 100 021,51 and R1 750 000, for the already completed work. The total amount paid by the Third Respondent having a total of R41 729 647,00.
Subsequently, to the settlement agreement being made an order of court. Further Advice was sought from legal practitioners external to the Third Respondent. That advice was to the effect that the award of the ‘contract’ to VIT was irregular and flew in the face of s 217 of the Constitution. During January 2015, the Third Respondent cancelled the contract again. That resulted in the current proceedings, in which VIT sought a declaratory order that the Third Respondent’s ‘unilateral termination’ of the contract was unlawful and an order directing the Third Respondent to pay VIT R146 473 747,49 as damages. The Third Respondent opposed that application and brought a counter-application for the setting aside of the SDA and ‘all subsequent agreements’ entered into between the Third Respondent and VIT, and for the setting aside or rescission of the settlement agreement. The court a quo dismissed VIT’s application and granted the Third respondents counter-application in which it sought, inter alia, the setting aside of all contracts between VIT and the Department. The court a quo refused VIT leave to appeal, but leave was granted by this court on petition.
The issues that the court defined for interpretation were as follows: “whether the [Third Respondent’s] delay in bringing its counter-application was unreasonable and, if so, whether condonation should be granted; whether the award of the SDA to VIT and the subsequent extensions were lawful or not; and, if they were unlawful, the effect of the settlement agreement that was made a court order, and whether it should have been rescinded.”
The counter-application seeks, in effect, the review and setting aside of the award of the SDA to VIT. This means the Third Respondent has applied to set aside its own decision. The third Respondent is entitled to do apply to set aside its decision as, this principle emanates from the principle of legality that is sourced in the founding constitutional value of the rule of law, and that means that, in terms of the common law, it was required to apply for the setting aside of the award of the SDA within a reasonable time.
The test for what constitutes a reasonable time is a two-stage enquiry. First, it must be determined whether any delay in bringing the application was reasonable or unreasonable. If it was unreasonable, then the court must decide whether the unreasonable delay may be overlooked and condonation granted. Relying on Khumalo and Another v Member of the Executive Council for Education, KwaZulu-Natal, the Court states that no specific application is required in a legality review for the condonation of an unreasonable delay in launching proceeding.
The court granted condonation for the delay in launching the counter-application, the court found the delay to have been reasonable due the error of the state law advisor in allowing a settlement agreement to be entered into between the parties, that was favourable to VIT. The Third Respondent, it would appear, had no way of knowing that the advice it had been given was wrong, and this problem was compounded by an ill-conceived settlement agreement that was made a court order. Once the matter had been settled, the Third Respondent had little choice but to comply with the order to which it had agreed. It was only when it obtained independent legal advice that it found out that the state law advisor’s advice had been wrong, and that it should cancel the agreement again. In due course, the counter application was brought to set aside the SDA and everything that followed it.
With respect to whether the SDA, its extensions and agreements were valid the Court pronounced as follows: “Section 217 of the Constitution requires organs of state such as the [Third Respondent], when it procures goods and services, to do so in terms of a system that is ‘fair, equitable, transparent, competitive and cost-effective.” The sections purpose is to prevent patronage and corruption, on the one hand, and to promote fairness and impartiality. The consequence of non-compliance is clear: in 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.
After assessing the process relating to the tender the Court held that the award of these contracts was unlawful and invalid because their award had not been preceded by an open procurement process in accordance with the required constitutional and legal prescripts.
The settlement agreement was of the effect that unlawful contractual arrangements between VIT and the Third Respondent would remain in force, with two important qualifications. First, in an apparent acknowledgement that the arrangement in place was indeed unlawful, the parties agreed to call it something else in order to create the impression that it was compliant with the requirements of the Treasury Regulations. Secondly, the parties agreed, not only to the restoration of the status quo ante, but to the further extension of the already extended unlawful contractual arrangement. This was then made an order of court.
In deciding whether it could give effect to the settlement agreement, the Court referred to the decision of Gibson v Van der Walt, which is authority for the proposition that if the underlying contract suffers from a defect, such as unenforceability, dressing it in different garb will not alter that fact. In other words, the settlement agreement has had no effect on the unlawfulness of the contractual arrangement between VIT and the Third Respondent: it remained an unlawful agreement whatever the parties chose to call it.
The Court referencing the decision of Eke v Parsons, wherein it was stated that “the order must be ‘competent and proper’ in the sense that it relates to the dispute with which the court was seized. Secondly, it may not be objectionable from either a legal or a practical perspective: its terms, in other words, must ‘accord both with the Constitution and the law’ and they may not be ‘at odds with public policy’ and further referencing the decision of Buffalo City Metropolitan Municipality v Asla Construction (Pty) Ltd wherein it was held that ‘inconsistency with the Constitution cannot be cured by a settlement agreement’. Decidedly determined that the decision of the Court a quo to rescind the settlement order, was a valid and sound decision.
The Court had to determine whether the court a quo was correct in its decisions to grant condonation, determine that the tender was unlawful and rescind the court order that embodied the settlement agreement between the parties.
Tender, Settlement Agreement, Recession, Condonation, s217 of the Constitution, Review, non-compliance, consequence, National Treasury, Public procurement, contract awarded for the provision of services to organ of state,