Treasury issues clarity on assignment and cession of government contracts

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13-09-2022
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Taranis
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National Treasury has issued further clarity as to whether assignment and cession of contracts, won by a supplier, will be allowed both under the current legislation and common law, respectively.

Firstly, the assignment of a contract awarded by an organ of state is not permissible since such an action would be contrary to the spirit of Section 217 of the Constitution, which dictates that all public procurement systems must be based on the principles of fairness, transparency and competitiveness, respectively.

If a supplier, who has won a contract from an organ of state assigns or transfers its rights to another entity to execute it in whole or in part, such an assignment will be against the principles prescribed in Section 217 of the Constitution.

Despite the fact that the General Conditions of Contract (GCCs), which forms part of all tender agreements, allow for a supplier, to “assign, in whole or in part, its obligations to perform under the contract”, it may only do so with the written consent of the “purchaser”, it is still in contradiction with what is prescribed in Section 217 of Constitution and is therefore not permitted.

Secondly, a Cession is permissible since the supplier will only transfer its rights to be paid to another entity and not hand over the contract, per se, since it will remain the service provider to the original contract.

However, whilst the process of Cession is allowed, National Treasury has instructed that it may only be done in the instance where the supplier has ceded the right to payment to either a registered Financial Services Provider (FSP) or a state institution.

The rationale behind this limitation is that funding may only be advanced by a registered FSP or state institution, to a supplier to execute a contract awarded by an organ state and not to any other third party.

This is also to curb the potential of fronting where a supplier will nominate another company to receive the payment from an organ of state.

Also, the request for Cession must only be submitted to the organ of state by a registered FSP or state institution and no requests should be considered, emanating from third parties as such.

The agreement between the service provider, the FSP or the state institution must also accompany the written request to approve a Cession for payment.

According to Gerrit Davids, Lead Advisor, TaranisCo Advisory, tendering agency, “It is imperative for suppliers to government contracts to understand as to what is allowed and what is not permitted in terms of whether they want to assign a contract, which is allowed for in commercial contracts, but not for public sector contracts and that of a Cession, in lieu payment.”

For more information, contact:

Gerrit Davids (Lead Advisor)

TaranisCo Advisory CC

Web Site: https://www.taranis.co.za

Mobile. +27 (0) 82 496 1657

E-mail:  gerrit@taranisco.co.za