17 August 2021 by and Dispute Resolution Alert

Unsuccessful in bidding for a public tender? Think twice before instituting a claim for delictual damages

Under the Constitution, an organ of state must contract for goods and services in accordance with a system that is “fair, equitable, transparent, competitive and cost effective”. When an organ of state does not do so, aggrieved bidders whose rights or interests have been infringed upon are entitled to approach the courts to have the decision set aside on review and, where appropriate, to interdict the organ of state from implementing its decision. 

Despite this, over the past 25 years aggrieved bidders have sought to bring delictual claims – that is, claims for civil damages – against organs of state for their infringement of the various rules and procedures that apply to public procurement. These attempts have been unsuccessful largely because the courts have held that public policy does not require an organ of state to compensate an aggrieved bidder for loss of profits, particularly under circumstances where the organ of state has already paid the successful tenderer. The Constitutional Court went so far as to hold that even out of pocket expenses, such as wasted costs for compiling a bid, were not recoverable.

However, in 2007 the door was left ajar by the Supreme Court of Appeal (SCA) in Minister of Finance and Others v Gore NO [2007] (1) SA 111 (SCA), where a provincial tender was awarded through fraud, bribery and corruption. In this case, the SCA confirmed that even where the organ of state’s conduct amounted to negligence, a claim for damages would not be competent, however, a claim would be competent where it is established that the award of the contract was brought about by the dishonest or fraudulent conduct of the officials, for which the organ of state is vicariously liable.

However, circumstances of blatant malfeasance are rare, and one would be hard pressed to find instances where aggrieved bidders have successfully prosecuted a case for damages against the relevant organ of state despite the narrow opening left by the Gore case. The recent judgment of the SCA in Esorfranki Pipelines (Pty) Ltd v Mopani District Municipality [2021] ZASCA 89 is illustrative of this point, particularly because the facts in that case demonstrated, at the very least, mala fides, which is commonly translated as bad faith but which also means an intention to deceive.

Damages sought for loss of profit

An exposition of the facts underlying the conduct of the municipality cannot be sufficiently condensed to fit into this article, however, what is important to note is that the decision to award the tender was successfully reviewed by Esorfranki in an earlier suit and was declared unlawful. Esorfranki was also successful in interdicting the implementation of the award, but was unsuccessful in enforcing the interdict, because the municipality was intent on implementing the award despite being interdicted from doing so.

This brings us to the issue of delictual damages, which was sought by Esorfranki against the municipality for loss of profit. The legal requirement for a delictual claim for damages is that a litigant must prove that there was a wrongful act, fault either in the form of negligence or intention, causation, and damages in the form of a reduction in the litigant’s financial position (or non-patrimonial loss such as loss for pain and suffering). The limitation to a wrongdoer’s liability is found in the wrongfulness and causation elements. As a result, these elements are often crucial to the success or failure of a claim for delictual damages.

If you recall, in Gore the SCA held that a claim in delict would be competent where it is found that the conduct underpinning the decision to award the tender was tainted by fraud, bribery and corruption. In Esorfranki, the SCA grappled with whether an express finding that the conduct by the organ of state was fraudulent and corrupt was required to satisfy the wrongfulness element of a delictual claim.

Judgment

The judgment of Goosen AJA found that because the decision maker at the municipality acted with deliberate dishonesty, in bad faith, with an ulterior purpose and fraudulently (not once but twice because the decision to award the tender was reviewed by Esorfranki twice) it was clear that the conduct was wrongful.

The judgment of Nicholls JA disagreed with this finding, holding instead that because the review court made no direct findings of fraud against the municipality when it set aside the decision to award the tender, wrongfulness could not be established. In addition, she found that when the review court set aside the decision to award the tender, it resulted in there being no extant tender in which Esorfranki lost the opportunity to bid and thus make a profit. In other words, Esorfranki obtained a public law remedy that set aside the decision to award the tender, which made the decision void from the outset. The result being that the wrongful conduct perpetrated by the municipality would no longer attach to any existing tender, meaning that there was no legal duty owing to Esorfranki which Esorfranki could use as a basis for establishing a cause of action.

The judgment of Goosen AJA was supported by Petse AP, whereas the judgment of Nicholls JA was supported by Poyo-Dlwati AJA. The five-person bench was split down the middle, with no clarity being given as to whether wrongfulness could be established under circumstances where the review court has set aside the award and where the reason the award was set aside in the first place was due to conduct amounting to fraud and corruption.

In the end, however, Esorfranki was unsuccessful, and the appeal was dismissed because Nicholls JA (Poyo-Dlwati AJA concurring) along with Mbatha JA (who wrote a separate judgment on the issue) found that Esorfranki had failed to satisfy the causation element, more crudely known as the “but for test”. Of course, causation is more than simply answering the question of whether the harm would have been caused but for the wrongdoer’s conduct. It involves a second analysis to determine the remoteness of the conduct to the harm caused and whether there were intervening factors. On this issue, the majority found that there were insufficient facts, given the litigious history of the matter whereby no witnesses were called at the trial, to satisfy the legal element of causation.

Comment

So, what does it all mean? In our view, despite the lengthy debate on wrongfulness, the status quo remains the same for aggrieved bidders seeking to claim damages. That is, that although Gore is illustrative of the fact that our courts are willing to entertain claims for damages, the circumstances giving rise to such claims require blatant malfeasance that distinguishes clearly between mere incompetence and deliberate corruption. In addition, even where such extraordinary facts are established, it is by no means clear that a court will award the delictual damages being sought. Thus, aggrieved bidders would do well to think twice before instituting an action for delictual damages.

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