Valor IT v Premier, North West Province and Others

Valor IT CC (VIT), an IT service provider accredited by SITA, submitted an unsolicited proposal to the North West Department of Sports, Arts and Culture in January 2011 for an enterprise content management system. After considering this proposal, in July 2011 the Department issued a request for quotations to SITA-accredited entities for a records management solution. VIT was awarded the contract on 4 August 2011 for R498,000 (excluding VAT) for what was termed "Phase 0" - an assessment and scoping phase to be completed in six weeks. A Service Delivery Agreement (SDA) was signed on 4 October 2011. However, the relationship did not end with Phase 0. On 2 December 2011, the parties signed "Schedule 2" for Phase 1A valued at R9.8 million. Later, Phase 1B was agreed at R12.882 million. Over approximately three years, payments to VIT escalated from the original R498,000 to a total of R41,729,647 (including R22.8 million in "damages" pursuant to a settlement agreement). The contract was awarded through a closed quotation process rather than an open tender. Despite ongoing concerns raised by supply chain management officials about irregular expenditure, the relationship continued. On 1 October 2013, the Department first cancelled the agreement citing non-compliance with section 217 of the Constitution and procurement prescripts. VIT instituted proceedings claiming damages of R152 million. On advice from the Chief State Law Advisor, the matter was settled and made a court order on 13 February 2014. The settlement declared the termination unlawful, restored the status quo, redefined the contract as a "transversal term contract" to purportedly comply with Treasury Regulations, and awarded VIT R22.8 million in damages. After obtaining independent legal advice revealing the unlawfulness of the entire arrangement, the provincial government cancelled the contract again on 9 January 2015. VIT then brought a second application seeking a declaration that this termination was unlawful and claiming damages of R146,473,747.49. The provincial government opposed and brought a counter-application to set aside the SDA and all subsequent agreements, as well as to rescind the settlement agreement order.

• Whether the provincial government's attorney had authority to represent it in the appeal
• Whether condonation should have been granted for late filing of the answering affidavit and reply in the counter-application
• Whether the provincial government's delay in bringing its counter-application was unreasonable and if condonation should be granted
• Whether the award of the SDA to VIT and subsequent extensions complied with the constitutional and legal requirements for public procurement
• Whether the settlement agreement that was made a court order was lawful
• Whether a court can validly make an unlawful settlement agreement an order of court
• The effect of attempting to repackage an unlawful contract by renaming it to create an impression of compliance with Treasury Regulations

The appeal was dismissed with costs, including costs of two counsel. The judgment of the North West Division of the High Court, Mahikeng was upheld, which had: (1) dismissed VIT's application for a declaratory order that the termination was unlawful and for damages; (2) granted the provincial government's counter-application setting aside the SDA and all subsequent agreements between VIT and the Department; and (3) rescinded the settlement agreement that had been made a court order on 13 February 2014.

1. A public procurement contract that exceeds R500,000 (inclusive of VAT) must be awarded through an open, competitive tender process in accordance with section 217 of the Constitution, the PFMA, and Treasury Regulations. Contracts awarded through a closed quotation process in such circumstances are unlawful and invalid. 2. When the value of a procurement transaction exceeds the threshold requiring competitive bidding, the threshold is calculated inclusive of VAT. Structuring a transaction to appear below the threshold by excluding VAT does not avoid the requirement for competitive bidding. 3. A contract that is unlawful due to non-compliance with constitutional procurement requirements cannot be cured or legitimized by repackaging it under a different name or redefinition (applying the principle from Gibson v Van der Walt that an unenforceable claim cannot be enforced merely by clothing it in another form). 4. A court cannot validly make a settlement agreement an order of court where that settlement agreement would give effect to arrangements that are unlawful or inconsistent with the Constitution. To do so would itself be inconsistent with the Constitution (following Buffalo City Metropolitan Municipality v Asla Construction). 5. All subsequent agreements that flow from an initially unlawful procurement contract are themselves unlawful and invalid, regardless of their value or the additional work they purport to authorize. 6. In review proceedings based on the principle of legality (as opposed to PAJA), unreasonable delay may be condoned where the applicant has strong prospects of success on the merits and the interests of justice (particularly the protection of public funds) so require, even where the explanation for the delay is inadequate.

The court made several noteworthy observations beyond the strict ratio: 1. The judgment details the "strange tale" of how a R498,000 contract escalated to over R41 million in payments "without any bona fide attempt to comply with the public procurement processes that have their origin in s 217 of the Constitution" - emphasizing the scale of the irregularity and potential corruption or patronage involved. 2. The court observed that officials within the Department "played a pivotal role in the scheme, from the initial award of the SDA to VIT to its progressive extensions thereafter," explaining why the legality was not challenged earlier. This suggests possible complicity or malfeasance by departmental officials. 3. The court noted that it was only after the province was placed under administration (in terms of section 100 of the Constitution) that fresh eyes looked at the arrangement and challenged it, highlighting how internal oversight failures can perpetuate unlawful arrangements. 4. The court criticized the "inexplicably wrong advice" and "patently poor advice" provided by the Chief State Law Advisor who recommended settlement of VIT's first challenge, describing the resulting settlement agreement as "ill-conceived." This underscores the importance of competent legal advice in protecting public resources. 5. The court observed that VIT had "failed to satisfy numerous requests for proof of deliverables" and that "doubt exists whether the outcome of the project produced tangible progress," suggesting that beyond the procurement irregularities, VIT may not have actually delivered value for the enormous sums paid. 6. The judgment noted that when requesting quotations, the Department had described a broad scope of work encompassing assessment, design, implementation and training - substantially more than the "Phase 0" preliminary investigation that VIT's proposal actually addressed, raising questions about whether VIT's quotation was even responsive to the request.

This judgment is highly significant in South African public procurement law for several reasons: 1. It reinforces the constitutional imperative under section 217 that public procurement must follow a system that is "fair, equitable, transparent, competitive and cost-effective," and that compliance with procurement legislation and regulations is mandatory, not discretionary. 2. It confirms that contracts concluded in breach of procurement prescripts are invalid and unenforceable, following the principle established in Municipal Manager: Qaukeni Local Municipality v FV General Trading CC and Allpay. 3. It clarifies that the threshold for competitive bidding includes VAT, and attempts to structure transactions to artificially remain below thresholds will not avoid procurement requirements. 4. It establishes that unlawful procurement contracts cannot be cured or legitimized by simply renaming them or repackaging them in different terminology - applying contract law principles from Gibson v Van der Walt to the public law context. 5. Crucially, it affirms the principle from Buffalo City Municipality v Asla Construction that courts cannot validly make settlement agreements an order of court where those agreements would give effect to arrangements that are inconsistent with the Constitution or unlawful. This is a critical safeguard preventing parties from using consent orders to circumvent constitutional and statutory requirements. 6. The case illustrates the serious consequences of procurement irregularities - despite VIT having received over R41 million, the entire contractual relationship was declared invalid. 7. It demonstrates the courts' willingness to grant condonation for delay in challenging unlawful procurement where strong public interest considerations are at stake, even where the explanation for delay is inadequate. The judgment serves as a stern warning against attempts to circumvent procurement processes and confirms that neither settlement agreements nor court orders can legitimize fundamentally unconstitutional arrangements.