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[2018] ZAWCHC 150
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City of Cape Town v Namasthethu Electrical (Pty) Ltd and Another (446/2017) [2018] ZAWCHC 150; [2019] 1 All SA 634 (WCC) (12 November 2018)
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
Case Number:
446/2017
In
the matter between:
CITY
OF CAPE
TOWN
Applicant
and
NAMASTHETHU
ELECTRICAL (PTY)
LTD
First
Respondent
JAMES
ROBERT GARNER N.O.
Second
Respondent
Delivered:
12 November 2018
JUDGMENT
BOQWANA,
J
Introduction
[1]
This is an application to declare an
agreement concluded between the applicant (“the City”)
and the first respondent
(“Namasthethu”) in November
2014, pursuant to the award of Tender no 240Q/2013/14 (“the
tender”) to Namasthethu,
void
ab
initio
; alternatively that the
agreement was validly terminated by the City on 15 March 2016; to set
aside the determination made by the
second respondent (“Mr
Garner”) on 24 August 2016 in favour of Namasthethu; to extend
the time period permitted
for the setting aside of the aforementioned
determination under Section 38 of the Arbitration Act 42 of 1965
(“the
Arbitration Act&rdquo
;), insofar as may be necessary; and
to direct Namasthethu to pay the costs of this application, including
the costs of two counsel,
on an attorney and own client scale.
[2]
The application is opposed by
Namasthethu; Mr Garner abides the decision of the Court.
Background
[3]
On 7 March 2014, the City advertised a
tender for the supply, retrofit and installation of energy efficient
luminaries at the Cape
Town Civic Centre. Having been the successful
bidder, Namasthethu was awarded the tender on 19 August 2014.
The estimated
value of the tender award was R33 329 498.00,
inclusive of VAT.
[4]
On 17 September 2014, an unsuccessful
bidder, Citrine, lodged an appeal in which it claimed that
Namasthethu and its directors had
been convicted of fraud in August
2013. The appeal was not entertained by the City due to its lateness.
The City went ahead to
conclude a written agreement with Namasthethu
on 25 November 2014, which was to run for 18 months, until 31 July
2016.
[5]
On the same day, the City wrote a letter
to Namasthethu informing it that it had come to the City’s
attention that Namasthethu
and/or its directors had been found guilty
on charges relating to fraud or corruption during August 2013. The
letter further stated
that the City had been referred to a case in
the Pietermaritzburg High Court where Namasthethu was cited as a
respondent in a matter
brought in terms of the Prevention of
Organised Crime Act 121 of 1998 (“POCA”). The City then
requested Namasthethu
to respond by no later than 28 November 2014,
as to whether these allegations were true and if they were, to
provide full particulars
thereof, and notwithstanding that, the City
would still conduct its own investigations on the matter. It reserved
its rights to
take action which may affect any contract Namasthethu
had with the City.
[6]
On 27 November 2014, Namasthethu
responded to the City’s letter, through one S Chetty who was
indicated to be its Chief Executive
Officer (“CEO”). The
reply went,
inter alia
,
as follows:
“
We
confirm that NAMASTHETHU ELECTRICAL (PTY) LTD t/a NATIONWIDE
ELECTRICAL and its sole Director, S Chetty have not and have never
been convicted of fraud and corruption during August 2013. We further
confirm that NAMASTHETHU ELECTRICAL (PTY) LTD t/a NATIONWIDE
ELECTRICAL and S Chetty have never been convicted of any other charge
during any other period and that the conduct of the party
that
forwarded to you the false information, was clearly malicious.
…
We
confirm that NAMASTHETHU ELECTRICAL (PTY) LTD t/a NATIONWIDE
ELECTRICAL was cited as a Respondent in civil proceedings and record
that these proceedings were consequently [sic] finalised before Court
and that no Order was made against NAMASTHETHU ELECTRICAL
(PTY) LTD
t/a NATIONWIDE ELECTRICAL in the finalization of the Application.
”
[7]
The Senior Legal Advisor, of the City, R
Hassiem wrote a further letter to the Namasthethu on 3 December 2014
wherein he drew Namasthethu
to the following information from the
Construction Industry Development Board (“CIDB”)
pertaining to it:
“
Contractor/director/s
were found guilty in terms of a Plea Agreement in terms of Section
105[sic] of the Criminal Procedure Act
on 13 August on various
charges of fraud and corruption.
-
Contractor/director/s were sentenced
with a fine of R200 000.00 and five years imprisonment, the
latter which was suspended.
”
[8]
Hassiem further informed Namasthethu
that the matter would be referred to the City’s Forensic
Services Department for further
investigation. Notwithstanding the
proposed investigation, he invited Namasthethu to provide him with a
reply of the said allegations
within 7 days of the letter.
[9]
On 5 December 2014, the City asked the
CIDB’s Manager: Legal and Compliance, Bongiwe George
(“George”), to confirm
whether Namasthethu had been found
guilty of fraud and corruption to which she replied:
“
Yes,
guilty finding on charges of fraud and corruption related to
Namasthethu Electrical (Pty) Ltd t/a Nationwide Electrical
.
”
[10]
On 9 December 2014, the City’s
Legal Services Department requested its Forensics Ethics Integrity
Department (“FEID”)
to investigate the position of
Namasthethu and to establish whether the allegations against it were
well founded. In this request
the legal department stated that “
[t]he
Procurement Law Unit does not have all the information necessary to
verify the allegations … hence the matter was referred
to the
[FEID]
”.
[11]
On 12 December 2014, Namasthethu replied
to the City’s letter of 3 December 2014, under the name and
signature of one PS Govender
(“Govender”). In this
letter Govender stated that:
“
The
Bidder on this project (Contract No: 240Q/2013/14) is NAMASTHETHU
ELECTRICAL (PTY) LTD t/a NATIONWIDE ELECTRICAL. The sole Director
for
NAMASTHETHU ELECTRICAL (PTY) LTD t/a NATIONWIDE ELECTRICAL at time of
Tender was Mrs Shamla Chetty.
I
have attached current proof of registration with the CIDB. I have
attached the CIPRO document which confirmed that Mrs Shamla
Chetty is
the sole Director and the letter from
SAPS- Office Of The
Anti-Corruption Task Team
confirming that no criminal charges
were obtained against NAMASTHETHU ELECTRICAL (PTY) LTD t/a NATIONWIDE
ELECTRICAL or its Director,
Mrs Shamla Chetty.
We
trust this meets your approval.
”
[12]
On 18 December 2014, the City handed
over the site to Namasthethu and subsequent thereto Namasthethu began
with the work as agreed.
[13]
Meanwhile, the FEID, which had been
conducting forensic investigation into Namasthethu, completed its
work during the beginning
of 2016. In its report to the City Manager
it stated the following findings under paragraph 8:
“
801
…
802
We established that Namasthethu and its directors (S Chetty and R
Chetty) were criminally charged with fraud and corruption.
Namasthethu, under the trading name of Nationwide Electrical and R
Chetty, who at all relevant times acted as a director, were
convicted
in the Commercial Crimes Court in Pietermaritzburg on 7 November
2013, less that [a] year prior to the date of the tender
application
on 240Q/2013/2014.
803
We established from the above that S Chetty made a prima facie
misrepresentation to the City when she stated in the negative
on the
tender declaration to the question whether any of the directors or
the company/entity has been convicted by a court of law
for fraud or
corruption during the past five years. This amounts to fraud.
804
We established that S Chetty made a further prima facie
misrepresentation to the City, when she included the CIDB certificate
in Namasthethu’s tender application knowing that her husband
admitted during the above-mentioned criminal proceedings that
the
certificate was obtained through fraud and corruption.
805
We established that S Chetty in her tender submission provided the
City with a local business address for Namasthethu as 7 –
15
Avenue Kensington which was discovered to be false. Furthermore
it was established that the service provider operates
from 3
containers located at the Civic Centre parking area Hertzog Boulevard
Cape Town.
806
We found that the CIDB grading for Namasthethu was upgraded on 9
February 2012 from a grade of F 1CE PE to 7EB PE of which the
latter
was fraudulently and/or corruptly obtained. They misrepresented
to the City in submitting the same CIDB certificate
as part of their
tender proposal in tender 240Q/2013/2014.
807
Due to the fact that misrepresentations were made in the tender
documents of the tenderer
the
tender were incorrectly awarded to Namasthethu
.
”
(Own emphasis)
[14]
FEID then made the following
recommendations in paragraph 9 of its report:
“
901
We recommend that the Executive Director Corporate Services and
Compliance, in conjunction with the Legal Services consider:
·
Subject to the procedures
contained in the City’s Combating Abuse of Supply Chain
Management (SCM) System Policy
,
to list the directors, former directors as well as the entity on the
City’s Register of Tender and Contract Defaulters in
that,
prima facie evidence exist, that they abused the City’s SCM
System and/or committed improper conduct, during the procurement
process and/or during the execution of the contract, as defined in
the said Policy; and
The
termination of the contract
.
