Publication: Business Day Issued: Date: 2003-08-19 Reporter: Tim Cohen

Money Moves Centre Stage as Arms Deal Goes to Court



Business Day

Date 2003-08-19


Tim Cohen

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Bidder's demand for nearly R150m relies on claims of political manoeuvring that allegedly decided a contract

Behind the political furore over the arms deal, and all the political manoeuvring, press revelations and scandal, stands an unseen spectre. Money.

Money is all too often prevalent in great catastrophes and even great achievements. But seldom has it been so obscured by theatrics as it has in SA's R50bn arms-procurement process. The issue of money will soon regain its rightful place centre-stage following the filing of court papers in an action for damages allegedly sustained by a central figure in the case and losing bidder in the process.

The claim is being brought by CI Systems MD Richard Young, and it is not small just under R150m. The claim is dramatic enough in itself, but there is a twist.

The claim falls into a rather unresolved area of South African and even international law. The question is this is it possible to sue for lost profits in circumstances where no contract existed between the parties? Strip away all the engineering jargon and politics and the case brought by CI Systems is simple. It argues that it was acknowledged as the preferred supplier for a contract to provide expensive electronics to be used in navy ships government intended buying.

Through what the company alleges was objectionable and illegal manoeuvring, this contract was ripped out from underneath it at the very last minute. And here comes the tricky part as a consequence of this turn of events, CI Systems claims it is entitled to the profits it would have made had it won the contract.

So even if it proves all the other issues (as it must), the company must also establish that it not only had a right to what it actually lost but also to what it might otherwise have gained.

The legal issues here are quite different, mainly because the courts have historically been cautious about establishing a precedent that would allow citizens to claim damages for civil wrongs based on what might have been, particularly against the state or its organs. One problem is that the ubiquity of the state and the services it provides opens it ironically to a corresponding ubiquity of claims. Every loose stone on the road, every slippery pavement and every corrupt official has the potential to open the state to such a flood of claims that it would make governing an absurdity.

A related argument is that claims for damages against, say, the police could result in "negative policing" as the police acted with such extreme caution to avoid causing harm that they curtailed their effectiveness. Even though it might seem unfair, sometimes loss must lie where it falls.

How does this relate to the CI Systems case? At the risk of oversimplifying, the argument of the company in its court documents goes like this in 1993, the defence force began looking at the acquisition of patrol corvettes, modestly armed combat ships, in what was described then as Project Sitron.

One aspect of the project, assigned to the company, was for a computerised information management system to link the various functions of the ships described as the "spinal cord" of the ship's electronics combat suite. This would, for example, enable the navigation system, tracking radar and air-defence guns to interact so that the guns would point accurately at an incoming threat when the firing button was pressed. The company described this function as the Information Management System (IMS).

Explicitly with the participation of the overall integrators of the combat system and its components a company called African Defence Systems (ADS) CI Systems forged ahead, spending lots of research and development effort in perfecting its system.

The procurement process went through its ups and downs, but it was decided late in 1997 that the navy would probably buy a number of corvettes. A collection of companies with different functions was amalgamated into a consortium, called the German Frigate Consortium, to put together a proposal and some pricing.

In early 1998 the defence department submitted something called the requests for final offers to four shortlisted suppliers. This included the latest costing and design specifications called the "element costing and description". This description stipulated a certain definite combat suite configuration produced "by nominated RSA industry" and went so far as to specify that the "databus" should be provided by CI Systems.

But from here it began to get ugly. According to the CI Systems' testimony, Altech sold 50% of the shares in ADS to Thomson-CSF of France (now called Thales) in April 1998. This was crucial because ADS was one of the key companies in the overall German Frigate Consortium.

Thales then created two companies in SA into which a black empowerment partner was introduced. This partner took the form of Nkobi Holdings, whose MD and majority shareholder was Durban businessman Schabir Shaik. His brother, Chippy, as defence department acquisitions chief, was overall co-ordinator of the acquisition programme.

According to CI Systems, from this stage it began to be eased out of the project in preference to products produced by Thales.

ADS was in the odd position of tendering for the combat suite as a whole, but was also a competitor in the fight for subsystem contracts.

Despite further discussions, it was decided to retain the IMS system, mainly as it was technically superior. Thales' Detexis system was "deficient and failed to comply with the URS (the navy's specification)", the CI Systems court application says.

When the choice was put to the defence department's and Armscor's evaluation boards, chaired by Chippy Shaik, the base cost of both systems was about the same.

But a risk factor was added to the IMS system, which doubled its cost, based on the supposed possibility that the whole system might need to be replaced. Phrased this way, it seems unsurprising that the committee decided on the Thales system.

The constitution requires fair administrative action. This fairly new concept in law, one innovation of the constitution, is based on the idea that the state should treat citizens fairly.

CI Systems' assertion is partly that the tendering process was unfair because the procedure was flawed, and particularly that an unfair risk factor was added to its claim. For this item, CI Systems is claiming a maximum of R99m, which includes loss of profits and the likelihood that it would have won at least one other similar contract, tendering costs and profits from future maintenance. It claims alternatively for these items individually.

In apparent conflict with the claim stands a case called Olitzki Property Holdings v the State Tender Board in which a damages claimant lost his case. The case effectively reaffirmed that the existing law stands despite the introduction of, at that stage, the interim constitution.

Before and after Olitzki, the general rule is that those who sue in terms of contract law, sue for enforcement of the contract or its monetary equivalent. Those who sue on the basis of a wrongful act sue for loss they suffered. This depends on circumstances, including other available remedies.

But since then the new constitution has been confirmed, new laws have been introduced and the case law has progressed. One of the most notable new cases is Van Eeden v the minister of safety and security. Here a 19-year-old woman was raped and robbed by a known dangerous criminal who escaped from police custody through an unlocked security gate.

Van Eeden won her case for damages, despite the court canvassing English law which has often declined to find public authorities liable for negligent performance of duties. This "public-interest immunity" would be inconsistent with the constitution and its values, the court found.

Based on this approach, the arms procurement process that has cost taxpayers so much might end up costing even more. It may also force codefendants Armscor and ADS to put their hands deep into their pockets.

Cohen is chief reporter.

With acknowledgements to Tim Cohen and the Business Day.