Nelson Mandela Bay Municipality v Afrisec Strategic Solutions (Pty) Ltd and Others (865/07) [2007] ZAECHC 155 (26 June 2007)

IN THE HIGH COURT OF SOUTH AFRICA

SOUTH EASTERN CAPE LOCAL DIVISION Case No. 865/07

In the matter between

NELSON MANDELA BAY MUNICIPALITY Applicant

and

AFRISEC STRATEGIC SOLUTIONS (PTY) LTD First Respondent

MANDELA BAY DEVELOPMENT AGENCY Second Respondent

AFRISEC EASTERN CAPE (PTY) LTD Third Respondent

JUDGMENT

Agreements for the delivery of goods and services to a municipality set aside on the ground that they exceeded the terms of the original tender- municipality has standing to bring such application -misrepresentations by public body about public policy and its legal capacity cannot found an estoppel -participants in public procurement processes have the obligation and legal means to obtain information about the validity of those processes.

Froneman J.

Introduction

[1] This is an application to set aside as invalid certain agreements entered into between the applicant ('the municipality') and the first respondent ('Afrisec"), on the basis that these agreements were not concluded in accordance with a procurement system that is 'fair, equitable, transparent, competitive and cost-effective', as required by section 217 of the Constitution and legislation enacted to give effect to that constitutional standard. What makes the matter somewhat different from usual applications of the kind is that it is not an aggrieved and unsuccessful competitor for the tender who complains, but the entity that awarded the tender which led to the conclusion of the agreements, namely the municipality.

[2] The municipality's case is a relatively simple one. It accepts that it called for tenders for security related work and that in response thereto Afrisec made a valid tender, which tender it duly accepted. This part of the process was above board, it says, but the agreements made in purported execution or furtherance of the terms of the tender were not, because they exceeded the boundaries set in the valid tender.

[3] Afrisec's defence is multi-pronged. It disputes the fundamental factual premise of the municipality's case, namely that the agreements go beyond the terms of the tender. In respect of one of the agreements it alleges that this particular agreement flows from a separate valid tender awarded to the third respondent ('Afrisec Eastern

Cape') by the second respondent ('the agency') and that a valid cession and delegation of the respective rights and obligations under this tender was made to the municipality and Afrisec. It also claims that the municipality's procurement policy under which the respective tenders were made is of a purely internal nature and that, accordingly, where the municipality represented that it had complied with the policy it is, by estoppel, bound to those representations. In the last instance it relies on an arbitration

clause in the agreements to deny this court jurisdiction in the dispute.

The relevant facts

[4] During the latter part of2004 the municipality issued a call for tenders to tbe public for an asset risk analysis and design of a security master plan for the municipality. Afrisec submitted a tender to tl1e municipality on 15 December 2004. On 29 March 2005 the municipality's special bid committee resolved that Afrisec's tender to conduct an asset risk analysis and design of a security master plan should be accepted. The municipal manager approved the committee's decision on 4 April 2005.

[5] On 27 October 2005 the municipality and Afrisec concluded the main agreement between the parties, annexure 'A' to the founding

affidavit. For convenience and clarity I will refer to it as 'the main agreement'. On 27 January 2006 the municipality and Afrisec

concluded a scope of work agreement ('SOW 1') and subsequent thereto a number offmiher such agreements ('SOW 3- 28'). It is common cause that no independent tend r process, other than the one refened to in para. [4] above, preceded the conclusion of these SOW' s.

[6] On the same day that SOW 1 was concluded, namely 27 January 2006, a further scope of work agreement ('SOW 2') was concluded between the municipality and Afrisec. It recorded that a tender in respect of the services contemplated in SOW 2 had been awarded by the agency to Afrisec. Eastern Cape; that this contract had been transferred back to the municipality; that the municipality wanted Afrisec Eastern Cape to subcontract the services under the tender to Afrisec; and that all the parties agreed to this arrangement. It will be apparent that the dispute between the parties in respect of SOW 2 rests on a different footing to that in respect of the main agreement and SOW's 3 to 28, because of the different tender process that it is alleged preceded it.

