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[2007] ZASCA 26
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Minister of Social Development and Others v Phoenix Cash & Carry Pmb CC (189/06, 244/06) [2007] ZASCA 26; [2007] 3 All SA 115 (SCA); 2007 (9) BCLR 982 (SCA) (27 March 2007)
Links to summary
IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
Case nos: 189/06 and 244/06
In
the matter between
THE
MINISTER OF SOCIAL DEVELOPMENT
......................
FIRST APPELLANT
SNOTHO
TRADING
......................
SECOND APPELLANT
MDC
CATERING
......................
THIRD APPELLANT
PFULA
MBOKOTO CONSORTIUM
......................
FOURTH APPELLANT
and
PHOENIX
CASH & CARRY – PMB CC
......................
RESPONDENT
Coram:
SCOTT,
CLOETE, HEHER, CACHALIA JJA and THERON AJA
Heard:
5
MARCH 2007
Delivered: 26 MARCH 2007
Summary: Administrative law –
public tender – bid conditions – interpretation.
Neutral
citation: This judgment may be referred to as
Minister
of Social Development v Phoenix Cash & Carry
[2007]
SCA 26 (RSA)
_____________________________________________________________________
JUDGMENT
__________________________________________________________________
HEHER JA
HEHER JA:
[1]
The award of public tenders is notoriously subject to influence and
manipulation. Section 217(1) of the Constitution requires
an organ of
state to contract for goods or services ‘in accordance with a
system which is fair, equitable, transparent, competitive
and
cost-effective’. These principles must inspire all aspects of
the process which makes provision for the conclusion of such
a
contract. Pursuant to s 217(3) of the Constitution the legislature
passed the Preferential Procurement Policy Framework Act 5 of
2000
(‘the PPPF Act’) setting up the framework in which the
preferential procurement goals identified in s 217(2) must
be
implemented. This, in turn, depends upon the submission of an
‘acceptable tender’ which is defined in s 1 of the Act
as
‘any tender which, in all respects, complies with the
specifications and conditions of tender set out in the tender
document’.
Here also the principles of s 217(3) apply to any
process which makes provision for the conclusion of a contract
flowing from the
submission of an ‘acceptable tender’.
Unfortunately, as experience in this Court proves, the high standards
that the
Constitution sets seem to be more honoured in the breach
than in the observance.
[2]
Without attempting a comprehensive survey of the circumstances which
will offend against s 217(1) certain general observations
are
demonstrated as true by the facts of the present case-
(1) a tender process which
depends on uncertain criteria lends itself to exclusion of
meritorious tenderers and is opposed to fairness
among tenderers, and
between tenderers and the public body which supposedly promotes the
public weal;
(2) a process which lays
undue emphasis on form at the expense of substance facilitates
corrupt practice by providing an excuse for
avoiding the
consideration of substance; it is inimical to fairness,
competitiveness and cost-effectiveness. By purporting to distinguish
between tenderers on grounds of compliance or non-compliance with
formality, transparency in adjudication becomes an artificial
criterion.
In saying this I do not suggest that the tender board is
not entitled to prescribe formalities which, if not complied with,
will
render the bid invalid, provided both the prescripts and the
consequences are made clear. What I am concerned to stress is the
need
to appreciate the difference between formal shortcomings which
go to the heart of the process and the elevation of matters of
subsidiary
importance to a level which determines the fate of the
tender.
It
follows that a public tender process should be so interpreted and
applied as to avoid both uncertainty and undue reliance on form,
bearing in mind that the public interest is, after giving due weight
to preferential points, best served by the selection of the
tenderer
who is best qualified by price. This is particularly relevant to the
activities of a ‘technical evaluation committee’
which
examines the tenders for formal compliance but does not evaluate the
merits of the bids. In the present case the bids which
survived the
technical scrutiny were passed on to the bid committee for
evaluation. By then the die was cast against the respondent
(‘Phoenix’) and the bid committee was deprived of the
opportunity of considering the merits of its tender.
