Security company loses court bid to restore unlawful tender contract

A security company has lost its court challenge after claiming the Msunduzi Municipality in KwaZulu-Natal had no right to cancel its tender contract.

The contract initially resulted in Thabzo Security Services receiving R1.7m a month for its services, but on Tuesday last week, the Pietermaritzburg high court dismissed the security company’s challenge, ordering it to pay the highest scale of legal costs.

In 2021, the Msunduzi Municipality in KwaZulu-Natal advertised a tender for security providers.

One of the prequalifications for bidders was the submission of documents such as audited financial statements for the past three financial years. More than 30 bidders responded, including Thabzo.

It apparently did not comply with this prequalification criterion. Instead of providing audited financial statements, Thabzo gave three documents concerning its previous year’s financial statements.

Despite not strictly adhering to the prequalification criteria, Thabzo was one of the successful bidders recommended by committees in the municipality.

The municipality entered into a contact in January 2022 with Thabzo, which began rendering security services. Thabzo was paid about R1.7m a month.

In November that year, the auditor-general’s office sent a report to the municipality, identifying irregularities in the tender process. One of the irregularities was that four bidders, including Thabzo, which failed the prequalification criteria were nevertheless successful.

The municipality concluded that the contract with Thabzo was improper. In December 2022, the municipality notified Thabzo it intended to cancel the contract in February 2023.

Thabzo argued the municipality did not have the right to cancel the contract unilaterally. The company accepted that the three documents it initially submitted were for the same financial year, saying it had “omitted by error” the documents for the other two financial years.

Various applications to court and responses from the municipality were made regarding cancellation of the contract.

The municipality cancelled the contract in April.

Thabzo took the matter to the high court, wanting the contract put in place and arguing the cancellation was unlawful. The municipality opposed, saying it had every right to cancel.

On Tuesday, acting judge Anna Annandale dismissed Thabzo’s case, as the municipality was on “solid ground” when it cancelled.

Thabzo argued the financial statements were not material and the committees could, in any event, condone noncompliance. The municipality could not unilaterally cancel a contract after entering it. Finally, the municipality needed to self-review if there was concern that its own process was unlawful.

“The mandatory requirement that bidders submit three years’ audited annual financial statements,” said Annandale, “was intended to enable the municipality to assess prospective service providers’ financial soundness. It was plainly not an irrelevant or unconstitutional requirement.”

She ruled that the documents Thabzo submitted were in themselves “conflicting financial statements”, which then “deprived the municipality of the opportunity to make a proper assessment of its financial situation”.

She agreed with Thabzo that the municipality lacked a contractual right to cancel. Thabzo initially argued that the only remedy left to the municipality was to go to court on self-review and have a court declare the tender process unlawful. That was not done. However, Annandale ruled that when “justice demands”, a municipality does not have to self-review before unrolling the unlawfulness it has identified.

In this case, as identified by the auditor-general, the unlawfulness is alleged to be the tender process. Annandale noted that if she granted Thabzo’s remedy it would mean “implement[ing] a constitutionally invalid tender award”.

The municipality was therefore on “solid ground”. She ruled that “the tender process was irregular and [Thabzo’s] bid should never have been considered”.

Because Thabzo wanted “to preserve a manifestly unlawful status quo to enrich itself by receiving payments of some R1.7m a month from public coffers”, Annandale ordered punitive costs on “an attorney and own client scale”. This is SA court’s highest scale of costs order, and is rarely ordered.

moosat@businesslive.co.za