[7] As noted above, the original call for tenders; Afrisec's tender; and the acceptance of that tender by the municipality, were all in respect of conducting an asset risk analysis and design of a security master plan. Afrisec's tender provided for this to be done in six phases. Its quoted price for the first five phases amounted to R803000.00. The price for the sixth stage of monitoring was R80000.00 per month. The terms of SOW 1 covers this ground again and provide for payment of R803000.00, and R80000.00 per month for a period of 24 months.

[8] The municipality seeks no relief in respect of SOW 1, clearly on the basis that it gave effect to the original tender made by Afrisec and accepted by the municipality. Although there were some skirmishes on this aspect when the dispute between the municipality and Afrisec first reared its head, it was not in dispute during the hearing that the municipality is bound to give effect to the remaining monthly payments for the monitoring services until the 24 month period comes to an end on 30 September 2007. The main dispute relates to the main agreement entered into on 27 October 2005, and SOW's 3 to 28 that followed upon the conclusion of the main agreement.

[9] Afrisec's bid in the original tender was for R803000.00 for the first five phases and a further R80000.00 per month for monitoring in the sixth phase. The monitoring process is for a period of 24 months, as set out in SOW 1. The total value of the original tender was thus R803000.00 + (R80000.00 x 24) = R2,723,000.00. It is, however , common cause that as at 21 March 2007 the municipality had already paid an aggregate amount of Rl1,546,428 .85 to Afrisec, purportedly in terms of the main agreement and the resultant SOW's.

[10] It is apparent from the papers that things were going along quite nicely, on an acceptance of the propriety of the main agreement and the various SOW's, until the municipality called for tenders in respect of a tender 45/6. This related to the provision of security alarm systems and goods for a large number of sub-stations and sites, including libraries and clinics. These services had previously been rendered by another entity, Iwonga Construction Services CC, but that contract had come to an end. Afrisec objected to the call for a tender and asked the municipality to withdraw the call on threat of litigation. In the course of correspondence that followed it appeared that Afrisec contended that it had, in terms of the main agreement, certain rights in respect not only of the analysis, design and monitoring of the master security plan, but also its implementation. For present purposes it is not necessary to discuss the extent of these claims. The immediate cause for municipality discontent was Afrisec' s objection to the tender process in respect of tender 45/6. This was aggravated by murmurings that Afrisec was also entitled to implementation of security related matters in respect of the stadium being built for use in the 2010 Football World Cup.

[11] Afrisec's complaints and threat of litigation led the present municipal manager, who was not involved in the earlier processes, to investigate the history of those processes. The result of his investigation is the present application, seeking an order declaring

the main agreement and SOW's 2 to 28 invalid.

The issues

The scope of the original tender

[12] The municipality contends that the original call for tenders, Afrisec's own tender document, and the terms of acceptance of its tender, make it clear that the subject matter of the original tender was the analysis and design of a master security plan for the munidpality and, in the sixth phase of the tender, also the monitoring of the · system for a certain period. A specific

amount ofR803000.00 was the price quoted for the analysis and design part (in five phases), and R80000.00 per month for the monitoring

part.

Afrisec agrees that the analys is, design and monitoring of the plan is covered by these amounts (and given effect to in SOW 1), but it alleges that the original tender process contemplated the further award of the implementation of the plan to the successful tenderer a. s well, without the need for each stage of the implementation to be set out for separate tenders. As already stated, it is common cause that, apart from SOW 2, no further independent tenders preceded SOW's 3 to 28.

[13] To detem1ine this issue it is necessary to examine, not only the actual terms of the call for proposals, the tender document and its acceptance in some detail; but also the legal context in which public procurement for goods and services takes place at local author ity level in our constitutional democracy.

[14] Section 217 of the Constitution provides as follows:

"217 (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 and 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 or 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 subsection (2) must be implemented."

[15] National legislation in the form of the Local Government: Municipal Finance Management Act 56 of 2003 ('the Municipal Finance Act') obliges the municipality to implement a supply chain management policy which must be "fair, equjtable, transparent, competitive and cost-effective", echoing the constitutional norm (section 112 of the Municipal Finance Act). Regulations have been issued under section 168 of the Municipal Finance Act setting out the terms such a policy must comply with. At the time of the initial tender process the policy the municipality had in place was called a preferential procurement policy, but by the time the main agreement was concluded on 27 October 2005 that policy had been substituted by the supply chain management policy in accordance with the regulations under the Municipal Finance Act. In the initial call for proposals attention was drawn to the existence of the procurement policy and prospective tenderers were invited to obtain copies of the policy document at the municipal offices.

