Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa and Another v Hidro-Tech Systems (Pty) Ltd (175/09) [2010] ZASCA 23; 2010 (3) SA 365 (SCA) ; [2010] 4 All SA 80 (SCA) (25 March 2010)

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[2010] ZASCA 23
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Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa and Another v Hidro-Tech Systems (Pty) Ltd (175/09) [2010] ZASCA 23; 2010 (3) SA 365 (SCA) ; [2010] 4 All SA 80 (SCA) (25 March 2010)

THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No:
175/09
In
the matter between:
VIKING
PONY AFRICA PUMPS (PTY) LTD t/a
TRICOM
AFRICA 1
ST
Appellant
BUNKER
HILLS PUMPS (PTY) LTD t/a
TRICOM
SYSTEMS 2
ND
Appellant
and
HIDRO-TECH
SYSTEMS (PTY) LTD
Respondent
Neutral
citation
:
Viking Pony
Africa Pumps v Hidro-Tech Systems
(175/09)
[2010] ZASCA 23
(25 March 2010)
Coram:
MPATI
P, HEHER, MLAMBO, BOSIELO JJA AND SALDULKER AJA
Heard:
9
March 2010
Delivered:
25
March 2010
Updated:
Summary:
Tender
process – Preferential Procurement Policy Framework Act –
Regulations – duty of organ of state to act when it detects
that a
preference has been obtained on a fraudulent basis – when duty
arises – nature of action contemplated – whether organ
of state
in breach of duty.
____________________________________________________________________________________
ORDER
On
appeal from:
Cape
of Good Hope Provincial Division (Irish AJ sitting as court of first
instance).
The
appeal is accordingly dismissed with costs.
_______________________________________________________________________
JUDGMENT
___________________________
__________________________________________
HEHER
JA (MPATI P, MLAMBO, BOSIELO JJA and SALDULKER AJA concurring):
[1] A
tender for the provision of goods or services to an organ of state is
regulated by the Preferential Procurement Regulations
published
1
pursuant to the provisions of the
Preferential Procurement Policy
Framework Act 5 of 2000
. A contract must be awarded to the tender
which scores the highest points.
2
Points earned for the tender price and functionality and local
manufacture may be supplemented by a preference also reflected in
points. Such points are earned by being a Historically Disadvantaged
Individual (HDI), for subcontracting with an HDI and for achieving
certain specified goals
3
and also for equity ownership by HDI’s.
4
A tenderer who claims preference points on any basis has, as do all
tenderers, to declare that information provided in the tender
is
correct.
5
[2] Corruption
in the tender process is endemic. This appeal concerns the
interpretation and application of reg 15(1) with particular
reference
to the duty imposed on an organ of state to act against a person who
has obtained a preference by fraud.
[3]
Regulation 15
is headed ‘Penalties’ and provides as follows:
‘
(1) An
organ of state must, upon detecting that a preference in terms of the
Act and these Regulations has been obtained on a fraudulent
basis, or
any specified goals are not attained in the
performance
of the contract, act against the person awarded the contract.
(2) An
organ of state may, in addition to any other remedy it may have
against the person contemplated in subregulation (1) -
(a)
recover
all costs, losses or damages it has incurred or suffered as a result
of that person’s conduct;
(b)
cancel
the contract and claim any damages which it has suffered as a result
of having to make less favourable arrangements due to
such
cancellation;
(c)
impose
a financial penalty more severe than the theoretical financial
preference associated with the claim which was made in the tender;
and
(d)
restrict
the contractor, its shareholders and directors from obtaining
business from any organ of state for a period not exceeding
10
years.’
[4] The
first appellant (‘Viking’ trading as Tricom Africa) and the
second appellant (Bunker Hill Pumps (Pty) Ltd ‘Bunker Hill’
which
trades as Tricom Systems,) are companies that supply and install
mechanical equipment for water and sewerage treatment works
from a
common place of business in Bellville.
[5] The
respondent (‘Hidro-Tech’) carries on similar business activities
from premises in Cape Town. It is a competitor of the
appellants. The
origin of the present dispute lies in Hidro-Tech’s repeated lack of
success in winning contracts put out to tender
by the City of Cape
Town (‘the City’). Several of these contracts were awarded to
Viking despite the submission of lower tender
prices by Hidro-Tech.
The inference which Hidro-Tech drew was that Viking succeeded because
of preference points derived from its
HDI profile.
[6]
Regulation
13
provides (to the extent relevant):
‘
(1) Preference
points stipulated in respect of a tender must include preference
points for equity ownership by HDIs.
(2) The
equity ownership contemplated in subregulation (1) must be equated to
the percentage of an enterprise or business owned by
individuals or,
in respect of a company, the percentage of a company’s shares that
are owned by individuals, who are actively involved
in the management
of the enterprise or business and exercise control over the
enterprise, commensurate with their degree of ownership
at the
closing date of the tender.
(3) In
the event that the percentage of ownership contemplated in
subregulation (2) changes after the closing date of the tender,
the
tenderer must notify the relevant organ of state and such tenderer
will not be eligible for any preference points.
