In its May 2020 decision in Namasthethu Electrical (Pty) Ltd v. City of Cape Town and Another, South Africa’s Supreme Court of Appeal upheld a decision to revoke a contract award due to misrepresentations made by the winning contractor during the bidding process. The dispute dealt with a tendering process for the supply, retrofit, and installation of energy-efficient lighting at the Cape Town Civic Centre. As the Court of Appeal summarized, a losing bidder challenged the outcome, claiming that the winning bidder engaged in fraudulent misrepresentations by failing to disclose recent fraud and corruption convictions that should have resulted in disqualification:
On 17 September 2014 an unsuccessful bidder, Citrine Construction (Pty) Ltd (Citrine), a competitor in the tender process, sought to appeal the award of the tender to Namasthethu and called on the City to set aside the award of the tender. Citrine complained that Namasthethu and its directors had been convicted of fraud and corruption on 13 August 2013, arising from a complaint by the Construction Industry Development Board (the CIDB). The City was informed that Namasthethu and its directors were consequently sentenced to a fine of R200 000 coupled with a wholly suspended sentence of 5 years’ imprisonment. This was the basis of the appeal.
The significance of the complaint located in the appeal in relation to the present dispute lay in the fact that in its tender submission, Namasthethu had completed an official tender document declaring that neither it, nor any of its directors, had in the past five years been convicted of fraud by a court of law. If the allegations by Citrine were true, it would mean that Namasthethu was guilty of a fraudulent misrepresentation. In terms of clause 36.1.3 of the contract, the City was entitled to terminate it where Namasthethu had committed a corrupt or fraudulent act during the procurement process, or in the execution of the agreement.
Upon verifying these allegations, the Town revoked the award. The contractor challenged that termination decision, arguing that the matter should have been sent to arbitration pursuant to the arbitration provisions in the awarded contract:
Namasthethu disputed the cancellation in correspondence which it sent to the City without, however, addressing or challenging the specific fraud allegations against it, and thus the City’s reasons for cancellation of the contract. Its focus was to insist that the dispute surrounding the City’s cancellation of the contract be adjudicated in accordance with the dispute resolution procedure specified in the contract.
While the contractor obtained an arbitration ruling, that ruling was struck down in court and the contractor appealed. The Court of Appeal upheld the lower court ruling, finding that the fraudulent misrepresentations made the contract voidable from the outset, which meant that none of the contract terms survived and the arbitration provisions therefore were null and void:
In the end, having considered the conduct of the appellant during and after the tendering process, the court a quo was satisfied that all the requirements of fraudulent misrepresentation had been met, which rendered the contract voidable at the instance of the City, which it then validly and effectively elected to rescind. I am unable to fault the court a quo in arriving at this conclusion.
The question that must now be answered is whether, in the light of the fraudulent and corrupt conduct of which the appellant was undoubtedly guilty, the City, after validly cancelling the contract, can be compelled to submit to an arbitration process in accordance with the dispute resolution clause in the contract, an issue to which I now turn.
It is trite law that fraud is conduct which vitiates every transaction known to the law. In affirming this principle, this court, in Esorfranki Pipelines (Pty) Ltd, referred with approval to Lord Denning’s dicta in Lazarus Estates Ltd v Beasley,5 when he said:
‘No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts and all transactions whatsoever . . .’.
As regards an arbitration or similar adjudication clause contained in an agreement which was found to have been induced by fraud, this court has emphatically ruled that once the agreement had been rescinded by an aggrieved party, the said arbitration clause cannot stand.
Accordingly, as the Court of Appeal concluded, the referral of the termination dispute to the arbitrator was invalid and unlawful and the lower court “was correct in setting aside his determination following on an unlawful adjudication process.”
As this case illustrates, contracts awarded based on misrepresentations may be subject to post-award revocation after those misrepresentations are discovered. In those instances, all the terms in the contract, including the dispute resolution provisions, may be legally null and void. This case serves as a clear warning to bidders who may be tempted to make misrepresentations during a bidding process in a misguided attempt to win a contract award. Purchasing institutions should ensure that their contracts include express recission rights for prior misrepresentations, and that their debarment rules include debarment for prior criminal convictions and prior misrepresentations. This will allow institutions to terminate contractors for ill-gotten awards and then also bar those contractors from future bidding opportunities.
