Global Sourcing Tenders: Legal Aspects of International Tenders
By Catherine Barannikova
Published on September 9, 2016
In the modern world economy, global sourcing has substantially evolved; transforming procurement functions to the strategic level of corporations. Multinationals optimize sourcing by carrying out cumulative tenders for their units (plants) in different countries and thus applying economy of scope. Regulation, for procurement of commercial legal entities (vs public ones), however, does not exist in a sufficient manner: neither in national, nor international private law. In this article, we will consider several examples of violations faced by multinationals in global sourcing tenders and propose solutions to overcome them.
International tender is competitive bidding, where organizers, participants, and/or third-party affiliated beneficiaries belong to different jurisdictions. Depending on tender conditions, the contract concluded afterward – between the winner and the organizer of the tender – may be in the form of a framework agreement valid for several countries (common for the Single Market of EU); a set of separate agreements between different legal entities; or a combination of framework agreements and separate contracts. For example, following the results of the tender held by Carlsberg S/A (Denmark) for malt sourcing, a framework agreement covering malt supplies to the European markets, where the plants of Carlsberg are presented, was signed between the organizer and the winner of the tender. JSC Baltika Breweries (Russia) signed a separate contract with the supplier (winner in the tender) under the terms of the aforementioned tender. This was required per Russian customs regulations and was subject also to the Board of Directors’ approval, according to Russian corporate law for related party transactions because Carlsberg is the major shareholder of Baltika Breweries.
Which law should be applied to tendering relations of the parties, if they concluded the deal by international tender results, but did not yet sign the main contract(s)? For example, Art 1186.2 of the Civil Code of the Russian Federation stated that “… the law of the country with which the civil deal with a foreign element is mostly related should be applied” and, at the same time, purchasing relations are not regulated by Russian civil law, unless public procurement is concerned.
Which party is liable for violations: the headquarters of the multinational or its subsidiary in a different country and registered there as a separate legal entity? Piercing of the corporate veil is not common in Russia. Which legal remedies are available for the parties of tendering relations? The answers to these questions are not evident due to the gaps in international private law and emphasis on public procurement regulation by national law (EU procurement directives, Russian Federal Laws 44-FZ dated 05 April 2013 and 223-FZ dated 18 July 2011, which created “Procurement Lawyers” due to complexity of legal application in practice).
Let us illustrate several examples of violations in international tenders.
Unilateral change of contract terms during the transition from tendering to contract relations.
In order to protect the rights of the parties of tendering relations before the main contract is signed, the doctrine of “tendering contract” may be applied. This was referred to in several English & Canadian cases resolution. A similar approach was proposed by one of the leading Russian legal scholars M.I. Braginsky
The mistakes in tender documentation: where during the conclusion of the main contract, the parties find out at the moment of calculation, that the participant has won the tender made a math mistake, and actually meant another price on which he insists during the negotiations of the contract.
Unreliable tier-2 sourcing: American company, Gibson, awarded the contract for the supply of ebony fingerboard blanks to German supplier T.N. GmBH, which successfully complied with tender qualification requirements. Then, T.N. GmBH purchased ebony fingerboard blanks from an Indian wholesale agent, which specialized in exports of wood from India and Madagascar. As a result of this supply chain transaction, Gibson was penalized for the violation of the American Lacey Act (as per amendment of 2008), according to which American plant importers are liable for the violation of foreign law (turned out that exports of ebony are illegal from Madagascar). Thus, we recommend imposing contract liability for supply chain counterparties (tier-2,3, etc.) to the winner of the tender.
Delaying of the conclusion of the main contract: after confirmation of the deal in the international construction tender, the parties begin to sign the main contract EPC. The parties, however, interpreted initial tender terms differently. This was due to the complexity of the contract and the use of general words in the tender’s technical specification. The participant having won the tender began to delay the signing of the contract; insisting on revised conditions that weren’t agreed upon in the tender. In such situations, the tender organizer sometimes has to give up, as the delaying of the realization of the investment project affects negatively its commissioning schedule and return on investment. Besides, EPC is non-existent in the Russian Civil Code contracts classification and is considered a “mixed contract” with unstable contract law practice thus far.
The repudiation of the main contract: Russian subsidiary of the multinational decided not to place an order as per the conclusion of the international tender due to ruble currency depreciation and finding a more favorable proposal from a local supplier. Which legal remedies are available for global suppliers in this case? Nowadays, such disputes are resolved by negotiations as legal remedies are unclear.
The breach of confidentiality by the tender organizer and tender participants. Confidentiality breach (even with a signed NDA) is quite difficult for litigation and in terms of burden of proof. If the dispute corresponds to an international tender, which law should be applied? Besides, the problem gets more difficult because a third interdependent party may be involved in the purchasing (legal entities registered in other countries, but staying under the same corporate veil as the headquarters, which organized international tender). This issue is most sensitive in cases involving innovative product development (for example, a new category of alcohol drink development specifically for the Russian market), where a breach of confidentiality can result in competitors taking up the innovative idea and its launching at the market before the original intellectual property developer.
Disclosure of necessary information: the tender organizer is liable for the accuracy of the information provided under the tender. For example, if the tender organizer obtains relevant details in technical scope (geological analysis), which affects the contractor`s future performance – and does not disclose that to tender participants in order to get lower quotes from them – the tender organizer is liable by way of fraudulent intent.
Tender resulting in involuntary servitude: while negotiating the main contract, after the tender results are confirmed, but before the main contract is signed, the party with the stronger position begins to impose on the other party additional contract terms, which were not announced during the tender.
Restrictive trade practices: in tenders for package deals with geographical diversification, freedom of competition can be distorted in some of the markets. For example, in an international tender (in addition to a main bid for telecom equipment supply to Russia) there were obligatory conditions to perform: practically “free of charge” delivery of equipment to the Indian market. No respective Indian suppliers are able to provide such a level of price, while their rival enters the Indian market with more attractive pricing due to the application of leverage of the main bid in the package deal (supply of equipment to Russia). Meanwhile, in Article 13.2 of the Russian statute “Protection of Competition”, tying products are considered only when buyers are forced to purchase them. By the analogy of law, similar norms can be developed for sellers` protection as well.
The change of the qualifying requirements for the tender participants after the beginning of the tender: if for any reason the organizer does not plan to award the main contract to the participant, where a proposal is compliant with the initial tender criteria, the organizer changes the criteria in its discretion in such a way that another participant will win the tender (for example, add the criterion “the creativity of the packaging design”). Let us examine the following comparison of initial and revised tender criteria and resulted suppliers’ selection:
Table 1: initial tender results
Table 2: revised tender results
In order to eliminate such unfair practices, it is recommended to adopt corporate purchasing standards (procedures, policies) and audit compliance with them on a regular basis. In our opinion, such purchasing standards should be available for tender participants (for example, on the websites of the multinational) to ensure procurement process, transparency, and compliance.
The break of contract negotiations without valid reason after tender results announcement: after the confirmation of the contract award, but before its signing, the party withholds negotiations without justified reason, which can be redressed by promissory estoppel. This is necessary where it is required to have an unequivocal promise (contract award by tender) and a clear causal link between incurred losses and the failed promise.
Tender is based on competition and rules are established by the tender organizer and accepted by tender participants in the way of providing the bids in response to the tender invitation. Thus, equity will be impaired: if the tender organizer does not follow the rules established by him, or the tender participants fail to comply with their bids. In our opinion, Anglo-American doctrines of tendering contracts and estoppel (promissory, of representation, by convention) should be considered for the regulation of international tenders.
Besides, we recommend the development of international conventions or guidelines for the legal regulation of sourcing tenders (by UNCITRAL or other relevant international bodies) in order to protect the rights and ensure compliance with obligations by the parties involved in global sourcing tenders. However, worth mentioning, that such regulation should provide freedom of negotiations and flexibility of decisions in business. Thus, balanced regulation will be most efficient.
Catherine Barannikova is a top professional in Procurement and Supply Chain. Ms Barannikova has broad expertise in various procurement categories (from raw materials to CAPEX), outsourcing, private and public procurement. She successfully led sourcing projects in big MNCs such as Carlsberg, Diageo, METRO Cash & Carry, etc.
Ms Barannikova has 2 Master’s degrees in International Business and International law. Currently, she pursues a Ph.D. thesis in global sourcing in a leading Russian University (Moscow State Institute of International Relations)
Article picture: lloorraa via Pixabay