[3]
During October 2005 Phoenix applied to the Pietermaritzburg High
Court for an order against six respondents – respectively
the
Minister of Social Development, the MEC for Social Development: Kwa
Zulu-Natal, Snotho Trading, MDC Catering, Royal Rice Company
and
Pfula Mbokoto Consortium. The National Department of Social
Development (‘the Department’) had awarded a tender to
supply and deliver food hampers in Kwazulu-Natal to the third,
fourth, fifth and sixth respondents. Phoenix, an unsuccessful
tenderer,
initially obtained a rule
nisi
that
operated as an interim interdict restraining the respondents from
entering into agreements to supply and deliver such hampers.
[4]
All the respondents opposed confirmation of the rule. The first and
second respondents filed an affidavit as did MDC. Having heard
argument Morley AJ granted relief in the following terms:
‘
An
order is granted-
(a)
confirming paragraph 1(a) of the Rule granted on the 26
th
October
2005. The first and second respondents are ordered to pay the
applicant’s costs in relation to the interdict proceedings
jointly and severally, including the costs of two counsel where
applicable;
(b) setting aside the decision of the
applicant to award tender No SD 20/2004, in so far as it relates to
Kwa Zulu-Natal, to the third
to sixth respondents;
(c) requiring the first respondent to
invite fresh tenders should the first respondent decide to pursue the
supply and delivery of
food hampers in terms of the National Food
Emergency Scheme in Kwa Zulu-Natal;
(d) requiring the first respondent to
take cognizance of this judgment in formulating new tender terms and
conditions;
(e) that the respondents are ordered to
pay the applicant’s costs of the review proceedings jointly and
severally including
the costs of two counsel where applicable;
(f) that the first and second respondents
are ordered to pay the costs of the third to sixth respondents
jointly and severally, including
any costs that the third to sixth
respondents may be called upon to pay to the applicant.’
[5]
The Minister, Snotho, MDC and Pfula applied for and were granted
leave to appeal to this Court against the whole of the judgment.
The
MEC and Royal Rice did not seek leave.
The
background to the litigation
[6]
Phoenix held a contract to supply food hampers to poor families in
the province for the period December 2003 to February 2004.
After its
expiry it submitted a further tender but the invitation was withdrawn
without explanation. Thereafter the Department renewed
its invitation
under bid number SD 20/2004. The closing date for submission of
tenders was 30 March 2005. The stated aim was the
appointment of
local service providers and consortiums to supply food items to about
150,000 families in the Kwa Zulu-Natal and Eastern
Cape provinces.
Bidders were required to provide prices for two options of hamper,
the respective contents being specified. Each
invitation to bid was
accompanied by the Terms of Reference for the bid comprising nineteen
clauses. Of these only parts of clause
17 need to be quoted:
‘
17.
The following conditions apply to the bid and if any of the
conditions are not met, the bid will not be considered.
. . . .
17.2
The Department reserves that (
sic
)
right to verify or request for (
sic
)
proof to confirm that the service provider will be able to deliver at
the price tendered. Should the service provider be unable
to provide
such proof, the bid will be cancelled.
. . . .
17.6 Bids will only be considered from
service providers who are local traders, small business enterprises,
NPOs and FBOs in the locality
or service providers who form consortia
with these local small business enterprises.
17.7 Local small business enterprises
(shop owners) are encouraged to form consortiums to be able to have
the required capacity to
deliver on this bid.
. . . .
17.10
Financial resources must be readily available (provide audited
financial statements, bank statements, letters from the bank)
(
sic
)
as proof of availability of funds. Should the financial resources be
in the form of credit facilities such as for transport, warehousing,
food items etc, a letter of approved credit facilities should be
provided. If no such evidence is provided the bid will be
invalidated.
Note
:
Bank loan awaiting contract will not be considered.’
