This question is crucial, given that many business owners are frequently subjected to investigations by state authorities or under scrutiny from investigative journalists. Sometimes these investigations are unfounded. This is especially prevalent when competitors file false criminal charges or make frivolous corrupt claims to manipulate law enforcement agencies.  

The matter heard in the Western Cape High Court, in Construction Company (Pty) Ltd v City of Cape Town and Other, originated from a claim by a competitor alleging that the Construction Company (TCC) rendered an invoice to the City for work that was not performed. Mr Loonat and Mr Rajah (the complainants) reported this allegation to the South African Police Service (SAPS). SAPS acted on this information and arrested the directors; however, the Magistrate dismissed the case due to delays, even though the charges were not formally withdrawn. Notably, the City’s Forensic Services Unit also investigated the allegations made by Loonat and Rajah and found that there was no substance to the allegations.

The City’s Forensic Report Unit also asked the City Manager to determine whether TCC should be blacklisted. Blacklisting or debarment, although not widely utilised by the government despite the high levels of corruption identified in a Dullah Omar Institute study, is an administrative measure in which a company or individual is barred from engaging in business with the state for a period that may extend up to 10 years. Blacklisted companies and individuals' names are placed on the Database of Restricted Suppliers maintained by the National Treasury, either because they have submitted fraudulent invoices, misrepresented information, failed to perform, or committed fraud. Thus, before awarding a tender, government departments, including municipalities, must consult the list and satisfy themselves that bidders are not blacklisted  are an issue previously discussed in the Bulletin. In the present matter, the City Manager found no reason or evidence to backlist TCC.

Since being cleared, TCC submitted two bids in response to two tenders advertised by the City: tender 310Q and tender 27Q. The City initially accepted, in respect of tender 310Q, that TCC's bid was the only acceptable bid. In the meantime, the directors of TCC were again arrested in a separate matter, which was widely reported in the media. The latest arrest came to the City's attention, which, after consulting legal advice, resolved to cancel tender 310Q, citing that any association with the TCC would pose a reputational risk. Similarly, the City’s Bid Evaluation Committee (BEC) elected not to recommend TCC for the award of tender 27Q, also citing reputational risk. Specifically, the City acted in terms of its Supply Chain Management Policy, which empowers it to cancel a final award and contract where the implementation of the contract may result in a reputational risk or harm to the City. The City’s SCM policy empowers it to act as a result of:

• 106.2.1 reports of poor governance or unethical behaviour, or both;
• 106.2.2 association with known notorious individuals and family of notorious individuals;
• 106.2.3 poor performance issues, known to the City;
• 106.2.4 negative media reports, including negative social media reports;
• 106.2.5 and adverse assurance (e.g. due diligence) report outcomes.
• 106.2.6 Circumstances where the relevant vendor has employed, or is directed by, anyone who was previously employed in the service of the state (as defined in clause 1.48), where the person is or was negatively implicated in any SCM irregularity.’

Arguments

Aggrieved by the City’s decisions, TCC lodged an internal appeal, which the City Manager dismissed. TCC then approached the Western Cape High Court to review the decision under the Promotion of Administrative Justice Act of 2000 (PAJA). At the heart of its review, TCC argued that the BEC and Municipal Manager failed to properly consider the factual basis of the negative media reports. It further submitted that the criminal proceedings against its directors had already been investigated and resolved by the City and that it was irrational to conclude that TCC posed a reputational risk. According to TCC, the SCM Policy cannot be triggered by unproven media statements alone. At a minimum, the City was required to verify whether the charges had substance before cancelling the tender. In other words, a real risk of reputational harm had to be established and not assumed from media reports alone [para 8].

The City accepted this interpretation as correct but argued that a real risk of reputational harm existed, based on the negative media reports concerning the pending criminal proceedings against the directors [para 11]. The City also contended that the objection to tender 310Q had become moot, as the services had already been awarded to another company through a new tender and that the allocated budget had been spent.

Decision

The Court agreed with the arguments raised by the City, finding that the challenge in respect of tender 310Q is moot, considering that the services in question have already been procured by the City by way of a new contract, and the budget for these services has been spent and that the contract with the new tenderer has been completed. Accordingly, the Court determined that no live controversy existed upon which it could adjudicate, resulting in the dismissal of the challenge regarding tender 310Q [para 29].

