A defective bank guarantee does not constitute a bid bond

The failure to identify the guarantor in the wording of the bank guarantee prevents the contracting entity from recognising the bid bond as properly paid. An error of this type cannot be cured by way of interpretation.

After the Polish power company PGE GiEK announced the results of the tender for construction of a new generating unit at the Turów power plant on 18 March 2014, things heated up, and not only among the bidders whose offers were not selected. Several articles appeared in the press suggesting that Shanghai Electric Group Co., Ltd., which had submitted the cheapest offer, had been excluded solely because the contracting entity had a negative attitude toward Chinese contractors. Serious allegations were made that the contracting entity intentionally treated the offer of the Chinese company rigorously while taking a laxer approach toward other bidders. The whole matter was also escalated by the argument that the Chinese company had offered the lowest price. Each of the three offers submitted exceeded the contracting entity’s budget, but an attempt was made to argue that the contracting entity had to select the cheapest offer to stay as close to its budget as possible.

These allegations and arguments aired in the press supposedly pressured the contracting entity, but also the National Appeal Chamber, which held nine hearings before finally issuing a ruling in the appeal initiated by the two losing bidders. To hold so many hearings, even in such a large tender (with the offer selected coming in at nearly PLN 4 billion with VAT) means that the case must have been exceptionally complicated and required great attention from the chamber.

A ruling was finally announced on 23 May 2014. The National Appeal Chamber denied both of the appeals and thus upheld the correctness of the selection of the most advantageous offer made by the contracting entity. According to the chamber’s spokesman, Justyna Tomkowska, the chamber confirmed some of the objections concerning the technical parameters of the offer submitted by the Chinese bidder. But first and foremost the chamber held that it was necessary to exclude Shanghai Electric because the bank guarantee submitted as a bid bond had defects that could not be removed through interpretation or explanation.

And rightly so.

If the contractor secures its offer in a tender with a bid bond in the form of a bank guarantee, the guarantee must provide the contracting entity the same level of security as cash paid into its bank account, as the National Appeal Chamber has confirmed numerous times (e.g. KIO 36/11 and KIO 58/11). Upon opening of the bids, the contracting entity must be certain that if there are grounds to retain the bid bond it will receive the guaranteed amount in full.

In this proceeding the contracting entity did not include any specific provisions in the technical specifications concerning the bid bond, which was in the amount of PLN 15 million. It was thus permissible to submit an irrevocable, unconditional bank guarantee which could be drawn on in the instances set forth in Art. 46 (4a) and (5) of the Public Procurement Law.

Shanghai Electric secured its offer, which was submitted in two languages (Polish and English), with a bank guarantee issued on letterhead of the Industrial and Commercial Bank of China (Europe) S.A. Polish Branch. The name and address of the Polish branch appeared in the header of each page of the guarantee document, and the stamp of the branch was placed on the last page. The first page of the guarantee gave such data as the number and date of the guarantee document, the issuing bank (the same as given in the header of each page), the amount payable (PLN 15 million), the expiration date, the beneficiary (i.e. the contracting entity) and the customer (written out in full as “Shanghai Electric Group Company Limited” with its address in Shanghai). But the first page of the guarantee appeared to be only the “caption”—in other words, the title page rather than the actual substance of the document. According to Polish dictionaries, this term refers to the introduction to a document, setting forth the date, place, parties and circumstances of the operative text which follows.

The actual text of the guarantee began on the second page of the document and was incomplete. It began by stating, “This Irrevocable Bank Guarantee” in favour of the contracting entity in the amount of the bid bond amount, with the guarantee number, “was issued for a contractor seeking award of a public contract, Shanghai Electric Group Co., Ltd.” Then there was a place for inserting the address of the Shanghai company, but it was not provided. Nor was there any other information identifying the contractor, such as its registration number or tax number. The absence of the contractor’s address alone would not have presented a major problem if it were the only shortcoming of the document, because it was stated in the guarantee that the company had submitted an offer for construction of the new generating unit at the Turów power plant, and thus it could be assumed that the identity of the contractor was sufficiently established.

Nonetheless, it should be pointed out that it is the accepted practice to identify the tender more precisely by giving the title of the tender for which the bond is being provided, as stated in the contract announcement, as well as the reference number assigned to the proceeding by the contracting entity.

But the fundamental problem with the bank guarantee began in the following words: “____________ (the ‘Guarantor’)….” The guarantee had a space for writing in the name of the bank guaranteeing payment of the funds, but the space was not filled in. The name of the bank was stated in the caption of the document, the letterhead, and the stamp at the end. But in the principal wording of the guarantee stating the guarantor’s obligation to pay out the funds, the guarantor was not identified at all.

When this article was being written, the justification for the ruling by the National Appeal Board (KIO 634/14) had not been published yet, and thus it is only the author’s conjecture that the defectiveness of the guarantee submitted by Shanghai Electric was the grounds for exclusion of the bidder. Nonetheless, based on the wording of the bank guarantee it should be found that the guarantor was not identified in the content of the guarantee. The failure to identify the bank could present a real risk to the contracting entity that if it demanded payment from Industrial and Commercial Bank of China (Europe) S.A. Polish Branch, the bank might refuse to pay. This risk would thus require the contracting entity to conclude that the offer by Shanghai Electric was not properly secured by a bid bond.

If a contractor submits the bid bond using a bank guarantee, it must ensure that the guarantee is free of errors. The guarantee should specify not only the amount of the bond and the conditions for payment, but also properly identify the customer, the beneficiary and the guarantor. An improper guarantee is deemed to mean failure to submit a bid bond, and results in exclusion of the contractor and rejection of its offer.

It should also be stressed that the bid bond document does not constitute part of the offer and is not covered by the provisions of the Public Procurement Law concerning oversights in the offer (KIO 36/11). The bid bond cannot be supplemented after the deadline for offers and thus shortcomings in the bid bond guarantee cannot be cured.

Erroneous identification of an entity (customer, beneficiary or guarantor) need not automatically result in rejection of the guarantee as improper, because the National Appeal Chamber has held several times (e.g. KIO 150/12, KIO 1645/12 and KIO 1413/13) that the content of a bank guarantee is subject to interpretation. In the case at hand, however, interpretation was not available because the existence of security for the offer could not be inferred directly from the wording of the guarantee. A separate assurance by the bank provided to the contracting entity after the deadline for offers could not cure this defect.

It may thus be concluded that in this proceeding PGE GiEK acted as a prudent contracting entity should act, protecting its interests and respecting the regulations. Admitting an offer with a defective bank guarantee would violate the Public Procurement Law because a bidder which secures its bid with a defective bond is mandatorily excluded from the proceeding.

The lowest offer cannot be rescued if it has a shortcoming that cannot be cured. The contracting entity cannot be blamed for the carelessness of a contractor that failed to check the documents submitted. Use of the bank’s name in the letterhead and the title page was insufficient to find that the guarantee was complete. In the key spot where the guarantor’s obligation was stated, the guarantor was not identified at all, and thus it was doubtful how to interpret the terms of the guarantee. These doubts could not be clearly resolved because the contracting authority could not be certain how the bank itself would react if it were asked to pay.

Unfortunately, in this case the consequences of the bank’s oversight were borne by the contractor which offered the defective guarantee document. There is no surprise ending in store here. The offer selected was unfortunately not the lowest one, but it was properly submitted. In the final analysis, the Hitachi consortium provided the required bid bond and Shanghai Electric did not, and thus Japanese technology rather than Chinese technology could be included in the ranking of offers.

Anna Prigan, legal adviser, Infrastructure & Transport and Public Procurement & PPP practices, Wardyński & Partners