[7]
Phoenix submitted a bid in purported compliance with its
understanding of the conditions. It supported its bid with a letter
from
Standard Bank, Newcastle Branch dated 17 March 2005 addressed to
the bid committee in the following terms:
‘
Phoenix
Cash and Carry – PMB Close Corporation
Bid
Number SD 20/2004
This letter serves to confirm that the
above mentioned Close Corporation has been associated with our
Institution since inception.
Their accounts have been well conducted
and there has been no reason or any occasion to return their drawings
over the past 12 months.
We confirm that they have made the
necessary financial arrangements with the Institution to support
their financial requirements to
service a contract with yourselves.
Kindly do not hesitate to conduct
[presumably ‘contact’] the writer should you require any
futher information.’
Phoenix
also submitted a letter addressed to the Committee from Messrs Khan,
Salejee & Company, Chartered Accountants dated 22
March 2005, as
follows:
‘
RE:
TENDER
NO. SD 20/2004
Kindly be advised that the 2003 financial
statements and the 2004 interim financial statements for PHOENIX CASH
AND CARRY –
PMB CC are readily available for your perusal.
Should you require these statements,
kindly do not hesitate to contact me.’
Furthermore,
Phoenix submitted letters from six proposed commodity suppliers
verifying that all financial arrangements had been made
for the
supply to it of the individual components of the items which were to
be included in the hampers and letters from other suppliers
in
respect of the finalization of financial arrangements for the
transport of goods and the packaging of groceries.
[8]
About 4 October 2005 it came to the knowledge of Phoenix that the
tender had been awarded to persons other than itself. Further
enquiries revealed that the successful tenderers were the third to
sixth respondents. Phoenix requested the Department to furnish
written reasons for refusing to award the tender to it.
[9]
On 17 October 2005 Phoenix received the following response from the
Department:
‘
Insofar
as your request for reasons is concerned, the Department responds as
follows:
5.1 your client is not entitled as of
right to be awarded the tender;
5.2 the Department evaluated all bids and
awarded to the entities listed in annexure A;
5.3 the bids of the entities listed in
annexure A satisfied the requirements of the tender;
5.4 the Department exercised its
prerogative in awarding the tender to the entities in annexure A. In
other words, the Department
exercised its discretion not to award the
tender to your clients and did so after consideration of all bids
that were submitted.’
[10]
The Department supplied certain information relating to the tenders
that had been received. This showed, inter alia, that the
tender
prices per parcel of the successful tenderers ranged between R269,10
and R299,69. The prices per parcel for
the
two options that Phoenix offered were in striking contrast at R187,00
and R180,70 respectively. As the adjudication procedures
had notified
prospective bidders that the
tenderer
with the lowest bid would obtain 90 out of the maximum possible 100
points available and as Phoenix believed that it must
also have
scored an additional 5 points awarded to historically disadvantaged
individuals as well as a further 5 points for carrying
on an
enterprise located in the province, it was understandably perplexed
at not having succeeded in its bid.
[11]
As Phoenix justifiably complained in its founding affidavit,
‘
Nothing
in the National Department’s reply constitutes
objective
criteria
which
would justify the award to a tenderer other than the Applicant in
terms of Section 2(1) of the PPPF Act.
1
The
reply is vague. It in fact provides no reason at all why the
Applicant’s tender did not succeed. It does not comply with
the
abovementioned requirements of the Constitution and the PPPF Act. It
also does not comply with the provisions of the
Promotion of
Administrative Justice Act No. 3 of 2000
.’
[12]
However, on 10 November 2005, after service of the founding papers in
the application, the State Attorney served a notice on
Phoenix’s
attorney which stated that
the
bid was unsuccessful for the following reasons:
‘
1.
[I]t failed to satisfy the requirements of the bid regarding the
financial resources. It failed to provide the following documents:
1.1 audited financial statements;
1.2 bank statements;
1.3 a letter from the bank containing
sufficient information.’