(4) Preference
points may not be claimed in respect of individuals who are not
actively involved in the management of an enterprise
or business and
who do not exercise control over an enterprise or business
commensurate with their degree of ownership.’
[7] Hidro-Tech
had its suspicions about the genuineness of Viking’s HDI
representivity but it was not until two former directors
and
employees of that company joined it that it was able to obtain
apparent confirmation.
[8] On
17 January 2008 Jacques Viljoen Attorneys of Bellville caused two
letters to be delivered to the City, addressed to the head
of Tenders
and Contracts and marked for the attention of Mr Ian Bindeman.
Together they contain the information on which Hidro-Tech
relied in
its application to court as having given rise to the duty on the City
to act against Viking and Bunker Hill. I therefore
set their content
out in full:
‘
RE:
FRONTING PRACTICES OF VIKING PONY AFRICA PUMPS (PTY) LTD T/A TRICOM
AFRICA REGISTRATION NUMBER: 2000/021393/07
We
refer to the above and advise that we act on behalf of Hidro -Tech
Systems (Pty) Ltd.
Our
instructions are as follows:
1. Our
client was unable to procure certain contracts from the City of Cape
Town, despite having tendered the lowest contract price.
2. Our
client failed to procure these contracts due to the fact that our
client’s HDI status is measured at 30% whilst Tricom Africa’s
status is indicated as 70%.
3. Our
client suspects that Tricom Africa is engaging in f ronting practices
in that:
3.1 Historically
Disadvantaged Individuals being directors and shareholders are
introduced on a basis of tokenism and are discouraged
and inhibited
from substantially participating in the core activities of Tricom
Africa in that they are being excluded from any management
decisions;
3.2 the
economic benefits received by Tricom Africa, because of its HDI
status, do not flow to Historically Disadvantaged Individuals
in the
ratio as specified per their shareholding in Tricom Africa;
3.3 Tricom
Africa is utilized as an opportunistic intermediary whilst the actual
benefit received from tenders awarded to Tricom Africa,
are routed to
a sister company known as Bunker Hills Pumps (Pty) Ltd t/a Tricom
Systems (“Tricom Systems”), which company is
wholly white owned.
We
are of the opinion, after having consulted with two former directors
of Tricom Africa and Tricom Systems, that the fronting practices
referred to in paragraph 3 above exist and accordingly request you to
urgently investigate this matter.
In
order to assist you in your investigations, our client has requested
us to prepare a separate confidential document, which shall
be
furnished to you under separate cover detailing the manner in which
Tricom Africa is conducting these fronting practices.
Kindly
contact the writer if any further details and/or assistance are
required.
We
await to hear from you.’
[9] The
text of the accompanying letter was as follows:
‘
RE
CONFIDENTIAL INFORMATION REGARDING FRONTING PRACTICES OF TRICOM
AFRICA
We
refer to our letter of even date and, as undertaken, furnish you
herewith, with the confidential information to be utilized by
you, in
your investigations into the fronting practices of Tricom Africa.
We
have been instructed to bring the following to your attention:
1. A
former director of Tricom Africa, Mr Johannes James, is now in the
employ of our client.
2. Mr
James was a director of Tricom Africa for 3 years during 2003 until
20 06.
3. Mr
James was also a shareholder of Tricom Africa and held a 35%
shareholding in that company.
4. Mr
James is a Historically Disadvantaged Individual.
5. A
former director of Tricom Systems, Mr Heinie Zandberg, is also now in
the employ of our client.
6. Mr
Zandberg was a director of Tricom Systems during 2006.
7. Mr
Zandberg was also a shareholder of Tricom Systems and held a 10%
shareholding in that company.
8. In
addition Mr Zandberg was also an employee of Tricom Africa.
9. Attach
hereto marked “A” are copies of extracts from the records of the
registrar of Companies from which it is evident that
the two
companies, Tricom Africa and Tricom Systems, share certain directors.
10. Tricom
Africa has one Historically Disadvantaged Individual director, Mr
Daniel Mosea, who is also a 70% shareholder of that company.
11. Tricom
Systems on the other hand is wholly white owned.
12. During
the period May – December 2006, whilst Mr Zandberg was an employee
of Tricom Africa, he received a monthly remuneration
package of R23
500.00 together with medical aid, a company credit card for expenses
as well as a petrol card. Of the R23 500.00 an
amount of R13 500.00
was paid by Tricom Africa whilst the further amount of R10 000.00 was
paid by another entity known as New
Heights. Furthermore Mr Zandberg
was entitled to spend R10 000.00 per annum on the company credit card
with no strings attached.
13. Whilst
Mr Zandberg was an employee of Tricom Africa, Mr James, who was a
director of Tricom Africa, received a monthly remuneration
package of
only R5 600.00 together with medical aid but no company credit card
or petrol card.
14. During
his time as director of Tricom Africa Mr James was never involved in
any meaningful business decisions in respect of the
company and was
never informed of the financial status of the company nor did he have
any access to financial statements, financial
records or any
management accounts. He was also never informed of how dividends were
calculated.
