This article will touch on some of the fundamental legal aspects of the tendering process relating to construction and engineering projects and offer some guidance on how best to avoid problems during this crucial stage of contract formation. Tendering for large and complex construction or engineering projects can be a very expensive exercise for employers and tenderers alike. However, it would be money well spent if the objectives of tendering were achieved.

Most industry players will agree that the main objectives of tendering is two fold: firstly, the tendering process enables the employer to secure a suitable contractor to carry out the intended works at a competitive price; secondly, the process provides a level platform for participating tenderers to understand the requirements of the intended works and the various risks involved in carrying out the works before deciding on their bid price.

In a heated construction market such as Dubai was recently, parties do not often appreciate the legal aspects of the tendering process. During the previous frenzied market conditions, stakeholders of the construction industry were too engrossed in negotiating and closing deals as quickly as they would after the tender closing dates. From our experience there have been instances where parties have compromised on the legal issues during the tender process for fear of missing the set milestones of a particular project.

The tender process

The tendering process in the construction and engineering industry has developed into a very comprehensive and complex procurement process. It often involves many steps and procedures which tenderers must undertake and numerous conditions that must be satisfied before they are eligible to move to the next stage of the process.

The following provides the different phases of a tendering process.These phases were 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 phase
At this phase the employer will set its selection criteria (for example, contractors who are experienced in a specific type of engineering works) and invites prospective tenderers who satisfy the said criteria to submit their details and capabilities. The objective of this phase is to enable the employer to select suitable contractors to proceed to the next phase.

• The tender invitation phase
The employer issues an invitation to the shortlisted contractors (those who were selected from the pre-qualification phase) or to the public at large (if no pre-qualification phase was 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 documents or the requirements of the employer to enable them to price their offer or bid. In responce, the employer will issue written clarification to the queries. The employer may also issue tender addendums amending any part of the tender documents. Tender site visits are usually carried out during this phase.

• The tender offer or bid submission phase
Tenderers submit their offers or bids before the stipulated deadline along with the required tender security.

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

The award phase
The employer issues a letter of acceptance to the successful tenderer.

• The formalisation of contract phase
The successful tenderer signs a formal agreement with the employer for the execution of the project.

With regards to public procurement in the UAE, there are laws which govern public procurement processes. In the Emirate of Dubai, Law No.6 of 1997 regulates contracts with the government departments of Dubai. Law No.6 sets out the various methods of procuring contractors by the Government of Dubai which include public and closed tender processes. This law also prescribes the procedures by which tenders are to be conducted. The prescribed tender procedures are generally in accord with the phases set out above.

The two-stage contract

From a legal perspective, an invitation to tender or a request for tender (RFT) document should be framed in such a way that it does not create any legal relationship between the invitor (the employer) 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 between the invitor and each of the prospective tenderers.

The common understanding is that a contract will come into existence if and when the invitor or the employer issues a letter of acceptance or letter of award in response to the tender. However due to the complexity of the construction tender process, each of the parties participating in the process, including the invitor, will 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 two-stage contract.

The first stage contract

The first stage begins when the employer issues an invitation to tender or RFT. By issuing the invitation, the employer is making an offer to each of the prospective tenderers to enter into the first stage contract or the “tendering contract”. The underlying obligation of the employer under this contract is its promise to consider each of the bids that the tenderers submit in accordance with the terms of the tender invitation. In consideration of the employer’s promise, each tenderer will deploy its resource to participate in the tender process and in turn promises to execute the project in accordance with its bid should the employer accepts it. Therefore, it can be argued that individual tendering contract commences when each tenderer begins to participate in the tender process.

It is common industry practice for employers to include in the tender invitation a document usually labelled as the ‘Instructions to Tenderers’ or the ‘Conditions of Tendering’. These documents will set out the obligations of the parties during the tender process for a fixed period of time 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 terms of the conditions of tendering, a tenderer may be disqualified from the tender process if it fails to comply with the conditions. On the other hand any breach on the part of the employer may entitle the aggrieved tenderer to recover damages. Therefore, it is not surprising to find in the conditions of tendering a host of rights that favour the employers. Some of these rights are discussed below.

Employers’ overriding rights

As mentioned earlier, it is the promise of the employers that they will evaluate and consider the individual bid submitted by each of the tenderers. Therefore in the absence of any express terms to the contrary the employers are obliged to evaluate the bids and award the project to the successful tenderers. Otherwise, the employers may be liable to the tenderers for the wasted costs and expenses incurred in participating in the tender process.

However, it is not uncommon to find a term in the conditions of tendering which provides that the employer will not be bound to accept the lowest priced bid. Given the current economic climate, employers may also include in the conditions of tendering an absolute right for them to suspend or cancel the tender process at any time. With such discretionary rights, the employers would be able to reconsider the timing or feasibility of their projects should they need more time to secure the necessary funding, or if the market turns for the worse.

Other additional rights that employers might set out in the conditions of tendering include the right to vary the procedure and timing of the tender process and the right to waive any irregularity in the bids. At times, these rights seem to have gone beyond what is necessary and reasonable at the expense of transparency and fairness to the tenderers.