[13]
At the same time the State Attorney purported to file the record of
the proceedings in the matter, consisting, apparently, of
the formal
tender documents that had accompanied Phoenix’s bid and a
schedule of bidders (some 112 in all) who did not meet
the bid
requirements and whose bids were therefore not considered at all
(this schedule is apparently the ‘matrix’ referred
to
below). The annotation in the comments column opposite Phoenix’s
name was ‘Not considered. No financial resources.’
[14]
The procedure followed by the Department in weeding out invalid bids
and evaluating those that complied is described in the answering
affidavit of the Minister and the MEC made by the Director-General of
the Department:
‘
[A]fter
the bidding time had closed, the bids were opened and entered into a
register. The technical evaluation committee considered
the bids in
terms of whether they were acceptable bids. It then compiled a matrix
of all the bids indicating the compliance or non-compliance
with the
terms of the bid. A copy of the matrix and the bids were then
submitted to the procurement section of the department. Copy
of the
matrix is annexed hereto marked annexure “
VM1
”
.
The procurement section then submitted them to the bid committee. The
bid committee then considered the bids. It then sent all the
bids and
its recommendations to me. I then considered the matrix, the
recommendations of the bid committee and the bids. I then made
the
decision on the basis of all that information.’
[15]
The answering affidavit of MDC did not take the matter further as the
deponent possessed no personal knowledge of the circumstances
relevant to the application.
The
judgment of the court
a
quo
[16]
Morley AJ, in granting the application, delivered a careful judgment
in which he reasoned as follows:
1. Section 217 of the
Constitution required the first and second respondents to act in
accordance with a system which is fair, equitable,
transparent and
cost-effective.
2. Section 33(1) of the
Constitution provided a right to lawful, reasonable and procedurally
fair administrative action.
3. The decision to reject
the Phoenix’s tender was administrative action.
4. Fair administrative
action depends on the circumstances of the case.
5. The formulation of the
tender conditions is the first step in ensuring fair administrative
action in the bid adjudication.
6. The terms of clause
17.10 of the Terms of Reference were not sufficiently certain to
satisfy the requirement of fairness since
they did not inform a
tenderer with reasonable and sufficient certainty of the requirements
for a valid and acceptable tender. Tender
documentation should speak
for itself.
7. Uncertainty may result
in lack of competitiveness and cost-effectiveness because of
exclusion of otherwise valid tenders. Nor does
it answer the demands
of fairness in the process.
8. Vagueness flowed from
(a) the absence of an
indication of the period covered by audited financial statements;
(b) the absence of a stated
period for which bank statements were to be provided;
(c) the failure to specify
what information from the bank was required;
(d) the uncertainty as to
whether the second sentence of clause 17.10 was to be read
conjunctively or disjunctively with the first
sentence.
9.
The tender document was too vague to satisfy the requirements of
administrative fairness. It required to be redrafted. The consequence
was that if the Department wished to proceed with the tender it would
have to begin
de
novo
.
10. The requirement that
the procurement process be procedurally fair requires that interested
parties be given a reasonable opportunity
to make representations
relating to the award of the contract.
Discussion
[17]
I see the matter somewhat differently. On a plain reading of clause
17.10 the substance of the conditions of validity of a bid
is
apparent: first, financial resources to carry out the contract must
be readily available; second, the tenderer must furnish evidence
of
that fact including, where credit facilities will be relied on, proof
that such facilities have been approved. The form lies in
the means
of proof. The words in parenthesis (properly bracketed, ‘(provide
audited financial statements, bank statements,
or letters from the
bank, as proof of availability of funds)’) seem to me no more
than advisory or indicative of the various
possibilities of proving
that financial resources are readily available. The examples
mentioned are not intended to be cumulative
or exhaustive. The
letters from suppliers furnished by the applicant are an obvious
addition to the possibilities. Likewise production
of a letter of
approval of credit facilities or a bank letter could never have been
intended to exclude any other obviously sufficient
means of proof
such as an affidavit from a relevant source in appropriate terms.
