By: Paul Emanuelli
This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
Where public institutions fail to follow proper contract approval procedures, they increase the risk of litigation over the validity of their contract awards. While in certain instances an improperly awarded contract may be unenforceable, in other cases a public institution may still be responsible for payment for work performed under an invalid award.
For example, in its August 2021 decision in LB Construction and Joinery v. Attorney General, the High Court of the Solomon Islands found that a verbal contract awarded by the Minister of Aviation for a road repair project was unenforceable and that the contractor was not entitled to payment for its work. As the Court noted, after observing deteriorating road conditions around an airport, the Minister of Aviation relied on urgency as the rationale for directly awarding a verbal contract for the required repair work. While the Minister informed Ministry staff of the verbal award, work commenced without a formal contract. In fact, a contract was never formalized, and the contractor was never paid. The contractor sued.
Notwithstanding the Minister’s non-compliance with the applicable contract award rules, the contractor argued that a legally binding contract was formed based on the Minister’s verbal award. The Ministry disagreed, arguing that the Minister had no authority to verbally award the work. The Court agreed, finding that the lack of a written agreement meant that there was no certainty in relation to critical performance and payment terms. The Court also found that the contractor was unable to prove that the work was “independently certified to be completed by the supervising engineers.” The Court therefore ruled that the verbal award was “void and unenforceable” and found the contractor was not entitled to payment.
Similarly, in its September 2021 decision in ‘Ikani L. Taliai v. Ministry of Internal Affairs, the Supreme Court of Tonga dealt with a dispute where the government argued that its failure to follow proper approval procedures rendered the resulting contract unenforceable. However, while the Court found that the contract in question was properly approved in compliance with applicable regulations, it ultimately rejected the contractor’s payment claim since no work was ever performed. As the Court ruled, the contractor lacked the “clean hands” necessary to be entitled to an equitable payment remedy.
Further, in its June 2022 decision in The Special Investigating Unit v. Zakheni Strategic Supplies (Pty) Ltd, South Africa’s Special Tribunal set aside a contract due to procedural irregularities. The dispute dealt with the award of a pandemic-related contract for the supply of personal protective equipment under an emergency procurement process. The Tribunal found that Gauteng Department of Health awarded the contract in contravention of applicable procurement rules, which mandated the central acquisition of emergency procurement supplies under established pricing limits. The contractor argued that the regulations were merely guidelines and were not legally enforceable. The Tribunal disagreed, finding that the Department’s Chief Financial Officer lacked the authority to award the contract. The Tribunal set aside the contract and ruled that the contractor forfeit and be divested of any earned profits.
Conversely, in its February 2022 decision in Navini Limited v. The Independent State of Papua New Guinea, the National Court of Papua New Guinea found that a disputed road repair contract was void due to the government’s failure to follow proper approval procedures. However, the Court ultimately ruled that the contractor, who was found to be an innocent third party in relation to the non-compliance, was entitled to payment under the equitable principles of unjust enrichment for the work that it performed. Similarly, in its February 2022 decision in Rimba v. Porti, the National Court of Papua New Guinea considered another case where the government attempted to avoid payment due to improper award procedures. After once again finding that the contractor was an innocent third party in relation to the procedural irregularities, the Court ruled that “it would be unfair and unjust for the defendants to enrich themselves if they do not pay for the services”. It ordered the government to pay for the work.
As these cases illustrate, while contractors who perform work based on improper award procedures do so at their peril, they may still be entitled to payment under the equitable principles of unjust enrichment. Rather than attempting to evade responsibility for their own infractions, public institutions should bolster their approval procedures to avoid exposing their awards to legal uncertainty.