Ultimately, employers need to be mindful of the overriding requirements of good faith under UAE law whenever they exercise their rights pursuant to the conditions of tendering. They must bear in mind that one of the main objectives of tendering is to provide an equal platform for all tenderers to compete fairly. In this context, all tenderers must be treated equally and fairly by the employer throughout the tender process. For example, each of the tenderers should be given the same information and clarification within the same time as any other tenderers during the process. Otherwise the tender process may be seen as a sham and the eventual exercise of the employer’s right in turning down unsuccessful bids could be construed as an exercise of bad faith.

To avoid any allegation of unfairness and bad faith, employers, (including their consultants especially those who are responsible for conducting the tender process), must ensure that each of the tenderers receives equal treatment and opportunity as any other tenderer. If there is any additional information which has arisen either in response to a query of one of the tenderers or late information that has not been included in the tender invitation, then the employer must ensure that such information is disseminated to all tenderers in a timely manner (unless the information is only relevant to a specific tenderer who needs it in order to be able to submit an alternative offer as allowed under the conditions of tendering).

The procedure for disseminating information to all tenderers is often set out in the conditions of tendering and is usually done by way of conducting site visits, convening tender clarification meetings and issuing various tender documents such as addendums, clarifications and a collection of questions and answers.

In the context of disseminating information, we consider that the practice of interactive tendering should be encouraged, whereby interactive sessions are built into the tender process giving each of the tenderers the opportunity to discuss and clarify the requirements of the employers and perhaps to further develop the specifications or project brief contained in the tender documents. Such sessions can also be implemented 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 information arising from these sessions.

Whilst the interactive sessions must be conducted in strict confidence in order to protect the know-how of the tenderers, transparency and fairness must prevail such that any material information or errors discovered during the sessions are shared amongst the tenderers by way of issuing further tender clarifications or addenda. Careful planning and staging of such sessions will promote a truly competitive and effective tendering process.

Tenderers’ risks

In most conditions of tendering there are different types of disclaimers that protect the employers. Employers will usually disclaim any responsibilities for the accuracy or correctness of information provided in tender documents. Depending on the time and budget constraints of the particular employer and the scope and nature of the intended works, it is always advisable for employers to include in their tender document the amount and details of information that are reasonably sufficient for tenderers to appreciate the risks that they will be undertaking if they are successful. This will certainly promote and encourage tenderers to put in their most competitive prices.

Conversely, if the tenderers are to carry the burden of making their own investigations and enquiries as to the accuracy and correctness of the information contained in the tender documents, then subject to the risk appetite of the individual tenderer, most tenderers would likely add on a premium to their bid or offer prices to cover the risks of any inaccurate or incorrect tender information along with other associated risks.

It is also a common requirement for tenderers to assume the risks of any misinterpretation, error or mistake on their part in construing the information given in the tender documents and in pricing their bids. In this respect, it is highly advisable for tenderers to ensure that they clearly and accurately record the assumptions and interpretations that they have adopted in pricing or formulating their bids. These assumptions and interpretations should then be discussed with the employer during tender clarification meetings. If the employer finds it necessary, the appropriate addendum or clarification may be issued to all tenderers in order to remove or minimise any ambiguity in the tender documents.

The second stage contract

The second stage sets in when the employer, after due consideration of the tender bids, issues its 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 between the employer and the successful tenderer is created.

The conditions of tendering would usually specify the event upon which the second stage contract, i.e. the construction contract is deemed to have come into existence. For example, it may be provided that the construction contract will deemed to have commenced on the day the successful tenderer receives the employer’s letter of acceptance. And it is usually provided that until a formal agreement is executed between the parties the letter of acceptance shall form a binding contract between them.

However, for the employer’s acceptance to be binding on the successful tenderer, the terms of the acceptance must in substance correspond with the essential terms of the tenderer’s bid. Otherwise there cannot be a meeting of minds between the employer and the tenderer in order to form a contract. What 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 time for completion would be two obvious terms that are essential to the transaction.

A letter of acceptance that does not correspond with the successful tenderer’s offer will amount to a counter-offer. The tenderer would then be in the position to either accept or reject the employer’s acceptance. However, before the tenderer rejects the employer’s purported acceptance it must be careful in determining whether the employer’s terms of acceptance are, in substance, different from its own offer or bid, otherwise the employer may encash the tender security or bond on the basis that the tenderer has failed to comply with its obligation under the tendering contract.

The tenderers also need to be aware that there would be no obligations on their part to proceed with the construction contract if they do not agree with the new terms introduced in the employer’s letter of acceptance. In this situation they must refrain from conducting or acting in such a way as if a contract has been formed otherwise they may be deemed to have accepted the new terms.

Conclusion

As highlighted above, it is very important for parties to be aware of their respective legal obligations during the tender process. Any inadvertent default on their part may give the other party the right to claim compensation. To take an extreme view, a defaulting employer may be liable to a disgruntled tenderer for the loss of chance of profits that the tenderer may have earned but for the employer’s breach of its tender obligations. On the other hand, a tenderer who refuses to be bound by its bid may be liable to the employer for the difference between its tender price and the higher contract price of another tenderer who the employer eventually engages. Therefore the stakes are high for both the employers 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 market, parties should take the opportunity to revisit their practices either in their implementation of the tender process or in their respond to tender invitations. Even though it seems that the construction market in the UAE is currently in a depressed stage, it is certainly an opportune time for employers to capitalise on the lower construction costs and for infrastructure projects to catch-up with the building industry.

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