[18]
Counsel for the second, third and fourth appellants submitted that
the expression ‘no such evidence’ in the penultimate
sentence of clause 17.10 should be construed as a reference to the
specific items of evidence expressly identified in the clause.
However, the purpose of obtaining proof of the ready availability of
financial resources is best served if the expression is afforded
a
broad scope, ie no evidence having the tendency to establish such
availability; cf
Nissan
SA (Pty) Ltd v Commissioner for Inland Revenue
[1998] ZASCA 59
;
1998
(4) SA 860
(SCA) at 869C-870C.
[19]
I have quoted clauses 17.2, 17.6 and 17.7 of the Terms of Reference
because they are relevant to a proper understanding of clause
17.10.
The first affords the Department the flexibility of investigating the
financial substance of a service provider. When the
applicant
submitted its tender every supporting document from the bank and its
suppliers invited the bid committee to contact the
writer should any
further information be required. The opportunity properly to evaluate
a bid which was on the face of it markedly
superior to the tenders of
the respondents was however spurned. The remarks of Conradie JA in
Metro
Projects CC v Klerksdorp Local Municipality
2004
(1) SA 16
(SCA) at para 13 bear repeating:
‘
In
the
Logbro
Properties
case
supra
,
paras [8] and [9] at 466H-467C, Cameron JA referred to the
“ever-flexible duty to act fairly” that rested on a
provincial
tender committee. Fairness must be decided on the
circumstances of each case. It may in given circumstances be fair to
ask a tenderer
to explain an ambiguity in its tender; it may be fair
to allow a tenderer to correct an obvious mistake; it may,
particularly in
a complex tender, be fair to ask for clarification or
details required for its proper evaluation. Whatever is done may not
cause
the process to lose the attribute of fairness or, in the local
government sphere, the attributes of transparency, competitiveness
and cost-effectiveness.’
The
second- and third-mentioned clauses illustrate that the process was
intended to encourage bidders with little or no financial
history.
But the process followed by the committee treated each item of
evidence mentioned in clause 17 as peremptory and the whole
as
excluding reliance on any not specifically mentioned. By doing so it
failed to appreciate that audited financial statements might
reasonably be inapplicable to a small business only beginning to find
its feet or to a consortium without a previous history. Thereby
it
potentially shut out or discouraged the very interests which clauses
17.6 and 17.7 were intended to attract.
[20]
Counsel for the second, third and fourth appellants, conscious that
the alleged vagueness of clause 17.10 was not going to be
persuasive
in the appeal, submitted that the letter from the Standard bank did
not in any event provide acceptable evidence that
the necessary
resources were readily available to Phoenix. I disagree. The averment
is made in unequivocal terms in the second paragraph
of that letter.
The technical committee had no reason to question its accuracy.
[21]
The process of sifting bidders adopted by the Minister succeeded in
discarding the wheat with the chaff. In the result there
was no
proper evaluation of Phoenix’s tender (and, conceivably, of
many others) and Phoenix did not receive the benefit of
procedurally
fair administrative action as was its constitutional entitlement.
[22]
For these reasons the court
a
quo
was
correct in setting aside the award of the tender to Snotho, MDC,
Pfula and Royal Rice and directing that a fresh tender process
should
be undertaken if the Department intended to pursue the distribution
of hampers. Because of the change in emphasis in this
judgment, the
order which that court embodied in paragraph (d) is no longer
appropriate.
[23]
The affidavits in this matter revealed disquieting features, which,
in view of the conclusion which I have reached, need to be
noted by
those responsible, in order avoid repetition.
1.
The initial reasons furnished to Phoenix by the Department were, to
say the least, seriously misleading. They created the impression
that
its tender had been evaluated and rejected on its merits, which was
far from being the case. No explanation for the compilation
of those
reasons was ever furnished. In a proper case such a failure might
justify an inference of
mala
fides
.
