South African courts wade deeper into construction procurement process

One of the most recent swipes came from the Western Cape High Court, in a ruling over a dispute between JK Structures CC and the City of Cape Town, which might have established a new standard for determining the qualifying Construction Industry Development Board (CIDB) grading criteria when inviting contractors to tender for public works.

City of Cape Town’s construction tender invitation

The case involved an ordinary application for the review of the city administration’s bid evaluation committee’s decision to disqualify a contractor’s tender for lack of compliance with the required CIDB grading, as per the bid invitation. The administration’s initial bid invitation was directed at procuring up to three contractors as part of a panel which it could then call on to replace sewer piping throughout the city. The panel would be constituted through a ‘framework agreement’, which would be valid for a “tender term” period of three years.

How the work would be performed, however, was at odds with the relevant tender invitation. The framework agreement accompanying the bid invitations suggested that the works would be undertaken by the contemplated panel of contractors through a series of bite-sized “works orders” ranging in value between R1 million (approx. US$54,750) and R6m, with the total value of the works expected to be around R180m over the three-year tender term.

But, according to the invitation, the city administration would only consider tender responses from contractors registered with a CIDB grading of a contractor capable of performing projects with a value of at least R60m. That figure did not appear to relate in any way to how the works were expected to be performed. The R60m figure was, instead, an arbitrary division of the R180m total tender expenditure, divided by the three-year tender term.

As a result, JK Structures’ tender for the work was never evaluated by the administration’s bid evaluation committee. It was rejected as non-compliant because the contractor’s registered CIDB grading was not at the level required by the bid invitation. This was particularly devastating to the contractor given that it had previously been awarded and satisfactorily performed works on behalf of the city administration in terms of similarly contemplated umbrella framework agreements.

The Western Cape High Court’s ruling

The High Court was asked to rule on whether the city administration had misdirected its application of the CIDB Act and regulations when evaluating JK Structures’ tender, by virtue of it requiring a CIDB grading level which was too high when measured against how the work would actually be performed. JK Structures argued that the value of the individual tender works range should have been the determining factor for specifying the qualifying CIDB gradings, instead of dividing the total anticipated expenditure by the administration by the tender term of three years.

The contractor added that it was always understood that the works were never going to be undertaken by a single contractor, or that one contractor would be required to have the resources to undertake R60m-worth of works on its own in a single year. The court agreed with JK Structures and held that if the administration were to use the total tender value to determine the required CIDB grading, as opposed to the tender range, the resultant disqualification of otherwise capable contractors would be “unbusinesslike”.

Mr Justice Binns-Ward said that the administration’s interpretation was “undoubtedly unfair” and would go against the express purposes of the CIDB Act, entitling city officials to employ only relatively large contractors to undertake projects well within the established capability of smaller contractors. He concluded that the administration’s procurement process had been “fundamentally tainted” in the result.

The impact of the JK Structures case on public sector procurement

Whether or not this ruling establishes a new standard or onus for the public sector to justify how they expect public works to be performed remains to be seen, but it is clear that the courts seem increasingly tempted to wade into and impose their views on, for example, how tender invitations ought to be graded and how tenders ought to be adjudicated. This is especially true on the basis of what, in Mr Justice Binns-Ward’s view, would make more business sense and what is fair when measured against how the works can be performed.

This is undoubtedly a potential lifeline to contractors to review CIDB grading criteria that would otherwise disqualify them from tendering, based on how the contractors view the projects are capable of being performed. What would otherwise have been naturally understood to be large contracts which would be performed by a single contractor might now be interpreted by the courts as being capable of being done in separate parts, thereby giving an opportunity for smaller contractors to qualify as part of a panel.

Either way, South African courts seem to be wading deeper and deeper into a role that bid invitation committees ought to have autonomy in performing and managing, and which the legislature should be playing to create certainty for the industry regarding who can and should be performing certain work. The certainty the courts are attempting to create, in the circumstances, may unfortunately be having the opposite impact. 

Co-written by Njabulo Gumede of Pinsent Masons.