High Court backs municipality’s right to reject bidders over reputational harm

Image source: Maxim Kazmin – 123RF.com

The matter arose from two review applications instituted by The Construction Company (TCC) challenging the City of Cape Town’s (the City), decisions relating to separate tenders from which TCC had been excluded. In both instances, the City relied on a reputational risk provision contained in its supply chain management policy (SCM policy) to justify TCC’s disqualification from the tender process.

Under this provision, the City is empowered to refuse to register a vendor, decline to make a final award, revoke an award already made, or cancel a contract outright where the implementation of the contract may pose a risk of reputational harm to the City.

Series of allegations

The dispute stemmed from a series of allegations made against TCC and its directors, dating back to 2019, when complaints were lodged with the City claiming that TCC had invoiced for work it never performed.

These complaints were referred to SAPS, reported in the media, and led to search-and-seizure operations, arrests, and court appearances by its directors. Although the matter was later removed from the court roll, the charges were never formally withdrawn.

The City’s own forensic services department later investigated the allegations and found no substance to the claim that TCC had billed for work not done.

Despite this, when TCC submitted bids for new tenders in 2022, concerns resurfaced during the bid evaluation process, particularly after an external due diligence report by Moore Stephens flagged allegations of corruption and potential abuse by TCC of the City's SCM policy.

Although the bid evaluation committee (BEC) initially accepted TCC’s explanations and found no reason to disqualify it, the arrest of TCC’s directors in an unrelated matter triggered renewed concerns about reputational risk. The City’s bid adjudication committee (BAC) ultimately decided that awarding the tender to TCC could expose the City to reputational harm.

On this basis, the tender was cancelled on the grounds that no acceptable bids had been received – TCC being the only responsive bidder. The City adopted the same approach in relation to a second tender for which TCC had also submitted a bid.

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TCC’s review of the City's decision

TCC’s central complaint was that, when the BEC and the municipal manager invoked the reputational risk clause, they failed to appreciate that the factual allegations underpinning the negative press reports and criminal process had already been investigated and resolved through the City’s own forensic services department.

TCC argued that it was irrational to conclude that it posed a reputational risk when both the forensic report and the municipal manager had previously found no substance to the allegations publicised in the media.

In any event, the court held that the municipal manager's decision in this regard did not concern the question of reputational risk, but he was tasked at that point to determine whether or not TCC could be "blacklisted".

TCC further argued that the reputational risk clause, properly interpreted, cannot be triggered solely by unproven media statements or by the mere fact of an ongoing criminal process.

It contended that the existence of criminal charges alone could never suffice to conclude that contracting with a tenderer would result in reputational harm. According to TCC, the clause could only operate lawfully where there is a demonstratable and real risk of reputational harm.

The City argued that this was precisely the case; on the facts, there was a real risk of reputational harm arising from the negative reports relating to ongoing criminal proceedings against TCC’s directors.

In the City’s view, reputational risk may arise simply from the fact that criminal charges have been instituted and reported on, regardless of whether the underlying allegations had previously been found to lack substance.

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The court’s decision

The High Court found that reputational risk is a legitimate and rational consideration in municipal procurement, particularly where it concerns the integrity and credibility of the City’s supply chain process.

It accepted that the City’s SCM policy expressly empowers officials to decline, revoke or cancel an award where a bidder poses such a risk. The court further held that the City’s decision-making process was procedurally fair, as TCC was repeatedly given opportunities to respond to allegations and make submissions.

Even though the City’s forensic investigation had cleared TCC of the earlier invoice-related allegations, the ongoing criminal proceedings and recent arrests of TCC’s directors were sufficient to trigger legitimate concerns about reputational harm.

Furthermore, the BEC and BAC were entitled to reassess TCC’s suitability and to conclude that awarding the tender would present an unacceptable risk to the City.

The court asserted that there was no merit in TCC's complaint that the reputational risk clause infringes the presumption of innocence to the extent that it allows the City to disqualify a tenderer based on pending criminal proceedings. The presumption only applies in the context of criminal proceedings. The City has a reputational interest to protect.

The court held that an assessment of potential reputational risk is concerned with the potential for impairment of public confidence in the City arising from association with individuals or entities who are the subject of negative public attention.

City acted lawfully

Ultimately, the court held that the City acted lawfully, rationally and reasonably in declining to award the tenders to TCC.

The judgment confirms that municipalities may lawfully take potential reputational harm into account when making procurement decisions, provided that such discretion is clearly authorised in a municipality's SCM policy.