In addition, the reasons speak of a ‘prerogative’ and a
‘discretion’ which betrays a fundamental misconception
of
the function to be performed by the adjudicator of the tender, whose
duty under s 2(1)(f) of the PPPF Act is to award the contract
to the
tenderer who scores the highest points, unless objective criteria in
addition to those contemplated in s 2(1)(d) and (e) of
the Act
justify the award to another tenderer.
2. The representative of
the Department, Ms Phemba, was unable to supply Phoenix’s
attorneys on request with the addresses of
Snotho and Phula and those
respondents could not be served or given notice of the application
proceedings. Yet they were represented
by counsel when the matter
came to court. This also was unexplained.
3.
According to records from the Companies’ Office annexed to the
applicant’s supplementary founding affidavit, Snotho
is a close
corporation, but one that was only incorporated after the closing
date of the tender.
Prima
facie
that
rendered its bid invalid:
Steenkamp
NO v Provincial Tender Board, Eastern Cape
2006
(3) SA 151
(SCA) at para 51. One perforce asks how Snotho could have
satisfied the requirement of providing evidence of readily available
financial
resources within the terms of clause 17.10 as the technical
committee is said to have interpreted that requirement.
4. As has been shown, the
merits of Phoenix’s tender were so manifest and the grounds of
its exclusion so flimsy that doubts
are necessarily raised as to the
reliability and credibility of the procurement process employed by
the Department.
5.
Counsel for Phoenix informed us that notices in terms of Rule 14(5)
calling on Snotho and Pfula to disclose particulars of the
proprietors or partners had been served at the hearing. Those notices
were neither followed up nor answered. The unsatisfactory result
is
that counsel representing those entities asked this Court to make
orders in favour of those respondents without knowledge of their
locus
standi
,
their
true nature or the faces behind them.
[24]
In the result the following order is made:
1.
The appeals are dismissed, save that paragraph (d) of the order made
by the court
a
quo
is
set aside.
2. The costs of the
appeals, including the costs consequent upon the employment of two
counsel, are to be paid by the appellants in
the appeals jointly and
severally.
__________________
J
A HEHER
JUDGE OF APPEAL
SCOTT
JA )Concur
CLOETE
JA )
CACHALIA
JA )
THERON
AJA )
1
‘
(1)
An organ of state must determine its preferential procurement policy
and implement it within the following framework:
(a)
A preference
point system must be followed;
(b)
(i) for
contracts with a Rand value above a prescribed amount a maximum of
10 points may
be allocated for specific goals as contemplated
in paragraph
(d)
provided
that the lowest acceptable tender scores 90 points for price;
(ii) for contracts with a Rand value equal to or
below a prescribed amount a maximum of 20 points may be allocated
for specific
goals as contemplated in paragraph
(d)
provided that the lowest acceptable
tender scores 80 points for price;
(c)
any other
acceptable tenders which are higher in price must score fewer
points, on a
pro rata
basis,
calculated on their tender prices in relation to the lowest
acceptable tender, in accordance with a prescribed formula;
(d)
the specific
goals may include-
(i) contracting with persons or categories of persons, historically
disadvantaged by unfair discrimination on the basis of race,
gender
or disability;
(ii) implementing the programmes of the
Reconstruction and Development Programme as published in
Government
Gazette
16085 dated 23 November 1994;
(e)
any specific
goal for which a point may be awarded, must be clearly specified in
the invitation to submit a tender;
(f)
the contract
must be awarded to the tenderer who scores the highest points,
unless objective criteria in addition to those contemplated
in
paragraphs
(d)
and
(e)
justify
the award to another tenderer; and
(g)
any contract
awarded on account of false information furnished by the tenderer in
order to secure preference in terms of this Act,
may be cancelled at
the sole discretion of the organ of state without prejudice to any
other remedies the organ of state may have.
(2) Any goals contemplated in subsection 1
(e)
must be measurable, quantifiable and
monitored for compliance.’