Law on damages claims concerning public contracts clarified in South Africa

The SCA confirmed the point in the case between Esorfranki Pipelines (Pty) Ltd v Mopani District Municipality, where it considered whether damages could be awarded to an unsuccessful tenderer where the tender process was found to be fraudulent and unlawful.

The case in brief

Esorfranki initiated a claim for damages, for loss of profit, against the municipality after the contracting authority rejected its bid to win the contract for the construction of a water pipeline between Thohoyandou and Giyani in South Africa's Limpopo Province and awarded the contract to a joint venture company instead.

Though the SCA was split in its decision in the case, the majority of the judges dismissed Esorfranki's claim for damages. In arriving at its decision, the SCA considered the elements of a damages claim, including causation and wrongfulness. In doing so, the SCA determined that Esorfranki failed to establish each of these elements for raising a successful damages claim against the municipality.

Background to the dispute

In 2010, the municipality advertised tenders for the construction of a pipeline (original tender). This contract was awarded to the JV. Esorfranki, along with another unsuccessful bidder, brought an urgent application to prohibit the award. In 2011, an order was granted by consent between the parties that the tender be set aside and re-awarded. After further legal proceedings and another unsuccessful bid application, Esorfranki instituted a claim for damages for the alleged losses it had suffered.

Esorfranki commenced proceedings to have the award reviewed by the High Court and on 29 August 2012 the review court found that the contract awarded to the JV should be set aside. The municipality was considered to have acted with deliberate dishonesty and bad faith in awarding the contract to the JV. The contract was, however, not set aside by the review court.

In 2014, Esorfranki brought an appeal before the SCA to have the contract set aside. The SCA confirmed the findings of the High Court by declaring the contract void, granting equitable relief and ordering the Department of Water Affairs to assess the work required to complete the pipeline and to issue a new tender for such works. The new tender was advertised by the Department and Esorfranki once again bid for the contract and lost.

After the SCA review proceedings, Esorfranki instituted a claim for damages in the High Court for loss of profit arising from the wrongful and unlawful failure by the municipality to award the original tender to it. The High Court dismissed the damages claim. It reasoned, amongst other things, that Esorfranki failed to establish causation – that is, in simple terms, a sufficient link between the actions of the municipality and the company’s alleged loss. Esorfranki appealed the decision of the High Court to the SCA.

The case before the SCA: proving a claim for damages

A number of issues were raised on appeal, however of particular relevance is the SCA's treatment of Esorfranki's claim for damages.

For its damages claim to succeed, Esorfranki had to satisfy the elements of a damages claim. Of particular focus in this case were the elements of causation and wrongfulness.

Causation

The element of causation involves a two staged enquiry of factual and legal causation, which Esorfranki was required to prove. The test for factual causation involves an enquiry into the facts of the case as to whether the impugned conduct or omission in question is factually linked to the harm caused. Legal causation, on the other hand, involves considerations into, amongst others, reasonable foreseeability, directness, the absence or presence of an intervening event and reasonability.

The SCA was split in its finding of whether factual causation was proven by Esorfranki. Some of the judges found that Esorfranki had failed to demonstrate that it would have been awarded the original tender, but other judges found that there was no objective reason that Esorfranki would not have been awarded it. However, the majority found that Esorfranki failed to prove legal causation. In the absence of both factual and legal causation, causation was not established by Esorfranki.

The SCA's finding was based on, amongst others, the fact that the causal link between the harm suffered by Esorfranki due to the municipality's conduct was broken by the new tender. The court considered that this intervening event freed Esorfranki from the impact of not being awarded the original tender. 

Wrongfulness

In respect of the element of wrongfulness, the legal test is whether public policy and the convictions of society require that liability for damage should be imputed to the conduct which caused the pure economic loss.

In this instance, the fact that there was collusion between the JV and the municipality did not necessarily mean that the conduct was wrongful in the context of a damages claim. The municipality did not owe a legal duty to Esorfranki to permit it to profit from a fair and competitive tender process. The SCA referred to the legal position under South African law that negligence and incompetence is not enough for there to be liability for damages.

The SCA also found that Esorfranki could not bring a claim for loss of profit arising from the works under the original tender where the works also fell within the scope of the new tender. In addition, the SCA said that it would be contrary to public policy for a company to retain a claim in an unlawful tender process that is set aside, in circumstances where that same company fails in the lawful tender process that follows. This, the court considered, would result in a double charge against the municipality and a double entitlement for Esorfranki to profit.

The SCA dismissed Esorfranki's claim and ordered the company to pay costs.

Conclusions to be drawn from the judgment

Whilst the onus is on the party claiming damages to prove the elements of a damages claim, this can be a challenge – particularly where the party in question is an unsuccessful tenderer. This is so even when the claim is based on a fraudulent and unlawful procurement process which was reviewed and set aside by the court.

This decision confirms that the guarantee under the Constitution of the Republic of South Africa of a fair, competitive and cost-effective tender process does not translate into an entitlement by an unsuccessful tenderer to claim damages for loss of profits. To allow such a claim would open the floodgates of litigation, result in excess expenditure of public funds and potentially compromise the fair and competitive evaluation of tenders as prescribed under the Constitution. 

Co-written by Natalie Keetsi, Christoff Ferreira and Kirsten Gilbert-Dempsey of Pinsent Masons.