15. It
must also be noted that despite the fact that Tricom Africa has an
estimated annual turnover in excess of R35 000 000.00 with
an
approximate net profit of R1 500 000.00, Mr James, upon resigning
from Tricom Africa, only received an amount of R23 000.00 for
his 35%
shareholding in that company. In addition, Mr James, being a 35%
shareholder, only received dividends of R47 000.00 over
the three
year period whilst he was a shareholder and director of this company.
16. In
contrast to the above, Mr Zandberg, was given the opportunity to
purchase shares in Tricom Systems during May 2006. At the
time the
value of the shareholding of both Tricom Africa and Tricom Systems
were valued in an amount of R6 000 000.00.
We
trust that you shall be able to utilize the abovementioned
information in your investigations. We suggest that in the event of
you being desirous to contact Messrs James or Zandberg, you do so via
our offices in consultation with the writer.
We
urge you to treat the abovementioned information as extremely
confidential as our client may contemplate legal action against
Tricom
Africa and would not like any evidence to be destroyed once
Tricom becomes aware of your investigations into their fronting
practices.
Kindly
contact the writer if any further information or assistance is
required.’
[10] On
8 February 2008 the attorneys followed the earlier letters with
another on the same subject:
‘
We
refer to the above and in particular to our letter dated 17 January
2008 which was delivered to your Mr Bindeman by hand on 17
January
2008 and the subsequent telephone conversations the writer had with
your Mr Bin deman.
We
confirm your Mr Bindeman’s advices that the fronting practices by
the Tricom Group as evidenced by our abovementioned letters
were
reported to your data base managers, Quadrem Tradeworld. We further
confirm your Mr Bindeman’s advices that after Quadrem
Tradeworld
approached the Tricom Group, they were informed that a shareholders
change is currently taking place and those details
of such
shareholders change will be provided within 7 days.
We,
with respect, wish to point out that the above actions are not
sufficient in that Quadrem Tradeworld do not have the ability nor
is
it their function to investigate the allegations of fronting made by
our client. They are merely managing your data basis.
We
therefore, once again, bring to your attention the fronting practices
taking place within the Tricom Group as set out in our letters
of 17
January 2008.
We
urge you to have regard to what constitutes a fronting practice such
as:
1. Historically
Disadvantaged Individuals being directors and shareholders are
introduced on a basis of tokenism and are discouraged
and inhibited
from substantially participating in the core activities of a business
and are excluded from management decisions.
2. The
economic benefits received by a business, because of its HDI status,
do not flow to Historically Disadvantaged Individuals
in the ratio as
specified per their shareholding in such business.
The
practices alluded to above cannot be properly investigated by Quadrem
Tradeworld as it is not in their brief to do so, as they
are merely
data basis managers. It is up to the City of Cape Town to investigate
these fronting practices and to ascertain whether
such practices are
taking place and to act accordingly once such practice has been
established.
We
wish to place on record that our client has suffered damages as a
result of contracts being awarded to the Tricom Group based merely
on
their HDI status whilst in fact they were and still are undertaking
fronting practices. In this regard we refer to the Race Course
Road
Pump Station (tender number WR11/2007), which was awarded to them
whilst our client had submitted the lowest tender. We also
understand
from our client that an award is about to be made in respect of the
Potsdam Filter Pump Station Upgrade (tender number
Q07/114) and that
the Tricom Group in all likelihood will once again be awarded this
contract based on their HDI status when in fact
they are partaking in
fronting practices which practices are defeating the whole object of
Black Economic Empowerment.
We
have accordingly been instructed by our client to demand from you, as
we hereby do, that the City of Cape Town urgently investigate
the
fronting practices of the Tricom Group failing which our client shall
have no alternative but to approach the High Court for
an interdict
compelling the City of Cape Town to do so and furthermore claim
damages from the City of Cape Town for the financial
losses suffered
and to be suffered by our client as a result of tenders being awarded
to the Tricom Group of Companies in circumstances
where they are
conducting fronting practices.’
[11] Not
receiving a response which satisfied his client, Mr Viljoen wrote
again on 19 February in the following terms:
‘
We
refer to our letters dated 17 January 2008 addressed to your Mr Ian
Bindeman, our telefax addressed to your Mr Leonard Shnaps dated
8
February 2008 as well as the subsequent telephone conversation with
your Mr Shnaps on 18 February 2008.
We
confirm that during a telephone conversation on 11 February 2008,
regarding the contents of our letters under reference, we were
advised by Mr Shnaps that the City of Cape Town is unable to take any
action against Tricom at this stage, and that our client’s
remedy
would have to be to approach the High Court. During the telephone
conversation with Mr Shnaps on Monday 18 January 2008, during
which
writer pointed out various statutory provisions relating to this
issue, writer was advised to address another letter to the
City,
referring to the particular applicable statutory provisions, upon
receipt of which Mr Shnaps would take the matter up with
the City’s
legal advisors and revert to us on an urgent basis.
Our
understanding of the situation, after having consulted counsel, is as
follows:
1. On
the evidence that we have presented in our letter of 17 January 2008
(which letter is marked “confidential”), there can
be absolutely
no doubt that Tricom was and possibly still is guilty of fronting
practices and/or fraudulent representation of its
HDI status. We
annex hereto as “A” and “B”, copies of affidavits by Messrs
James and Zandberg, confirming the contents of
the abovementioned
letter addressed to your Mr Bindeman dated 17 January 2008. We have
every reason to believe that these unlawful
practices are ongoing.
