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Sat 13 Jan 2007 12:00 AM

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Competitive tendering has to be a transparent process

As the Middle East does not follow the same rule book as other jurisdictions such as the UK when it comes to competitive tendering, Nick Carnell asks: ‘when is it no longer acceptable to award a contract to my friends?’

Throughout the world the question of how particular construction projects are awarded to particular contractors has given rise to a variety of issues; some legal, some political and some economic. In circumstances where the procurement of many contracts occurs amidst complex procedures

designed to ensure transparency and fairness, the construction industry, both in the Middle East and elsewhere, has sometimes found itself lagging behind.

Put at its very simplest, the question becomes: when is it no longer acceptable to award a contract to my friends? This in turn begs the question whether open and transparent tendering processes are necessarily good, and perhaps finally, what remedies, if any, might be open to an aggrieved tenderer who feels that he has been unfairly treated as part of the tendering process.

Unsurprisingly, different considerations apply in Europe and the Middle East. Particularly within the EU member states the concept of encouraging competition in the market-place has been given enormous prominence in the last two decades. This is especially so in the case of public procurement.

Put simply, in the case of public procurement of works, the idea that those works have been met in a way which is competitive and transparent is regarded as paramount. Government agencies are seen as accountable to the electorate and therefore owe a duty to ensure that works are procured in a way which is beyond reproach.

Similar principles apply in the private sector, at least when it comes to public companies being seen to be accountable to shareholders. The high water mark is reached in PPP and PFI projects – where public and private sectors meet with not always happy results – where the costs and complexity of the tendering process are such that one leading UK contractor withdrew from all such projects for a period of years claiming that it simply could not afford to bid.

Of course, in legal terms, the problem has always been that of finding a legal relationship between the tenderer and the employer that gives rise to obligations so that a tenderer who feels that he has been ill-used might have some sort of remedy. In the case of public works in England, and recently in the case of a private development in Northern Ireland, the courts have developed the notion of a collateral contract in order to create legal relations between the tenderer and the employer.

The most recent case, J&A Developments Ltd v Edina Manufacturing Ltd, provides an instructive illustration because it involves a situation encountered in many jurisdictions.

Developers sought tenders and these were duly received. The developer approached both the lowest and the second lowest tenderers asking each to reduce their price.

The lowest tenderer refused, the second lowest agreed to reduce their price, thereby undercutting the lowest tenderer’s bid. The developer predictably awarded them the contract.

The aggrieved tenderer sued and the High Court of Northern Ireland upheld the claim, finding in effect that there was a collateral contract between the tenderer and the employer and that a term of that contract was that the employer would not enter into a bidding war between tenderers.

It is particularly important to note that at the heart of the Judge’s reasoning was the conclusion that the tendering procedure was to be in accordance with the Code of Procedure for single-stage selective tendering, published in 1996 by the Northern Ireland Joint Construction Council – which mirrors the code published shortly before that in England and Wales and which deplores the sort of “Dutch auction” referred to above.

All of this is a very long way from the conditions likely to be encountered in the Middle East. Firstly, the considerations which apply to public procurement in Europe simply do not exist. Government agencies are not subject to the degree of regualatory interference which affects those subject

to European Union Procurement rules.

Secondly, the concept of public companies, and hence corporate governance of the sort referred to above, are concepts which remain relatively embryonic.

Thirdly, at least within the UAE there is no direct equivalent of the NJCC code. Accordingly, practices such as those condemned in the Edina case can and do continue largely unchecked.

Fourthly, while Article 246 of the Civil Transactions Code requires the parties to a contract to behave in a manner consistent with good faith the Civil Transactions Code does not recognise the notion of a collateral contract, and while Articles 125-129 make it clear that the concept of a contract will be defined very broadly, the notion that the approach adopted in the Edina case would be followed looks speculative in the extreme.

So where does this lead us, and perhaps more importantly should the Middle East construction industry seek to emulate those in Europe? A personal view is that the level of regulation which governs tendering processes in Europe is both unnecessary and inappropriate but where works are expressed to be let on the basis of competitive tenders, that tender process should be truly competitive.

In other words, if an employer wishes to let works to someone he favours, he can, albeit that in so doing he risks not achieving the best price. On the other hand, if he says he is going to let the works on the basis of competitive tenders, the tender process should truly be competitive.

“A personal view is that the level of regulation which governs tendering processes in Europe is both unnecessary and inappropriate but where works are expressed to be let on the basis of competitive tenders, that tender process should be truly competitive.”

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