Tales from the National Appeal Chamber: Submission of a bid bond by a consortium
Several contractors apply together for the award of a public contract. Can they submit a bid bond in the form of a bid bond guarantee that does not name all of the members of the consortium? This issue has been, and remains, the subject of debate in the legal literature and case law. Taking a position in this debate, in its ruling of 31 July 2020 (case no. KIO 1183/20), the National Appeal Chamber stressed that the decisive role is played by the wording of the guarantee itself, which must unequivocally specify the scope of liability of the guarantor (e.g. bank, insurance company, or corporate guarantor) in terms of which entities and subject matter are covered.
State of facts
In a public procurement in Poland, the contracting authority selected the offer filed by contractors jointly seeking award of the contract. One of the unsuccessful bidders filed an appeal with the National Appeal Chamber (KIO).
According to the terms of reference for the procurement, the contractor had to submit a bid bond providing for an unequivocal obligation of the guarantor to pay the full amount of the bid bond, irrevocably and unconditionally upon first demand by the contracting authority asserting the occurrence of one or more of the circumstances indicated in Art. 46 (4a) or (5) of the Public Procurement Law, without the need to provide proof of those circumstances.
The appellant alleged that the consortium had filed the bid bond improperly, for two reasons.
First, in the bid bond submitted by the consortium, only one of the consortium members was named in the insurance guarantee as the obligor. Consequently, it could not be found unequivocally in the guarantee that the guarantor would pay out the amount of the bid bond to the contracting authority if a circumstance arose justifying retention of the bid bond attributable to a member of the consortium other than the one named in the guarantee.
Second, the wording of the guarantee lacked an express reservation that the contracting authority did not need to prove to the guarantor the existence of the circumstances resulting in retention of the bid bond, which was required by the terms of reference for the procurement.
In the appellant’s view, these allegations warranted invalidation of the selection of the most advantageous offer, and exclusion of the winning consortium from the contract procedure.
Rejection of offer when bid bond is not submitted or is submitted improperly
Taking up the allegations on appeal, the chamber first pointed to the legal basis for seeking rejection of the offer. Under Art. 89(1)(7b) of the Public Procurement Law, the contracting authority shall reject the offer if it demanded a bid bond but the bid bond was not submitted, or was submitted improperly.
The bid bond must be properly and effectively submitted because under Art. 46(4a) or (5) of the Public Procurement Law, the contracting authority is authorised to retain the bid bond. Under this provision, the contracting authority shall retain the bid bond, along with interest, if in response to a summons to supplement the filed statements or documents (Art. 26 (3) and (3a)), for reasons attributable to the contractor, the contractor fails to submit:
- Statements or documents confirming the circumstances referred to in Art. 25(1)
- Statements referred to in Art. 25a(1), or
- Powers of attorney
or does not consent to correction of oversights referred to in Art. 87(2)(3), making it impossible for the contractor’s offer to be selected as the most advantageous.
Additionally, under Art. 46(5), the contracting authority shall retain the bid bond, along with interest, if the contractor whose offer has been selected:
- Refuses to sign the public contract under the terms stated in the offer, or
- Fails to provide required security for proper performance of the contract
or conclusion of the public contract has become impossible for reasons attributable to the contractor.
Payment of the bid bond cannot depend on the good will of the guarantor
For the bid bond to ensure effective protection of the contracting authority’s claims, the contractor must properly draft the guarantee and carefully identity the set of obligors. As KIO stated in its ruling, “The need for the guarantor to pay the amount secured in an insurance guarantee submitted as a bid bond in the situations provided for in Art. 46 (4a) and (5) of the Public Procurement Law must not raise doubts. In particular, a situation in which payment of the funds under the guarantee depends on the good will of the guarantor, or is conditioned on an interpretation of the guarantee contrary to its wording, must be regarded as impermissible.”
According to the chamber, proper drafting of the bid bond is up to the contractors, and with an awareness that defective submission of the bid bond is grounds for rejection of the offer, they should look out for their own interests and take all efforts to ensure that the document is properly submitted. Here the chamber relied on the holding by the Wrocław Regional Court (judgment of 11 July 2013, case no. X Ga 189/13) that the wording of a guarantee submitted as a bid bond must be clear and understandable.
In light of these guidelines, how did the chamber assess the bid bond filed in this case by the consortium?
“For reasons attributable to the contractor”
First the chamber had to determine whether the bid bond submitted in the procedure covered acts and omissions by all members of the consortium. It was clear that the bid bond was supposed to secure a joint offer submitted together by contractors seeking award of the contract.
In the chamber’s view, “In a situation in which only one of the contractors jointly seeking the award of a public contract is indicated in the guarantee as the debtor (customer, supplier, contractor, offeror) obligated to satisfy the secured claim, and the grounds indicated in the guarantee justifying a claim for payment coincide with those mentioned in Art. 46 (4a) and (5) of the Public Procurement Law, the interpretation of the reservation ‘for grounds attributable to it’ should be decisive for assessing whether the bid bond was properly submitted.”
