Electronic bid bond has negative consequences for bids | In Principle

The approach taken in a Public Procurement Office opinion towards the issue of the form of a non-pecuniary bid bond will mean a lower number of valid bids above EU thresholds, where the bid bonds required are so high that contractors use bank guarantees.

On 17 October 2018, the Public Procurement Office published a legal opinion saying that in procedures conducted electronically, a non-pecuniary bid bond must be submitted as an original, in electronic form. The Public Procurement Office itself does not seem to know what this entails. Arguments presented in an eight-page document do not support the conclusions presented in the summary of the opinion, while the guidelines summarising the opinion might lead contracting authorities to take a highly restrictive approach to bid bonds. In particular, contracting authorities will probably require a bank guarantee to be submitted in electronic form with a qualified electronic signature. Meanwhile, under the Banking Law, the electronic form does not only mean a qualified signature. Also, a bid bond does not have to be submitted in electronic form in order for the rule of communication in electronic form in proceedings to be complied with.

Solution for the problem of the number of bids

In the Ideas for a New Public Procurement Law, published in June 2018, the Public Procurement Office points out the problem of the number of bids in proceedings: 43% of tenders held in 2017 produced only one bid. The legislation now being proposed is intended to reverse this trend by introducing mechanisms that make proceedings more competitive. Meanwhile, this latest opinion, laying down the rules for submitting non-pecuniary bid bonds, will not only not increase competitiveness, it may undermine it.

Instrumental approach to the principle of transparency

To begin at the end, the Public Procurement Office cites the standpoint adopted by the Court of Justice of the European Union in Saferoad Grawil. In this case, the CJEU points to the higher value of equal treatment and the requirement for transparency. It says that a contractor cannot be penalised for not complying with an obligation that is not specifically provided for in the tender documentation or current national laws. The Public Procurement Office takes an instrumental approach to the CJEU guidelines; if contracting authorities state in the tender documentation that an original of a bank guarantee in electronic form is required, they can disqualify a contractor for not complying with this requirement.

This is contrary to other CJEU judgments, Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on Public Procurement and repealing Directive 2004/18/EC, as well as Art. 7 of the Public Procurement Act. The Polish act says that “the contracting authority shall prepare and conduct public procurement proceedings in a manner that ensures fair competition and equal treatment of contractors and in line with the principles of proportionality and transparency”. This provision elaborates on provisions in the directive that prohibit artificial restriction of competition by setting requirements that give some contractors preferential treatment over others (Art. 18(1)) and that prohibit unreasonable barriers to opening public tenders to competition (Art. 42(2)).

Proportionality

According to the principle of proportionality, a requirement set in tender documentation has to take into consideration, in equal measure, the interests of contractors and the need for a proper performance bond for the tender contract. For contracting authorities, this means that they have to employ means appropriate and necessary to achieve the objective, and the means may not be more burdensome than necessary. The requirements may not be excessive. The CJEU explains the principle of proportionality for example in Serrantoni, Impresa Edilux, Falk Pharma, Assitur and Michaniki (these are judgments that the Public Procurement Office actually published on its website). Any restriction imposed in the tender conditions must accommodate the requirement for equal treatment in relation to the objective pursued as far as possible.

The principle of proportionality has also been cited repeatedly in Polish case law. These judgments state that the requirements must be appropriate for the envisaged objective, with regard to size, nature, complexity and type (Supreme Administrative Court judgment of 24 November 2016, II GSK 1127/15). Equally, the standards set to achieve the contracting authority’s interests must be realistic standards for the average contractor. A National Appeals Chamber judgment of 13 May 2016 (KIO 650/16) describes proportionality as “setting a condition at a level that ensures, in a justified manner, the quality and reliable performance of the subject of the tender contract, but does not impose restrictions on admission to the proceedings that are unreasonable from the point of view of performance of the future agreement”.

