Nelson & Francis Associates v I.G. Sacco Ltd [2017] KEHC 9741 (KLR)

Full Case Text

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT KAKAMEGA

CIVIL DIVISION

CIVIL CASE NO. 7 OF 2017

NELSON & FRANCIS ASSOCIATES........................PLAINTIFF

VERSUS

I.G. SACCO LTD…..................................................DEFENDANT

R U L I N G

The Application

1. The application for determination is the Notice of Motion dated 2. 5.2017 brought pursuant to the provisions of the Constitution of Kenya 2010, Section 25 of the Societies Act Cap 490 Laws of Kenya, Section 54 of Sacco Societies (Deposit Taking Sacco Business) Regulations, 2010, Section 54 of SASRA, Order 51 Rules of Civil Procedure Rules 2010 and Section 3 and 3A of the Civil Procedure Act. The plaintiff seeks orders of stay of execution of the award of the tender No. IG SACCO/AS/14/2017 EXTERNAL AUDITOR and/or notification of the award to the purported tenderer pending the hearing of the application and the main suit. The plaintiff also seeks temporary orders of stay of proceedings of the annual delegates meeting held on 21. 04. 2017 at Starbuck Hotel Eldoret in particular agenda 11 of the meeting and the award of tender NO. IG SACCO/AS.014/2017 EXTERNAL AUDITOR TO ERNEST & YOUNG pending the hearing and determination of this application interparties and the main suit.

2. The application is premised on the grounds on the face of the application and supported by the affidavit of Nelson Korir the managing partiner of the plaintiff’s firm.

3. The plaintiff/applicant contends that following the advertisement by the defendant for prequalification of suppliers of goods and services for the year 2017, the plaintiff applied for pre-qualification for provision of external audit services under tender No. IG SACCO/AS/014/2017. The applicant avers that on 21. 04. 2017 a date he was not aware of, the respondent during the annual delegates meeting appointed the firm of Ernest and Young as the statutory auditors for the period of 2017 yet the said firm had not been prequalified nor had it submitted its tender. The plaintiff claims that the defendant went ahead and included the firm of DELOITTE & TOUCHE as being among the bidders without following the laid down procedures. It contends that this inclusion of the said firms was illegal and unlawful as the entities were not among the auditors who were captured by the respondent as pre-qualified suppliers of audit services.

4. The plaintiff further contends that the award of tender to the firm of ERNEST & YOUNG is in contravention of the provisions of the law and the international accounting standards as well as international financial reporting standards and equally certain provisions of The Public Procurement and Asset Disposal Act which touch on private tendering and the rules guiding the tender process. The plaintiff maintains that they will be prejudiced because the tender has already been awarded to the said firm and the process of signing the tender may commence any moment, unless the orders sought are granted

The Response

5. The Defendant opposed the said application. In his replying affidavit dated 29. 5.2017 Mr. Peter A Vuhya, the C.E.O. of the defendant company deponed that the company maintained a list of registered suppliers who qualified to be considered for prequalification for relevant services and that these included the plaintiff company, Ernest and Young and Deloitte & Touche who applied for prequalification for the provision of Audit services under category NO. IG/SACCO/AS/014/2017

6. The deponent avers that after evaluation the names forwarded to the Annual Delegates meeting for appointment of 2017 auditors were;-

1. Deloitte & Touche

2. Ernest & Young

3. Nelson & Francis & Associates

7. The deponent avers further that Ernest & Young were the lowest bidders and were duly appointed during the Annual Delegates meeting held on 21. 04. 2017 which makes the suit and application to have been overtaken by events. The CEO of the defendant company further depones that since the plaintiff has not deposited security for costs he is not worthy of the orders sought

8. Finally, the deponent adds that the award of tender being contractual, the defendant cannot be coerced, intimidated and unduly influenced by the plaintiff to award the tender to it. He further claims that if at all there are any losses to the plaintiff the same can be easily compensated by way of damages. He maintains that both the plaintiff’s suit and his application are improperly before the court and that the court has no jurisdiction to hear and determine the same. For reasons above stated, the deponent wants the application dismissed with costs.

Submissions

9. The application herein was canvassed by way of written submissions. The submissions by the applicant centre around the following issues;-

a) Whether the firm of Ernest and young was eligible to be appointed the statutory auditor by the respondent even when they didn’t apply for prequalification.

b) Whether the respondent followed due process as required by the law and tender procedures in appointing the firm of Ernest & Young.