Likewise, the Court rejected TCC’s arguments in respect of tender 27Q, which as stated before, primarily rested on the lawfulness of the reputational clause. The Court found that TCC did not present any evidence to challenge the lawfulness of the Policy, such as establishing that the policy lacks a legitimate governmental purpose. No case was made, with TCC simply arguing that the City has no reputational interest to protect and, as such, the reputational clause does not advance a legitimate governmental purpose. Indeed, the Court, to the contrary, confirmed that the City does have a reputational interest to protect. In particular, it noted that the City's ability to fulfil its functions and render services depends on public confidence, which is necessary to collect rates and borrow funds from financial institutions. The City’s ability to function would be impaired by the loss of confidence if it were associated with persons of questionable integrity. Thus, in the words of the Court

"in the same way that justice must be and seen to be done, the City must have and be seen to have integrity. Perception matters. The public is entitled to expect the City to be above reproach in its dealings, and to refrain from associating with those who stand accused of criminal charges relating to procurement irregularities." [para 45]

In upholding the reputational clause, the Court also rejected the argument that it violated the presumption of innocence by allowing the City to disqualify a tenderer based on pending criminal proceedings. The Court correctly noted that the presumption of innocence applies only in criminal proceedings and does not create an entitlement to a tender award [para 46]. It further held that the City was not required to adopt the best or least restrictive means to protect its reputational interests; rather the test was whether there was a rational connection between the means chosen and the purpose pursued. [para 47]. The Court accepted that such a connection existed, and that the reputational clause could be interpreted lawfully to require a finding of a real risk of reputational harm [para 38].

The City's reliance on media reports of procurement fraud and corruption involving TCC directors and City officials constituted a rational basis for it to invoke the reputational risk clause. As public bodies, the Court ruled that the City cannot second-guess the National Prosecuting Authority (NPA) [paras 89 and 117]. When the City applied the reputational clause, its actions were based not only on adverse media coverage but also on TCC’s representations and the determinations of both the NPA and the Magistrate, who established that sufficient evidence existed to warrant the issuance of arrest warrants and prosecution.

Overall, and for these reasons, the Court found the reputational risk clause and the City's conduct in applying it lawful and valid. 

Comment

This judgment is of considerable significance for municipal procurement, as it affirms municipalities' authority to exclude tenderers on the basis of reputational risk, as provided for in their supply chain management policies. Indeed, the judgment confirms that municipalities have a legitimate interest in protecting their integrity and public trust, which is essential for their effective functioning and financial stability. The judgment makes clear that municipalities are not required to wait for criminal convictions before excluding a tenderer. Rather, a real reputational harm risk established by credible evidence, such as adverse media reports and ongoing criminal proceedings, is sufficient.

One of the strengths of a reputational risk clause is that it enables municipalities to act proactively to safeguard their operations and reputation, rather than responding only after legal processes are concluded. This lower threshold, compared to the stringent requirements of criminal law and the process of blacklisting set out in the Municipal Finance Management Act 56 of 2003 and the Supply Chain Management Regulations, provides flexibility to address reputational concerns swiftly.

However, it is argued that the system is not without its weaknesses. The absence of a requirement for a criminal conviction increases the risk of exclusion based on unproven allegations or media reports, which could lead to unfair outcomes if not managed carefully. Thus, while the judgment empowers municipalities to protect their interests, it also underscores the need for clear guidance and fair procedures to ensure that exclusions are justified and rational. Thus, to establish whether a real reputational harm exists, it is argued that municipalities should evaluate media reports against objective data from law enforcement agencies such as SAPS, the National Prosecuting Authority, the Public Protector, and the Auditor-General, rather than relying solely on unverified sources. In addition, municipalities must ensure procedural fairness by obtaining the affected bidder's views before deciding to exclude a bidder or cancel a tender.

It should also be noted that an exclusion finding made in terms of the City’s reputational risk clause is time-bound. For example, in this matter, the Court ruled that the City was correct by not applying the reputational risk clause to H and I Construction and Sakhikhaya Suppliers for historical conduct, especially where the matters giving rise to reputational risk have been resolved. Consequently, a finding made in terms of a reputational risk clause does not exclude a tenderer from submitting tenders in future, especially where the reputational risk issue has been resolved. As previously stated, the reputational risk process differs from backlisting in that, after being blacklisted, a company or person may be prohibited from doing business with the state for up to 10 years.

Ultimately, the judgment strikes a balance between the municipality’s duty to maintain public confidence and tenderers' rights to participate in procurement processes. It underscores the need for companies doing business with the state, including subcontractors, to continuously monitor and take any action against any potential reputational risk issues that might arise. The case also highlights the importance of rational decision-making and transparency in applying reputational clauses, ensuring that exclusions are based on substantiated risks rather than mere suspicion. It is crucial for municipalities to develop robust frameworks that consider both the responsibility to protect public trust and its constitutional obligation to ensure that procurement is done in a manner that is fair, equitable, transparent, competitive and cost effective.  

By Curtly Stevens