SchoemanLaw - The Turquand Rule-Applicable When Contracting With Government?

Introduction

The Turquand rule originates from Royal British Bank v Turquand (1856) 6 E&B 327. It is a UK Company Law Case that determined that people transacting with Companies are entitled to assume that Internal Company Rules are complied with, even when they are not.

The question is though - does this apply to an Organ of State? Specifically, in a context of sophisticated Procurement Rules and Frameworks.

The Constitution and rationale of behind the regulatory framework

Section 217(1) of the Constitution of the Republic of South Africa, 108 of 1996, states that when an Organ of State in the National, Provincial or Local Sphere of Government, or any other Institution in National Legislation, Contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.

Section 38(1)(a)(iii) of the Public Finance Management Act, No 1 of 1999, as amended, in line with the Constitution, directs that an Accounting Officer employed by a Department, has and maintains an appropriate procurement system which is fair, equitable, transparent, competitive and cost- effective.

The importance of and rationale behind the processes and regulations was illustrated in the unanimous judgment of Marais JA in Eastern Cape Provincial Government v Contractprops 25 (Pty) Ltd 2001 (4) SA 142 (SCA) ("Contractprops").This matter involved the validity of two Lease Agreements of immovable property concluded without any reference to the Provincial Tender Board and thus peremptory statutory prescripts,. The Court held the following:

"As to the mischief which the Act seeks to prevent, that too seems plain enough. It is to eliminate patronage or worse in the awarding of contracts, to provide members of the public with opportunities to tender to fulfil provincial needs, and to ensure the fair, impartial, and independent exercise of the power to award provincial contracts. If contracts were permitted to be concluded without any reference to the tender board without any resultant sanction of invalidity, the very mischief which the Act seeks to combat could be perpetuated."

Legality

The Court held further in Contractprops that:

"This is not a case in which 'innocent' third parties are involved. It is a case between the immediate parties to government, or any other institution in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective. The rationale for nullifying these transactions is that they deprive the public of the benefit of an open and fair competitive process. leases which one of them had no power in law to conclude and had been deprived of that power (if it ever had it) in the public interest. The fact that the respondent was misled into believing that the department had the power to conclude the agreement is regrettable and its indignation at the stance now taken by the department is understandable. Unfortunately for it, those considerations cannot alter the fact that leases were concluded which were ultra vires the powers of the department and they cannot be allowed to stand as if they were intra vires."

It therefore follows that an assumption that internal regulations were complied with is inherently linked to the legality of the actual Agreement.

Extensions versus new Agreements

In Gauteng MEC for Health v 3P Consulting (Pty) Ltd (199/10) [2010] ZASCA ("3P Consulting") the Court held that " It is clear that the renewal of the services agreement did not give rise to a new services agreement; it simply extended the duration of the services agreement for a period of three years. As there was no new services agreement, there was no new procurement of goods or services and it was therefore in my view not necessary to follow a competitive public bidding process in this regard."

Similarly, in City of Tshwane Metropolitan Municipality v RPM Bricks Proprietary Ltd 2008 (3) SA 1 (SCA), the Court said the following:

"Estoppel cannot, as I have already stated, be used in such a way as to give effect to what is not permitted or recognised by law. Invalidity must therefore follow uniformly as the consequence."

Conclusion

Agreements entered into outside of a tender process or without following all internal regulations must be renewal arrangements of Legally- constituted Agreements. In the absence of this, an Agreement unlawfully constituted remains that. It is important for Suppliers to Large Business and Government to seek professional advice before commencing performance.

Contact an expert at SchoemanLaw to assist.