Brief Summary

State Tenders — Disqualification of tenderer — Review of decision by State Tender Board to restrict tenderer from future contracts — Supersonic Tours (Pty) Ltd awarded a tender by the Department of Defence, later found to have misrepresented information regarding its Tax Clearance Certificate and equity ownership — State Tender Board imposed a ten-year restriction on Supersonic and its directors from obtaining state contracts — Legal issue of procedural fairness under the Promotion of Administrative Justice Act (PAJA) and the interpretation of relevant regulations under the State Tender Board Act and the Preferential Procurement Policy Framework Act — Court upheld the decision of the State Tender Board, confirming its authority to impose restrictions based on misrepresentation in the tendering process.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned an appeal to the Supreme Court of Appeal against an order granted on review in the Pretoria High Court. The review proceedings were brought by Supersonic Tours (Pty) Ltd (“Supersonic”) in motion proceedings to set aside a decision of the State Tender Board (“STB”) that restricted Supersonic and its directors for ten years from obtaining business from the State or any organ of state.

The appellants in the Supreme Court of Appeal were the Chairman of the State Tender Board (first appellant) and the Minister of Finance (second appellant), cited in the latter’s capacity as head of the National Treasury under whose control the STB fell. Supersonic was the respondent on appeal.

The High Court (Pretorius J) granted the review relief, setting aside the restriction decision, and later granted leave to appeal to the Supreme Court of Appeal. In the Supreme Court of Appeal, the central dispute concerned whether the restriction decision was lawfully imposed under the applicable procurement regulatory framework, and in particular whether the decision was procedurally fair under the Promotion of Administrative Justice Act 3 of 2000 (“PAJA”).

The dispute arose from a State tender for the provision of travel and accommodation services to the Department of Defence. Although the STB also decided to cancel Supersonic’s contract, that aspect had become academic by the time the matter was heard; the litigation on appeal focused on the continuing consequences of the ten-year restriction.

2. Material Facts

Supersonic had conducted business for more than 25 years providing travel management services, including to government departments and organs of state. In August 2003 the STB called for tenders for travel and accommodation services to the Department of Defence for a two-year period. Supersonic tendered and was awarded the contract by the end of September 2003.

On 28 February 2005, Supersonic received correspondence from the Department of Defence dated 26 January 2005. The Department advised that, after the award, it had come to its attention that there were possible misrepresentations in Supersonic’s tender documentation, particularly relating to a SARS tax clearance certificate and the preference points claimed for equity ownership by historically disadvantaged individuals. Supersonic was requested to provide an urgent explanation and documentation.

The tender documentation incorporated a preference points claim form (ST11.1). That form included an acknowledgement that if claims were found to be incorrect the STB could, among other steps, restrict the tenderer, its shareholders and directors from obtaining business from any organ of state for up to ten years.

Supersonic provided a detailed written response dated 11 March 2005. Later, on 21 July 2005, the National Treasury sent Supersonic a letter in terms identical to that sent by the Department of Defence, and Supersonic responded on 4 August 2005 by forwarding a copy of its earlier response.

On 27 September 2005 the Department of Defence informed Supersonic that it had failed adequately to address discrepancies. Supersonic immediately sought further particulars of which discrepancies remained inadequately addressed. The Department and the Acting Secretary of Defence indicated that the STB should provide the requested explanation.

However, the STB had already taken its decision on 22 September 2005. On 29 September 2005, National Treasury faxed Supersonic informing it that the STB had found the Department, in awarding the tender, had relied on misrepresentations in Supersonic’s tender (again referencing the tax clearance certificate and preference points). The STB resolved that the contract be cancelled with immediate effect and that Supersonic and its directors be restricted for ten years.

It was common cause that the restriction operated to prevent Supersonic and its directors from obtaining business from the State or any organ of state for the period. It was also accepted in the appellants’ papers that Supersonic did not deny that the tax clearance certificate accompanying the tender documents did not relate to Supersonic. The dispute relevant to the outcome, however, was not resolved on whether fraud or bad faith was in fact established on the merits; the court’s determination turned on the legal character of the decision and the procedural steps required before such a restriction could lawfully be imposed.

3. Legal Issues

The central legal questions were whether the STB’s decision to restrict Supersonic and its directors for ten years constituted administrative action subject to PAJA, and, if so, whether the decision was taken in a manner that satisfied procedural fairness.

A closely connected issue concerned the proper interpretation and scope of the regulatory powers relied upon by the appellants. In particular, the court had to consider the distinction between provisions that permit remedial action when information provided is merely incorrect, and those that allow the severe consequence of disqualification from future tenders, which is linked to conduct such as fraud or bad faith.

The dispute was therefore primarily one of law (the applicability of PAJA and the interpretation of procurement regulations), and the application of legal standards to the established procedural facts (whether adequate notice and opportunity to make representations were afforded in relation to the basis on which a restriction could be imposed).

4. Court’s Reasoning

The Supreme Court of Appeal analysed the legal source of the STB’s power to impose a restriction. It rejected the proposition that clause 14.7 in the preference points claim form created contractual rights in favour of the STB. The clause was treated as an acknowledgement of the STB’s powers rather than an agreement conferring rights. Accordingly, the lawfulness of the restriction depended on statutory and regulatory authority, not contractual incorporation.

The court then examined the regulatory framework. Under the regulations made in terms of the State Tender Board Act 68 of 1968, regulation 3(6) provides a set of remedies where an agreement has been concluded on the strength of information later proved incorrect; those remedies include recovery of costs and damages, termination, and a penalty, but do not include disqualification from future tenders. By contrast, regulation 3(5)(a)(iv) empowers the STB to resolve that no offer from a person should be considered for a stipulated period where the person has, among other misconduct, acted fraudulently, in bad faith, or in any other improper manner in relation to a concluded agreement. The court emphasised that these provisions must be contrasted because they demonstrate that a restriction is not a general consequence of incorrect information; it is tied to more serious forms of impropriety, including fraud and bad faith.

The court also considered regulation 15 made under the Preferential Procurement Policy Framework Act 5 of 2000. That regulation requires that, upon detecting that a preference has been obtained on a fraudulent basis (or specified goals are not attained), an organ of state must act against the contractor. The range of remedial measures includes restricting the contractor, its shareholders and directors for up to ten years, but the court stressed that those measures are triggered only once the prerequisite in regulation 15(1) is met. An “incorrect” claim to preference points, without more, does not automatically equate to fraud for purposes of the regulation.

Having established the regulatory thresholds for imposing a restriction, the court turned to the applicability of PAJA. It held that the STB is an organ of state within the meaning of the Constitution and PAJA, and that the restriction decision was a “decision relating to imposing a restriction” as contemplated in PAJA’s definition of “decision”. The decision was taken in the exercise of public power under legislation, and it had immediate and direct legal consequences for Supersonic. On this basis, the decision constituted administrative action under PAJA, with the result that Supersonic’s rights were materially and adversely affected and it was entitled to procedural fairness under section 3(1) of PAJA. The court referred, in this connection, to the approach adopted in Grey’s Marine Hout Bay (Pty) Ltd v Minister of Public Works.

The procedural fairness enquiry focused on whether Supersonic had been given adequate notice of the nature and purpose of the proposed administrative action and a reasonable opportunity to make representations as required by section 3(2)(b) of PAJA. The court considered the content of the correspondence sent to Supersonic. The letters from the Department of Defence and National Treasury framed the concerns in terms of possible misrepresentations, and indicated consequences such as invalidation of the tender or voidability of the contract. However, they did not convey that Supersonic was suspected specifically of fraud or bad faith, nor that the STB was contemplating the particularly severe sanction of a ten-year restriction on that basis.