(Own emphasis)
903
It is further recommended that FEID lodge a criminal case of fraud
with SAPS against S Chetty, R Chetty, Naidoo and the entity,
Namasthethu, for the misrepresentations relating to information
contained in the tender submission.
”
[15]
FEID’s report also recorded that
Namasthethu was a Durban based company whose directors had previously
been husband and wife:
Ravan Chetty (‘R Chetty’) and
Shamla Chetty (‘S Chetty’). R Chetty resigned as a
director on 12 May
2011. S Chetty resigned as a director on 14
November 2014. On the same day as S Chetty resigned, Lumendrie Naidoo
(‘L Naidoo’)
became the sole director of
Namasthethu. L Naidoo had been with the company since 2010 and
had been responsible for the company’s
accounts, purchasing and
project management. According to FEID, L Naidoo was only prepared to
meet with FEID on a without prejudice
basis and was not prepared to
answer certain questions.
[16]
As a result of this report, the City
wrote a letter to Namasthethu on 15 March 2016 informing it that
their contract was being cancelled
with immediate effect on the basis
that Namasthethu had “
committed
fraudulent acts during the tender process”
,
which had resulted in the tender being awarded to it. The letter also
specifically referred to Namasthethu’s failure to
disclose a
conviction for fraud and corruption, and the fact that it had given a
local physical address which was fictitious. The
letter referred to
clause 53 of the City’s Supply Management Policy (“SCM
Policy”) which, according to the letter,
stated that:
“
53.
The City Manager must provide measures for the combating of abuse of
the supply chain management system and is able to:
53.6
cancel a contract awarded to a person if
:
53.6.1
the person committed a corrupt or fraudulent act
during
the bidding process or the execution of the contract
;
”
[17]
The letter also indicated that this also
in accordance with
Regulation 38(1)(f)
of the
Municipal Supply Chain
Management Regulations
(“the Regulations”). The
significance of these references to the SCM Policy and the
Regulations are important for the
Respondent’s case which shall
be discussed shortly. In its third paragraph the letter states
that the City had received
the information that Namasthethu was
convicted of fraud “
[d]uring
the execution of the contract”
which
according to Namasthethu is incorrect, this information was received
long before the contract was concluded.
[18]
Namasthethu disputed the cancellation in
a letter sent by its attorneys, Anand-Nepaul, by email on 16 March
2016. The letter
stated the following:
“
Without
admitting any of the allegations in your letter under reply, we are
instructed as follows:
1.
Client disputes your right to cancel the contract.
2.
Client is exercising its lien over the site in respect of the labour
and improvements.
”
[19]
Anand-Nepaul called for an undertaking
that the City “
will refrain
from interfering with Clients’ Lien and further that you will
be withdrawing the cancellation
”
and threatened an urgent application with costs.
[20]
The City refused to accede to the
requested undertaking and maintained that the termination of the
contract was valid. Anand-Nepaul
responded that their client “
resists
the City’s purported cancellation and insists on its right to
perform the outstanding balance of the works.”
He also indicated that Namasthethu wanted the “
disagreement
… between the City and our client regarding the determination
of the contract”
resolved in
accordance with the dispute resolution contained in the JBCC Series
2000 Principal Building Agreement as revised (“the
JBCC
Agreement”). He indicated that the dispute was
“
essentially of a legal nature,
and it certainly does not
raise any construction issues requiring the appointment of a
construction professional as the arbitrator
.
We suggest that should it
become necessary to appoint an adjudicator, that a suitably
experienced advocate or attorney take up the
appointment.
”
(Own emphasis)
[21]
The City responded by asking whether
Namasthethu disputed “
the fact
that they committed fraud and/or corruption during the tender process
or execution of the contract … [i]f this is
the case then
please provide us with their reasons why they dispute the termination
in light of the overwhelming evidence against
them.”
The City advised that on receipt of any such reasons, it would give
consideration to whether it would be appropriate to convene
a meeting
with Namasthethu.
[22]
Anand-Nepaul responded on 29 March 2016
by stating that “
[o]ur client
vehemently denies any allegation of fraud and/or corruption, as
alleged or at all.”
[23]
The City then replied on 4 April 2016,
as follows:
“
We
note that your client refused to provide any further details
pertaining to their alleged fraudulent and/or corrupt conduct during
the tender process or execution of the contract. This is despite the
overwhelming evidence against them and they are disputing
the
termination.
Furthermore
with reference to your letter dated 17 March 2016, it seems that your
client is following the dispute settlement procedure
in the
contract. In light of your client’s bare denial of the
allegations against them, we reiterate that the disagreement
with
regard to determination cannot be resolved
.
”
[24]
Namasthethu continued to insist that the
dispute surrounding the cancellation of the agreement be adjudicated.
It suggested as potential
adjudicators three senior counsel at the
Cape Bar, whilst the City persisted with their contention that the
agreement was validly
terminated in March 2018.
[25]
Anand-Nepaul stated further that
Namasthethu would proceed to have an adjudicator appointed by the
Association of Arbitrators Southern
Africa (‘AASA’). ASSA
appointed Mr Garner, a construction consultant and surveyor, as
the adjudicator.
[26]
The City wrote an email on 19 May 2016
reiterating that it considered that “
this
contract has been validly terminated and the entity, Namasthethu
Electrical must approach the High Court for relief
”.
It also added that it would not participate in any adjudication
process and noted that “
Mr
Garner has no legal background which is imperative in this instance
as the matter relates to legal interpretation. Even
if the City
elected to participate in the adjudication, we would have objected to
his appointment
.” It further
stated that: “
[s]hould they
continue with the adjudication, without participation of the City,
the City will have no option but to take any ruling
made by the
arbitrator to the High Court to be set aside
.
…
the City deems this matter
closed and will not entertain any further correspondence in this
regard.
”
[27]
Having been appointed and in an email
dated 22 May 2016, Mr Garner stated,
inter
alia,
that in the absence of any
amendment to the adjudication provisions of the principal building
agreement:
“
1.
Clause 40.0 entitles either party to refer a dispute to adjudication.
2.
Clause 40.9 of the Agreement provides that the provisions of clause
40.0 survive the termination of the agreement.
3.
The nominating body to appoint an adjudicator and/or arbitrator is
the Association of Arbitrators (Southern Africa)
”
[28]
In a further email dated 29 July 2016,
Mr Garner advised that:
“
a.
Clause 40.9 of the specified Agreement provides that “the
termination of this
agreement
shall not affect
the validity of this clause 40.0
b.
The Changes made to the Standard JBCC Agreement do not affect either
clause 40.2/ 40.2.1 of clause 40.9.
3.
It therefore appears to me that the Contractor is entitled to refer
dispute for adjudication, notwithstanding termination of
the
Agreement (the validity which is in any event disputed by the
Contractor) and has in fact done so.”
[29]
Namasthethu then sent a Statement of
Claim and other documents, including an assessment of damages report
by Johan Richards and
a CIDB document titled “Decision and
Reasons” dated 1 August 2016, which apparently found
Namasthethu not guilty on
all charges. In an email dated 10 August
2016, the City informed Mr Garner that it would not participate in
any adjudication process
but informed him about a written ‘Plea
of guilty’ (allegedly made by Namasthethu) and sent it to Mr
Garner at his request.
[30]
Mr Garner then prepared a determination
on the basis of the Statement of Claim and further documents sent to
him by Namasthethu.
No oral evidence was led. His determination was
delivered on 24 August 2016, in which he upheld various claims by
Namasthethu and
found the City liable to Namasthethu for the amount
of R516-671.04 inclusive of VAT; R1 483-304.42 inclusive of VAT;
and R499-599.40
inclusive of VAT. The summary of the determination
went as follows:
“
14.1
Claim for Final Account value outstanding R490,519.95 (excluding VAT)
This
claim is dismissed in its entirety.
14.2
Claim is for profit on outstanding work
This
claim is valid, and in the amount claimed of R451,465.83 plus VAT
(including VAT the total is R516,671.04) and this amount
should be
paid to the Contractor in addition to amounts already paid.
14.3
Claim for repayment of the amount retained under the
agreement
as security for performance. This is claimed in the amount of
R1,350,645.28 excluding VAT.
The
contractor is entitled to be paid the sum of R1,303,144.23 plus VAT =
R1,483,304.42.
14.4
Claim for Incorrect Deductions of Penalties in the sum of
R438,210.00.
The
claim for refunding the incorrectly deducted penalties is valid.
This entitles the Contractor to the sum of R438,210.00
to which VAT
is to be added. This is because VAT payable is calculated from
the value certified for payment after deduction
of penalties.
Once the penalty deduction is removed the increase in payment due to
the Contractor is the amount of the incorrectly
deducted penalties,
plus VAT.
