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Improvement of bid bond rules

Work on a concept for a new public procurement law is an opportunity to review the rules on bid bonds. The changes need to go beyond those proposed in the concept.

It has been suggested that rules on bid bonds be amended as part of work on a new public procurement law. Under the concept, there will be a rule that the contracting authority will make decisions regarding the obligation to pay a bid bond on a case-by-case basis regardless of the value of the contract. This will not apply to open and restricted tenders of a value exceeding the EU limits. In these cases, it will continue to be compulsory to require a bid bond.

The architects of the concept also point out that the regulations on refunding a bid bond submitted in kind need to be more precise. The rules on bid bonds for extended periods for which a bid is binding and concerning retention of the bid bond also need to be more precise. These changes will not solve the problems that arise in practice relating to securing a bid with a bid bond.

A bid bond is a legal instrument that has to be submitted for a contractor to compete for a contract. It is intended to ensure that the contracting authority’s actions taken during the tender are efficient. A penalty in the form of forfeiture of the bid bond if the contractor awarded the contract fails to sign a contract on the terms given in the selected bid, which is regulated in Art. 46(5) of the Public Procurement Law, ensures that the objective of the tender is achieved (see Art. 704 of the Civil Code). A bid bond also protects the public procurement market from prohibited competition-restricting practices of contractors (Art. 46(4a) of the Public Procurement Law).

In practice, in tenders in Poland, errors made by contractors concerning bid bonds too often cause them to be eliminated from the procedure. Under Art. 89(7b) of the Public Procurement Law, the contracting authority is required to reject a contractor’s bid if the contractor does not submit a bid bond or does not submit it correctly. Prior to the 2016 amendment, this issue was an element of the grounds for exclusion (repealed Art. 24(2)(2)). Meanwhile, under the previous laws, incorrect submission of a bid bond was considered to be covered by the rule on failure to submit a bid bond (see National Appeals Chamber ruling of 24 May 2017, case file number KIO 951/17). In particular, in view of the relevant provisions in the Public Procurement Law, the following situations were considered in case law to be failure to submit a bid bond (for example Regional Court ruling of 11 July 2013, case file number X Ga 189/13):

  • The bid bond is not submitted within the deadline for bids,
  • The bid bond is not submitted in the full amount required by the contracting authority,
  • The bid bond is not submitted in the form required by law, and
  • The bid bond submitted does not secure the contracting authority’s interests by enabling the bid bond value to be obtained or retained in all circumstances in which it is forfeited.

Under Polish law, errors of this kind are grounds for eliminating contractors from a procedure due to rejection of their bid, or as under previous laws, exclusion of a contractor from the procedure.

The issue of security in the form of a bid bond does not apply to the grounds and criteria for verification of a contractor’s capacity to perform a contract or to verification of a contractor’s bid submitted during the procedure. The purpose of every tender procedure is to eliminate contractors that do not have the capacity to perform the contract, and select the contractor who submits the most favourable bid. At the same time, this process has to be conducted according to the grounds and criteria applied, having regard for rules on non-discrimination, equality, transparency, and proportionality. The question is whether elimination of an entity capable of performing the contract that submitted a bid correctly merely because it did not submit the bid bond correctly is a means proportional to the purpose of the tender. This is particularly important because elimination is automatic. The established interpretation in Polish practice and case law is that under the Public Procurement Law it is not possible to validate an incorrectly submitted bid bond. This rule is not formulated in law, but does follow from the absence of reference to the option of applicability of Art. 26(3) of the Public Procurement Law to supplementation of a bid bond, and is supported by the argument that this solution serves a reasonable purpose given the assumption of rationality of the legislature (see judgment of 6 December 2017, case file number KIO 2466/17). This is a view deeply rooted in formalism and is an interpretation of the rule in Art. 89(1)(7)(b), groundlessly read in isolation from provisions on the purpose of making a bid bond compulsory and from generally applicable rules in the Public Procurement Law, including those in the classical Directive 2014/24, such as elimination of barriers to public contracts on a single market, even those that are not discriminatory but disproportionate.

The above-described view of the National Appeals Chamber is indefensible when the statement of reasons for this judgment is examined more broadly. The Chamber stated that it was surprised that in the age of professionalisation of the public procurement market “a professional contractor did not exercise due diligence when drawing up documentation submitted with the bid”, pointing out that after all “significant formalism is a feature of public procurement proceedings and therefore high standards are expected with regard to the documentation the contractors submit”. Without entering into debate, it is worth pointing out that formalism by itself is not the aim of public procurement provisions and therefore it cannot be grounds for interpretation of provisions on this subject, especially as, in principle, in a tender procedure supplementary additional information and material for documents may be submitted (Art. 26(3) of the Public Procurement Law).

In the case described above, the contractor suffered negative consequences of incorrectly submitting a bid bond in the form of a bank guarantee. It is clear that currently a bank guarantee is the most popular form of bid bond, apart from an insurance guarantee.