The court further held that the reference in the letters to the preference claim form clause (paragraph 14.7) did not cure the deficiency. Even if Supersonic had consulted that clause, the clause suggested that restrictions could follow merely if claims were “found to be incorrect”, which the court characterised as a mistaken statement of the legal position under regulation 15 of the Preferential Procurement Policy Framework Act. Because regulation 15(2) is dependent on regulation 15(1), the prerequisites of fraud (or failure to attain specified goals) must be satisfied before restriction may be considered under that instrument. The notices given to Supersonic therefore did not adequately alert it to the true basis upon which a restriction could lawfully be imposed, nor to the nature of the contemplated administrative action.

On that reasoning, the court concluded that the STB’s restriction decision was procedurally unfair as contemplated in section 6(2)(c) of PAJA and therefore fell to be set aside under section 8(1) of PAJA.

Finally, the court noted a disquieting feature in the record unrelated to the merits of the restriction decision but arising from an investigative memorandum by attorneys instructed by the Department of Defence. The memorandum suggested that “unofficial” means would be used to obtain information from SARS despite section 4 of the Income Tax Act 58 of 1962. The court considered it necessary to request the Registrar to forward the memorandum and judgment to the Commissioner for SARS to enable investigation into a possible contravention and any further steps, including possible referral to the relevant law society.

5. Outcome and Relief

The Supreme Court of Appeal dismissed the appeal, with the consequence that the High Court’s order setting aside the STB’s decision to restrict Supersonic and its directors for ten years remained in place.

The appellants were ordered to pay costs, including the costs of two counsel.

In addition, the court directed (through a request to the Registrar) that a copy of the relevant memorandum and the judgment be sent to the Commissioner, SARS, drawing attention to the potential issue regarding section 4 of the Income Tax Act 58 of 1962.

Cases Cited

Grey’s Marine Hout Bay (Pty) Ltd v Minister of Public Works [2005] ZASCA 43; 2005 (6) SA 313 (SCA).

Legislation Cited

Constitution of the Republic of South Africa, 1996 (section 239).

State Tender Board Act 68 of 1968.

Preferential Procurement Policy Framework Act 5 of 2000.

Promotion of Administrative Justice Act 3 of 2000 (sections 1, 3(1), 3(2)(b), 6(2)(c), 8(1)).

Income Tax Act 58 of 1962 (section 4).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that the STB’s decision to restrict Supersonic and its directors from obtaining business from the State or any organ of state for ten years was an administrative action under PAJA because it was a public-power decision taken under legislation with immediate and direct legal consequences.

The court held further that the decision was procedurally unfair under PAJA because Supersonic was not given adequate notice that it was suspected of fraud or bad faith, nor that a ten-year restriction was under consideration on those grounds. References in the correspondence to incorrect claims and to tender documentation did not suffice to meet PAJA’s notice and representation requirements, particularly given the regulatory distinction between incorrect information and fraud-based remedies.

LEGAL PRINCIPLES

The judgment applied the principle that a decision by an organ of state imposing a restriction on participation in future state contracting, when taken under empowering procurement regulations and with immediate legal consequences, constitutes administrative action and is therefore subject to PAJA.

It affirmed that procedural fairness under section 3 of PAJA requires that affected persons receive adequate notice of the nature and purpose of the proposed administrative action and a reasonable opportunity to make representations, which includes being informed of the operative basis on which the decision-maker is empowered to act (for example, alleged fraud or bad faith where those are jurisdictional predicates for disqualification).

The judgment applied an interpretive distinction within procurement regulation frameworks between consequences triggered by mere incorrectness of information and the more severe sanction of restriction/disqualification, which is linked to specified forms of serious misconduct such as fraudulent conduct or bad faith. It treated the availability of a restriction as dependent on meeting the correct statutory or regulatory prerequisites, and held that notices that frame the issue only as “incorrectness” or general “misrepresentation” may be insufficient where the empowering provisions require fraud-based or bad-faith grounds for the contemplated sanction.

Chairman of the State Tender Board and Another v Supersonic Tours (Pty) Ltd (389/07) [2008] ZASCA 56; 2008 (6) SA 220 (SCA) (27 May 2008)