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Legal Dispute over South African Military Aircraft Procurement, Study notes of Finance

A legal dispute between the Plaintiff and several defendants, including the Armaments Corporation of South Africa and the Speaker of the House of Assembly, regarding the acquisition of aircraft from a third party. The Plaintiff alleges that the procurement was not transparent, not cost-effective, and not necessary for South Africa's defense needs. The document also discusses the financial risks involved in the loan agreement and the potential impact on South Africa's fiscal health and economic prosperity. The Plaintiff is seeking to cancel the procurement agreement and claim damages from the third party.

What you will learn

  • Why did the Plaintiff reject lower bids from Italy and the Czech Republic?
  • What role did the DIP and NIP provisions play in the negotiations and adjudication process?
  • Why were sound recommendations from the South African Air Force ignored?
  • What are the allegations against the defendants regarding the aircraft procurement?
  • What financial risks were involved in the loan agreement and how did they impact South Africa?

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2021/2022

Uploaded on 09/27/2022

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THE PLAINTIFFS PARTICULARS OF CLAIM
1. The Plaintiff is the Quaker Peace Centre a non-profit organisation
(number 011-709) and public benefit organisation (number
18/11/13/30183) of 3 Rye Road, Mowbray, Western Cape .
2. The Plaintiff:
2.1 sues in its own interest and in the public interest as contemplated
by sections 38(a) and 38(d) of the Constitution of the Republic of
South Africa, 1996 (hereafter referred to as the Constitution),
2.2 seek relief:
2.2.1 that is in the public interest given the values of accountability
and responsiveness which inform governance in the Republic
of South Africa; and
2.2.2 which involves infringements of the human rights of the
public in South Africa, in particular those rights guaranteed to
all in Chapter Two of the Constitution which require resources
of the state in order for the state to respect, protect, promote
and fulfil them; and
2.2.3 which impugns conduct (concerning the purported conclusion
and implementation of the agreements annexed marked “A”
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THE PLAINTIFFS’ PARTICULARS OF CLAIM

  1. The Plaintiff is the Quaker Peace Centre a non-profit organisation (number 011-709) and public benefit organisation (number 18/11/13/30183) of 3 Rye Road, Mowbray, Western Cape.
  2. The Plaintiff: 2.1 sues in its own interest and in the public interest as contemplated by sections 38(a) and 38(d) of the Constitution of the Republic of South Africa, 1996 (hereafter referred to as “the Constitution”), 2.2 seek relief:

2.2.1 that is in the public interest given the values of accountability and responsiveness which inform governance in the Republic of South Africa; and

2.2.2 which involves infringements of the human rights of the public in South Africa, in particular those rights guaranteed to all in Chapter Two of the Constitution which require resources of the state in order for the state to respect, protect, promote and fulfil them; and

2.2.3 which impugns conduct (concerning the purported conclusion and implementation of the agreements annexed marked “A”

and “B”) that is inconsistent with the Constitution in the respects pleaded fully in the three claims below.

  1. The First Defendant is the Government of the Republic of South Africa, acting through its National Treasury, Department of Finance, Department of Defence and its Department of Trade and Industry, care of The State Attorney’s Office, 255 Frances Baard Street, Pretoria, Gauteng.
  2. The Second Defendant is the Armaments Corporation of South Africa SOC Ltd, a state owned enterprise and statutory body established in terms of section 2 of the Armaments Development and Production Act of 1968 and the Armaments Corporation of South Africa Limited Act 51 of 2003 (as amended) of corner Delmas Drive and Nossob Street, Erasmuskloof Ext 4, Pretoria, Gauteng.
  3. The Third Defendant is British Aerospace (Operations) Limited, whose address is First Floor, Building 2, Cambridge Park, Bauhinia Street, Highveld TechnoPark, Centurion.

5.1 The Third Defendant is a subsidiary of BAe Systems PLC, 5.2 BAe Systems PLC is a publicly quoted company in the United Kingdom in which the Fifth Defendant, the Secretary of State for

BACKGROUND FACTS:

  1. On 3 December 1999 the First, Second and Third Defendants, at a place unknown to the Plaintiff, entered into a written agreement for the procurement of:

11.1 24 Hawk LIFT aircraft together; with the associated products, spares, ground support equipment and services, and 11.2 28 Gripen ALFA aircraft; together with the associated products, spares, ground support equipment and services (collectively hereafter referred to as “the aircraft”).

  1. A copy of the procurement agreement, signed by the then Minister of Defence, MGP Lekota, the Secretary for Defence, J Masilela, the acting director general of the Department of Trade and Industry, B Roberts, the chairman of Second Defendant, R F Haywood, and the chief executive of the Third Defendant, J Pix Weston is annexed, marked “A” (hereafter referred to as the “Procurement Agreement”).
  1. The Total Contract Price of the Procurement Agreement has been redacted by, or on behalf of the First Defendant, from the copy annexed marked “A”.
  2. The redaction was contrary to the spirit of openness, accountability and responsiveness as contemplated in section 1(d) of the Constitution of the Republic of South Africa.
  3. In terms of clauses 4.2 and 4.3 of the Procurement Agreement, the Third Defendant undertook to perform certain “… direct and indirect Defence Industrial Participations (DIP) and National Industrial Participations (NIP) activities ”.
  4. It was an express condition precedent of the Procurement Agreement that it was subject to receipt by not later than 15 April 2000 by the Third Defendant “… of all governmental approvals or authorisations necessary to allow the [Third Defendant] to commence performance of its obligations ” as recorded in clauses 3.1 and 3.1.1 thereof.
  5. The Procurement Agreement provided remedies to the First and Second Defendants in the event of bribes or illegalities tainting the agreement. Clause 20 under the heading “ Remedies In Case Of Bribes ” provides:
  1. The Procurement Agreement contains no provision for the payment of agents’ fees, commissions, consultants’ remuneration and middle-men charges.
  2. In terms of the loan agreement referred to below the First Defendant borrowed from the Fourth Defendant, a foreign international bank, in order to finance the acquisition of the aircraft from Third Defendant, which borrowings by the First Defendant were supported by the Fifth Defendant in the manner defined in the said loan agreement.
  3. A copy of the loan agreement to which First, Fourth and Fifth Defendants were a party and which was signed by then Finance Minister Trevor Manuel of behalf of First Defendant, G Buck on behalf of the Fourth Defendant and C Leeds on behalf of the Fifth Defendant on 25 January 2000, is annexed marked “B” (hereafter referred to as the “Loan Agreement”).

PLAINTIFF’S FIRST CLAIM:

UNCONSTITIONALITY OF THE PROCUREMENT

  1. The Procurement Agreement is invalid ab initio in that its conclusion amounts to conduct that does not comply with the provisions of section 217 (1) of the Constitution which requires that when an organ of state contracts for goods or services, it must do so “ in accordance with a system which is fair, equitable, transparent, competitive and cost- effective .”
  2. The conclusion of the Procurement Agreement is, in the light of the facts and circumstances pleaded in paragraphs 23 to 28 below, conduct that is inconsistent with the Constitution and is accordingly invalid in terms of section 2 of the Constitution.
  3. The Plaintiff specifically pleads that the aircraft procurement from Third Defendant was not fairly concluded by reason of the following facts and circumstances:

23.1 The socio-economic rights and needs of the majority of South Africans in 1999 and thereafter strongly militated against the incurring of enormous expenditure on the aircraft which at the time of acquisition were not reasonably necessary, appropriate or useful for the defence needs of South Africa and which have not

23.4.2 economic prosperity and socio-economic progress and

23.4.3 successful transition to a constitutional democracy in which human rights are respected, protected, promoted and fulfilled in the manner required by section 7(2) of the Bill of Rights which is Chapter Two of the Constitution.

  1. The Plaintiff specifically pleads that the procurement of the aircraft was not equitable as they were:

24.1 the most expensive aircraft on offer in the tender process,

24.2 unsuitable for, alternatively of very limited suitability for, South Africa’s defence needs,

24.3 overpriced,

24.4 acquired through tender processes and procedures that were manipulated to favour success of the bid by the Third Defendant by the adoption of what the then Minister of Defence, Joe Modise called “a visionary approach”, whereby the cost of the aircraft was excluded as a factor for consideration in the procurement

evaluation and adjudication process and the eventual award of the tender that culminated in the conclusion of the Procurement Agreement, thereby negating the constitutional requirement of cost effectiveness; and

  1. The Plaintiff specifically pleads the aircraft were not acquired in a transparent manner as:

25.1 Lower bids from Italy and the Czech Republic were irrationally rejected in favour of the bid by Third Defendant,

25.2 The DIP and NIP provisions in the Procurement Agreement played a disproportionate and untoward role in the negotiations and adjudication process which preceded the conclusion of the Procurement Agreement,

25.3 The First Defendant concealed, and denied the Auditor General and members of the National Assembly access to, information regarding the DIP and NIP provisions on the spurious basis that these DIP and NIP offsets contracts were “commercially confidential”.

27.1 the highest priced bid was accepted by the First and Second Defendants,

27.2 The so-called “visionary approach” of the then Minister of Defence precluded taking cost into account in the decision to procure the aircraft from Third Defendant, thereby infringing the express mandatory provisions of section 217 of the Constitution.

