Invalidating contracts for procurement based on s 217 of the Constitution

March 1st, 2024
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Kunene Rampala Inc v North West Province Department of Education and Sport and Development (unreported case no 460/2022, 15-9-2023) (Hughes JA (Mbatha, Mothle and Matojane JJA and Mali AJA))

To achieve compliance with s 217 of the Constitution, procurement of goods and services for public entity must, among other things, be conducted in an open and competitive environment.

The Constitution states in s 217(1) that: ‘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.’

As a result, the Public Finance Management Act 1 of 1999 (PFMA) was adopted to give effect to certain constitutional provisions, including s 217 of the Constitution. The PFMA enables National Treasury to issue regulations and instruction notes.

To underscore the relevance of s 217 of the Constitution, the court remarked in Valor IT v Premier, North West Province and Others 2021 (1) SA 42 (SCA) that the section is meant 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.’

This article focuses on the recent ruling in Kunene, which had to consider s 217, among other things. In the Kunene matter, the court had to decide whether a contract concluded in violation of
s 217 of the Constitution could be considered valid.

Discussion

The Kunene matter has to do with an appeal by Kunene Rampala Inc (the company) to, among other things, challenge the High Court’s judgment to dismiss its claim with costs pursuant to a contract with the North West Province Department of Education and Sports Development (the department). The issue stems from an addendum to the Service Level Agreement (the SLA) between the company and the department, which was concluded after the parties concluded the SLA.

In a nutshell, the company was successful after the supply chain and management tender that it submitted had been evaluated.

Conversely, three days after signing the SLA with the department, the parties signed an addendum to the SLA that included other services without going through any procurement processes for the additional specified services listed in the addendum.

The SLA was for a period of 12 months, but with the amendment in the form of an addendum, it was extended to the period of three years. The company rendered its services in terms of the SLA or the original contract and was paid for such services. In contrast, the issue only emerged in connection to the services provided under the parties’ addendum, which were not originally part of the SLA.

It is particularly important to highlight that the company provided the services as specified in the addendum and invoiced the department, which was unwilling to pay for the additional services.

Following that, the company threatened to sue the department for failing to pay for the services. The department subsequently wrote to the company, informing it that it had come to its attention that the addendum was invalid since it included new scope of work, as well as new terms and conditions that differed from the tender to which the company responded to and was appointed.

The matter was heard by the High Court, which dismissed it with costs. The High Court found that the appointment of the company as the suitable service provider came about by way of a mere ‘swoop of the pen’ with total disregard to fair, equitable and transparent processes as is envisaged by s 217 of the Constitution. In addition, it concluded that the addendum extended ‘the SLA without an open tender process, was clearly contrary to the Treasury’s Instruction Note on Enhancing Compliance Monitoring and Improving Transparency and Accountability in Supply Chain Management.’

Placing reliance on Gobela Consulting CC v Makhado Municipality (SCA) (unreported case no 910/19, 22-12-2020) (Molemela JA (Wallis, Mbha and Dlodlo JJA and Poyo-Dlwati AJA)) and Valor IT, the High Court also found that on the evidence before it, the department was entitled to challenge the validity and lawfulness of the addendum in its plea, without seeking to review and set it aside. The High Court accordingly dismissed the company’s claim as the contract was concluded in breach of the applicable procedure prescripts and was thus invalid and unlawful.

Validity of the addendum

The central issue in the appeal is whether the High Court was correct in finding that the contract was invalid, unlawful and in breach of the applicable procedure prescript, in the absence of a counter-application seeking a review and setting aside of the addendum. The court’s starting point was to look into the provisions of s 217 of the Constitution. The court stated that the National Treasury Practice Note no 8 of 2007/2008, specifically in terms of clauses 3.4.1 and 3.4.2 thereof, necessitated an open tender for the services (National Treasury ‘Supply Chain Management: Threshold values for the procurement of goods, works and services by means of petty cash, verbal/written price quotations or competitive bids’ (www.treasury.gov.za, accessed 3-2-2024)). The Treasury Practice Note states that:

‘3.4.1 Accounting officers/authorities should invite competitive bids for all procurement above R 500 000.

3.4.2 Competitive bids should be advertised in at least the Government Tender Bulletin and in other appropriate media should an accounting officer/authority deem it necessary to ensure greater exposure to potential bidders. The responsibility for advertisement costs will be that of the relevant accounting officer/authority.’ 

The court held that with the addition of the addendum, the transaction amount surpassed the R 500 000 threshold prescribed by the Treasury’s Practice Note.

In the court’s view, adopting the addendum solely based on transaction value amounted to flouting and non-compliance with the requisite public procurement prescripts. As a result, it decided that the addendum’s conclusion violated s 217 of the Constitution. The court observed that no open-tender process was adopted, as such, there were no competitors against whom the company could compete. The court further noted that there was no further alternative service provider.

The court at the end decided that the amendment was inconsistent with s 217 of the Constitution since the procedure used to appoint the company was ‘a system which was [not] fair, equitable, transparent, competitive and cost-effective’ as required by s 217.

Conclusion

In the end, the court was not convinced by the company’s submission and determined that the addendum violated s 217 of the Constitution, dismissing the appeal with costs.

As a result, the court followed the decisions of prior courts by reaffirming that the importance of s 217 of the Constitution cannot merely be the prerogative of public authorities.

One of those was in the Allpay Consolidated Investment Holdings (Pty) Ltd and Others v Chief Executive Officer, South African Social Security Agency, and Others 2014 (1) SA 604 (CC); 2014 (1) BCLR 1 (CC), where the court emphasised the importance of the legal framework and stated that compliance with it was required for a vital procurement process, and its components were not mere ‘internal prescripts’ that could be disregarded at whim.

Michael Kabai LLB (UL) LLM (Unisa) LLM (NWU) MBA (Regent) is a legal practitioner, adviser, and legal and compliance manager at the South African National Space Agency (SANSA). The views expressed in Mr Kabai’s article are his own and do not reflect the views of SANSA.

This article was first published in De Rebus in 2024 (March) DR 40.

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