Tender Blacklisting

Introduction

In terms of the Regulations promulgated under the State Tender Board Act, 86 of 1968, the State Tender Board (Board) has the power, if it is of the opinion that a person who has concluded a contract with it has offered a bribe or has acted in a fraudulent manner, in bad faith or in any other improper manner, to resolve that such person be excluded from contracting with the Board for such period as it may decide. The Board may also extend this restriction to any other enterprise, partners, managers, directors or other persons who wholly or partly exercised control over the person or entity concerned.

Similar powers are accorded to any organ of State in terms of the Regulations promulgated under the Preferential Procurement Policy Framework Act, 5 of 2000 (PPPF Act).

In terms of the PPPF Act Regulations an organ of State may, upon detecting that a preference in terms of the Act has been obtained on a fraudulent basis, restrict the contractor, its shareholders and directors from obtaining business from any organ of State for a period not exceeding 10 years.

In August this year the Pretoria High Court delivered a judgment setting aside a 10 year blacklisting of a group of companies which had for many years provided recording and transcribing services for the South African courts.

Facts

In January 2000 Sneller Digital (Pty) Ltd (Sneller) submitted a tender to the Board to undertake recording, transcribing and archiving of digital recorded proceedings in the High Court of South Africa for a period of approximately five years which was later extended for an additional year into 2006.

In order to ensure that it had the necessary BEE rating, Sneller had been specially set up with BEE shareholders and BEE directors.

The shareholders’ resolution appointing the BEE directors was passed on 20 January 2000 which preceded the submission by Sneller of its tender on 28 January 2000. The necessary company formalities recording the appointment of those directors however only occurred after 31 January.

Sneller was duly awarded the contract.

In October 2005, at a time when the contract as extended only had some months to run, Sneller received a letter from the National Treasury Department stating that in light of a resolution of the Board taken in September, the company, its directors, shareholders, associated companies and all of their shareholders were prohibited from doing business with the State for 10 years.

This occurred without any advance warning or without any opportunity being afforded to make representations. This also notwithstanding that Sneller had during the course of the contract performed its services in an exemplary manner.

Sneller launched an urgent application to interdict the implementation of this decision pending a review.

Sensing that it had gone where no sensible government department ought dare to go, the National Treasury Department hastily withdrew its blacklisting decision and agreed to pay the legal costs incurred by Sneller. This however was to prove to be a temporary reprieve.

In February 2006 the Chief Director: Contract Management in the National Treasury Department, one Matebula, wrote to Sneller querying whether its BEE directors had been appointed prior to the submission by Sneller of its tender in January 2000.

The attorneys representing Sneller and its directors, Cox Yeats, in early March 2006 wrote and reassured the Department that the directors concerned had in fact been appointed by the shareholders by resolution dated 20 January 2000. They pointed out that the fact that the paperwork recording these appointments was only processed by the Registrar of Companies Office later did not detract in law from the fact that directors take office from when they are appointed, from which date they become liable for all of the duties and obligations imposed on directors.

In May 2006, following a further letter from the Chief Director, Sneller’s attorneys offered a certificate from the company’s auditors verifying that the appointments had been made as previously stated.

A few months later, in October 2006, the Chief Director again wrote to the attorneys stating that he was not satisfied with the explanations given and affording Sneller 30 days within which to make written representations as to why the company and all its associated persons should not be blacklisted for 10 years. No explanation was offered as to why the Chief Director remained unconvinced and unsatisfied.

A few days later in a letter to the Chief Director the attorneys asked for clarification as to the basis upon which the Department proposed to take the threatened drastic action.

With commendable despatch the Chief Director replied by stating that he would respond by the end of “next week”. A short while later he wrote to say that he would only respond by 24 November 2006. Despite a reminder from the attorneys, no such response was ever forthcoming.

The Blacklisting

More than seven months later, in June 2007, by which time the contract awarded to Sneller in 2000 as extended had expired, the Chief Director issued a letter stating that, pursuant to a resolution of the Board, Sneller and “its directors, partners and all associated members” were blacklisted from doing business with all three spheres of government for 10 years. The stated basis for the decision was “suspected fraudulent misrepresentation and fronting” with a view to claiming BEE points so as to procure the tender in 2000.

The letter went on to state that the company had failed to remove the suspicion of fraud because it had not established that the BEE directors had been appointed prior to submission of its tender.

Court Action

Sneller immediately launched appropriate proceedings to have the decision concerned reviewed and set aside by the High Court.

In support of its application Sneller put up a copy of the resolution passed on 20 January appointing the directors concerned. The Board was unable to come up with any cogent basis for disputing the factual position as presented by Sneller.

The court observed that the Chief Director had ignored the offer of a certificate from the company’s auditors verifying the appointment of the directors concerned and had also ignored a request by Sneller’s attorneys for an explanation as to why he remained unhappy with the explanation proffered.

The court had little hesitation in accepting that the directors had been properly and timeously appointed.

The court was equally quick to dismiss the suggestion that Sneller had been guilty of any fronting. The BEE directors were in fact, save for one, all long term bona fide employees of the Sneller Group of Companies.

It emerged in the court proceedings, when it became incumbent on the Board to produce all documents relevant to its decision to blacklist the company, that the source of the witch hunt against Sneller was a complaint from one of its disgruntled competitors, one Vishno Munilall, who had made wild and unsubstantiated accusations about Sneller, none of which had ever been conveyed to Sneller, who had accordingly never been given the opportunity of responding to them.

It also emerged that in view of Mr Munilall’s accusations and at the request of the Board, investigations had been undertaken inter alia by the Auditor General, the Scorpions and the South African Revenue Service, none of whom came up with any adverse findings against Sneller. In addition, the State Attorney had advised the Board at an early stage that it had no grounds to cancel the tender awarded to Sneller in 2000.

In the light of all of these revelations, the court described the decision as clearly biased and based on an unjustified witch hunt. It went on to say that the Board had acted procedurally unfairly, had been influenced by errors of law and of fact and had acted arbitrarily and capriciously and in a manner that no reasonable person would have.

After those kind words, the court granted Sneller the relief it was seeking and set aside the decision and ordered the Board to pay the costs of the proceedings.

Conclusion

Before an organ of State invokes its power to blacklist a person, it must be sure of its facts. It must also do more than pay lip service to the duty of affording a party a fair hearing before taking a decision.

Postscript

One of the arguments raised by the Board in support of its decision was that the decision had been taken in the sphere of contract law as opposed to administrative law and as such was not amenable to being reviewed by a court and set aside. The principles of fair and just administrative action which underpin court intervention in relation to administrative actions and decisions of course do not have application in the law of contract. In contract the parties’ rights and obligations are to be found in their contractual agreement and the law of contract.

The Board sought to rely on a condition of tender which stipulated that if any misrepresentations or fronting were established which led to the award of a tender, then the tenderer concerned could be blacklisted.

The court dismissed this argument, inter alia for the reason that the decision to blacklist came after the contract had already long since been discharged by performance.

Another argument raised by the Board in desperation was that the blacklisting decision had not been communicated to the directors who were party to the proceedings and they therefore had no basis to complain. The legal position is that a decision has no legal effect until it is communicated to the person affected.

The court dismissed this argument by reminding the Board that the decision concerned had been communicated to the company’s attorneys who were acting for the company and all of its directors.

Alastair Hay
Cox Yeats
21 Richefond Circle
Ridgeside Office Park
Umhlanga Ridge