The tendering process – A two stage contract – Part 2

The second stage contract

This stage sets in when the employer issues its acceptance of the successful bid. Depending on the conditions of tendering, it is usually upon the issuance of the said acceptance that a construction contract between the employer and the successful tenderer is formed. The conditions of tendering would usually specify the event upon which the second stage contract, ie, the construction contract, is deemed to have come into existence.

The letter of acceptance

It is sometimes overlooked by the parties that in order for the employer’s letter of acceptance to be binding on the successful tenderer, the terms of the acceptance must, in substance, correspond with the essential terms of the tenderer’s bid or offer. Otherwise, there would not be a meeting of minds between the employer and the tenderer for a contract to be legally constituted. What makes a term essential in a particular contract is dependent on the nature of the transaction itself. In relation to construction contracts, the contract price and time for completion would be the two obvious terms that are essential to the transaction.

A letter of acceptance that does not correspond with the successful tenderer’s offer would in effect amount to a counter-offer. The tenderer would then be in the position to either accept or reject the employer’s purported acceptance. However, before the tenderer takes this course it must be careful in determining whether the employer’s terms of acceptance are, in substance, different from its own offer or bid. Otherwise, the employer may encash the tenderer’s security or bond on the basis that the tenderer has failed to comply with its obligation under the tendering contract.

On the other hand, the tenderers should be aware that there would be no obligations on their part to accept the employer’s letter of acceptance and proceed with the formalisation of the contract if they do not agree with any new terms introduced in the letter of acceptance. In this situation they must refrain from conducting or acting in such a way as if the second stage contract has been formed otherwise they may be viewed to have accepted the new terms.

Conclusion

It is very important for parties to be aware of their respective legal obligations during the tender process. Any inadvertent default on their part may give the other party the right to claim compensation. To take an extreme view, a defaulting employer may be liable to a disgruntled tenderer for the loss of profits that the tenderer could have earned but for the employer’s breach of its tender obligations.

On the other hand, a tenderer who refuses to be bound by its bid may be liable to the employer for the difference between its tender price and the higher contract price of another tenderer whom the employer eventually engages.

As the global financial crisis grips the UAE construction market, parties should take the opportunity to revisit their practices either in their implementation of the tender process or in their response to tender invitations. Even though it seems that the construction market in the UAE is currently in a depressed stage, it is certainly an opportune time for employers to capitalise on the lower construction costs and for infrastructure projects to catch-up with the building industry.

Eric Teo specialises in construction & engineering law. He was a project engineer and has worked for developers and contractors before practising law. He practiced law with leading law firms in Malaysia and Australia, and is presently attached with Al Tamimi & Company’s head office in Dubai International Financial Centre. Teo is currently involved in reviewing procurement processes and contracts, claims preparation, settlement negotiations and arbitration.

The opinions expressed in this column are of the author and not of the publisher.