Court rulings bringing up uncertainty over validity of public-sector contracts
Government entities are increasingly turning to legal processes to have irregular public procurement reviewed and set aside
SA is grappling with large-scale public-sector corruption, which has severely undermined the government’s public procurement system. Recent judicial developments, including a court-ordered commission of inquiry into state capture, appear to have been met, finally, with serious political will to root out corruption.
President Cyril Ramaphosa’s inaugural promise of a “new dawn”, animated by a spirit of “thuma mina”, seems belatedly to be prompting some government officials to investigate and expose irregularities in their departments.
Where public procurement processes appear to have been irregular, the implicated government entities have increasingly turned to the courts to have these irregularities reviewed and set aside. While this may be seen as an important means of promoting transparency and accountability, it also gives rise to some uncertainty regarding the validity of existing public-sector contracts.
Sometimes, self-review proceedings are brought months, or even years, after the contracts are concluded and implemented. While it is an accepted principle that judicial review proceedings ought to be brought in a timely manner, the Constitutional Court has, for the most part, been reluctant to allow procedural obstacles (such as time bars) to prevent it from reviewing the lawfulness of an exercise of public power. In support of its view, the court has relied on the constitutional imperative to declare unlawful conduct invalid.
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In the past two years, the court delivered two judgments navigating this tension: State Information Technology Agency (Sita) vs Gijima Holdings, and the more recent case of Buffalo City Metro vs Asla Construction. In the former, delivered in late 2017), the Constitutional Court assessed the validity of a contract between Sita and Gijima Holdings under which Sita agreed to appoint Gijima as the information technology (IT) service provider for the department of defence and the KwaZulu-Natal health department.
When Gijima instituted arbitration proceedings over alleged nonpayment, Sita claimed that the contract was invalid owing to noncompliance with section 217 of the constitution (which, among other things, provides that contracts for goods or services must be entered into in accordance with a system that is fair, equitable, transparent, competitive and cost-effective). The arbitrator ruled that he lacked jurisdiction to hear the matter. Sita subsequently approached the high court to have the contract set aside, nearly two years after the contract was awarded.
The high court found that the decision to award and renew the contract qualified as administrative action in terms of the Promotion of Administrative Justice Act (Paja), which thus had to be challenged within the statutory 180 day time limit. As Sita failed to launch the proceedings within the stipulated time period and did not seek condonation for its failure to do so, the high court refused to entertain the review and the application was dismissed.
On appeal, the Supreme Court of Appeal likewise concluded the Paja 180-day deadline applies where an organ of state seeks judicial review of its own administrative action. However, the Constitutional Court decided that Paja does not apply to self-review applications. Instead, these must be brought under the broader constitutional principle of legality and within “a reasonable time” (rather than strictly 180 days), unless there are compelling reasons for overlooking the delay.
While acknowledging that Sita had not instituted its self-review application within a reasonable time, the Constitutional Court found itself compelled to overlook the delay, declared the contract invalid and set it aside, as it had not been awarded in compliance with section 217(1) of the constitution.
In the Buffalo City judgment, delivered in May, the Constitutional Court assessed the lawfulness of a contract concluded in 2014 between the Buffalo City metropolitan municipality and Asla Construction. In 2014, the city had awarded Asla a contract to manage the completion of a particular housing project. The city later extended Asla’s scope of work to include a second housing project nearby.
In 2015, the acting city manager claimed that this scope extension was unlawful as it had not followed a proper tender process. In response, the city appointed an independent investigator but allowed Asla to continue performing under the extended scope of work in the meanwhile.
While the investigation was under way, Asla instituted a high court claim against the city for alleged nonpayment for work performed under the scope extension. In its defence, the city argued that the scope extension was unlawful and instituted a counterapplication to have it set aside under Paja.
Despite the counterapplication being brought later than 180 days after the scope extension was made, the high court found that the city had made out a proper case for condonation and declared the scope extension invalid. The SCA disagreed, holding that a proper case for condonation had not been made out, and thus declined to consider the lawfulness of the scope extension.
On appeal, the Constitutional Court took the opportunity to reiterate how courts should approach delays in launching self-review proceedings. The court had the benefit of hearing the matter after the Gijima judgment had been delivered and acknowledged as settled law the fact that organs of state seeking judicial review of their own decisions must do so under the principle of legality.
The court applied a two-step approach to assess whether a self-review application may be considered despite a significant delay. First, the court must determine whether the delay was reasonable. Key to this assessment is the requirement that applicants provide a full and honest explanation for the entirety of the delay. Where the applicant is unable to justify the delay, the delay will necessarily be unreasonable. For example, in Buffalo City, the unexplained year-long delay from the time of the award of the scope extension to the time when the alleged irregularities in the procurement process were reported was deemed to be unreasonable.
Second, if the court finds the delay to be unreasonable, it must determine whether it ought to exercise its discretion to overlook the delay. While the potential reasons for exercising this discretion are context-dependent, the court in Buffalo City identified three important factors that should be considered: the potential prejudice to affected parties and the consequences of declaring the impugned decision unlawful; the nature of the impugned decision; and the applicant’s conduct.
The court applied these steps and (by a majority of six judges to three) concluded that the city’s delay of 14 months from when the decision to award Asla the work falling within the extended scope was unreasonable and there were no compelling reasons to overlook it. Curiously, however, the court nevertheless elected to declare the scope extension invalid, reasoning that “this court is obliged, as it did in Gijima, to set aside a contract it knows to be unlawful”. Despite this, the court made an order “declaring the [scope extension] invalid, but not setting it aside so as to preserve the rights to which [Asla] might have been entitled. It should be noted that such an award preserves rights which have already accrued but does not permit a party to obtain further rights under the invalid agreement.”
Where to from here? While the Gijima judgment was criticised for creating uncertainty in the treatment of delay in bringing judicial reviews and for furthering the bifurcation between Paja review and legality review, the majority judgment in Buffalo City appears to have set an even more unclear precedent, which suggests that courts will have to consider a judicial review application under all circumstances regardless of the delay in it being launched. As a consequence, contracts entered into with the state may be declared invalid even where the delay in bringing the application is found to be unreasonable and the court has found no compelling reason to overlook it.
As argued in the dissenting minority judgment of justices Cameron and Froneman (with Justice Khampepe concurring), this renders the two-step approach redundant and leaves contracting parties in a precarious position.
Given the political context in which municipalities are trying to “clean house” by overhauling past decisions, the validity of many public-sector contracts may be in contention.
The uncertainty resulting from the Constitutional Court’s decision in Buffalo City is unlikely to find favour with the investment community, which understandably places great value on the predictability and finality of decision-making.
• Leon is partner and co-chair at Herbert Smith Freehills’ Africa practice.