Archive for Sello E. Xama

Fraud commited in awarding tenders

Posted in Employee misconduct with tags , on March 24, 2007 by labourlawoffices

With the advent, establishment and development of the democratic dispensation in South Africa came the development of the Broad Based Black Economic Empowerment strategy, policies and processes which are aimed at addressing and achieving various objectives. Against this background, companies and institutions have geared themselves up and strategically positioned themselves to provide goods and services to the government. 

Government procurement has been identified as one of the crucial tools that could be used to achieve the socio-economic redress as well as to empower the historically disadvantaged. A government public tender is a means and a vehicle of engaging in public procurement. It is the most effective way of complying with the principles of fairness, equity, transparency, competitiveness and cost effectiveness. 

The Supreme Court decision 

Notwithstanding these noble principles, media reports are abound with allegations of fraud committed during tender processes. The Supreme Court of Appeal in the matter of Minister of Finance and others v Gore NO was called upon to determine and pronounce on whether or not the national and provincial governments can be held vicariously liable for the fraudulent conduct of its employees committed during a tendering process which conduct caused pure economic loss to the party who had lost out on a government tender. 

A brief synopsis of the relevant facts are as follows. The Cape Provincial Administration (“CPA”) was experiencing massive corruption and fraud in registration and payments of pension grants. Company X, concluded an exclusive association with a foreign based company (“Y”)  to secure the sole rights to import and distribute a new fingerprint identitification and verification technology. Company Y was the only Company that provided the said technology in the world. 

Company X helped the CPA to devise tender requirements. Company X subsequently held discussions and successful demonstrations and tests of the said technology with, inter alia, the CPA’s Deputy Director for Social Security (“Z”). 

A tender was advertised and about 13 entities including company X and company Q submitted tenders. The tender awarding committee chaired by the CPA’s deputy director, Z, recommended that company Q, which did not have previous experience in information technology, be awarded the tender. 

It was established that Z fraudulently and corruptly concluded an agreement with company Q before the tender was advertised; prepared company Q’s tender  documents on CPA’s premises; manipulated the award process by concealment, distortions and lies; and secured a job with company Q before the tender was awarded. 

Company X issued summons as a result of the fraudulent conduct committed by Z. The national and provincial governments raised the following defences; that the plaintiff’s claim had prescribed; that they were not vicariously liable for the conduct of its employee; that company X would not have secured the contract and thus had suffered no damages; and that a public body was immune from liability for fraud committed in the course of a tender process.  

With regard to the defence of prescription the Court found that company X had no more than a suspicion that fraud had been committed. The Court restated the principle that prescription begins to run when the creditor has knowledge of the minimum facts from which the debt arose. The Court held that a mere opinion or supposition was not enough to sustain a defence of prescription. What was required was a justified belief or conviction that can be inferred from attendant circumstances. 

The Court applied a two pronged test and held, with regard to the national and provincial governments’ defence that they were not vicariously liable for the deliberate dishonest conduct of their employees, that while the fraudulent conduct was subjectively committed solely for the employee’s own in interests and purposes, objectively there was a sufficient close link between the national and provincial governments’ business. It concluded that although the conduct of Z defrauded both company X and the national and provincial governments, his actions were tightly aligned to the functions he was employed to the perform.  

The Court further restated that the question of causation is one of fact. On the facts before it, it held that it was a matter of common sense based on the practical way in which an ordinary person’s mind works against the background of everyday life experience that company X, without the fraud, would have been the successful tenderer. 

With regard to the national and provincial governments’ contention that generally our law does not extend a delictual claim to an unsuccessful tenderer against a government department for losses suffered in the course of a tender process, including where the loss was inflicted by fraud, it held that the fact that the employee’s conduct was deliberate and dishonest dictated that liability should follow in damages even where a public tender was being awarded.