[16] Under the supply chain management policy goods or services above a transaction value of R200000.00 and long term contracts may only be procured through a competitive bidding process. A competitive bidding process entails, amongst other things, a public invitation of bids, evaluation of bids, and, after approval of a bid, the conclusion of a written agreement.

[17] The final terms of a contract with a bidder identified through a competitive bidding process as a preferred bidder may be negotiated,

provided that the negotiation may not allow a preferred bidder a second or unfair opportunity; may not be to the detriment of any

other bidder; and may not lead to a higher price than the bid submitted (clause 24 of the supply chain management policy). Por

large complex projects; projects where it may be undesirable to prepare complete, detailed technical specifications; or long term

projects exceeding three years, a two-stage bidding process is allowed. In the first stage technical proposals on conceptual design

or performance specifications should be invited, and in the second stage final technical proposals and priced bids (clause 25).

[18] Recent case law makes it abundantly clear that the entity that awards public tenders must act jn accordance with its statutory mandate. This means it must act fairly, impartially and independently (Steenkamp NO v Provincial Tender Boarcl, Eastern Cape 2007 (3) SA 121 (CC), para. [35]). In the local government sphere loss of the attributes of transparency, competitiveness and cost-effectiveness in the tender process will render the process invalid (Metro Projects and another v K!erksdorp Local Municipality and others 2004(1) SA 16 (SCA) at 21E). The sanction of invalidity does not depend on the individual or particular harshness discernable in a particular case (Eastern Cape Provincial Government and others v Contractprops 25 (Ply) Ltd 2001(4) SA 142 (SCA), para. [9]).

[19] In Premier, Free State and others v Firechem Free State {Pty) Ltd2000(4) SA 413 (SCA) the contract finally concluded differed from the terms of the invitation to tender and the letter of acceptance of the tender. The contract was held invalid for undermining the fairness of the tender process. Schutz JA stated the following as reasons (at 429G-I):

"[T]o allow a tender board to withhold from the body of tenderers its intention to conclude a secret agreement with one of them, an agreement which the others have never seen and have had no chance to match, would be entirely subversive of a credible tender procedure. One of the requirements of such a procedure is that the body adjudging tenders be presented with comparable offers in order that its members should be able to compare. Another is that a tender should speak for itself. Its real import should not be tucked away, apart from its tc11ns. Yet another requirement is that the competitors should be treated equally, in the sense that they should all be entitled to tender for the same thing. Competitiveness is not served by only one or some of the tenderers

knowing what is the true subject of the tender.''

[20] With an original tender bid of about R2,7m and final contracts already worth about Rl2m (and still counting), it seems to me that the conclusion that the main agreement and SOW's 3 to 28 are invalid for exceeding the boundaries of the original tender is inescapable. I really do not think it is necessary to go any further than to point out that (1) the call for tenders by the municipality did not state that the call was for the implementation of the general security plan; (2) Afrisec's tender price was for the design of the security plan in the sum of R803000.00 and R80000.00 per month for monitoring; (3) there was no fixed or ascertainable bid price for implementation in Afrisec's tender; (4) the municipality accepted the tender for the analysis and design of a security plan and not for its implementation; and (5) the main agreement and SOW's 3 to 28 purport to grant rights to Afrisec in relation to the implementation of the security plan. In my judgment that should really be the end of the matter.

[21] Counsel for Afrisec submitted, however, that it is not. On a proper interpretation of the original call for tenders, the argument went, it was contemplated that the successful tenderer would also be allowed to negotiate an agreement with the municipality for the implementation of the security plan without the necessity of further tender processes preceding such a negotiated agreement. If that is so (and in my judgment it is not, for reasons I will explain shortly) then the call for tenders would contain the seeds of its own destruction. It would fall foul of the objectionable features referred to by Schutz JA in the po11ion of his judgment in the Firechem matter, quoted in para. [19) above. Because there would then be no obligation in the call for tenders to quote a price for the implementation of the security plan the municipality would have no basis to compare offers on the basis of price. The tender would not speak for itself, because its real impo1i - the procurement of the substantially more lucrative rendering of services and goods, namely the implementation of the security plan - would be "tucked away, apart from its terms". The separately negotiated agreement

for implementation would be "a secret agreement... an agreement which the others have never seen and have had no chance to match''.

