A guide for foreign companies bidding on procurement contracts in Pakistan-Part 1

Quite a few of our clients who are operating internationally corporate seats in Key EU/US destinations find Pakistan to be a very attractive jurisdiction for bidding on procurement contracts.
Many of them will try to enter with another local company as a consortium. Many of these companies have common questions on many aspects of liability of consortium members.

A common confusion for foreign companies stems from their relationship with the local partner they intend to bid with.It is important to understand that they are consortium members and not  sub-contractors.Furthermore, they need to understand the strength of their contribution as the presence of each consortium member contributes marks to the winning bid. In the event of default, defective performance or no performance at all, the whole contract may or may not go to waste, no matter which member’s fault it is. Hence, in such a situation, exclusion of liability will not be easy and arguably not something, which can be possible if you seek to rely on such clauses.

In such an event my advice to the foreign company would  be that it may however be easy to utilize a clear clause which makes you exclude liability for matters you have no control or knowledge of or even those not within your technical domain. Such a clause will need careful construction.

For this purpose a foreign company and its legal strategists  need to understand the following key points.

(1) Pakistan’s Public Procurement Rules and the law governing the Formation of Consortiums
The rules are not too clear on how the consortiums should operate but a consortium is generally expected to be jointly and severally liable in all public contracts in Pakistan. At a point of dispute you have a clear risk of having your consortium contract’s clause for exclusion either overridden by the court’s legal/logical reasoning or the party being sued by the government, suing you to recover all the damage caused by your non-performance. Please consider that this why you are called a consortium partner and not a sub-contractor. While consortium partners and their capabilities count for bidding marks under tender bids, the presence of sub-contractors has no such bearing on enhancing the marks for bidding. So, by accepting to become a consortium member you have placed yourself in a position of liability (this is legal logic at least as far as general contracts in Pakistan are concerned).

(2) Meaning of ‘Supplier’ the tender and the consortium arrangements:
Very often the tender documents are silent on this aspect but it is clear that by “supplier” they mean all companies forming the winning consortium. This points to automatic joint and several liabilities.

(3) The Precedent, till date:
Reviewed case precedent shows that in past procurement disputes of governments with contractors, all partners in consortiums have been sued jointly and severally.

(4) The General law in Pakistan on consortium:
This point pertains mainly to freedom of contracting but it would be fair to presume that such exclusion will be much more difficult to carry out practically in a public contract dispute. Think of all the performance guarantees being paid and the paperwork they require as ‘undertakings’. Again this points to an expectation that all companies in the contract can be sued together as ‘supplier’. In the event the consortium is sued by the government for which it is none of the fault of the party relying on the exclusion clause, this may be a good defense to use generally but please remember that the government is very fond of insisting upon ‘joint and several’ liability. After the entire contract is being awarded on the basis of your contribution to the contract in the future and if that fails, it would be fair to hold you liable for the default.

(5) Whether the procurement law and tender provisions override the general law?
There is no such express or implied indication requiring that there be no exclusion, but a closer look at how tenders work suggests that the Government would have a reasonable expectation of joint and several liability. This suggestion may be based on many factors including the ‘deep pockets’ argument (that is the government would like to have a set of companies it can sue for a loss when the lead contractor has gone bankrupt or cannot pay for the damage done on its own.
There is a lot of flexibility in the Pakistani law and freedom of contract would ideally prevail in this regard as a normal rule of the thumb for the consortium members seeking to preserve their freedom together on their own terms for one contractor. The position may, however, be slightly different when the contractor is the government as many issues like national interest, security and the like come to the fore.
That being said, many problems may occur later if such a clause is sought to be relied upon during a dispute. First of all if the consortium agreement states that your company’s liability is excluded towards the government but the same liability is exclusively taken over by one party, the bid may well win and come through (through some honest oversight of the Public Contractor) but then the final contract has to be signed by the consortium with the government and the terms state some typical (example) clauses like:
Members of the Consortium shall at all times and under all circumstances be liable jointly and severally to the contractor for the execution of the entire Contract in accordance with the Contract terms and conditions and a statement to this effect shall be included in the authorization mentioned …as well as in the Letter of Bid and Form of Contract Agreement (in case of a successful bidder)”
The consortium clauses on liability or exclusion thereof, can ideally be over-ridden by the final contract between consortium supplier- government as well. Also then, consider this scenario. If you, as a company, are to default or non-perform in the contract, even if the government cannot sue you, it can sue the party with responsibility as per the consortium agreement. Now the same consortium partner and other consortium partners can also in turn sue you, for the loss that has had to be accounted for, to the public contractor/government.

So, in the light of the above, to answer your queries:
(A) Under Pakistani law, is it possible that only one party of the consortium is completely responsible and liable towards the contractor , while the other party is not responsible and not liable towards the contractor (the other party has no obligation to deliver the tendered products and services)?
Theoretically and practically, this would make sense under freedom of contract. If one party would rather be responsible for the performance guarantee and other obligations required by the tender, it would make sense that the liability of the Party excluding liability for being responsible to the government, be towards other consortium members only. Also please note that while subcontractors can avoid any liability towards the main public contractor, consortium members cannot do this. So, in practical terms, my answer, for the sake of practicality would be, No.

B) If this is possible, is it sufficient that this exclusion of liability by one consortium party is agreed in the consortium agreement between the parties of the consortium or does this need to be agreed with the tendering authority ?
This will need to be run through the procuring state agency, really. Maybe this can be negotiated at the contract stage too, after the bid is won. But based on precedent and the reasons given above, it is unlikely that a consortium is a consortium in the eyes of the State, unless all members/partners are jointly and severally liable.

C) If the latter is true, is it sufficient to include this exclusion of liability and responsibility in the consortium’s bid/offer?
You can be clear on what you need to exclude. You can say you exclude liability for things not under your control as a fair exclusion. But saying that you bid with the consortium and then be able to get exclusion of liability to the government for failing to do your part of the work can be dangerous. At any rate, if not the government, you still have a risk of being sued by the fellow consortium members because they may blame you for their loss due to non-performance. Maybe if such a clause is opted for, it should be very clear on why it is reasonably excluding a certain aspect of liability but not ALL liability. Also, if you have reduced your profit percentage in the view of utilizing this exclusion clause, please do not rely on it to fully protect you. It is better to retain your profit percentage than seek to reduce it in the hope of relying on such a clause.


 

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