Proportional bid bond in the form of a guarantee

Proportionality of the requirement that a non-pecuniary bid bond be requested in a specific form needs to be seen in terms of the role that a bid bond plays in a tender. A bid bond is intended as security for a bid while the bid is valid. It must be effective and easily enforceable by the contracting authority. A non-pecuniary bid bond should be as user-friendly as a pecuniary bid bond. It is important therefore that a non-pecuniary bid bond should be in the contracting authority’s possession before the scheduled date for opening the bids arrives.

Thus, as the forms of bid bond permitted under Art. 45(7) of the Public Procurement Law are equivalent in status, and the form of a bank guarantee is stipulated in the Banking Law, the requirement for a bank guarantee to be in electronic form may be excessive and disproportionate. The word “may” is used because the Public Procurement Office does not clarify anywhere in the opinion what it means by “bank guarantee in electronic form”. Contracting authorities will presumably automatically understand this to mean a form like the form of a bid/application and the ESPD. This is not correct.

In banking practice, a banking guarantee functions in the form of a message sent electronically via the SWIFT system, fulfilling the written form requirement. This is an electronic guarantee but is not a form with a qualified electronic signature that would be required in light of this opinion issued by the Public Procurement Office.

How does the Public Procurement Office understand a bid bond in electronic form?

In this current opinion issued by the Public Procurement Office, the conclusion that a non-pecuniary bid bond has to be submitted as an original in electronic form with a qualified signature derives from Art. 10a(1) of the Public Procurement Law. This article states that a contracting authority and a contractor communicate using electronic means of communication. Art. 10a(1) of the Public Procurement Law does not make reference however to a non-pecuniary bid bond: it only mentions bids/applications and declarations, including declarations in the form of an ESPD. Meanwhile, following National Appeals Chamber judgments KIO 63/12 and 66/12 of 19 January 2012 and KIO 2023/17 of 13 October 2017, the Public Procurement Office has stressed that bid bond documents are not an element of a bid. The Public Procurement Office also points out that a bid bond submitted in the form of a bank guarantee must be in the form required for establishment of the guarantee under Art. 91(2) of the Banking Law. This is because a bid bond submitted in this form is not a declaration of intent made by the contractor itself. It is an act of transfer (submission) to the contracting authority of a document obtained from a bank. The original bank guarantee therefore has to be submitted in the form in which it is obtained.

It therefore follows, logically, that as the form of the guarantee is provided for in the Banking Law, if a bank guarantee is obtained in written form, the contractor is required to send it to the contracting authority in the form of an original before the scheduled date of opening of the bids. At the same time, it has to enclose a self-certified electronic version, to fulfil both the electronic communication requirement for the entire correspondence in the proceedings, and the requirement to submit the original bank guarantee to the contracting authority.

The main form of a bank guarantee used in business at the moment is the written form. Not all banks offer the option of a bank guarantee with a qualified electronic signature. Contractors are entitled to submit a bank guarantee issued in any country, which means that foreign contractors obtain the guarantee in the country in which they have their business establishment. The practice of issuing bank guarantees may be different in these countries. In addition, for many years, in practice bank guarantees have been sent via the SWIFT electronic messaging system. The Public Procurement Law cannot interfere in any of these forms because when making reference to a bank guarantee it refers to a qualified (reserved solely for banks) transaction regulated in the Banking Law.

Paper form permitted under the directive

The reason for which the Public Procurement Office takes such a restrictive standpoint is probably the wish to enforce the requirement that communication be solely in electronic form, which is a requirement provided for in Recital 52 and Art. 22 of Directive 2014/24/EU. The requirement for communication to be in electronic form does not exclude the option of sending an original document, of which an electronic copy is sent at the same time.

It is clear upon careful reading of the relevant provisions in the directive that the obligation to submit documents solely in electronic form only applies to documents listed specifically in the law. The purpose of electronic communication on the other hand, which now applies to all of the correspondence between the parties, is to make the tender award process more effective and transparent. It is also intended to enable contractors greater participation in public procurement proceedings on the entire internal market. The guidelines in the Public Procurement Office opinion are not aligned with these ideals.