This
the additional amount due to the Contractor in respect of this claim
is R438,210.00 plus VAT = R499,559.40.
14.5
The claim for Variation Orders executed in the sum of R308,396.69.
For
the reasons explained in 13.5 above this claim is dismissed in its
entirety.
14.6
The claim is for Standing Time, in the amount of R974,518.94.
For
the reasons explained in 13.6 above this claim is dismissed in its
entirety.
14.7
In the Statement of claim the Contractor also requests a
determination that interest is payable from a date to be set by the
adjudicator, and for an award of legal costs for the referral and the
adjudication itself. In these respects my determination
is as
follows:
14.7.1
The Employer is required to pay the amounts determined above within
five working days from receipt of this determination,
and that
interest will be payable if this is not done, from the date five
working days from receipt of this adjudication at the
legal rate.
14.7.2
The Adjudication Rules applicable do not make any provision for costs
of representation and submissions made by the parties.
Accordingly no charges are admissible for such costs.
14.7.3
The Rules do provide, in Rule 4.3 for the Adjudicator to direct that
a party is to pay the adjudicators fees. On the
basis that the
Contractor has succeeded to a substantial degree in its claims, I
direct that my fees are to be paid by the Employer
(the City).
14.7.4
Further in accordance with Rule 4.1.4 I exercise my lien on the
Determination, pending receipt of the remainder of my fees,
which are
notified to the parties together with notice that this Determination
has been completed.
14.7.4.1
I direct and determine that if one party pays fees that are directed
to be paid by the other party, to obtain the Determination,
that
party may forthwith recover such amount from the party that has been
directed to pay the fees.
”
The
City’s case
[31]
Firstly, the City seeks the
determination to be set aside on the basis that Namasthethu’s
invocation of the adjudication clause
was impermissible. According to
the City, the tender agreement was procured by Namasthethu’s
fraud and as a result the whole
agreement was invalid from the
outset. For this reason the dispute resolution clause 40 could not be
relied upon after the City
had exercised its right to bring the
contract to an end. That clause, like the rest of the agreement, was
also void from the outset,
notwithstanding clause 40.9 (relied on by
Mr Garner), which was also void.
[32]
In the alternative, and in any event,
even if clause 40 were to have survived, sub clause 40.2.1 and
40.3 do not contemplate
a legal dispute (such as the validity of a
termination of a contract) being referred to adjudication. (Clause
40.2.1 was intended
to apply to expert determinations by quantity
surveyors, architects and so forth, relating to matters within their
own spheres
of competence). A dispute of a legal nature had to be the
subject of litigation as envisaged in sub-clause 40.2.2.
[33]
Secondly, any adjudication which was
permissible had to be done by a legal expert not a surveyor such as
Mr Garner. There was therefore
no expert adjudication as contemplated
by clause 40 of the JBCC Agreement and Mr Garner could not validly or
competently consider
the question whether the tender agreement
had been validly terminated by the City.
[34]
Thirdly, to show that Mr Garner was
demonstrably unsuited to consider a legal question he found in his
determination:
“
This
claim is based on the determination
[
sic
]
not being
lawful. The Contractor has claimed that it was not lawful and
submitted documentation to support that claim.
As
the City has maintained that the termination was lawful it has the
obligation to prove that (the onus of proof lies on he who
asserts).
The
City has not submitted such proof, either in any submission in terms
of the adjudication (having refused to take part), or otherwise.
In
these circumstances I determine that this claim is valid, and in the
amount claimed of R451,463.83 plus VAT.
”
[35]
There were furthermore irregularities
and misdirections regarding the amounts awarded to Namasthethu in a
number of respects.
[36]
Fourthly, Namasthethu falsely
represented the factual position in its Statement of Claim to Mr
Garner. It stated that “
grounds
for termination as asserted by the respondent were in fact incorrect
and did not exist
”, which led
to Garner making the same finding. This was a further false
misrepresentation to secure a determination. Thus
Mr Garner’s
award was vitiated by gross irregularities and was also improperly
obtained.
[37]
Fifthly, even if Mr Garner’s
determination were to be held to be an arbitration award, and
section
33
(1) of the
Arbitration Act to
set it aside applies, the six weeks
period within which to bring the application could be extended on
good cause shown. Thus, whilst
the City did not bring the application
for review within six weeks of the award, it has shown good cause why
the period should
be extended and application to set aside Mr
Garner’s award be allowed.
Namasthethu’s
case
[38]
Namasthethu contends that this
application is not competent because the City has not established the
legal basis for the judicial
review of the award of the adjudicator;
it has conceded that the adjudicator’s award is not an arbitral
award, in terms of
the
Arbitration Act but
relies on “common
law applicable to expert adjudicators”. Even if that were to be
competent, none of the grounds advanced
by the City meet the
threshold applicable in such cases, namely: fraud, collusion,
capriciousness or manifest unjustness of the
determination.
[39]
Secondly, the provisions of the JBCC
Agreement do not provide for a dissatisfied party to approach a court
for a judicial review
of the adjudicator’s award. It requires
such party to give notice to the other of its intention to refer the
dispute to litigation
for the revision of the award by the court. The
City should have therefore launched action proceedings.
[40]
Thirdly, the City has not made out a
case that the contract was void. In any event, the purported
termination was unlawful and of
no force and effect for a number
reasons, namely, that the City failed to investigate the allegations
made against Namasthethu
in the appeal, instead it proceeded to
conclude a contract with Namasthethu and handing over the site,
thereby waiving its entitlement
it may have had to cancel the
contract. Alternatively, on the basis of the doctrine of election, it
forfeited any entitlement to
cancel by unduly delaying in purporting
to cancel it, having waited approximately 16 months, from the time
the allegations of fraud
were brought to its attention. By the time
it cancelled the contract on 15 March 2016, it had been 92% complete
and the City had
paid Namasthethu an amount of R24 721 740.44.
[41]
In addition to that, the City relied
upon clause 53 of its SCM Policy and Regulation 38(1)(f) of the SCM
Regulations (which is given
effect to in the SCM Policy) as a basis
for cancelling the contract. Given its reliance on the latter
provisions, it was unlawful
for it to terminate the contract without
having followed the procedures in the SCM Policy.
[42]
Furthermore there was no intention on
the part of Namasthethu and its directors to commit a corrupt and
fraudulent act during the
bidding process and finally the City did
not comply with clause 36 read with clause 36.2 as no notice was
given to Namasthethu,
nor was it placed in default and given an
opportunity to cure the defect.
[43]
Fourthly, the City’s contention
that the contract is void
ab initio
is not in accordance with the
relevant statutory scheme, policies and express terms of the
contract. In that event, the contract
would be voidable and not void
ab initio
.
[44]
Fifthly, the City has failed to
establish that fraudulent conduct occurred during the bidding
process. None of those who were directors
of Namasthethu
at
the time of the bidding process
had
been convicted of fraud during the five years. Therefore, Namasthethu
was correct when it ticked “No” to that question
in the
Declarations section of the tender document.
[45]
Sixthly, Namasthethu has never been
convicted of fraud, R Chetty pleaded guilty in his own capacity and
on behalf of the sole proprietor,
(Nationwide Electrical) and not
Namasthethu. In its allegation that Namasthethu was the third
accused, the City relied on
an incomplete charge sheet. The payments
to bribe a CIDB official were made on 7 August 2007 and 18 August
2007. This was before
Namasthethu was incorporated. Furthermore, they
were made in the verification and/or assessment of the CIDB grades of
the sole
proprietorship of “Nationwide Electrical” not
Namasthethu. The first time Namasthethu made an application to the
CIDB
was during November 2011 and that date was after the periods
relevant to the charges – the latest being 25 July 2011.
[46]
A copy of the “manuscript notes”
of the magistrate shows that no conviction or sentence was imposed on
Namasthethu.
The letter from Colonel K Naidoo and a further part of
George’s email which states that “
he
was sentenced with a fine of R200 000-00 and 5 years
imprisonment, the latter which was suspended
”
clearly confirm or indicate that no criminal convictions were
obtained against Namasthethu. Namasthethu also relies on the
CIDB
panel’s findings of 2016 that Namasthethu was not guilty on all
the charges. Mr Bouwer, who investigated the criminal
allegations, testified at the CIBD proceedings that Namasthethu was
not charged of criminal proceedings but Nationwide Electrical
was.
Issues
to be Determined
[47]
The issues to be determined by the Court
are the following:
(a)
Whether Mr Garner’s determination
should be allowed to stand and become enforceable at the instance of
Namasthethu.
In this regard, the question is whether the
adjudication clause in the contract between the City and Namasthethu
survived cancellation
of the contract by the City for fraud; or
(b)
Whether, if the dispute resolution
clause survived, Mr Garner’s determination should nevertheless
be set aside;
(c)
Whether fraud existed, and whether the
contract between the City and Namasthethu was void, alternatively
voidable at the instance
of the City as a result of fraudulent
misrepresentations.
