The duties of a financially distressed bidder to disclose a change in its financial position during the procurement process

In Umso Construction (Pty) Ltd v Member of the Executive Council for Roads and Public Works Eastern Cape Province and Others ((20800/2014) [2016] ZASCA 61), the Supreme Court of Appeal considered the legal position where, following the award of a tender, it is discovered that the preferred bidder had been placed under business rescue during the bid evaluation process.

13 Jul 2016 3 min read Dispute Resolution Alert Article

The Eastern Cape Provincial Department of Roads and Public Works (Department) awarded a tender to Tau Pele Construction (Pty) Ltd (Tau Pele). Umso Construction (Pty) Ltd (Umso), was one of four unsuccessful tenderers.

Umso instituted proceedings asking the High Court to review and set aside the Department’s decision to award the tender to Tau Pele and to substitute it as the successful tenderer. The High Court set aside the decision to award the tender to Tau Pele but declined to substitute Umso as the successful tenderer.

Th timeline in this matter is crucial. The essential dates are:

  • The Department advertised the tender on 27 July 2012.
  • The closing date for the submission of bids was 8 August 2012.
  • Tau Pele applied to be placed under business rescue on 17 September 2012. It was placed under business rescue on 21 September 2012, but did not disclose this information.
  • Tau Pele’s business rescue was successfully terminated on 21 May 2013.
  • On 27 May 2013, the Department awarded the tender to Tau Pele.
  • After Umso initiated proceedings in the High Court in August 2013, it discovered that Tau Pele had been under business rescue during the bid-evaluation process. It filed supplementary founding papers to address this issue. The Department learnt that Tau Pele had been placed under business rescue in Umso’s supplementary founding papers.

In the High Court, Umso raised Tau Pele’s non-disclosure as a ground upon which the Department’s decision to award the tender to it should be set aside. The Department agreed with this contention. Tau Pele argued that it had no legal duty to inform the Department of its business rescue status, and that its non-disclosure did not invalidate the award of the tender.

The High Court found that there was a legal duty on Tau Pele to disclose that it was financially distressed when it became aware of this fact and that its failure to do so constituted a material non-disclosure. The Supreme Court of Appeal (SCA) agreed. According to the SCA, this duty emanated from two sources:

  1. One of the Department’s tender conditions was that the Department would “only consider tenders from tenderers who can prove to its satisfaction that they have the necessary financial resources to undertake and complete the work”. According to the SCA “it can hardly be disputed” that a prospective tenderer would fall foul of this condition if it had applied to be placed under business rescue because it was financially distressed.
  2. According to the law of contract, in contracts “of utmost good faith”, such as contracts of insurance and agency, the non disclosure of a material fact amounts to misrepresentation by silence. There has been “a steady progression in our law” towards applying this rule to contracts other than those “of utmost good faith”. In these cases the rule is applied because one party involuntary relies on the other party to disclose certain facts that are only known to that party. According to the SCA, the present case was such a situation.

The SCA concluded that, once Tau Pele’s financial position had changed materially after it submitted its bid, it was under a duty to disclose that material fact.

It is noteworthy that Tau Pele was found to be under a duty to disclose its materially changed financial position, even though it applied for, and was placed under, business rescue after it submitted its bid; and even though its business rescue was successfully terminated before the Department awarded the tender to it.

This case illustrates that a bidder may have to disclose a change in its financial position to a procuring entity. Whether this duty arises will depend on whether the change was material. This is often difficult to determine. A bidder should therefore proceed with caution if, after submitting its bid, its financial position changes markedly – particularly where this change affects its ability to deliver the goods and/or services that it tendered for. The prudent course of action would be to disclose this to the entity that solicited its bid.

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