2. The
relevant legislation, subordinate legislation and policy documents
that we wish to bring to your attention (although this should
not be
necessary), are the following:
2.1 In
terms of sec. (b) of the “Guidelines on Complex Structures and
Transactions, and Fronting (previously statement 002)” of
the
Department of Trade & Industry (a copy of the relevant pages
being annexed as “C” hereto): “
Fronting
means a deliberate circumvention or attempted circumvention of the
BBBEE Act
6
and the codes
”
and includes “
window-dressing
”
which include the situation where black people are appointed or
introduced to an enterprise on the basis of tokenism;
2.2 Item
9.4, Vol. 1 of the Procurement Policy Initiative of the City of Cape
Town (a copy of the relevant pages being annexed as
“D”), in
terms of which a contractor found guilty of “
misrepresenting
any facts in respect of either ownership or empowerment indicator,
either in a tender submission, or on the supplier
data base, in order
to effect the outcome of a tender, either before or after the award
of a contract, (shall) with the approval
of the Implementing Agent,
be blacklisted on the supplier data base for a period of 12 months
and shall be notified accordingly.
The effect of such blacklisting is
that absolutely no further work may be awarded to that contractor
for
the duration of the blacklisting”.
2.3 Section
13(4) of the Preferential Procurement policy Framework Act, 5 of
2000, which forbids the claiming of preference points
in respect of
individuals who were not actively involved in the management of an
enterprise or business and who do not exercise control
over an
enterprise or business commensurate with their degree of ownership;
2.4 Section
15(1) of the said Act (copies of the relevant pages are annexed as
“E”) in terms of which
an
organ of state
must
,
upon detecting that a preference . . . has been obtained on a
fraudulent basis
,
act against the person awarded the contract, and Section 15(2) in
terms of which an organ of state may,
inter
alia
,
cancel the contract and claim damages, impose a financial penalty,
and restrict the contractor, its shareholders and directors from
obtaining business from any organ of state for a period not exceeding
10 years.
7
2.5 Section
8 of the Promotion of Administrative Justice Act, 3 of 2000 (a copy
of the relevant pages are annexed as “F”), setting
out the relief
that may be granted together with judicial review proceedings,
including [in sub]paragraph 1(c)(ii)(bb)] directing
the administrator
or any other party to the proceedings to pay compensation and in
terms of sub-section 8(1)(e), granting a temporary
interdict or other
temporary relief.
3. You
are also reminded of the common law principle that “
fraud
unravels everything
”,
which is particularly pertinent to this situation.
4. According
to our instructions, apart from instances in the past where our
client has lost tenders to Tricom (in respect of which
our client’s
rights to claim damages are reserved), there are two current tenders
which are affected, namely:
4.1 Tender
no WR11/2007 in respect of the Race Course Road Pump Station, which
we believe was awarded to Tricom on or about 15 December
2007; and
4.2 Tender
no Q07/114 for the Potsdam Filter Pump Station upgrade, in respect of
which the tenders closed on or about 14 December
2007, but which ha s
not yet been awarded.
5. Our
instructions are to demand that we be given the assurance by no later
than 17h00 on
Tuesday
26 February 2008, that the City of Cape town will:
5.1 on
an urgent basis investigate, or cause to be investigated, the
fronting practices of Tricom and act in accordance with the relevant
legislation and policy guidelines that we have referred to. In this
regard we point out that it is of no use whatsoever to simply
refer
the matter to the database managers, Quadrem Tradeworld (as your Mr
Bindeman has done), who has already advised writer hereof
that they
do not conduct any investigations “behind” the stated
shareholding of a company; and
5.2 immediately
suspend all work on the Race Course Project and completion of the
tender process in respect of the Potsdam Project,
pending the outcome
of any investigation,
failing
which, our client shall have no alternative other than to approach
the High Court on an urgent basis for a
mandamus
,
compelling the City to comply with its aforesaid obligations and a
temporary interdict halting the aforesaid projects, pending the
outcome of such investigations.’
In
their enclosed affidavits Messrs James and Zandberg each confirmed
the truth and correctness of the contents of the confidential
letter
in so far as it related to him.
[12] In
short, the two letters of complaint alleged that Viking had
(1)
tendered for and been awarded contracts on the strength of its HDI
status as represented in its tender submissions; and
(2)
misrepresented its HDI status in that its HDI directors were token
appointees excluded from active participation in management,
decision-making and oversight of its financial affairs.
The
complaints were buttressed by affidavits from one former HDI
shareholder and director (James) and one former non-HDI shareholder
and director (Zandberg) confirming that HDI directors and
shareholders did not receive financial benefits proportionate to
their
ostensible shareholding and measure of control and that the
profits accrued by the award of the tenders were largely passed on to
Bunker Hill, whose directors and shareholders were not historically
disadvantaged persons. The inference necessarily borne by these
allegations is that Mosea, who took over James’s 35% shareholding
and now holds 70% of the equity of Viking, is likewise a puppet
of
those who control Bunker Hill.