Discussion
Applicable
case law on the effect of fraud on arbitration clauses
[48]
The
issue of enforceability of an “arbitration clause” in an
instance where a contract is said to be void or voidable
has been
discussed in a number of cases. The decision that articulates the
principles that are relevant and useful to this case
is that of
North
East Finance (Pty) Ltd v Standard Bank of South Africa Limited
.
[1]
[49]
Parties in that case had entered into a
settlement agreement, which contained an arbitration clause stating,
inter alia, that: “
[i]n the
event of any dispute of whatsoever nature arising between the parties
(
including any question as to
the enforceability of this contract
….), such dispute will be referred to arbitration in the
manner set out below.”
The
issue accordingly was whether the arbitration clause would compel the
parties to submit to arbitration in the face of allegations
that the
settlement had been induced by North East’s fraud. In
other words, did the arbitration clause survive the
demise of the
contract in which it was included.
[50]
Standard Bank alleged that North East
had failed to disclose all the irregularities and by doing so, it
induced the bank to conclude
the contract. As a result, so Standard
Bank argued, it elected to resile from the contract and to regard it
as void
ab initio
.
It refused to submit the question of whether there had been fraud
inducing the contract to arbitration on the basis that
the
arbitration clause fell with the contract and claiming that the
clause had been included in the contract as part of a fraudulent
strategy.
[51]
The
High Court there found that the matter contained numerous disputes of
fact and as such could not be resolved on the papers before
it. It
further held “
that
the arbitration clause was part of the agreement and had no separate
existence; that the allegations of fraud were not wholly
unfounded on
the bank’s version; that the arbitration clause did not refer
to fraudulent misrepresentations inducing the
contract specifically
such that this was an issue to be determined by arbitration; that the
agreement to arbitrate was not severable
from the rest of the
settlement agreement; and that accordingly the Court would not compel
the bank to comply with it.
”
[2]
[52]
The
Supreme Court of Appeal (“SCA”) confirmed the judgment of
the High Court. In the first instance it held that: “
if
a contract is void from the outset then all of its clauses, including
exemption and reference to arbitration clauses fall with
it
.”
[3]
It referred with approval to the findings made by the same Court in
another important decision of
North
West Provincial Government and Another v Tswaing Consulting CC and
Others,
[4]
wherein it held that an arbitration clause embedded in a
fraud-tainted agreement could not stand. The SCA then referred to the
decision of
Heyman
v Darwins Ltd,
[5]
which stated that:
“
An
arbitration clause is a written submission, agreed to by the parties
to the contract, and, like other written submissions to
arbitration,
must be construed according to its language and in the light of the
circumstances in which it is made. If the dispute
is as to whether
the contract which contains the clause has ever been entered into at
all, the issue cannot go to arbitration under
the clause, for the
party who denies that he has ever entered into the contract is
thereby denying that he has ever joined in the
submission.
Similarly, if one party to the alleged contract is contending that it
is void ab initio (because, for example,
the making of such a
contract is illegal), the arbitration clause cannot operate, for on
this view the clause itself is also void.
”
[53]
Whilst agreeing with that principle,
North East argued that the contract in their case, itself, provided
that the dispute as to
enforceability of the settlement agreement had
to be determined by arbitration, given the phrase “
including
any question as to the enforceability of the contract
.”
[54]
The
SCA observed that the general position as regards fraud induced
contracts is that they are regarded as voidable. In this regard,
“
the
aggrieved party may elect whether to abide by the contract and claim
damages (if it can prove loss) or to resile – to
regard the
contract as void from inception, and to demand restitution of any
performance it may have made, tendering return of
the fraudulent
party’s performance
.”
[6]
Based on this principle, the Court found that Standard Bank had
elected “
to
treat the settlement agreement as void from inception, and when it
made that election the contract effectively ceased to exist.
It
did not have to be cancelled or rescinded: it was void
.”
[7]
[55]
It found further that the term
‘enforceability’ which appeared in the relevant clause
referred to both void and voidable
contracts, and that if parties had
intended that the question whether fraud inducing the contract should
be determined by an arbitrator
then the arbitrator will determine
whether the contract was valid and enforceable, or voidable or void.
The Court held further
that it is possible in principle for parties
to agree that the question of the validity of their contract may be
determined by
arbitration even though reference to arbitration is
part of the agreement being questioned.
[56]
Referring
to English authority, the Court stated that if the parties “
foresee
the possibility of a particular dispute arising as to the validity of
their contract, they may provide that it be referred
to an arbitrator
for resolution
”
but it should be determined only by having regard to the context in
which the contract was concluded.
[8]
In this regard a court must ascertain what the parties intended the
contract to mean by looking at the words, the contract as a
whole,
whether or not there is any ambiguity and the factual matrix or of
the agreement or context in which the agreement was concluded.
In addition it must be given a commercially sensible meaning.
[9]
[57]
Having considered arguments by North
East and Standard Bank regarding the foreseeability of fraudulent
conduct by North East at
the time of the conclusion of the contract,
the Court held at para 30–
“…
in
the light of the purpose of the agreement and having regard to what
the parties envisaged (because it was what they could foresee
then),
at the time of concluding the agreement it was not intended that the
validity or enforceability of the contract induced
by fraudulent
misrepresentations and non-disclosures would be arbitrable.
”
[58]
Having found that, the Court then went
on to determine whether the allegations made by the Bank in the
answering affidavit were
sufficiently substantiated such that the
High Court should have refused to compel it to arbitration?
[59]
The Court held that the High Court was
correct: the allegations made by Standard Bank were sufficient to
found and justify the conclusion
that the settlement agreement was
probably
induced by fraud and that it could not be compelled to refer the
questions of fraud to arbitration.
[60]
The question that I have to determine
first therefore is whether parties in the instant case intended the
question of the validity
of the contract allegedly induced by fraud
to be referred to adjudication.
The
interpretation of the dispute clause in question
[61]
Clause 40 of the standard JBCC document
stipulates as follows:
“
DISPUTE
40.0
SETTLEMENT OF DISPUTES
40.1
Should any disagreement
arise between the
employer
or
his
principal agent
or
agents
, and the contractor
arising out of or concerning this agreement or its termination
,
either
party
may give notice to the other to resolve such
disagreement.
40.2
Where such disagreement is not resolved within ten (10)
working
days
of receipt of such notice it
shall be deemed to be a
dispute and shall be referred by the party which gave such notice
to either:
40.2.1
Adjudication [40.3] where adjudication shall be conducted in terms of
the edition of the
JBCC
Rules for Adjudication
current at the time when the dispute was declared,
or
40.2.2
Litigation where the institution of such action shall be commenced
and process served within one (1) year from the existence
of the
dispute, failing which the dispute shall lapse.
40.3
Where a dispute is referred to adjudication the following shall
apply:
40.3.1 The
adjudicator
shall be appointed in terms of the
Rules [40.2.1]
40.3.2
Adjudicator’s eligibility to arbitrate
(No clauses)
40.3.3
The
Adjudicator’s
decision shall be binding on the
parties
who shall give effect to it without delay
unless
and until subsequently revised by a court of law
.
40.3.4
Should either
party
be dissatisfied with the decision given by
the
adjudicator,
or should no decision be given within the
period set in the Rules, such party may give notice of
dissatisfaction to the other
party
and to the
adjudicator
within ten (10)
working days
of receipt of the decision
or, should no decision be give [sic], within ten (10)
working days
of expiry of the date by which the decision was required to be
given, the dissatisfied
party
shall refer the dispute to
litigation.
40.4
Arbitration
(No
clause)
40.5
The above provisions [40.2-4] shall not be construed as a waiver of
the parties’ entitlement to resolve a dispute by
mediation at
any time.
…
.
40.7
Recording of a dispute [40.1] shall not relieve the
parties
from liability for the due and timeous performance of their
obligations
…
.
40.9
The termination of this
agreement
shall not affect the validity of this clause 40.0”
[62]
Clause 36.1 allows for termination in
the case of a contractor committing a corrupt or fraudulent act
during the procurement process
or the execution of the contract as
follows:
“
36.1
The employer
may terminate the
agreement
where:
36.1.1
The Contractor fails to comply with [12.2, 14.1, 15.1, 3], or
36.1.2
The Contractor refuses to comply with a contract instruction [17.1]
subject to 17.2.
36.1.3
The Contractor committed a
corrupt or fraudulent act during the procurement process or the
execution of the contract
.”
(Own
emphasis)
[63]
In terms of clauses 36.2 and 36.3:
“
36.2
Where the
employer
considers terminating this agreement, the
principal
agent
shall be instructed to
notify the contractor of such default [36.1].