[22] But the call for tenders contains nothing which obliges the municipality to negotiate a separate implementation agreement with

the successful tenderer. What it does contain are references and clauses which allows for the possibility that the successful tenderer

may be retained to act as an adviser to oversee implementation of the plan or to implement the plan (for example clauses 4.1, 4.3, 7.8 and 7.10). Clause 5.3 provides that if the municipality selects a preferred tenderer, "it reserves the right to negotiate the

content of the proposal, the scope of the services, including the team composition and the financial terms". This clause does not refer to a proposal for implementation, but to the called-for proposal for a risk analysis and design of a security master plan. Clause 24 of the supply chain management policy, which deals with preferred bidders, assumes the existence of a submitted bid ("does not lead to a higher price than the bid as submitted" in clause 24(l)(c)). The call for proposals did not ask for submission of a bid for implementation, nor did Afrisec's tender contain any bid price for implementation. Clause 24 thus does not assist Afrisec either.

[23] The thrust of the main agreement (and SOW's 3 to 28 which follow in its wake) is geared towards the future, after completion of the design of the security plan. It is quite obvious that its primary subject-matter is the implementation of the security plan over an initial period of three years, from 1 April 2005, and renewable thereafter for an additional two year period (SOW 1 in effect dealt with the subject-matter of the original tender, namely the analysis, design and monitoring of the security plan). The main agreement does not even, in its own terms, purport to confine itself to the initial award of the tender. In clause 2, headed "Appointment", Afrisec is simply appointed "as the provider of security related consulting and implementation services related to" the municipality. Final proof of this cutting of the umbilical cord is clause 22.1 which records that the agreement "constitutes the entire agreement between the parties in respect of the subject matter hereof and neither party shall be bound by any under takings, representation, warranties or promises not recorded in this agreement''.

[24] In my judgment it is obvious from this that the main agreement and SOW's 3 to 28 fall outside the scope of the original tender.

The transfer of a tender - SOW 2.

[25] SOW 2 purports to follow upon a tender awarded by the agency to Afrisec Eastern Cape. The origin and existence of this separate tender is somewhat of a mystery because the municipal official most closely associated with the alleged tender denies that it was awarded and Afrisec has failed to produce Afrisec Eastern Cape's own original tender documents. For the purposes of my decision, however, it is not

necessary to decide the factual dispute of the existence of a valid tender. I will assume that such a tender was validly awarded to Afrisec Eastern Cape.

[26] For much the same reasons as set out in paragraphs [18] and [19] above, however, the so-called 'transfer' of this tender from the agency and Afrisec Eastern Cape to, respectively, the municipality and Afrisec, would generally be impermissible as a non-transparent

separate 'secret' agreement outside the parameters of the original tender. 'Die transfer would mean that a different tenderer than the one that made the successful tender bid would secure the benefits of the tender, with all the attendant unfair consequences to other bidders already referred to. Afrisec relied on the provisions of clause 32 of the municipal supply chain management policy to justify tbe transfer, but as pointed out by counsel for the municipality that clause makes provision for the municipality to step into a contract made by a municipal entity of which it is the parent municipality (clause 32(2)(b)), but does not allow for the substitution of tenderers. The rationale for not allowing this is presumably the underlying unfairness and lack of competitive transparency it would entail.

Estoppel

[27] Both the main agreement and SOW 2 contain clauses that might be interpreted as warranties or representations that the municipality

had the lawful authority to conclude the agreements in question. I will accept for the purposes of this judgment that such an interpretation is indeed the correct one, without deciding that issue. On the basis of that interpretation it was contended on behalf

of Afrisec that the municipality is estopped from denying the validity of these agreements. In my judgment the submission cannot be sustained.

[28] The argument is premised on the assertion that the supply chain management policy does 11ot have the force of law and that it is simply part of the internal management of the municipality's affairs. Third parties, such as Afrisec, do not have access to or knowledge of the internal workings of municipal management and are thus entitled to accept the correctness of representations by the municipality or its officials that its internal processes have been complied with. That premise, in my view, fails at the first hurdle.

