Tenders and their respective duties of due care28th Feb 2020
Let’s be honest: undertaking a custodial role in a scheme in which you either reside or have a financial interest can be somewhat onerous. Emotion-driven general meetings, laced with commendable intentions to ensure the ongoing viability of your investment, can often see you ‘volunteering’ for any number of duties and/or committees.
As honourable as these acts of selflessness are, care should be taken to ensure that you navigate these waters wide-eyed, equipped with an understanding of what your fiduciary-esque responsibilities entail. And there is no area where this is more true than in procurement.
A tender process is meant to provide a framework to govern the opening, evaluation and selection of a successful vendor – in response to an identified project need. Potential vendors submit competitive bids, which are evaluated and decided upon, thereby circumventing possible instances of bribery and nepotism. Coordinating this process falls to those elected as custodians, with requirements varying depending on the type of scheme you preside over. Let’s break it down.
If you are a trustee of a sectional title scheme
Sectional title schemes in South Africa are governed by the Sectional Titles Act of 1986, the Sectional Titles Schemes Management Act of 2011 (‘STSMA’) and the Prescribed Management Rules (‘PMR’). Schemes are managed by an elected board of trustees. Although management of the scheme more often than not falls to an appointed managing agent, the buck stops with the trustees, who retain the fiduciary duty (the duty of due care in which one party acts in the best interests of the other).
The STSMA allocates significant powers to trustees to contract on behalf of the body corporate, including, inter alia, appointing agents and employees; purchasing and taking transfer of units; acquiring movable property; borrowing and investment of funds; alienation of common property, and the acquisition of land to extend common property. It is worth noting, however, that these powers are, in an attempt to regulate their deployment, subject to certain conditions.
As such, none of the current legislation provides for any tender-specific guidance and regulations. This begs the question as to how duly elected trustees should conduct this process to ensure that their fiduciary duties are faithfully discharged. Section 7(1) of the STSMA and PMR 9(b) offer some assistance by making provision for the members of the scheme, in general meeting, to impose restrictions or give specific directions to the trustees, for example limiting the amount of money to be spent on a capital purchase or the restriction to contract with one service provider over another.
The ability of trustees to exercise their powers is further subject to the scheme budget (approved by the members in general meeting), with none of the powers to be exercised by any one single trustee. A signed document is only valid and binding if it is signed on the authority of a trustee resolution, and is signed by two trustees or one trustee and the managing agent. These requirements seek to curtail, to some extent, possible tender irregularities.
Ultimately, the duty of good faith that falls to trustees will govern tendering processes, backed by stringent scrutiny of trustee actions by the members in general meeting.
If you are a director of a homeowners association
A homeowners association (HOA) can be established either as a common law association or a non-profit company (NPC). The latter option is by far the more widely adopted method in South Africa.
When incorporated as an NPC, the Companies Act of 2008 is the primary source of regulation. This, in conjunction with the Memorandum of Incorporation (MOI), provides the governance structure for the HOA. The MOI details the purpose of the HOA, and seeks to regulate the rights and responsibilities of the HOA, in particular the owners (members) and directors (executives). Directors are further empowered to formulate regulations, rules and guidelines, but these may not contravene the MOI.
Synonymous with companies in South Africa is the King Code. The code applies to all organisations registered in South Africa, irrespective of their form or manner of incorporation. The practices prescribed by the King Code should, however, be applied on a proportionality basis, taking into account the nature, size and complexity of the organisation. Compliance with the code is voluntary, unless prescribed by law or a stock exchange listing requirement.
Accordingly, in the HOA environment, in addition to the requirements set out in section 66(1) of the Companies Act, which requires the business affairs of a company be managed by the directors, procurement matters will be governed by the MOI and any specific responsibilities or limitations dictated by the owners to the directors. This MOI should, at all times, be read in conjunction with the approved rules and guidelines.
Procurement, and spending on potentially big-ticket items, can be a contentious matter, especially in a custodial role. But the application of basic common sense, driven by the desire to prioritise the needs of the scheme, and backed by a diligent understanding of the rules and documents of incorporation, will stand you in good stead.