The
issuing of such notice shall be without prejudice to any rights that
the employer may have
36.3
The employer may give notice of termination should the contractor
remain in default for ten (10) working days after the date
of receipt
of such a notice of default
”
[64]
According to Namasthethu, in the first
instance the City incorporated an aspect of the statutory and policy
framework governing
municipality supply chain management into the
contract, such that it may terminate this agreement where the
contractor committed
a corrupt or fraudulent act during the
procurement process or the execution of the contract. It was
therefore foreseeable, both
in terms of the contract itself and the
applicable statutory and policy framework that the contract may be
terminated on the basis
of fraudulent conduct during the building
process.
[65]
In that regard, changes were made in the
JBCC tender documentation. Therefore, when the dispute clause
is read together with
clause 36.1, it could only have been the
intention of the City that any dispute arising from the termination
of the contract in
terms of clause 36.1 of the contract could also be
referred to adjudication.
[66]
According to Namasthethu in terms of
clause 40.1 parties agreed that a disagreement concerning termination
of agreement should be
adjudicated upon, if the disagreement is not
resolved. Where a disagreement is not resolved within the time frame,
either party
has an election whether to refer the dispute to
adjudication or litigation, irrespective of the nature of the
dispute. Further
that clause 40.9 provides that the termination of
the agreement will not affect the validity of clause 40.
[67]
Had the City intended to narrow the
scope of disputes that may be referred to adjudication so as to
exclude termination of the contract
due to fraud, it would surely
have included provisions to that effect in the changes that it
stipulated in the tender document
to the standard JBCC document.
[68]
Namasthethu therefore contends that if
the adjudicator had the power to determine the issue of termination
that is the end of the
enquiry; his award cannot be challenged except
on limited grounds. The Court may only intervene if the decision of
the adjudicator
is capricious, fraudulently obtained, or so
manifestly unjust or inequitable that the Court must intervene, which
according to
it, is not the case in this instance.
Was
it contemplated by the parties that the validity of the contract
(alleged to have been induced by fraud) would be an issue to
be
adjudicated upon?
[69]
The City contends that it never
contemplated that the validity of the agreement would be submitted to
adjudication. Counsel for
the City submitted that clause 36.1 was in
fact not in the contract when clauses 40, 40.1 and 40.9 were framed.
It was introduced
later by way of changes to the JBCC document in
order to deal with a particular context which was to allow the City
to terminate
the contract on those specific grounds, whilst clauses
40.1 and 40.9 had always been there. Therefore, on proper
interpretation
when clause 40 was framed, it was not introduced with
any contemplation of dealing with termination resulting from fraud,
which
makes the contract void or voidable.
[70]
Clauses 40.1 and 40.9 can therefore not
get a different meaning by virtue of the introduction of clause 36.1,
which was to ensure
that the City could cancel the contract because
of fraud in line with the SCM Policy and the Regulations. Furthermore
clause 36.2
is quite clear that the issuing of the notice
contemplating termination “
shall
be without prejudice to any rights that the employer may have
.”
Therefore the piecing together that Namasthethu seeks to make between
clauses 36.1 and 40.1 is unsustainable. It could
not have been
foreseen by the parties at the conclusion of the agreement.
[71]
As postulated in
North
East,
interpretation of the clause
should be done in the context in which the contract was concluded.
Consideration of the words used
by the parties and the contract as a
whole as well whether there is any ambiguity is important. Added to
that, the contract must
be interpreted so as to give it a
commercially sensible meaning.
[72]
Starting with the words used in the
dispute clause, it is clear that the words “
arising
out of or concerning this agreement or its termination
”
have been used as regards matters that can be referred to
adjudication in terms of clause 40. A contract can be terminated
for
various reasons not only for reasons relating to the committal of
fraud, which in general has the effect of making a contract
voidable.
Indeed clause 36.1 lists instances where the City may terminate,
including instances of non compliance with the
agreement. It
seems to me that termination resulting from those instances may
uncontroversially be referred to adjudication.
[73]
It can however not be confidently stated
that reference to matters arising from termination of the agreement
would necessarily include
adjudication of the validity of the
contract in instances where the employer regards the contract as void
from inception or one
which is voidable.
[74]
Viewing the context of the agreement, in
as much as Namasthethu contends that the changes made in clause 36
reflected a clear intention
on the part of the City that the dispute
clause would survive termination of the contract, including of the
contract that was terminated
as a result of alleged fraud during the
tender process, I am not sure if context is necessarily supportive of
that view.
[75]
What is suggested by the City, that
changes were inserted in a different and factual matrix to deal with
clause 36.1, which was
intended to allow the City to terminate the
contract upon fraud being committed and not on clause 40, makes
sense. The dispute
clause itself remained unchanged. Clauses
40.1 and 40.9 were not extended or amended, to widen the types of
disputes to be submitted
to adjudication as those having to do with
the validity or enforceability of the agreement. Whilst it may be
argued that termination
must include any issues concerning
termination of the contract, context is important; the question
primarily is what was foreseeable
when the parties concluded the
contract. Whilst they intended that a contract may be terminated when
fraud has been committed,
they left clause 40 unchanged. Absent
clause 36.1, there is no indication or suggestion that clause 40 was
intended for the determination
of the validity or enforceability of
the agreement. I therefore prefer the City’s interpretation in
this regard as it is
also more commercially sensible.
[76]
It
seems to me in order for the validity of the contract to be
determined by reference to adjudication, the contract must
“
specifically
say so
”
or in other words, the contract must clearly indicate as much. This
is because the general position is clear that if there
is a dispute
as to whether the contract which contains the arbitration clause has
ever been entered into at all, then the issue
cannot go to
arbitration under that clause. This position only changes if the
parties make a provision in the contract for such
referral, such as
for instance “
if
a dispute should arise as to whether there had been such a fraud,
misrepresentation or concealment in the negotiations between
them as
to make the purported contract voidable, that dispute should be
submitted to arbitration.
It
may require very clear language
to
effect this result
.”
[10]
(Own emphasis)
[77]
Clause
36.1 in the agreement allowing the City to terminate when fraud
occurred during the procurement process or execution of the
contract,
did not, in my view, change the meaning of clause 40.1 and 40.9 so as
to cover disputes that had to do with validity.
I do not think
that the dispute clause “
specifically
says so
”
in the sense debated in
North
East
supra.
The
intention must be clear. In
North
East,
despite a clause with a phrase that ‘
any
question as to the enforceability of this contract
’,
the Court found that it was not envisaged by the parties at the time
of concluding the contract that the validity or enforceability
of the
contract induced by fraudulent misrepresentations and non-disclosures
would be arbitrable.
[11]
So
in this case too whilst the term in clause 40.1 “
or
its termination
”
appears to be all embracing, the question of the validity of the
contract induced by fraudulent misrepresentations and non disclosures
is not clearly stated as one which can be referred to adjudication in
terms of clause 40.
[78]
On another issue though, clause 36.2
does not seem to suggest what the City’s counsel submitted. It
does not reserve rights
in relation to the issuing of the termination
notice but rather to the issuing of the notice of default. I
say so because
clause 36.3 that follows states that notice of
termination can be issued ten days after a notice contemplated in
clause 36.2 (i.e.
notice of default) has been issued. Clause 36.2
does not assist the City in my view. The rights spoken of in that
clause could
be rights to terminate, not rights regarding the course
to be taken upon termination.
[79]
To bolster the City’s argument
that validity of the agreement was never an issue to be referred to
adjudication, counsel for
the City argued that clause 40.7 which
provides that “
Recording of
[40.1] shall not relieve the parties from liability for the due and
timeous performance of their obligation”
gives
an impression that the parties envisioned that the agreement would
still be alive or valid whilst the dispute was being referred.
I
agree with this view.
[80]
From clause 40.7 read with the entire
clause 40, and the rest of the agreement, it does not appear that the
parties anticipated
an agreement whose validity could be determined
on adjudication. It follows therefore that the adjudicator was not
empowered to
deal with the question of the validity of the agreement.
Can
the Court in any event interfere with the award?
[81]
Assuming that the dispute clause obliged
the parties to submit the question of the validity of the agreement
to adjudication, the
following still remains to be determined:
whether the Court could nevertheless interfere with the adjudicator’s
determination.
[82]
Namasthethu submits that the Court
cannot. Both parties are
ad idem
that
an adjudicator does not have the powers of an arbitrator.
Clause 40 refers to adjudication as a dispute resolution process
to
be followed when there is a disagreement. There is also an option of
litigation, but no option of arbitration. In fact under
the heading
of arbitration there is a blank space.
[83]
Clause 1.1 of the JBCC Rules for
adjudication refers to adjudication as “
an
accelerated form of dispute resolution in which a natural person
determines the dispute as an
expert
, not as an arbitrator
and where determination is binding unless
and
until varied or overturned by an arbitration award.
”
(Own emphasis)
[84]
The reference to the adjudication being
overturned by an arbitration award is in conflict with clause 40.3.3
of the JBCC contract
applicable here, which states that the
Adjudicator’s decision “
shall
be binding on the parties who shall give effect to it without delay
unless
and until subsequently
revised by a court of law
”
;
and the latter provision would prevail.) Clause 5.4.1 of the
JBCC Adjudication Rules is to the similar effect, as it provides
that: “
The adjudicator shall …
[a]ct as an expert and not as an arbitrator in determining the
dispute”
.”
[85]
According
to Namasthethu, the Court therefore cannot review Mr Garner’s
award as it could under the
Arbitration Act. Its
powers are limited.
In
Chelsea
West (Pty) Ltd v Roodebloem Instants (Pty) Ltd
[12]
it
was held that, unless there is fraud, collusion or capriciousness, or
a manifestly unjust valuation, the parties are bound by
the valuer’s
determination. This was also confirmed in
Civair
Helicopters CC v Executive Turbine CC and Another
:
[13]
“
It
is trite that an expert may consult other persons when necessary and
if required in order to decide the matter submitted, and
may even
adopt views of the persons consulted as his own. Furthermore,
the determination of an expert can be set aside in
limited
circumstances only.
The
principles determining the circumstances in which a Court would
review and set aside a valuer’s determination have been
applied
in respect of the determination of other expert umpires.
According to these principles, the determination of an expert
can be
set aside only in the case of fraud, collusion or capriciousness or
in the event of the issuing of a manifestly unjust valuation.
Otherwise the parties are bound by the expert’s determination”
(Own Emphasis)
[86]
Whilst
I accept the view expressed in the judgments that the expert’s
determination can be interfered with only on a limited
basis, such as
fraud, collusion or capriciousness, there seems to be a nuanced
issue, which is that experts are appointed on the
basis of their
skills and experience.
[14]
[87]
In
this case the expert, who is a professional construction surveyor
consultant not only determined issues in which he had expertise,
he
also went into questions of law that fell outside his experience and
knowledge. It seems to me that the deference that should
be accorded
to experts is based on them being clothed with expert knowledge on a
particular aspect, such as valuation experts.
I do not think, in this
particular case, that clauses 40.1 and 40.2 went as far as to allow
any expert to be appointed as an adjudicator
in relation to any
subject in dispute.
[15]
[88]
Even if I am wrong as to my
understanding of why interference in expert awards is restricted,
besides them being binding on the
parties, there seems to be enough
before the Court to suggest that the determination was manifestly
unjust at least on one ground,
being that a dispute of a legal nature
was determined by a person who was not a legal expert and the
determination clearly demonstrates
that.
[89]
When it initiated the dispute,
Namasthethu itself stressed that the disagreement concerned
termination of the contract, and that
it was “
essentially
of a legal nature, and certainly does not raise any construction
issues requiring the appointment of a construction
professional as
the adjudicator
.
”
It suggested that a suitably qualified advocate or attorney take up
the appointment, should it be necessary. It thereafter
proposed names
of three senior counsel and indicated that should an agreement not be
reached it will approach AASA. AASA appointed,
Mr Garner, who is not
a legal expert, but a surveyor and a construction expert.
Strangely, Namasthethu did not request AASA
to appoint a different
expert with legal expertise. The City stated that it would have
objected to Mr Garner’s appointment,
although it did not
participate. The adjudication nevertheless proceeded. I accept that
the JBCC rules may not permit an objection
to the appointment of the
adjudicator appointed by AASA. That however could not mean that AASA
could not be approached to appoint
an appropriately qualified
expert.
[90]
Clearly the issues to be determined by
the adjudicator were issues of law. Whilst the Statement of Claim
submitted by Namasthethu
to Mr Garner expanded on the issues that had
to be determined, it also referred to issues of a legal nature,
being,
inter alia
,
the termination of the contract and its effect. Issues of whether the
termination constituted repudiation of the contract as Namasthethu
contended, as well as its entitlement to the heads of damages
claimed, amongst others, were all material matters of a legal nature.
[91]
Even if it were to be accepted that the
dispute also contained construction issues, it cannot be disputed
that it arose or was concerned
with the termination of the contract,
the validity of which was placed in dispute. The premise of the
adjudication was evidently
legal in nature, because, it is only when
a determination was made that the adjudicator was empowered to
proceed, that he could
so proceed. Thereafter, the issues of the
validity of the contract, lawfulness of termination, and the effect
thereof became important.
On that score, it was manifestly unjust to
have legal issues determined by a non-legal person.
[92]
In any event, even if Mr Garner was
empowered to look at questions of law. It does not appear that
he engaged at all with
the legal effect of a contract that was placed
in dispute. There is no indication that any evidence relating to the
allegations
of fraud was interrogated and considered, and if it was,
how it was treated is not clear in the determination. Although the
City
did not participate, it sent the Plea statement. It
appears that the determination was largely devoted to the claims for
damages. The legal basis for those claims was hardly examined, except
a mentioning repeatedly of the fact that the claims were valid.
Reliance was placed on the Estimated Damages attached to the
Statement of Claim with no further indication of how they were
assessed
by the adjudicator.
[93]
As
to the issue of termination, only a single mention is made that
Namasthethu claims the termination to have been unlawful, whereas
the
City claims it was lawful. The adjudicator states that the City had
the onus to prove the lawfulness and failed to do so as
it did not
submit such proof.
[16]
This
can hardly be regarded as giving the issue any treatment. Although
Namasthethu had initially indicated that it disputed
the cancellation
of the contract during its correspondence with the City, in the
Statement of Claim it stated that the cancellation
of the contract by
the City amounted to repudiation of the contract, which it duly
accepted and accordingly cancelled the contract.
How the City’s
conduct amounted to repudiation is not dealt with in the
determination.
[94]
It seems that the determination is
arbitrary in the many respects highlighted above. It therefore
falls to be set aside as
being manifestly unjust.
[95]
In view of that finding, I do not need
to consider the issue of whether it can be considered as an arbitral
award, which should
be set aside in terms of the
Arbitration Act. I
am consequently of the view that the Court is at liberty to consider
the issue of whether the agreement was void
ab
initio
, voidable, or otherwise
cancelled on valid grounds.
Was
the agreement void ab initio /voidable/ or otherwise cancelled on
valid grounds?
[96]
The City relied on the forensic
investigations report to terminate its agreement with Namasthethu on
the basis that “
NE has
committed fraudulent acts during the tender process and as a result
the contract was awarded to them.”
It
relied primarily on two grounds, namely, that Namasthethu failed to
disclose that it and its director(s) were convicted of fraud
in the
past five years as required in the tender documents, and secondly, it
falsely claimed to having a Cape Town address whilst
that was not
true. A third ground is stated on the papers (in line with FEID’s
findings) as the use of a fraudulently obtained
grading certificate
to tender for the contract.
[97]
As regards the first allegation, it is
not disputed that R Chetty pleaded guilty to charges of fraud and
corruption. What Namasthethu
states, is that he did so in his
personal capacity and on behalf of the sole proprietorship
“
Nationwide Electrical”
.
It is true that charges against S Chetty were withdrawn and that when
the tender was submitted she was the sole director of Namasthethu.
Two issues need to be determined on this score, (a) whether
Namasthethu was convicted and (b) whether the disclosure required in
the tender documents related to only those individuals that were
directors during the tender process or any individual who was
a
director of the bidding entity in the past five years even if he or
she no longer was during the bidding process.
[98]
Starting with the first issue, the
Charge Sheet that the City relies upon reflected the following:
S Chetty as accused 1 and
as director of accused 3 charged in
her personal capacity in terms of section 332 of the Criminal
Procedure Act 51 of 1977 (“the
Criminal Procedure Act&rdquo
;);
R Chetty as accused 2 and as director of accused 3 charged in
his personal capacity in terms of
section 332
of the
Criminal
Procedure Act; and
Accused 3 is reflected as Namasthethu Electrical
(Pty) Ltd (duly represented by S Chetty in terms of
section 332
of
Act 51 of 1977) on the annexure to the Charge Sheet detailing
charges. Under the General Preamble of this document, it is stated
that, S Chetty was a sole proprietor operating as Nationwide
Electrical since May 2005. Namasthethu was registered on 1 February
2008 and later operated under the trade name, Nationwide Electrical.
It is stated further that “
Namasthethu
Electrical Pty (Ltd) is a company registered in terms of the
Companies Act 61 of 1973 and a corporate body in terms
of
Section 332
(2) of the
Criminal Procedure Act and
hereinafter referred to as
accused 3
.”
[99]
The charges involved bribery of an
official at CIDB where various misrepresentations using false
information were made to CIDB in
order to obtain higher grades which
would enable the accused to qualify for being awarded tenders. The
first charge related to
the period of March to August 2007. The
second one related to August 2007 and February 2008. Before February
2008, we know that
Namasthethu was not yet incorporated. Charge 3
related to the period during October to December 2008, count 4 to the
period of
May to October 2009. It is also recorded that accused 3 was
awarded two projects by the KwaZulu [Natal] Department of Public
Works
on an open tender basis between the period of November 2008 and
July 2011. In addition to that accused 3 was awarded one tender
by
the Eastern Cape Department of Public Works in September 2009. Should
it not have had the required CIDB grade specified at the
time of the
adjudication of these tenders, the proposed tenders would have been
disregarded. Accused 3 received R12 903 033.82
in respect
of the respective tenders awarded.