  1. The procurement of the aircraft was not an efficient, economic and effective use of resources as required in terms of section 195(1)( b) of the Constitution because:

28.1 too many aircraft were procured given the reasonable defence needs of the country;

28.2 there were, and remain, insufficient certified and qualified pilots in South Africa to operate the Gripen Alphen aircraft; and

28.3 the operating budget of the South African Airforce is such that there is insufficient funding available to pay properly for maintenance of the aircraft, fuel for the aircraft and training for crew and mechanics for the aircraft.

  1. In the circumstances the procurement agreement was and is inconsistent with the Constitution, particularly section 2 of the Constitution.
  2. In the premises, the Procurement Agreement falls to be declared invalid.
  3. As a consequence of the invalidity of the Procurement Agreement, the aircraft supplied by the Third Defendant must, in law, be returned to it by First and Second Defendants against the refund of all monies paid thus far, together with mora interest.

PLAINTIFF’S SECOND CLAIM:

ILLEGALITY OF THE PROCUREMENT:

  1. In terms of section 16 (1) of the Exchequer Act 66 of 1975, as amended, (hereafter the “Exchequer Act”), which was in force at the time the loan agreement was concluded, the Minister of Finance was only permitted to borrow moneys to:

32.1 finance anticipated deficits in the Exchequer Account in terms of section 16(1)(a) of the Exchequer Act;

34.2 in terms of section 17 of the Exchequer Act, to borrow monies by entering into the Loan Agreement with an international bank or foreign institution for the purposes of aircraft procurement.

  1. Alternatively, and only in the event that section 17 of the Exchequer Act applies, the then Finance Minister Trevor Manuel, on behalf of the First Defendant, had no authority in terms of section 19 (1) of the Exchequer Act, to borrow monies by entering into the loan agreement with the Fourth Defendant, supported by the Fifth Defendant, for the purposes of the aircraft procurement, inasmuch as he was empowered to borrow money in the Republic only and the Fourth and Fifth Defendants were an international bank and foreign institution respectively and were not located within the Republic.
  2. The conduct of the Minister of Finance in concluding the Loan Agreement was and remains, unauthorised and unlawful in terms of the Exchequer Act.
  3. Accordingly, the Loan Agreement, underpinning the procurement of the said aircraft, is invalid for want of compliance with sections 16 and 17, alternatively 19, of the Exchequer Act.
  1. In the premises, the Loan Agreement falls to be declared invalid.
  2. The loan to the First Defendant from Fourth Defendant supported by Fifth Defendant is, in law, of no force and effect and unenforceable in consequence of its invalidity.

PLAINTIFF’S THIRD CLAIM: in the alternative to the Plaintiff’s first and second claims, and only in the event of the said claims not succeeding:

BRIBERY AND CRIMINALITY

  1. For the purposes of this claim, reference to “BAe” shall be to BAe Systems PLC, as more fully described in paragraph 5.2 above.
  2. During 2011 BAe, the ultimate holding company of the Third Defendant, entered into a plea bargain with the United States Department of Justice and agreed, inter alia, to pay a criminal fine of $400m the plea bargain agreement included:

41.1 an admission by BAe that it had made payments of at least £135m and $14m to advisors and agents to secure contracts globally;

  1. On or about 14 July of 2004, the then Director of the Serious Fraud Office in the United Kingdom (hereafter “the SFO”) accepted and commenced with an investigation, in partnership with the Ministry of Defence in the United Kingdom, involving allegations of bribery and corruption by BAe’s international system of advisers in relation to the sale of the aircraft by BAe to the First Defendant.
  2. The SFO investigation identified that BAe employed a network of advisers to assist in the marketing of its products including:

46.1 a business unit titled ‘Head Quarter Marketing Services’ [ subsequently named ‘International Business Support’], a division of BAe; and

46.2 Red Diamond.

  1. The SFO investigation further identified that BAe operated a system of ‘overt’ and ‘covert’ advisers worldwide to assist and enhance its marketing effort in the sale of its products.
  2. Consequent on the above investigation the SFO established that under and through banking accounts of Red Diamond held with Lloyds TSB,

payments of in excess of £ 115 million had been paid to advisers to assist BAe in the securing and maintaining the aircraft acquisition by the First Defendant.

  1. More specifically, the SFO investigation established that in relation to the acquisition of the aircraft by the First Respondent from BAe, in excess of :

49.1 £ 103 million had been paid from the Red Diamond bank accounts in the United Kingdom to covert advisers; and

49.2 £ 12 million had been paid from its [BAe’s] bank accounts directly to overt advisers.

  1. Based on Annex “2” to an affidavit dated 9 October 2008 by Gary Daniel Murphy, Principal Investigator employed by the SFO, which document is attached hereto as the schedule annexed marked “C”, the following information was identified in relation to payments by Red Diamond and BAe Marketing Services:

50.1 Details of the payer bank, by account name;