Article from Law Update (http://new sw eaver.ie/altam im i/e_000356310000103166.cfm ?x= b11,0,w )

April 6, 2009

Tendering Tips and Traps by Eric Teo - Dubai Office

This article w ill touch on som e of the fundam ental legal aspects of the tendering process relating to construction and engineering projects and offer som e guidance on how best to avoid problem s during this crucial stage of contract form ation.

Tendering for large and com plex construction or engineering projects can be a very expensive exercise for em ployers and tenderers alike. How ever, it w ould be m oney w ell spent if the objectives of tendering w ere achieved.

M ost industry players w ill agree that the m ain objectives of tendering is tw o fold: firstly, the tendering process enables the em ployer to secure a suitable contractor to carry out the intended w orks at a com petitive price; secondly, the process provides a level platform for participating tenderers to understand the requirem ents of the intended w orks and the various risks involved in carrying out the w orks before deciding on their bid price.

In a heated construction m arket such as Dubai w as recently, parties do not often appreciate the legal aspects of the tendering process. During the previous frenzied m arket conditions, stakeholders of the construction industry w ere too engrossed in negotiating and closing deals as quickly as they w ould after the tender closing dates. From our experience there have been instances w here parties have com prom ised on the legal issues during the tender process for fear of m issing the set m ilestones of a particular project.

The tender process

The tendering process in the construction and engineering industry has developed into a very com prehensive and com plex procurem ent process. It often involves m any steps and procedures w hich tenderers m ust undertake and num erous conditions that m ust be satisfied before they are eligible to m ove to the next stage of the process.

The follow ing provides the different phases of a tendering process.These phases w ere extracted from a guideline prepared by the International Federation of Consulting Engineers (FIDIC) (see The FIDIC Contracts Guide First Edition 2000). This outline of phases also illustrates a typical tendering process for a construction project in the UAE:

• Pre-qualification phaseAt this phase the em ployer w ill set its selection criteria (for exam ple, contractors w ho are experienced in a specific type of engineering w orks) and invites prospective tenderers w ho satisfy the said criteria to subm it their details and capabilities. The objective of this phase is to enable the em ployer to select suitable contractors to proceed to the next phase.

• The tender invitation phase The em ployer issues an invitation to the shortlisted contractors (those w ho w ere selected from the pre-qualification phase) or to the public at large (if no pre-qualification phase w as carried out) to participate in the tender process.

• The tender clarifications and addenda phase

During this phase, each of the tenderers is expected to raise any queries in relation to the tender docum ents or the requirem ents of the em ployer to enable them to price their offer or bid. In responce, the em ployer w ill issue w ritten clarification to the queries. The em ployer m ay also issue tender addendum s am ending any part of the tender docum ents. Tender site visits are usually carried out during this phase.

• The tender offer or bid submission phase Tenderers subm it their offers or bids before the stipulated deadline along w ith the required tender security.

• The tender opening and post tender clarification phaseThe em ployer opens and evaluates the offers or bids and seeks clarifications from the tenderers regarding their offers or bids (if necessary).

• The award phase

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The em ployer issues a letter of acceptance to the successful tenderer.

• The formalisation of contract phase The successful tenderer signs a form al agreem ent w ith the em ployer for the execution of the project.

W ith regards to public procurem ent in the UAE, there are law s w hich govern public procurem ent processes. In the Em irate of Dubai, Law No.6 of 1997 regulates contracts w ith the governm ent departm ents of Dubai. Law No.6 sets out the various m ethods of procuring contractors by the Governm ent of Dubai w hich include public and closed tender processes. This law also prescribes the procedures by w hich tenders are to be conducted. The prescribed tender procedures are generally in accord w ith the phases set out above.

The two-stage contract

From a legal perspective, an invitation to tender or a request for tender (RFT) docum ent should be fram ed in such a w ay that it does not create any legal relationship betw een the invitor (the em ployer) and any prospective tenderers at large. Unless and until the prospective tenderers have participated in the tender process, there should not be any legal relationship betw een the invitor and each of the prospective tenderers.

The com m on understanding is that a contract w ill com e into existence if and w hen the invitor or the em ployer issues a letter of acceptance or letter of aw ard in response to the tender. How ever due to the com plexity of the construction tender process, each of the parties participating in the process, including the invitor, w ill be bound by a set of obligations throughout the process. The fact that tenderers are required to furnish tender securities or tender bonds is an indication that there is a contract in place. The typical tendering process for a construction or engineering project is in effect, from a legal perspective, a tw o-stage contract.