Submission of a non-pecuniary bid bond in paper form would not affect the principle of electronic communication and information exchange if the contractor submitted a scan of a paper document with a bid in electronic form. Using electronic files, contracting authorities and other participants in the tender contract could review the manner in which a bid is secured and the scope of the security (by reviewing the electronic copy of the bid bond document). Even giving a contracting authority the right to make use of a guarantee by being served the original of the guarantee issued in accordance with the Banking Law could be done in traditional fashion. If this was permitted, this would realise all of the ideas in Recital 52 of the directive.

What about the former standpoint of the Public Procurement Office in this context?

In 2013, following an incident in which a client provided an electronic bank guarantee via SWIFT in written public procurement proceedings, I commented on this portal that under Art. 7(3) of the Banking Law, if the law stipulates the written form for a legal transaction, the transaction performed in electronic form meets the written form requirement even when failure to observe the stipulated form will lead to invalidity. Under Art. 5(1)(4) of the Banking Law, a bank guarantee is a banking transaction, and a message sent by SWIFT is clearly an electronic message. Therefore, a bank guarantee issued via the SWIFT system fulfils the written form requirement. This argument, and the relevant provisions, continue to apply according to the law at the moment.

This view was examined and confirmed to be correct during a review of public procurement proceedings conducted by the Public Procurement Office. In the review, the Public Procurement Office ordered the contracting authority to reverse rejection of a bid secured by a bid bond in the form of a bank guarantee sent via SWIFT, where the contracting authority stated in the tender terms of reference that the bank guarantee document had to be submitted as an original, and a bank guarantee sent via SWIFT does not take the form of a document.

The Public Procurement Office currently upholds this view, and does not use at any point in its opinion the phrase “secure electronic signature verified using a valid qualified certificate”. Only an electronic bank guarantee is mentioned.

What about guarantees that do not have to be originals?

While an original in written form has to be held for a bank guarantee to be effective, one seeks in vain provisions that apply in a similar way to an insurance guarantee. The Act on Insurance and Reassurance does not stipulate the form in which the insurance guarantee has to be established. An insurance guarantee might not take the form of a document at all. In some cases, insurance guarantees do not require the beneficiary to hold the original for submission to be effective. For a contracting authority to be afforded the right to retain a bid bond submitted in this way in an effective manner, submission of the original of the insurance guarantee is not necessarily required.

What kind of non-pecuniary bid bond is correct?

Under current laws, nothing has really changed with respect to bid bonds. The permitted forms of bid bond continue to be stipulated in Art. 45(6) of the Public Procurement Law, and this provision has not changed. This means that a non-pecuniary bid bond is correctly submitted when:

• It is in the contracting authority’s possession prior to the bid submission deadline in accordance with Art. 45(3) of the Public Procurement Law,
• The amount of the submitted bid bond is correct, as required under Art. 45(4) of the Public Procurement Law,
• It is submitted in the form required by law, i.e. one of the forms described in Art. 45(6) of the Public Procurement Law,
• It matches and secures the contacting authority’s interests in the form of the possibility of obtaining/retaining the bid bond amount to the full extent in the cases described in Art. 46(4a) and (5) of the Public Procurement Law,
• It complies with separate provisions on the method in which it is issued.

Trapped in formalism

As we enter a new procurement era in which tender contracts are handled electronically, we need to be mindful above all of the purposes that the switch to electronic tendering is intended to achieve. First and foremost this is making procedures more generally available and easier, so that the common market increases in value, and procurement processes of contracting authorities become increasingly transparent. It must be borne in mind that the Polish public procurement market is an element of the European system, which is subject to common laws. Polish laws cannot therefore be interpreted without regard for the spirit of EU law, of which the principal aim is to remove market barriers. If we forget this, we will become trapped in formalism.

The coming months will naturally be a time of removal of a range of unknown factors: provisions that have been defunct up to now will in fact begin to function in practice, and it is all of the market players who will be responsible for how our local practice is structured. Contracting authorities and institutions that shape practice have a special kind of obligation.

Anna Prigan, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners