South African court: ‘ignorance’ to flawed procurement processes may be insufficient to avoid consequences

The court found that an ‘innocent’ contractor was required to pay back profits it had made from a contract that originated from a flawed procurement process. The decision dealt with a self-review application brought by the South African Broadcasting Corporation (SABC) to set aside a consultancy contract that was awarded to Mott MacDonald Africa (Pty) Ltd (Mott).

The court also found that there were irregularities in the procurement process resulting in Mott’s appointment, noting that the appointment fell short of section 217 of the South African Constitution, which requires public procurement to be fair, equitable, transparent, competitive and cost-effective. As a result, the court held that the consultancy contract should be set aside as there were deviations from a competitive tender process.

The application in this matter was brought on a legality review in terms of section 172(1)(b) of the South African Constitution, which provides courts with the power to make a just and equitable remedy when deciding a constitutional matter.

What is a just and equitable remedy?

In determining what constituted a just and equitable remedy the court considered the decision in the 2020 ‘Vision View’ case. One of the principles from that case which the court relied on is the principle that “even an innocent contractor has no right to benefit from the proceeds of an invalid contract”.

The court found that this was a principle in South African law that should be relied on when determining an appropriate remedy. However, the Supreme Court of Appeal (SCA) recently ruled that this is not a principle in South African law. In doing so, the SCA did not consider the substance of the ‘principle’ that was relied upon to be incorrect, but instead held that courts should exercise discretion on a case-by-case basis and not merely rely on this principle when determining what a just and equitable remedy will be.

In coming to its decision, the SCA referred to a Constitutional Court decision, where the judge stated: "I do not think that it is wise to attempt to lay down inflexible rules in determining a just and equitable remedy following upon a declaration of unlawful administrative action. The rule of law must never be relinquished, but the circumstances of each case must be examined in order to determine whether factual certainty requires some amelioration of legality and, if so, to what extent.”

Does the conduct of an innocent contractor matter?

Turning to the particular circumstances of this case, while the position of ‘innocent’ contractors caught up in flawed procurement processes should be decided on a case-by-case basis, the court said: “it is unthinkable that a multi-national firm of consulting engineers like Mott would have been unaware that the procurement of services by state entities is strictly regulated.”

The court also held that Mott had not followed “its own commitment of good governance and due diligence” in accepting and assuming that the SABC’s procurement processes had been followed, and had acted unreasonably. The court confirmed that it was a case of “wilful blindness” on the part of Mott. As a result, the court found that Mott was required to pay back the profits which it had made from the contract.

Wider impact of the case

This High Court judgement undoubtedly stressed that it is inexcusable for multinational companies not to know that the procurement process for public tenders are regulated and should be fair, equitable, transparent, competitive and cost-effective.

Although the substance of the ‘principle’ relating to the disgorgement of profits solely as a result of an irregular procurement process is confined to the Johannesburg High Court, it remains to be seen how this will be tested by the SCA or the Constitutional Court. The High Court decision is a welcome reminder that it is in the public interest for contracting parties to ask the hard questions which are necessary to achieve the objectives of section 217 of the Constitution.

Co-written by Chantel Carreira and Christoff Ferreira of Pinsent Masons.