10. Relying on Article 27 of the Constitution 2010, the applicant contended that having not applied for prequalification together with the firms of Ronald’s Associates and Bill smith Associates, the firm of Ernest and Young, then it meant that the said firm was not interested in tendering for the project and when the tenders were finally considered, the said firm could not be said to be complaint with the tendering procedures with regard to the audit services. The applicant submitted further that the firm of Ernest & Young was allowed to circumvent the tendering procedures at the expense of the applicant because the bidders did not compete on an equal footing. It was also the applicant’s contention that having invited bidders to apply for prequalification, the applicant had a legitimate expectation that the rules laid down would be followed to the letter, which was not the case in the instant matter.

11. Regarding the financial package for the contract, the applicant submitted that whereas the applicant quoted kshs.1. 929. 400 (inclusive of VAT and disbursement) the firm of Ernest & young quoted 1,925,000 exclusive of VAT and disbursement which meant that the bid by Ernest &Young was not the lowest in the final analysis. The applicant asserts that it was sidelined in the award of the tender in favour of Ernest & Young. Finally on the issue whether Ernest& Young was eligible to be appointed, the applicant submitted that from the annextures marked 1G –1 and IG-2(a) and IG-2(b) to the replying affidavit of Peter A, Vuhyah, it was clear that there was a conspiracy to sneak in two firms namely Ernest & Young and Deloitte & Touche yet, these two firms never applied to be considered for the tender. In summary therefore, the applicant contends that the award of the tender to Ernest & Young was done illegally and without applying the laid down procedures which resulted in an affront to justice.

12. Regarding the second issue, the applicant submitted that for any award of tender to stand, the tender award must be done in compliance with the Constitution and applicable laws, namely that the award must meet the threshold of fairness, equity, transparency, competiveness and cost effectiveness. In this regard, counsel relied on the case of Republic – vs - Independent Electoral and Boundaries Commission & 2 Others [2017]eKLR. That in the instant case, the process leading to the award of the tender to Ernest & Young failed the test and consequently denied the applicant the opportunity to be the legal winner of the tender. It was the applicant’s further contention that the situation was made worse in the instant case by the fact that Ernest & Young was not a participant in the process from the very beginning.

13. It was also submitted by the applicant that what the respondent did in awarding the tender to Ernest & Young was in contravention of the Societies Act No. 14 of 2008 (the Act) Section 54(1) thereof which requires the respondent to “recommend three names to the Annual General Meeting which shall select one auditor to audit the accounts in accordance with Section 45 of the Act.” Section 45 of the Act sets out the qualifying requirements for such an appointment. The applicant submitted that though three names were recommended to the Annual General Meeting pursuant to Section 54(1) of the Act it was only the applicant who had applied for prequalification. The applicant contends further that the firms of Ernest & Young and Deloitte & Touche were not among the three firms that were read out at tender opening. The inference the applicant has drawn is that the respondent flouted the principle of integrity with impunity, thereby compromising the whole process of the tender award. For these arguments the applicant cited the case of Esorfranki Pipelines- vs – Mopani District Municipality 40/13(2014) ZASCA 21.

14. In the case, the court held that a tenderer is entitled to a fair and competitive tendering process whether she/he wins the tender or not. Further reliance was placed on the case of Clinton – vs – Department of Employment and learning & another [2012] MCA 48 where it was held that failure to comply with the laid down procedures for awarding of a tender is a breach of the duty of transparency. In the other case cited by the applicant of woods Building Services – vs – Milton Keynes Counsil [2015]EWHC 2011 allegations were made by the plaintiff that the counsil had committed manifest errors and had breached the principles of transparency and equal treatment in the evaluation of the bids. The court found in favour of the plaintiff.

15. On the basis of the above submissions, the applicant urged this court to allow the application.

16. In response to the applicant’s submissions, the respondent filed its brief submissions on 17. 10. 2017. The gist of the respondent’s submissions is that the respondent having appointed an auditor at its Annual General Meeting held on 21. 04. 2017, such appointment cannot be reversed and that even if the applicant is aggrieved, it cannot force the respondent trough a suit to start the tendering process de novo.

17. Secondly, the respondent submitted that the allegations raised by the applicant against the firm of Ernest & Young have no basis because the said firm was prequalified as per the annexture marked 1G – 2(a) in the respondent’s replying affidavit. That in any event, the firm of Ernest & Young was the lowest bidder and as such the respondent had no choice but to award the tender to it after due evaluation of all the tenders.

18. Finally, the respondent submitted that since there is no privity of contract between the applicant and the respondent the applicant cannot purport to force itself upon the respondent and that accordingly the applicant has not established a prima facie case to warrant the issuing of the orders sought herein. The respondent submitted that the balance of convenience in this case tilts in favour of the respondent and urged this court to dismiss the application with costs.

