Whether we like it or not, there will be leadership changes in government. Whether the current ruling party breaks the eight or the opposition wins power come 2024, there will be changes in the various government entities. A change of ministers, board members, managing directors, heads of agencies, etc., often leads to a review of previously entered contracts as the new head seeks to undertake a value-for-money analysis and/or legal compliance.
As such, it is essential that private sector entities entering into various contracts with the government ensure they comply with the applicable laws to avoid termination of such contracts because the contract was procured or entered into unlawfully. In this article, we look at some loopholes that private sector entities and government officials must avoid in entering into a contract to avoid future termination because the contract was entered into contrary to law.
Government contracting
The government remains the number one spender in Ghana’s economy. The government includes ministries, departments and agencies, local government entities – metropolitan, municipal and district assemblies, and state-owned entities. The government procures goods, works and services from private sector entities and enters into partnership arrangements with private sector entities to provide infrastructure and services that the government is responsible for. The government also enters into finance arrangements with banks, financial institutions and individuals to obtain funds for its development activities. These are all done through contracts between the government and the private sector entities.
Every contract that the government intends to enter into is regulated by law. Generally, a contract entered into in contravention of the applicable laws will make the contract unenforceable on the grounds that the contract is unlawful. While it is the government’s responsibility to ensure that the laws are complied with when entering into such contracts, the declaration of such contracts as unlawful also adversely affects the private parties who are counterparties to the contracts.
The private parties, therefore, have a vested interest in ensuring that the contracts are entered into in accordance with the applicable law. The declaration of the contract as unlawful, therefore unenforceable, bites the private party harder than the government in many cases.
Regulatory framework
Several laws regulate the capacity of a government entity to enter into a contract. The laws prescribe the capacity of the entity to enter into the contract, the procedure to follow in entering into the contract, and the approval to obtain to enter into the contract. The first thing to note is that government entities are created by law. The contracts entered into by a government entity must be permitted within its establishment instrument. Capacity is crucial for the validity of a contract. A private party entering into a contract with a government entity must satisfy itself that the government entity has the capacity to enter into the contract.
Secondly, the procurement of goods, works and services of a government entity must be conducted in accordance with the Public Procurement Act. The Public Procurement Act prescribes various procurement methods to be adopted by a procuring entity. It also indicates approvals required for the various methods, which approvals depend on contract sum thresholds.
Even where a competitive procurement process is adopted by the procuring entity, there are processes specified under the act to govern the various stages of the process. For restricted tender processes or non-competitive processes, there are conditions that are prescribed, and that must be satisfied for the use of such processes. Failing to use the right procurement method, not following the prescribed procedure, or not obtaining the required approval will lead to procurement challenges. Therefore, while the government entity is to ensure compliance, it is in the interest of the private party to understand the process and ensure it is followed.
There are notable exceptions to the application of the Public Procurement Act. These include awarding contracts for extracting natural resources; including petroleum and mining activities, and partnership arrangements. Agreements, where government entities borrow money or enter into financing arrangements, do not also come under the Public Procurement Act. Specific legislation is in place to deal with contracting arrangements for these activities.
One common mistake observed is the implementation of partnership arrangements under the Public Procurement Act rather than the Public Private Partnership (PPP) Act. The Public Procurement Act governs the procurement of goods, works and services financed wholly or partly through public funds and the disposal of public stores.
The PPP Act governs all partnership arrangements between a public entity and a private sector party, where the private sector party provides public infrastructure and services under a long-term contract. The private sector party assumes significant risk and obligation for the financing, designing, construction, operation and maintenance of the infrastructure.
The private sector party will perform the service that the government entity ordinarily performs and, in return, receives payment from the end-users or direct payment from the public entity. The PPP Act provides the legal framework that governs the project preparation, procurement, contracting and post-closing management of the project. PPP arrangements come in many forms, including concessions, build operate transfer, build own operate transfer, rehabilitate operate transfer, operation and maintenance arrangement, etc.
Where a project that is a PPP project is procured under the Public Procurement Act, the process and resulting contract are unlawful. The public entity must, therefore, clearly define the project and choose the right framework under which to implement the project. Generally, PPP projects require substantial investment from the private partner. The private partner must protect its interest by ensuring the partnership arrangement is undertaken under the right legal framework and that the process is followed with the relevant approval obtained.
The PPP Act also has some exceptions. These include the award of petroleum agreements, mining contracts, outsourcing of government services without significant transfer of financial and operation risk, and procurement of goods, works and services under the Public Procurement Act.
Financing arrangements come under the law establishing the relevant government entity, the Public Finance Management Act (PFMA), and the Constitution. These are not exhaustive. Where the entity has the capacity to borrow, such borrowing must be approved in the annual budget for the entity, or the entity must seek approval from the Minister of Finance. This is subject to the internal approval requirements of the entity. Parliamentary approval may be required in some instances.
Approval requirements
A critical factor in ensuring that contracts entered into with the government are not declared void because the contracts are unlawful is to obtain approvals required by law. The courts have held that failure to obtain such approval will render the contract void, and no action can be based on such contracts.[ii]
As discussed earlier, the procurement processes under the Public Procurement Act or the PPP Act require a number of approvals at the various stages of the procurement process. Similarly, finance arrangements require approval from the Minister of Finance under the PFMA and, for companies, from the government as a shareholder for state-owned companies where such transactions amount to major transactions.
The Constitution also requires parliamentary approval in several instances. These include instances where the government enters into:
- a loan agreement
- arrangements where the government provides or issues guarantees for repayment obligations or performance of any other obligations by any public or private entity
- international business or economic transaction to which the government is a party
- agreements that provide for exemptions from, or variation or deferment of applicable taxes and
- agreements for the exploitation of natural resources.
Where the contract relates to any of the afore-mentioned, it is crucial for the validity of the contract to obtain parliamentary approval. As indicated, the courts have held that such contracts are invalid where parliamentary approval has not been obtained. In some of these cases, it was the government that requested for the declaration of the contract as invalid, even though it was the duty of the government to obtain the approval.
Private sector entities entering into contracts with the government must, therefore, ensure that the internal approvals required under the establishing instrument of the public entity or company are obtained, in addition to approvals required under other laws.
Conclusion
All contracts entered into by or with the government are regulated by law. Generally, the failure to comply with applicable law will adversely affect the validity of the contract. The government remains the largest spender and will continue contracting with private sector companies. Since political change is inevitable, it is essential to ensure that the process of entering into such contracts and the contract terms comply with the relevant laws. Required approvals must be obtained.
While the government entity is responsible for ensuring compliance, the private sector counterparties mostly bear the risk of non-compliance. Private sector companies seeking to enter into such contracts must seek legal advice on the applicable laws, compliance with the required processes and that the required approvals have been obtained. As an added safeguard, a formal opinion should be obtained from a reputable law firm advising on the transaction on the validity and enforceability of the resulting contracts prior to execution of the contract by the private sector party.
[i] Ferdinand D. Adadzi is a Partner at AB & David, a multi-specialist pan-African business law firm practising in many jurisdictions in Africa, including Ghana. He is a member of the firm’s Energy, Infrastructure & PPP Group, Corporate & Finance Group and Government Business Group. He is also a senior lecturer at GIMPA Faculty of Law, lecturing in Company Law and Contract Law. He has many publications to his credit, including a seminal textbook on Company Law titled ‘Modern Principles of Company Law in Ghana’.
Contact: Tel: +233 (0)24 226 2180; Email: [email protected]
[ii] Attorney-General v Balkan Energy Ghana Ltd., Balkan Energy LLC & Philip David Elders (Supreme Court, Ghana No. J6/1/2012.
