South African court clarifies compliance requirements for lawful tenders

The Supreme Court of Appeal set aside a decision of the High Court that declared tender awards worth about R16 billion (approx. US$874 million) as unlawful.

The decision makes it clear that the splitting of tender awards is a practice that will be allowed to continue as long as the award has been based on objective criteria. It also cautions bidders against non-compliance with material requirements. Bidders are urged to familiarise themselves with both the criteria against which a bid will be assessed and what key requirements are outlined in the tender. These are important considerations to bear in mind, particularly as South Africa’s energy market continues to evolve.

The decision follows an application for leave to appeal against a High Court decision, brought by Eskom Holdings SOC Ltd (Eskom), Actom (Pty) Ltd (Actom) and Steinmüller Africa (Pty) Ltd (Steinmüller), who had been joint successful recipients of a tender award to render maintenance and outage repair services for boilers at fifteen of Eskom’s coal-fired power stations. Pinsent Masons advised Actom in the proceedings.

On 6 August 2018, Eskom published a request for proposals (RFP) inviting bids to tender for maintenance and outage repair services for boiler pressure parts and high outage repair services for pressure pipework.

In its RFP, Eskom had required an ISO 3384 certificate to be submitted, to verify that the company had the requisite resources, systems and personnel to weld to a required quality and standard. This certificate was listed as ‘mandatory’ and it was further stated that if the condition was not complied with, it would result in a bidder being disqualified at the evaluation stage.

Babcock Nthuthuko Engineering (Pty) Ltd (Babcock) submitted its proposal by the extended deadline of 24 October 2018, but it had failed to submit a current ISO 3384 certificate.

On 7 October 2021, Eskom awarded the tender jointly to Actom and Steinmüller, with Actom having been appointed to provide services at seven of the fifteen power stations and Steinmüller having been appointed at the other eight power stations.

Babcock then initiated High Court proceedings to review and set aside the tender awards on the basis that the decision of Eskom to disqualify it at the evaluation stage and to split the tender between Actom and Steinmüller was irrational, unlawful and invalid.

The High Court found that the condition of the RFP to provide an ISO certificate did not require the submission of the certificate itself, but rather a statement from the bidder that it had been certified. The High Court held that the requirement was ambiguous and as such, Eskom was obligated to allow disqualified bidders to submit a certificate after the deadline. The tender awards were subsequently set aside, and Eskom was ordered to conduct a fresh tender process.

Eskom, Actom and Steinmüller appealed against the decision of the High Court.

Was Babcock properly disqualified?

The Supreme Court of Appeal disagreed with the finding of the High Court that the certification requirement was ambiguous. The court highlighted that Babcock attended the tender clarification meeting, at which bidders had been informed, in clear terms, that the RFP required a mandatory ISO 3384 certificate, which had to be submitted before the deadline. Attendees were also informed that failure to do so would result in the bidder being disqualified from the evaluation phase.

Babcock also argued that, in deciding whether Babcock had complied with the requirement, Eskom was obligated to consider the purpose behind the requirement. Babcock referred to a previous decision to support its argument, AllPay (59 pages / 342 KB), in which the Constitutional Court adopted an approach that tested compliance with reference to the purpose of the legal provision, when assessing whether a tender complied with the legal requirements. 

Babcock argued that if Eskom had adopted this approach, it would have found that Babcock had met the mandatory requirement. This was argued to be the case as the purpose of the requirement was to ensure that bidders had the necessary qualifications. Additionally, Babcock argued that it held these qualifications and had been performing these services for Eskom since 2018 under a previous contract. Babcock further argued that Eskom was aware of the existing ISO 3384 certificate and failing to submit this would not have prejudiced Eskom in any way.

The Supreme Court of Appeal, in making its decision, referred to the cases of AllPay and Millenium Waste. In Millenium Waste it was found that as a tender board was able to accept tenders even if they failed to comply with tender requirements, condoning such failures may serve the public interest by boosting competition amongst bidders. It was also found that condonation in these instances would promote the values of fairness, competitiveness and cost-effectiveness.

Drawing a distinction between the case before it and that of AllPay, the court highlighted that in AllPay, the disqualified bidder submitted tenders in respect of all the provinces but had merely failed to file them separately as required in terms of the compulsory tender conditions.

The court highlighted that both the Millenium Waste and AllPay cases concerned trivial or minor forms of non-compliance, unlike the failure of Babcock in the present case. The failure of Babcock to provide proof of the relevant experience, and the necessary ISO 3384 certificate to this effect, was a failure to meet two of the most important tender conditions. Furthermore, it could not be overlooked that Eskom had repeatedly warned bidders that the requirement was mandatory. As such, the court found that Babcock’s disqualification was lawful, and Eskom did not have a discretion to condone the non-compliance.

The ruling cautions unsuccessful bidders against relying on court decisions that concern immaterial and trivial failures of non-compliance to support claims for condonation. A distinction must be drawn between tender requirements that are material and are integral considerations for the services tendered, and those that may be simply rectified and condoned. It stands that Eskom will not be requested by the courts to condone non-compliance with tender terms that are material. The ruling further illustrates that courts will take into account what is discussed at tender clarification meetings, and failure of a bidder to adhere to the requirements discussed at these meetings will be to the bidders’ own detriment.

Is it lawful to split tender awards?

Babcock argued that the splitting of the tender awards between Actom and Steinmüller was irregular and went against the Preferential Procurement Policy Framework Act 5 of 2000 (PPPFA). The PPPFA requires a tender to be awarded to the bidder which scores the highest points unless the objective criteria justify the award being given to another bidder.

Babcock argued that the PPPFA only allows for two scenarios. First, the awarding of a tender to the highest scoring bidder; or second, in exceptional circumstances, to a lower scoring bidder if the objective criteria so allow. As Eskom stipulated upfront that it wished to split the tender, Babcock argued that no objective criteria had been taken into account.

The Supreme Court of Appeal considered the reasoning behind Eskom’s strategy of wishing to split the tenders. In this respect, Eskom was concerned that limiting the award to one service provider would hold great risk should the provider become unable to provide the services, due to the fifteen power stations in question providing most of the country’s electricity supply. The Supreme Court of Appeal highlighted that the tender conditions in themselves provided objective criteria, including safety, health, environment and quality requirements (SHEQ), supplier development and localisation, and financial analysis.

Based on these criteria, the Supreme Court of Appeal found that Actom was the only bidder who did not meet the SHEQ criteria, and Eskom allowed it to remedy this. The court also found that a target of 240 candidates for skills development would be negotiated with both Steinmüller and Actom and that both Steinmüller and Actom were financially sound to receive the awards.

As the awarding of the bids in itself was based on objective criteria, the court found that the decision to split the award was rational, lawful and in accordance with the requirements of the PPPFA. This illustrates that tender bids may be lawfully split between bidders, provided that the reasoning behind awarding the tender to particular bidders remains based on objective criteria.

Co-written by Stefano Karzis and Kassandra Vercueil of Pinsent Masons.