Determination

19. I have now carefully perused the pleadings and the submissions. Whereas it is not contested that he respondent was under a statutory duty to hold its Annual General Meeting on or before 30. 04. 2017, and that it indeed held the said meeting on 21. 04. 2017 and thereat appointed the firm of Ernest & Young as auditors for the year 2017, the issue in controversy is whether the process leading to such appointment met the constitutional and statutory threshold. Whereas the applicant contends that the process fell short of meeting that threshold, the respondent contends otherwise. The applicant contends that the award of the tender to Ernest & Young was against its (applicant’s) legitimate expectation that being the lowest bidder, it would be awarded the tender.

20. On the other hand, the respondent argues that because a contract between it and the firm of Ernest & Young has been concluded, this court should look at nothing else and should therefore not disturb the status quo, arguing further that the applicant can be compensated in damages. On this point, the respondent relied on the famous case of Giella – vs – Cassman Brown & Co. Ltd [1973] E.A 358.

21. But as was held in Republic – vs – IEBC & Another (supra) “any procurement must therefore before considering the requirements in any legislation, rules and regulations, meet the threshold of fairness, equity, transparency, competitiveness and cost- effectiveness. In other words, any other stipulation whether in an enactment or in the tender document can only be secondary to the said constitutional dictates.”

22. In the instant case, the evidence adduced by the applicant, and this is not disputed by the respondent, is that at the tender opening for the audit tender, the following firms had submitted their bids:-

(a) Nelson &Francis Associates

(b) Ronald’s Associates &

23. Yet at the Annual General Meeting held on 21. 04. 2017, the respondent presented the following names

(a) Deloitte & Touche

(b) Ernest & Young and

24. The respondent contends that Deloitte & Touche and Ernest & Young had previously been prequalified and were therefore eligible to participate in the tender.

25. The question that arises is: why did the two firms not submit their tenders alongside the other three firms for the tender opening? The respondent has attempted to explain this issue through the annextures to the respondent’s replying affidavit but a close scrutiny of these documents reveals gaps that have not been explained by the respondent. The said documents are either not dated or signed or do not bear the name of the person signing on behalf of Ernest & Young nor do they have the stamp/seal for the firm of Ernest & Young. These gaps, in my considered view, go a long way in confirming the applicant’s fears that the respondent has sneaked in these documents after the event to cover up for its failure to comply with the Constitutional and statutory requirements thrust upon it.

26. In any event, the respondent has not told the court that prequalified bidders did not have to tender publicly along the other bidders. How else would the applicant herein, satisfy themselves that there was fairness, equity, transparency, competitiveness and cost-effectiveness in the whole tendering process when some bidders were allowed to submit their bids privately? Does it also mean, if the respondent’s explanation is to be believed, that prequalified bidders do not have to submit bids? As stated earlier in this ruling, the applicant had the right to a fair and competitive tender process, irrespective of whether it won the tender or not. “This includes the right to compete on an equal footing with his competitors who are similarly placed……. The applicant did not have such a chance.

27. In light of the above, I find and hold that the respondent’s appointment of Ernest & Young as external auditors of the respondent was not done in accordance with the Constitutional and statutory provisions of the law which required the respondent to observe the threshold of fairness, equity, transparency, competitiveness and cost – effectiveness. The award was clearly illegal and irregular.

28. The failure of the respondent to meet the constitutional and statutory threshold as above out lined means that the whole tendering process was compromised and cannot therefore stand the test of time.

Conclusion

29. Having made the finding that the award of the tender to Ernest & Young by the respondent was illegal and irregular, the court now makes the following orders;-

(1) An order be and is hereby issued staying execution of the award and signing of the contract in tender No. IG. SACCO/AS/14/2017 EXTERNAL AUDITOR and/or notification of the award to the purported tenderer pending the hearing and determination of the main suit herein.

(2) An order be and is hereby issued setting aside the proceedings of the Annual Delegates Meeting of 21st April, 2017 at Starbucks hotel Eldoret and particularly agenda No. 11 of the meeting and the award of tender No IG SACCO/AS/014/2017 EXTERNAL AUDITOR to Ernest & Young, pending the hearing and determination of the main suit or further orders of the court.

(3) The applicant shall have the costs of this application

It is so ordered.

Ruling delivered, dated and signed in open court at Kakamega this 7th day of December 2017

RUTH N. SITATI

JUDGE

In the presence of;-

Miss Atieno for Mr. Barasa (present)…….for Plaintiff/Applicant

M/S Nandwa & Co. (absent)……………….for Defendant/Respondent

Polycap…………….…………………………Court Assistant