[29] The procurement of goods and services by organs of state and the rendering of those goods and services by third patties is a public, not private, matter under our constitutional system of government. The mischief that this public gaze seeks to avoid is nepotism, patronage, 'or worse'. What it seeks is to provide members of the public with opportunities to tender to fulfil public needs and to ensure the fair, impartial, and independent exercise of the power to award these public contracts (Eastern Cape Government and others v Contractprops 25 (Pty) Lrd2001(4) SA 142 (SCA), para.

[8]; City of Tshwane Metropolitan Municipality v RPM Bricks (Ply} Ltd [2007] SCA 28 (RSA), para. [15]). The potential ills of nepotism, patronage, 'or worse', however, do not only lie with those who may award contracts, but also with those who receive them.

[30] The constitutional imperative of transparency in the process cuts both ways: not only is the general public entitled to insist on an open transparent procurement process in order to hold the public authority accountable, but the members of the public who want to avail themselves of the opportunity to take part in the process should know that by doing so they too become subject to public scrutiny. They should know that they caru1ot obtain these benefits in a private process not open to public scrutiny. The process of the procurement and award of tenders is not something that an organ of state such as the municipality may legitimately hide from the public, or from those participating in the process. Section 217 of the Constitution and the legislation passed to give effect to its terms allows the public and participants in the procurement process to insist on transparency and fairness. It is simply not correct to say that the supply chain management policy of the municipality is an internal management document. It is not. It is a public document. Participants in a tender process have a right of access to it. In the municipality's initial call for tenders prospective tenderers were invited to obtain copies of the procurement policy then in operation and there is nothing to suggest that the new policy was not similarly available after it came into operation. Participants in the tender process also have other rights of access to relevm1t information, once again based on constitutionally mandated national legislation (MEC for Roads and Public Works v Intertrade Two (Pty) Ltd [2006] SCA 34 (RSA)).

[31] The result of this is that it seems to me that just as there can be no estoppel based on a representation of law (Sampson v Union & Rhodesia Wholesale Ltd (in liquidation) 1929 AD 468 at 481). there can be no estoppel based on a representation of public policy by an organ of state where the content of the policy is available and open to the public. Participants in the public procurement of goods and services are not entitled to close their eyes as to the propriety of their own involvement in that process; they have the obligation and legal means to ascertain the public rules of the game before they participate. Afrisec, in this case, knew what it initially tendered for and at what price. It knew that the main agreement and the SOW' s following upon it purported to confer benefits upon it which were in excess of its original tender bid. The proper way to justify its own participation was not to attempt the subversion of public policy by contractual warranties and representations, but by insisting on a transparent and fair process before participating further.

[32] No matter how one looks at the alleged representations, they all come down to representations that the municipality had the legal capacity and authority to conclude the respective agreements. This inevitably relates to a representation about the requirements for the validity of the transact ion, the first category referred to in City of Tshwane Metropolitan Municipality v RPM Bricks (Pty) Ltd [2007] SCA 28 (RSA), which cannot be relied on to found an estoppel. The estoppel defence can thus not succeed either.

Arbitration, standing and costs

[33] The main agreement contains an arbitration clause. If the agreement as a whole is invalid for the reasons. discussed above, that particular clause cannot independently survive. Even if it could, I am not convinced that a clause that seeks to exclude the jurisdiction of the ordinary courts of the land in respect of fundamental constitutional issues may not be against public policy. I need not decide that issue though.

[34] At the start of this judgment I referred to the fact that the municipality seeks to declare invalid agreements that it is a party to. Whilst somewhat unusual, it is not only competent to do so (Pepcor Retirement Fund v Financial Services Board 2003(6) SA 38 (SCA), para. [47]), but it is also commendable in assisting to ensure the open and transparent government that the Constitution requires.

[35] The municipality only sought costs in the event of opposition to the application. In my judgment that was a proper approach to take in view of the fact that it was seeking to set aside agreements which it was itself a party to. The first and third respondents chose to oppose the application and there seems to be no valid reason why costs should not follow the result.

Conclusion

[36] The application for declaring the main agreement and SOW's 2 to 28 invalid must thus be granted:

1. There will be an order in terms of prayers 2 and 3 of the notice of motion;

2. The first and third respondents are ordered to pay the costs of the application, such costs to include the costs of two counsel.

__________________________

J.C. Froneman

Judge of the High Court

26/6/2007