[100]
The Plea in terms of
section 112(2)
of
the
Criminal Procedure Act relates
to R Chetty, accused 2, and
Nationwide Electrical (duly represented by R Chetty in terms of
section 332
of the
Criminal Procedure Act), accused
3. It was duly
signed by R Chetty as accused 2 and on behalf of accused 3.
[101]
From
the reading of the Charge Sheet and the Plea statement, it could not
be held that the plea of guilty was made in relation to
Nationwide
Electrical as a sole proprietorship, as contended for by Namasthethu.
The General Preamble of the annexure to the Charge
Sheet clearly
mentioned Namasthethu as accused 3. Evidently the charges also
referred to periods in which Namasthethu had already
been
incorporated. Letters from Colonel Naidoo and Adv Harispersad cannot
supersede information stated in the Charge Sheet. Secondly,
section
332
of the
Criminal Procedure Act relates
to prosecution of
corporations and members of associations and not sole
proprietorships. In any event, a sole proprietor is not
a corporate
body or a legal person spoken of in
section 332
(and which can be
sued or cited as a person – separate from R Chetty). R Chetty
himself, in the Plea statement alleges that
he is “
the
duly
authorised representative of accused 3
”
and describes accused 3 as an “
entity
”
that “
trades
under the name and style of Nationwide Electrical
”.
Reference to Nationwide Electrical must therefore be in the context
of Namasthethu’s trading name at least from the
period it was
incorporated. R Chetty further admitted in the Plea both on his
behalf and on behalf of accused 3, to all the charges
as stated in
the Charge Sheet and to charges of corruption for contravening POCA,
which occurred during the period of 17 July 2006
to 11 November 2011.
In this regard, it is stated that the accused acted in common purpose
in relation thereto. To put the issue
that Namasthethu was accused 3
beyond doubt, in the Plea and under counts 8 and 9 of corruption,
reference is made to directors
as follows: “
To
wit being the awarding of certain grades to accused Nationwide
Electrical
and
its directors
…”
[17]
The
periods implicated therein include the periods after Namasthethu’s
incorporation.
[102]
Counsel for Namasthethu submitted that
the Charge Sheet that the City relied on was incomplete. He referred
to a document in which
the words “
Namasthethu”
and “
Pty Ltd”
were deleted and replaced with “
Nationwide
Electrical”.
This, he
contended should tell us that Namasthethu was replaced by Nationwide
Electrical as the accused. Apart from us not knowing
the
circumstances upon which the deletion and insertion came to be, the
phrase (‘
Represented by acc 2
ito
Sec 332(1)
’
) remained.
Counsel for Namasthethu then referred to a handwritten document with
a heading ‘
Sentence’
where accused 3 was deleted at the bottom of the page. He contends
that Namasthethu was not sentenced but only R Chetty was. These
documents were apparently received from Namasthethu’s erstwhile
attorneys who apparently uplifted them from the court file
on 13
November 2015. Once again, how and why the deletion of accused 3 from
that document came about is not clear. Strangely, the
word ‘
are’
next to the reference to ‘
accused
2’
after the deletion of
‘
accused 3
’
is not deleted. We do not know if this is the only page on sentence,
but what is clear is that on the stamped cover of the
Charge Sheet it
is recorded that accused 2 and 3 were found guilty as charged on 7
November 2013. Conviction of accused 2
and 3 cannot be
disputed. Namasthethu’s version that it was not accused 3
is rejected as being palpably implausible,
far-fetched and so clearly
untenable such that it must be rejected on the papers.
[103]
I am not going to spend much time
dealing with the 2016 ruling of the CIDB panel as it could not erase
the 2013 finding of the court
that found accused 2 and 3 guilty. It
was also belated, and came after all the relevant events including
the cancellation of the
contract. Whether or not the court in
Pietermaritzburg incorrectly convicted Namasthethu, is not the issue
I can determine. The
point is that there is a conviction. Whether
such a conviction could not have been supported by the facts is
irrelevant at this
stage.
[104]
As regards, the question of whether on
the form in the tender documents, the Declaration required
information pertaining to current
directors only, my view is that
such interpretation of the form is unduly narrow. It is alleged that
R Chetty resigned as a director
in 2011. He was charged as a director
of, and in relation to his abuse of Namasthethu. So, clearly he was
convicted for acts committed
as a director of Namasthethu. The tender
documents were signed on 1 April 2014. The question asked in
clause 1.3 of the form
is as follows: ‘
Was
the Tenderer or any of its directors convicted by a court of law
(including a court of law outside the Republic of South Africa)
for
fraud or corruption during the past five years?
’
Even though S Chetty, the remaining director, was not convicted, it
was important for the City to know that R Chetty, who
had been a
director of Namasthethu, was convicted in the past five years. R
Chetty was moreover married to S Chetty. It was therefore
important
for the City to know the company it was dealing with, even though the
person spoken of had left. An explanation could
have been given in
clause 1.3.1 which provides space for further explanation.
[105]
As to the second ground for
cancellation, it is common cause that Namasthethu did not have a
physical address in Cape Town. According
to it, it had previously
used services of a project manager to look for premises from which
Namasthethu could operate and the project
manager ascertained that
those premises were available. According to Namasthethu, it did not
take up those premises because the
City provided space for the
premises in the containers.
[106]
This version does not make sense, the
tender form did not ask for a future address but for Namasthethu’s
address. Apart from
the fact that the occupants of the stated address
had no knowledge of Namasthethu, Namasthethu does not state that it
had any rights
to occupy such property or had entered into
negotiations with a view to concluding a possible lease agreement. It
was indeed a
misrepresentation for Namasthethu to give an address in
tender documents well knowing that it was never its address, let
alone
that its address was Durban based. The fact that the City
provided containers on site is a different question altogether and
irrelevant
to the issue that Namasthethu used a false address in its
tender form. Once again its version on this score must also be
rejected
as being palpably false.
[107]
As regards the allegation that Namasthethu used a grading certificate
that was fraudulently obtained, Namasthethu curiously does
not
directly deal with this allegation in the answering affidavit. The
version that Namasthethu only applied for the first time
to the CIDB
in November 2011 is not only hearsay but it does not accord with what
is contained in the Charge Sheet as explained
above. Furthermore,
according to paragraph 10.1 of the CIDB document, L Naidoo stated
that investigations conducted by her attorneys
revealed that “[
t
]
he
first time application was made by the Respondent to the CIDB
was
during November 2011
for
an upgrade and certain renewals
.”
(Own emphasis) It is further stated in the same CIDB panel
document at paragraph 23 that Mr Bouwer testified that
Namasthethu
became a contractor in February 2011 to the CIDB. This is clearly
incorrect. Not only is it contradicted by the former
statement, it is
controverted by the answering affidavit. Furthermore the former
statement reveals that Namasthethu applied for
upgrades and certain
renewals in November 2011, implying that it was already a contractor
by 2011. Other upgrades and renewals
were applied for in 2012 and
2014 according to this document.
[108]
Namasthethu’s attempts to distance
itself from the fraudulent conduct are not sustainable. Even if it
were to be accepted
that the certificate applied for in 2011 was that
which was used for the purposes of the bid in 2014 and it was
possibly “untainted”,
the two previous grounds
constituted good grounds for rescission of the contract. It must also
be remembered that L Naidoo who
deposed to the answering affidavit
and who is a current shareholder and sole director of Namasthethu
claimed to have no knowledge
of what occurred before her time in the
CIDB document, but yet ventures to give details on aspects which
occurred before she was
in charge. It is noteworthy also that no
detail was proffered to the City when Namasthethu was requested to
provide details regarding
the allegations of fraud on numerous
occasions. It simply denied any allegations of fraud.
[109]
I
am satisfied that the requirements of fraudulent misrepresentation
have been met, which rendered the contract voidable at the
instance
of the City, which validly and effectively elected to rescind.
[18]
An incorrect pre-contractual statement was made, relating to material
facts, deliberately so and with the knowledge that it was
false, with
the intention of inducing the contract, and which induced the
contract.
[19]
It is
implausible that there was no intention to defraud the City when the
misrepresentations and non-disclosures were made as
Namasthethu may
seem to suggest. S Chetty who completed the form on behalf of
Namasthethu, in any event, has not vouched to any
lack of intent. L
Naidoo was not a director at the time of the bidding process and any
averments as to intent cannot carry much
weight.
[110]
Giving
effect to the Regulations, the SCM policy provides for rejection of
the bid if the bidder or any of its directors had been
convicted of
fraud or corruption during the past five years.