[13] As
counsel for the appellants readily conceded, the substance of the
complaint was serious. It was reinforced by the confirmation
of
persons who might reasonably be expected to know the truth. The City
had no well-grounded reason to doubt their veracity or reliability.
I
will, for the moment, postpone reference to the City’s reaction and
response to the complaint. Suffice to say that Hidro-Tech
found it
unsatisfactory. It was advised that the City had been obliged by
reason of the substance of the complaint to act against
Viking and
Bunker Hill as contemplated by reg 15(1) but refused to do so and
that the City was also in breach of its own Procurement
Policy
Initiative (which had been referred to in its letter of 19 February
2008).
[14] Hidro-Tech
applied to the Cape High Court for an order against the City and
Viking in the following terms:
‘
That
a
rule
nisi
be
issued calling upon the First Respondent and any other interested
parties to show cause, on a date to be determined by this Honourable
Court, why an order in the following terms should not be made:
2.1 That
the First Respondent be ordered to act against the Second Respondent
in accordance with section 15 of the Regulations promulgated
in terms
of the
Preferential Procurement Policy Framework Act, 5 of 2000
;
2.2 That
the First Respondent acts against the Second Respondent in accordance
with item 9.4 of the Procurement Policy Initiative
of the City of
Cape Town;
2.3 In
the alternative to paragraphs 2.1 and 2.2 above, and only in the
event of the Honourable Court finding that further investigation
is
required in order to enable the First Respondent to so act against
the Second Respondent, that the First Respondent
8
be ordered to conduct or cause to be conducted a sufficiently
thorough investigation into the Applicant’s complaint of fronting
practices by the Second Respondent, which investigations must be
concluded within a reasonable time period, but no longer than two
months from the date of such order;
2.4 That,
in the event of the Honourable Court ordering that a further
investigation is required as prayed for in paragraph 2.3 above,
no
tenders for contracts be awarded to the Second Respondent by the
First Respondent, pending the conclusion of such investigation;
2.5 Costs
of the application to be borne by the Respondents’.
[
15] Viking,
Bunker Hill and the City opposed. The companies made common cause and
filed extensive affidavits supported by the production
of minutes of
meetings of Viking’s
directors
and Management Meetings of ‘the Tricom Group’ and ‘the Tricom
Board’ as well as a Shareholders’ Agreement between
the
shareholders of Viking concluded on 3 August 2004 to which Messrs
Mosea and James as well as other (white) shareholders were
parties.
The primary focus of the opposition appeared to be the rebuttal of
what was perceived as a case of fraudulent misrepresentation
made in
the founding affidavit. As counsel for the appellants conceded, that
approach was misconceived because the true nature of
Hidro-Tech’s
case was to persuade the court that
the
substance of the complaint
was sufficient to trigger the City’s duty under reg 15(1).
[16] The
affidavits filed on behalf of the City, deposed to by Messrs Bindeman
and Shnaps, were principally addressed to establishing
that the City
had given (and would continue to give) serious attention to the
complaint.
[17] The
application was argued before Irish AJ. He made a final order in the
following terms:
‘
1. The
First Respondent is ordered to act against the Second Respondent in
accordance with
section 15
of the Regulations promulgated in terms of
the
Preferential Procurement Policy Framework Act 5 of 2000
;
2. The
First, Second and Third Respondents are ordered , jointly and
severally, to pay the costs of the application, including the
costs
occasioned by the amendment of the notice of motion.’
9
The
careful judgment of the learned judge is now reported as
Hidro-Tech
Systems (Pty) Ltd v City of Cape Town and Others
2010 (1) SA 483
(C).
[18] The
key findings of the learned judge may conveniently be summarised in
his own words:
‘
On
the probabilities established by the Second Respondent’s own
documentation together with the allegations of the applicant which
have not been denied, I am satisfied that neither James nor Mosea
were actively involved in the management of the Second Respondent
or
exercised control over it to an extent commensurate with their
respective shareholdings at the time of the
submissions
by the Second Respondent of the tenders awarded in
the
years 2006 and 2007 and set out in annexure “RJV3” to the
founding affidavit.’
10
As
to the role played by the City, the learned judge wrote:
‘
It
is probably true that the First Respondent’s officials felt
somewhat unsure of their powers, given the wording of the
regulations.
But they nevertheless did regard themselves as obliged
to investigate the complaint. The real problem is that their
investigation
did not address the complaint.
11
‘
I
accordingly find that the applicant was justified, firstly, in
bringing the complaint to the attention of the First Respondent and,
secondly, in forming the opinion that the First Respondent’s
response to such complaint was wholly inadequate to safeguard the
applicant’s constitutional rights and legitimate commercial
interests.’
12
[19] As
to the proper interpretation of reg 15 in the context of the Act and
Regulations designed to fulfil the constitutional role
of a mechanism
to ensure openness and accountability in public procurement, Irish AJ
concluded:
‘
If
the Minister had intended that action only be taken “after
establishing”, or “after satisfying itself” or any other of
the
many other phrases routinely employed in regulatory enactments, he
would presumably have said so. In my view, in employing the
participle “detecting”, the Minister intended to cast a very wide
net, precisely so as to ensure that an organ of state be proactive
in
responding to the reasonable possibility that a preference has been
obtained fraudulently, or that a specific goal of its preferential
policy in terms of which a contract was awarded is not being
pursued.’