The first stage contract

The first stage begins w hen the em ployer issues an invitation to tender or RFT. By issuing the invitation, the em ployer is m aking an offer to each of the prospective tenderers to enter into the first stage contract or the “tendering contract”. The underlying obligation of the em ployer under this contract is its prom ise to consider each of the bids that the tenderers subm it in accordance w ith the term s of the tender invitation. In consideration of the em ployer’s prom ise, each tenderer w ill deploy its resource to participate in the tender process and in turn prom ises to execute the project in accordance w ith its bid should the em ployer accepts it. Therefore, it can be argued that individual tendering contract com m ences w hen each tenderer begins to participate in the tender process.

It is com m on industry practice for em ployers to include in the tender invitation a docum ent usually labelled as the ‘Instructions to Tenderers’or the ‘Conditions of Tendering’. These docum ents w ill set out the obligations of the parties during the tender process for a fixed period of tim e or until a specified event occurs (the conditions of tendering).

It is crucial for all parties to understand and appreciate their obligations during the tender process. Depending on the term s of the conditions of tendering, a tenderer m ay be disqualified from the tender process if it fails to com ply w ith the conditions. O n the other hand any breach on the part of the em ployer m ay entitle the aggrieved tenderer to recover dam ages. Therefore, it is not surprising to find in the conditions of tendering a host of rights that favour the em ployers. Som e of these rights are discussed below .

Employers’ overriding rights

As m entioned earlier, it is the prom ise of the em ployers that they w ill evaluate and consider the individual bid subm itted by each of the tenderers. Therefore in the absence of any express term s to the contrary the em ployers are obliged to evaluate the bids and aw ard the project to the successful tenderers. O therw ise, the em ployers m ay be liable to the tenderers for the w asted costs and expenses incurred in participating in the tender process.

How ever, it is not uncom m on to find a term in the conditions of tendering w hich provides that the em ployer w ill not be bound to accept the low est priced bid. Given the current econom ic clim ate, em ployers m ay also include in the conditions of tendering an absolute right for them to suspend or cancel the tender process at any tim e. W ith such discretionary rights, the em ployers w ould be able to reconsider the tim ing or feasibility of their projects should they need m ore tim e to secure the necessary funding, or if the m arket turns for the w orse.

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O ther additional rights that em ployers m ight set out in the conditions of tendering include the right to vary the procedure and tim ing of the tender process and the right to w aive any irregularity in the bids. At tim es, these rights seem to have gone beyond w hat is necessary and reasonable at the expense of transparency and fairness to the tenderers.

Ultim ately, em ployers need to be m indful of the overriding requirem ents of good faith under UAE law w henever they exercise their rights pursuant to the conditions of tendering. They m ust bear in m ind that one of the m ain objectives of tendering is to provide an equal platform for all tenderers to com pete fairly. In this context, all tenderers m ust be treated equally and fairly by the em ployer throughout the tender process. For exam ple, each of the tenderers should be given the sam e inform ation and clarification w ithin the sam e tim e as any other tenderers during the process. O therw ise the tender process m ay be seen as a sham and the eventual exercise of the em ployer’s right in turning dow n unsuccessful bids could be construed as an exercise of bad faith.

To avoid any allegation of unfairness and bad faith, em ployers, (including their consultants especially those w ho are responsible for conducting the tender process), m ust ensure that each of the tenderers receives equal treatm ent and opportunity as any other tenderer. If there is any additional inform ation w hich has arisen either in response to a query of one of the tenderers or late inform ation that has not been included in the tender invitation, then the em ployer m ust ensure that such inform ation is dissem inated to all tenderers in a tim ely m anner (unless the inform ation is only relevant to a specific tenderer w ho needs it in order to be able to subm it an alternative offer as allow ed under the conditions of tendering).

The procedure for dissem inating inform ation to all tenderers is often set out in the conditions of tendering and is usually done by w ay of conducting site visits, convening tender clarification m eetings and issuing various tender docum ents such as addendum s, clarifications and a collection of questions and answ ers.

In the context of dissem inating inform ation, w e consider that the practice of interactive tendering should be encouraged, w hereby interactive sessions are built into the tender process giving each of the tenderers the opportunity to discuss and clarify the requirem ents of the em ployers and perhaps to further develop the specifications or project brief contained in the tender docum ents. Such sessions can also be im plem ented after the tender closing date as long as each of the tenderers is given an equal opportunity to revise its offer or bid after taking into consideration any inform ation arising from these sessions.

W hilst the interactive sessions m ust be conducted in strict confidence in order to protect the know -how of the tenderers, transparency and fairness m ust prevail such that any m aterial inform ation or errors discovered during the sessions are shared am ongst the tenderers by w ay of issuing further tender clarifications or addenda. Careful planning and staging of such sessions w ill prom ote a truly com petitive and effective tendering process.

Tenderers’ risks

In m ost conditions of tendering there are different types of disclaim ers that protect the em ployers. Em ployers w ill usually disclaim any responsibilities for the accuracy or correctness of inform ation provided in tender docum ents. Depending on the tim e and budget constraints of the particular em ployer and the scope and nature of the intended w orks, it is alw ays advisable for em ployers to include in their tender docum ent the am ount and details of inform ation that are reasonably sufficient for tenderers to appreciate the risks that they w ill be undertaking if they are successful. This w ill certainly prom ote and encourage tenderers to put in their m ost com petitive prices.

Conversely, if the tenderers are to carry the burden of m aking their ow n investigations and enquiries as to the accuracy and correctness of the inform ation contained in the tender docum ents, then subject to the risk appetite of the individual tenderer, m ost tenderers w ould likely add on a prem ium to their bid or offer prices to cover the risks of any inaccurate or incorrect tender inform ation along w ith other associated risks.

It is also a com m on requirem ent for tenderers to assum e the risks of any m isinterpretation, error or m istake on their part in construing the inform ation given in the tender docum ents and in pricing their bids. In this respect, it is highly advisable for tenderers to ensure that they clearly and accurately record the assum ptions and interpretations that they have adopted in pricing or form ulating their bids. These assum ptions and interpretations should then be discussed w ith the em ployer during tender clarification m eetings. If the em ployer finds it necessary, the appropriate addendum or clarification m ay be issued to all tenderers in order to rem ove or m inim ise any am biguity in the tender docum ents.

The second stage contract

The second stage sets in w hen the em ployer, after due consideration of the tender bids, issues its

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acceptance of the successful bid. Depending on the conditions of tendering, it is usually upon the issuance of the said acceptance that a construction contract betw een the em ployer and the successful tenderer is created.

The conditions of tendering w ould usually specify the event upon w hich the second stage contract, i.e. the construction contract is deem ed to have com e into existence. For exam ple, it m ay be provided that the construction contract w ill deem ed to have com m enced on the day the successful tenderer receives the em ployer’s letter of acceptance. And it is usually provided that until a form al agreem ent is executed betw een the parties the letter of acceptance shall form a binding contract betw een them .

How ever, for the em ployer’s acceptance to be binding on the successful tenderer, the term s of the acceptance m ust in substance correspond w ith the essential term s of the tenderer’s bid. O therw ise there cannot be a m eeting of m inds betw een the em ployer and the tenderer in order to form a contract. W hat could be an essential term to a contract is dependent on the nature of the transaction itself. In relation to construction contracts, the contract price and tim e for com pletion w ould be tw o obvious term s that are essential to the transaction.

A letter of acceptance that does not correspond w ith the successful tenderer’s offer w ill am ount to a counter-offer. The tenderer w ould then be in the position to either accept or reject the em ployer’s acceptance. How ever, before the tenderer rejects the em ployer’s purported acceptance it m ust be careful in determ ining w hether the em ployer’s term s of acceptance are, in substance, different from its ow n offer or bid, otherw ise the em ployer m ay encash the tender security or bond on the basis that the tenderer has failed to com ply w ith its obligation under the tendering contract.

The tenderers also need to be aw are that there w ould be no obligations on their part to proceed w ith the construction contract if they do not agree w ith the new term s introduced in the em ployer’s letter of acceptance. In this situation they m ust refrain from conducting or acting in such a w ay as if a contract has been form ed otherw ise they m ay be deem ed to have accepted the new term s.

Conclusion

As highlighted above, it is very im portant for parties to be aw are of their respective legal obligations during the tender process. Any inadvertent default on their part m ay give the other party the right to claim com pensation. To take an extrem e view , a defaulting em ployer m ay be liable to a disgruntled tenderer for the loss of chance of profits that the tenderer m ay have earned but for the em ployer’s breach of its tender obligations. O n the other hand, a tenderer w ho refuses to be bound by its bid m ay be liable to the em ployer for the difference betw een its tender price and the higher contract price of another tenderer w ho the em ployer eventually engages. Therefore the stakes are high for both the em ployers and the tenderers if they choose to ignore the legal aspects of the tendering process.

As the global financial crisis grips hold of the UAE construction m arket, parties should take the opportunity to revisit their practices either in their im plem entation of the tender process or in their respond to tender invitations. Even though it seem s that the construction m arket in the UAE is currently in a depressed stage, it is certainly an opportune tim e for em ployers to capitalise on the low er construction costs and for infrastructure projects to catch-up w ith the building industry.

Published by Law Update Copyright © 2011 Al Tam im i & Com pany. All rights reserved.

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