A bank guarantee is a banking transaction regulated in the Banking Law. Under Art. 81 of the Banking Law, a bank guarantee is a unilateral obligation of a bank to make a payment to the beneficiary (in this case the contracting authority) if certain conditions are fulfilled. In the context of a bid bond, a bank guarantee is thus notice issued by a bank to the contracting authority, while the contractor is required to submit it to the contracting authority within the time limit stipulated in the tender terms of reference. The matter becomes more complex in this regard if we take into consideration that the law does not state the compulsory content of the undertaking required of the bank towards the contracting authority, and that in practice contractors do not have control over the content of notices served by a bank. Such notices are often worded according to a bank’s specimen documents or procedures.

With respect to the essential elements of a bank guarantee, National Appeals Chamber case law is inconsistent. Under the true conditions of tenders in Poland, there is a great deal of uncertainty as to the law regarding effective submission of a bid bond in the form of a bank guarantee. To give an example, in a judgment of 10 August 2016, case file number KIO 1363/16, and of 11 March 2016, case file number KIO 293/16, the National Appeals Chamber determined that the scope of the bank-guarantor’s obligation depends solely on the wording of the guarantee. In effect, the Chamber stated that in order for bid bond guarantees to be effective they have to reiterate legal provisions specifying the grounds for retention of the bid bond. In a recent judgment of 27 December 2017, case file number KIO 2591/17, the Chamber cited a ruling by arbiters of 2006, stating that the essence of a guarantee is not fulfilment of a requirement of literal wording with a legal provision, but guaranteeing that the contracting authority can retain the bid bond in the circumstances specified by law (the regional court judgment mentioned above, SO XGa 189/13, is similar, stating that there is no need to cite the Public Procurement Law in the wording of the guarantee). The Chamber found that the submitted bid bond secured the interests of the contracting authority in the manner required under the law even though the guarantee did not reiterate the wording of Art. 46(5) of the Public Procurement Law.

The Chamber’s approach in case KIO 2591/17 is correct. It is based on an interpretation of the law that takes into consideration the purpose of a compulsory bid bond and the principle of proportionality. With respect to interpretation of laws on procedure, the principle of proportionality means that a balanced approach towards procedural burdens is required. Despite this, the judgment was criticised merely for breaking with the established line of National Appeals Chamber case law.

In KIO 2591/17, the Chamber interpreted public procurement regulations and not the wording of the guarantee. This is another problem related to this form of bid bond. The view taken in  National Appeals Chamber case law is that a bank guarantee has to be interpreted as a declaration of will under Art. 65(2) of the Civil Code. This says that “in agreements the mutual intention of the parties and purpose of the agreement should be examined rather than the literal wording”. The National Appeals Chamber does not accept a situation in which interpretation of a bank guarantee can produce conclusions contrary to its literal wording (sic!).

Moreover, it is unclear whether the National Appeals Chamber allows a contracting authority to summon a contractor to provide clarifications in this area. To give an example, the National Appeals Chamber judgment of 10 May 2011, case file number KIO 883/11, stated that if a contracting authority has doubts of any kind as to protection under a disputed guarantee “it has the option of exercising the right under Art. 87(1) of the Public Procurement Law” (notice requesting clarifications). Under the National Appeals Chamber judgment of 10 June 2015, case file number KIO 1125/15 “the Chamber found that art. 87(1) of the Public Procurement Law, cited by the appellant, does not apply in light of the facts of the case. This is because this article concerns the merits of the bid, and a bid bond guarantee does not constitute the merits of the bid. The purpose of a guarantee is to secure the bid. A bid bond also is not a document for which supplementary material or clarifications can be submitted under Art. 26(3) and (4) of the Public Procurement Law.  Only the documents specified in Art. 25 of the Public Procurement Law can be supplemented or clarified. The Public Procurement Law does not provide for clarification of the wording of a guarantee on any other basis as the effectiveness and scope of a bid bond should be stated unequivocally and with certainty in the wording of the guarantee document”.

According to the above, under Polish public procurement law the issue of security for a bid in the form of a bid bond is approached in a manner which is excessively formal and which is irreconcilable with the purposes of public procurement law and the principle of proportionality. As a result, there is no standard of application of law with respect to security for a bid in the form of a bid bond. In this regard, the law is interpreted solely according to non-binding National Appeals Chamber case law. This case law is inconsistent, and clear conclusions cannot be reached on that basis. For these reasons, and to ensure certainty in public procurement law, less formalisation of the issue of the bid bond as part of the ongoing legislative works needs to be considered. This would be done taking into consideration that professionalism of a contractor is key in public procurement proceedings, but only with respect to the subject of the tender contract. This should also entail approval of a system of validation of bid bond documentation in which a bank or insurance company has made errors.

Mirella Lechna, legal advisor, Infrastructure, Public Procurement & PPP practice, Wardyński & Partners