13
And,
further:
‘
In
my view, the action to be taken by the organ of state is dependent
upon the nature of the information that reaches it. If that
information constitutes what is at face value no more than a credible
complaint, seriously advanced, of the obtaining of a preference
by
fraudulent means, then the organ of state must act (and would
presumably usually so do) by requiring the tenderer in question
to
provide proof of its real and operative HDI status. The organ of
state might appoint a forensic accountant to analyse any proof
furnished on its behalf; or to assist it in calling for such further
documentation as might be required. There is no undue hardship
in
requiring a tenderer who has claimed a certain status from being
required to justify that claim. Indeed, an entity that does not
wish
to be put in the position of having to justify a claimed HDI status,
should not claim such when tendering.’
14
[20] Irish
AJ granted the unsuccessful respondents leave to appeal to this
Court. The City did not participate in the appeal. It elected
to
abide our decision.
[21] Counsel
were
ad idem
before
us that the court
a quo
had
erred in entering upon an assessment of the probabilities and in
relying upon evidence adduced in the application that went beyond
the
content of the complaint to the City.
[22] I
hope I do Mr Dickerson, counsel for the appellants, no injustice when
I describe his argument as consisting of two major submissions,
one
factual, the other legal.
[23] The
first argument was to the following effect:
1. Hidro-Tech
had, both in its correspondence and founding affidavit, made claim
only to an investigation by the City. Its grouse
was that the
investigation which the City had purported to undertake did not
address the complaint.
2. Viking
and Bunker Hill had never been opposed to a proper investigation by
the City. But a failure to investigate properly or at
all was
insufficient to breach reg 15 because the compulsion to act could
only arise after the completion of any investigation. Until
then
there could not be said to be a detection of fraudulent preferment
because to ‘detect’ meant to ‘establish as a fact’.
3. From
the evidence placed before the court
a
quo
, the City regarded
investigation of the complaint as necessary. It was equally clear
that its investigation had not been completed
before the application
was brought. Therefore the duty to act had not arisen, could not have
been breached and the order of the court
a
quo
that its act was
incompetent or, at least, premature.
[24] I
do not agree with counsel’s analysis of the correspondence or the
founding averments. The thrust of Mr Viljoen’s letters
to the City
was the spelling out of facts which justified an immediate inference
of fraudulent preferment: ‘. . . there can be
absolutely no doubt
that Tricom was and possibly still is guilty of fronting practices’
(letter of 19 February 2008). In the same
letter he called upon the
City, ‘on an urgent basis’ to ‘investigate . . . and act’. In
my view the call to investigate was
not an acknowledgement that the
fraud was not established on the face of the complaint, but was
merely a practical recognition that
the City might first wish to try
to confirm the allegations. The cardinal response which Hidro-Tech
demanded was action.
[25] The
content of the founding affidavit is in essence a reiteration of the
factual allegations made in the letters. The case is
not that
Viking’s HDI participation
may
be
a sham but that it
is
a sham and that Viking
is
simply a front for Bunker Hill
15
and that the tenders
were
obtained unlawfully
16
.
It is the
facts
which have been brought to the City’s attention ‘to no avail’
17
not merely Hidro-Tech’s subjective suspicions. The deponent says
that Hidro-Tech has no alternative but to seek an order against
the
City ‘to comply with its statutory obligations to investigate the
Applicant’s complaints and act against [Viking and/or Bunker
Hill]
accordingly, thus drawing a clear distinction between investigating
the complaint and acting upon it, but claiming relief in
both forms
(as did the Notice of Motion). Later in the founding affidavit the
applicant states unequivocally that ‘the evidence’
(ie the same
averments as those in the letters of complaint) ‘clearly shows
unlawful fronting practices’ giving rise to an alleged
clear right
in the applicant.
18
[26] In
summary, I am left in no doubt that Hidro-Tech relied on the
sufficiency of the complaint to trigger the duty to act and regarded
investigation as a fall-back option. That being so, the order granted
by Irish AJ was consonant with the case made out.
[27] In
so far as it was argued on behalf of Hidro-Tech (and Irish AJ found)
that the City’s investigation did not address the complaint,
the
thrust was twofold: the City was delaying in acting upon the
complaint to no purpose and, for the purpose of the alternative
relief directed to a proper investigation, to show that what the City
relied on as compliance with the duty to investigate was in
fact no
compliance at all. That argument was not an indication that
Hidro-Tech rested its complaint or its case solely on an alleged
duty
to
investigate.
[28] Having
found that Hidro-Tech indeed relied on a breach of a duty to act, as
reg 15 requires, it follows that the learned judge
would have been
wrong to order the City to carry out an investigation. That is so
because the duty is not circumscribed in that regulation.
The organ
of state has the primary responsibility to decide on the form of
action that it regards as appropriate. The court
a
quo
had only to find that
the duty to act had been triggered by the complaint.
[29] But
the duty to act only arises once a fraudulent preference has been
detected by an organ of state. That brings me to Mr Dickerson’s
second, legal, submission, which I summarise as follows:
1. On
a proper interpretation of s 15 there can be no ‘detection’ of
the obtaining of a fraudulent preference unless the existence
of that
jurisdictional fact is established to the satisfaction of the organ
of state. Such establishment requires more than suspicion
or even
prima facie proof: the organ of state must be satisfied that the
complaint is proved as a fact.
2. In
support of this degree of proof Mr Dickerson argued that ‘detection’
is, in the context of reg 15, an administrative act
which requires
the application of principles of fairness, including the affording to
the party complained against insight into the
complaint and the
opportunity to address it before a conclusion is reached by the City.
3. Furthermore,
reg 15 is punitive in its purpose and effect. Because ‘detection’
leads to penal consequences the organ of state
cannot be expected to
act before it is certain of its facts.
[30] Irish
AJ undertook a careful analysis of reg 15(1) with particular regard
to its place in the promotion of the process established
by
parliament in order to satisfy the constitutional imperatives.
19
I do not think I can improve on it. He examined the possible meaning
and scope of the phrase ‘upon detecting’ in the context
that he
had thus identified. I agree with both the process of his reasoning
and his conclusion that:
‘
In
my view, in employing the participle “detecting” the Minister
intended to cast a very wide net, precisely so as to ensure that
an
organ of State be proactive in responding to the reasonable
possibility that a preference has been fraudulently [obtained], or
that a specific goal of its preferential policy, in terms of which a
contract was awarded, is not being pursued.’
20
[31] I
wish to add only two comments to the reasoning of the learned judge.
The first is that because ‘detect’ connotes the discovery
or
awareness of a certain state of affairs not previously known to the
person who so detects, it would strain the meaning unduly
to limit it
to a conclusion reached at the end of a process of investigation or
confirmation; in everyday speech ‘detect’ bears
the sense of a
provisional or unilateral opinion as to the given state (as in ‘I
detect hesitation in your voice’) which is open
to contradiction
rather than carrying the force of a final judgment on the matter. The
second is that the range of action open to
an organ of state is
limited only by its appropriateness to the proper addressing of the
fraud detected by it. The clearer the fraud
the more decisive the
action is likely to be. (But the option of further investigation
where the City is unsure is not excluded.)
One of the most common
ways of dealing (properly) with an allegation of fraud is to refer
the complaint to the police or director
of public prosecutions. In
neither instance need investigation be completed by the person who
refers it or before it is referred,
nor is that person required to
achieve any particular level of proof in his own mind before he so
acts, so long as he is not motivated
by malice in so doing.
[32] I
do not agree with Mr Dickerson that reg 15 is punitive as a whole. It
is true that the detection and action contemplated in
subreg (1) may
lead to a remedy at the instance of the organ of state which may take
the form of one of the types of redress for
which subreg (2)
provides. But subreg (1) is essentially remedial in nature: it
ensures that no organ of state will remain passive
in the face of
evidence of fraudulent preferment but is obliged to take appropriate
steps to correct the situation. The remedies
to which subreg (2)
refers are discretionary and, if invoked, need not be an immediate
consequence of the action contemplated in
subreg (1).
[33] The
fact that reg 15 bears the caption ‘Penalties’ is neither here
nor there. The
importance of headings in
the interpretation of statutes is well-recognised.
21
But I am by no means certain that the same rule should be applied to
subordinate legislation (such as these regulations) more particularly
when regard is had to the rationale for permitting reference to
headings but not to side-notes:
S
v Liberty Shipping and Forwarding
1982
(4) SA 280
(D) at 285E-F.
22
It is, however, unnecessary to resolve the question since the heading
‘Penalties’ is reconcilable with the potentially damaging
consequences of action against a party responsible for obtaining a
tender preference through fraud even if such action falls outside
of
reliance on the remedies referred to in subreg (2). Thus no conflict
with the interpretation placed on reg 15(1) by Irish AJ flows
from
the caption.
[34] Nor
am I able to agree with counsel that the detection of fraud which reg
15 contemplates is
per se
‘administrative action’ within the definition in s 1 of the
Promotion of Administrative Justice Act 3 of 2000 (‘PAJA’). If
such a detection is overtly made (and it need not be) and an organ of
state has evidence that a tender has been procured through
a
fraudulent preference, the detection does not of itself have the
capacity to affect the rights of any person.
23
Nor does it exercise a direct, external effect (although it may do so
within the organ inasmuch as it is bound to act upon the fraud
that
it has detected). Of course, once a duty to act arises, if the action
that is decided upon constitutes administrative action,
the target of
the action will be entitled to rely upon the protection afforded by
PAJA.
[35] Appellant’s
counsel attached weight to a dictum of this Court in
Chairman,
State Tender Board and Another v Supersonic Tours (Pty) Ltd
[2008] ZASCA 56
;
2008
(6) SA 220
(SCA). In that case the State Tender Board resolved to
restrict the company and its directors from obtaining any business
from an
organ of state for a period of 10 years. It did so purporting
to act pursuant to the powers conferred on an organ of state by reg
15. Although the decision was an administrative act within the
meaning of PAJA
24
the Court held that an ‘incorrect’ claim for preference does not,
without more, permit reliance on reg 15(1) (and consequently,
also
upon reg 15(2)). Cloete JA referred to the requirements of subreg (1)
as ‘either that the preference was obtained on a fraudulent
basis,
or that there was non-attainment of specific goals in the performance
of the contract’.
25
Counsel tried to support his submission as to the need to
establish
the existence of a
fraudulent preference on this weak foundation; weak because the
learned judge was only concerned to paraphrase
the requirement and
was not at all interested in spelling out the ambit of its operation.
[36] I
must now give attention, brief as it may be, to the submission that
the City had not arrived at the stage of taking action
before the
application was brought. Here too I agree with the reasoning and
conclusions of Irish AJ quoted above. The City referred
the complaint
to Tradeworld, a ‘verification agency’, because, according to Mr
Bindeman:
‘
It
is impossible for the City to keep abreast with all of the changes in
shareholdings, shareholders agreements and actual flow of
money
betwee n related companies. . .
However,
for the purposes of investigating fronting practices, the
investigations of [Viking] will go further than merely the
information
on Tradeworld’s database.’
Unfortunately,
the role and expertise of Tradeworld remained unexplained. No
affidavit was filed on its behalf. The court
a
quo
was left to guess as to
how the investigations would be carried beyond Tradeworld’s
database. In so far as the City relied on an
investigation that had
been initiated it was coy to the point of concealment as to the
detail. What is beyond dispute is that Mr
Bindeman, Head: Tenders for
the City, perplexed as to the means of proceeding, sloughed off its
responsibility and diverted Hidro-Tech’s
attorney to the Department
of Trade and Industry, rather than take a meaningful decision.
26
Mr Shnaps, Director: Supply Chain Management, for the City, notified
Viljoen in late February 2008 that ‘the City is unable to
take any
action against Tricom at this stage’. When Bindeman deposed to his
affidavit on 28 March, he stated, ‘This is still
the position’.
It was clear, as the learned judge found, that the City had taken no
rational step to address the complaint. There
was, therefore, no
decision taken by the City which the court
a
quo
needed to set aside
before making its own order. Since the allegation of fraudulent
procurement was serious, clear, particularised,
supported by cogent
sworn statements and stood uncontradicted, only an official who was
unreasonably cautious could have neglected
to take appropriate
action. The City was in breach of its duty from, at least, the time
of receiving the affidavits of James and
Zandberg on about 19
February.
[37] I
conclude that the court
a
quo
did not err in granting
the relief it did. The appeal is accordingly dismissed with costs.
____________________
J
A Heher
Judge
of Appeal
APPEARANCES
APPELLANT
S: J
G Dickerson SC with him A M Smalberger
Instructed
by Rabie & Rabie, Cape Town;
Honey
Attorneys, Bloemfontein
RESPONDENT
: D
C Joubert
Instructed
by Jaques Viljoen Attorneys, Cape Town;
Symington
De Kock, Bloemfontein
1
GN 725 in GG 22549 of 10 August 2001.
2
Reg 13(11), subject to certain exceptions not presently relevant,
and reg 3(4) or 4(4) (depending on the Rand value of the
tender/procurement).
3
Reg 8(7).
4
Reg 13(1).
5
Reg 14.
6
Broad-Based Black Economic Empowerment Act 53 of 2003
.
7
Emphasis in the original letter.
8
In terms of an amendment effected at the commencement of the
hearing. Paragraph 2.3 had previously provided for an investigation
to be conducted by a forensic auditor.
9
He also granted orders in favour of Hidro-Tech against Viking and
Bunker Hill relating to a striking out application and a
counter-application
neither of which is at issue in this appeal.
10
Para 22 of the judgment a quo.
11
Ibid para 70.
12
Ibid para 71.
13
Ibid para 65.
14
Ibid para 67.
15
Para 24 of the founding affidavit.
16
Ibid para 25.
17
Ibid para 26.
18
Ibid paras 37 and 38.
19
At paras 41 to 56 of the judgment.
20
Ibid paras 65 and 67. See also para 19 above.
21
Turffontein Estates Ltd v Mining Commissioner, Johannesburg
1917
AD 419
at 431;
President of the Republic of South Africa v Hugo
1997 (4) SA 1
(CC) at para 12;
Ex parte President of the
Republic of South Africa: In re Constitutionality of the Liquor Bill
[1999] ZACC 15
;
2000 (1) SA 732
(CC) at para 27;
S v Jordan and Others
[2002] ZACC 22
;
2002
(6) SA 642
(CC) at para 49.
22
Counsel were unable to furnish a precedent and my own research has
uncovered no authority in point.
23
Grey’s Marine Hout Bay (Pty) Ltd v Minister of Public Works
[2005] ZASCA 43
;
2005 (6) SA 313
(SCA) at para 23.
24
At para 14 of the judgment.
25
At 228B.
26
In an e-mail to Ms Bence of Tradeworld on 20 December 2007 Bindeman
recorded: ‘I have been given advice from our legal staff
not to
“involve the City”, but rather refer the complainant to the
Department of Trade and Industry.’