[20]
I am persuaded therefore that because the City deals with public
funds and is obliged to act in line with its statutory and legal
obligations on management of public funds and combating of fraud and
corruption, it would have been constrained to conclude the
contract
with Namasthethu had it known that it and its directors had been
convicted of fraud, in the period of five years prior
to the
tendering process.
[111]
I take note of Namasthethu’s
Counsel’s point that the City relies on FEID’s
investigation report in its founding
affidavit whilst no confirmatory
affidavits have been attached and therefore that report constitutes
hearsay. Apart from the fact
that this issue was not raised in the
answering papers, whilst it may be argued that the report constitutes
hearsay, the Charge
Sheet and Plea statement made in terms of
section
112
(2) of the
Criminal Procedure Act cannot
be regarded as hearsay.
I say so because those would be court documents and findings that
exist as a matter of fact. Namasthethu
has not disputed that and has
not said those documents themselves constituted hearsay; it merely
gives a different interpretation
or explanation to that which the
City offers, pertaining to the Charge Sheet and the Plea statement
(particularly as to who was
in fact charged and convicted). It also
supplements those documents with pages it said were missing from the
City’s version.
In the end, the Court objectively assessed the
respective court documents and versions proffered thereto by itself,
in order to
ascertain whether Namasthethu and its director(s) were
indeed convicted of fraud in the past five years, a fact that ought
to have
been disclosed in the tendering process.
[112]
Ultimately, my view is that the City
annexed information it relied on when it ended the contract, which
the Court independently
assessed. The issue of the incorrect physical
address given by Namasthethu in the form was dealt with in the
founding papers and
responded to by Namasthethu. I accordingly reject
the defence that the City’s allegations constituted hearsay.
Waiver
of right to cancel and the doctrine of election
[113]
As to the issues of whether the City
waived its right to cancel the contract due to its conduct and
delays, in my view, the City
could not have cancelled the contract
simply based on allegations by Citrine. It had to investigate the
allegations and take steps
only when the alleged conduct of
conviction for fraud had been confirmed. This is also because
Namasthethu had denied any wrong-doing.
I am not sure that it could
stall the project for which the tender was awarded pending the
investigations. Same can be said as
to the time the City took in
which to elect to rescind the contract.
[114]
Namasthethu alleges that it was unlawful
for the City to terminate the contract without having followed the
procedures in the SCM
Policy immediately after the complaint of fraud
was laid. In terms of the SCM Policy where “
the
City has obtained prima facie evidence
”
of improper conduct on the part of the tenderer including fraud,
certain steps should be followed to address the matter
which may
culminate into an adjudicative process where a Presiding Officer is
appointed.
[115]
In
my view, the process in the policy did not need be followed for the
contract to be terminated. It has also been held that “
[a]fter
a tender has been awarded, the relationship between the parties….was
governed by the principles of contract.”
[21]
Furthermore, as was held, in
Okuli
Security Services CC v City of Cape Town and Others
In
re: Comwezi Security Services (Pty) Ltd v City of Cape Town and
Another; In re: Command Security Services SA (Pty) Ltd v City
of Cape
Town and Another
[22]
,
“no substantive right to demand application of the Abuse Policy
is vested in the applicants in terms of the policy”.
[116]
It is useful to note that clause 4.1.1
of the SCM policy document empowers the City Manager to, after
verification with a person,
automatically
reject the tender of such a person
,
if the person has been convicted of fraud and corruption during the
past 5 (five) year period immediately preceding the invitation
of the
tender in question. The tendering procedure document contains a
largely similar provision. The summary rejection of the
tender when
conviction for fraud is involved gives an idea of how the SCM Policy
and Regulations view such conduct.
[117]
In any event, it does appear that an
investigation process was undertaken by the City to verify the
information it received before
cancellation of the contract and
Namasthethu was given an opportunity to comment on the allegations of
convictions and misrepresentations
made in the tender documents. The
correspondence between the parties and the FEID report bear such
engagement.
[118]
For these reasons, the City’s
application must succeed. The City in its notice of motion prayed for
the contract to be declared
as either “void
ab
initio
” or “validly
terminated”, whereas, in its replying affidavit and argument it
submitted that the agreement was
“void” alternatively was
voidable and had been validly voided.
[119]
In
keeping with the case law as to the general position
[23]
,
I have found that the contract was voidable as a result of fraudulent
misrepresentations; and therefore validly rescinded by the
City on 15
March 2016.
[120]
Based on the nature of the case, I would
award costs on a scale as between attorney and client.
[121]
In the result, I make the following
order:
1.
The determination of the Second
Respondent which was delivered on 24 August 2016 in favour of the
First Respondent is set aside.
2.
It is declared that the agreement
concluded between the Applicant and the First Respondent in November
2014 consequent upon the
award of tender no 240Q/2013/14 to the First
Respondent by the Applicant was voidable and accordingly validly
rescinded by the
Applicant on 15 March 2016.
3.
The First Respondent is to pay the costs
of this application, including costs of two counsel on attorney and
client scale.
_____________________
N P BOQWANA
Judge of the High
Court
APPEARANCES
For
the Applicant: Adv P Farlam SC and Adv T Mayosi
Instructed
by: William Da Grass Attorneys, Athlone, Cape Town
For
the First Respondent: Adv S Rosenberg SC and Adv C de Villiers
Instructed
by: Anand-Nepaul Attorneys, Durban, c/o Von Lieres, Cooper, Barlow &
Hangone, Cape Town
[1]
2013
(5) SA 1 (SCA).
[2]
As summarised by the SCA,
ibid
at para 8.
[3]
North
East
(above n 1) at para 12.
[4]
2007
(4) SA 452
(SCA) at para 13.
[5]
[1941]
1 All ER 337
(HL) at 343 F.
[6]
North
East
(above
n 1) at para 14.
[7]
North
East
(above n 1) at para 15.
[8]
Ibid
at para 23.
[9]
Ibid
at
para 25.
[10]
Heyman
supra at 357 B-D.
See
also
Gutsche
Family Investments (Pty) Ltd v Mettle Equity Group
2007 (5) SA 491
(SCA) at para 14, where it had been argued that an
arbitrator was empowered to finally determine his own jurisdiction,
the Court
held that the agreement must provide so specifically and
in the clearest terms.
[11]
North
East
(above n 1)
at
para 30.
[12]
1994
(1) SA 837
(C) at 856 C-D.
[13]
2003
(3) SA 475
(W) at para 34.
[14]
This dicta in
Chelsea
(above n 12)
at
845E-F
is apposite
: “
It
is clear then from these authorities that the valuer's duty is not
to hear and determine a dispute,
but
to decide the question submitted to him by the exercise of his
honest judgment and skill without a judicial inquiry
.
See Joubert (ed) The Law of South Africa vol
1 sv 'Arbitration' para 462 at 620. Obviously the
valuer/expert
must act honestly, impartially and fairly, but that
does not mean he is to be treated as a judge or an arbitrator
.
See Sutcliffe v Thackrah and Others
[1974] 1 All ER 859
(HL) at 864b-c, 870c-d, 882j.The position of an arbitrator in the
true sense is very different. He acts in a quasi-judicial capacity
and must conduct himself accordingly…
”
[15]
It is also worth noting that clause 40.3.3 of the agreement provides
that the adjudicator’s decision shall be binding unless
and
until revised by a court of law.
[16]
See para [34] above.
[17]
Own emphasis.
[18]
In
Bowditch
v Peel and Magill
1921 AD 561
at 572 it was held that “
A
person who has been induced to contract by the material and
fraudulent misrepresentations of the other party may either stand
by
the contract or claim a rescission. (Voet, 4.3, secs. 3, 4, 7).”
See
also the discussion on the effect of misrepresentation on a contract
in
Christie’s
Law of Contract in South Africa, 7
th
Ed, LexisNexis
(2016) at 332-3.
[19]
See
Christie’s
Law of Contract in South Africa
at
315 and
LAWSA
vol 9 3
rd
Edition: “Contract, Fraudulent Misrepresentation” at 318
(a) to (e).
[20]
See clause 4.1.1 of the SCM policy document, for instance and
sub-regulation 38 (1) (g) of the Regulations.
[21]
See
Government
of RSA v Thabiso Chemicals (Pty) Ltd
[2008] ZASCA 112
;
2009 (1) SA 163
(SCA) at para 18.
[22]
An
unreported
judgment of 24 June 2016 under case numbers: 19871/2015, 19872/2015,
19873/2015 at para 127.
[23]
See
Christie’s
Law of Contract in South Africa
at
315, fn 1 where the authors, note that “
Many
authorities refer to the innocent party’s right to ‘repudiate’
the contract, but in recent years it has
become more common to refer
to the innocent party’s right to ‘rescind’, or
‘resile from’ the contract.”
See
also para [109] above
.