The chamber stated that in examining this issue, it should be considered whether in light of the factors set forth in Civil Code Art. 65, this wording covers situations in which the immediate cause justifying retention of the bid bond is a failure by a contractor not mentioned in the guarantee, but the contractor mentioned in the guarantee also bears liability for the omission. In other words, it should be determined whether the phrase “for reasons attributable to it” can be equated with the phrase “for reasons for which it is liable.”
In resolving this issue, the chamber’s arbitrators found that the guarantee indisputably named only one debtor. In defining the “obligor,” the guarantor that issued the insurance guarantee referred exclusively to one of the consortium members. Consequently, potential acts or omissions by another member of the consortium were not properly secured, and the contracting authority would not be able to enforce retention of the bid bond for actions attributable to that other member.
It should be pointed out that Art. 25a(1) of the Public Procurement Law does not require submission of statements by the consortium, but by each member separately. Thus if one of the consortium members does not comply with its obligation, the contracting authority can retain the bid bond under Art. 46(4a). But in this case, a bid bond was filed that did not cover acts or omissions by all members of the consortium, but only by one member. Consequently, the contracting authority could not satisfy its statutory claim because the guarantee referred only to failure to submit a document by the consortium member mentioned in the bid bond, for reasons attributable to it.
Scope of guarantor’s liability determined by the wording of the guarantee
The bid bond issued by a guarantor must unequivocally state that it covers all the entities that are members of the consortium. In this case, however, it did not appear from the wording of the guarantee that the guarantor had decided to assume liability also for acts or omissions of consortium members, unknown to the guarantor, of the contractor procuring issuance of the guarantee. The wording of the guarantee contained no reference to acts or omissions of any other member of the consortium, nor any indication that the guarantor was aware of covering liability also for acts or omissions of any contractor other the one mentioned in the document. Consequently, retention of the bid bond under the insurance guarantee submitted in the procedure would depend solely of the good will of the guarantor, or possibly on an interpretation of the guarantee contrary to its express wording.
As the chamber explained, “Due to the broad scope of liability assumed by the guarantor, prior to approval of the guarantee the guarantor will scrupulously verify the contractor’s economic condition, to estimate the related risk. In turn, the result of this examination determines the approval of the guarantee, and also the amount of the fee the guarantor will charge for issuing the guarantee. Thus the guarantor will precisely specify in the guarantee letter which acts or omissions, of which entity, it will be answerable for. In this manner, the wording of the guarantee reflects the scope of the guarantor’s liability in terms of both entities and subject matter. It is also obvious that the risk of occurrence of circumstances referred to in Art. 47 (4a) and (5) of the Public Procurement Law may be different if the occurrence could result from the act or omission of a larger number of entities.” It follows that it is always the content of the guarantee that is decisive, because it is backed by a careful economic analysis. In answering financially to the contracting authority, the guarantor will undoubtedly strive to formulate the guarantee as precisely as possible, to clearly identify the events and entities covered by the guarantee.
The guarantor’s obligation as such is an abstract obligation, i.e. not dependent on the existence or validity of the principal obligation underlying the grounds for executing on the guarantee, as well as an autonomous (non-accessory) obligation, whose existence and scope do not depend on the existence or scope of any other obligation. Consequently, the nature, existence and scope of the guarantor’s independent obligation are defined by the insurance guarantee agreement itself.
In considering the abstractness of the guarantor’s obligation, the National Appeal Chamber also cited the Supreme Court judgment of 7 January 1997 (case no. I CKN 37/96): “The essence of a guarantee manifest in the separateness of the subject matter of the guarantor’s obligation from the principal debt means that only the provisions set forth in the content of the statement (guarantee letter) addressed to the beneficiary of the guarantee is determinative of the guarantor’s liability.”
The chamber also stressed that the correctness of a guarantee not covering all members of the consortium cannot be inferred from the fact that the bid-bond guarantee is unconditional and payable on first demand. The unconditionality of the guarantee does not mean that acts or omissions of entities not mentioned in the document fall within the scope of the guarantor’s liability. Here the chamber cited the Supreme Court judgment of 25 January 1995 (case no. III CRN 70/94), according to which the guarantor’s liability under an unconditional guarantee payable on first demand is not unlimited, and cannot be treated as absolute.
Contractors jointly seeking the award of a public contract must submit a bid bond securing the acts and omissions of all members of the consortium. What is decisive is the wording of the guarantee, which must state that the guarantor is liable for the activity of specified entities. If the guarantee refers only to one member of the consortium, the contracting authority may not retain the bid bond for failures on the part of the other consortium members. Both the contracting authority and the contractors are thus required to verify the wording of guarantees and determine whether the document submitted provides the proper coverage of entities and subject matter required in the given procurement procedure.
Cyprian Herl, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners