Bid inviters face more restrictions

By Wang Jihong and Zhang Xiaofeng, V&T Law Firm
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On 20 December 2011, the State Council issued the PRC Invitation and Submission of Bids Law Implementing Regulations, which came into effect on 1 February. The Implementing Regulations come 12 years after the introduction of the PRC Invitation and Submission of Bids Law, and impose a series of restrictions on the procedures for bid invitations.

Wang Jihong, Managing partner, V&T Law Firm
Wang Jihong
Managing Partner
V&T Law Firm

No bids by related parties

Until recently, it was not uncommon for subsidiaries and affiliates of a bid inviter to participate in the bidding, as this was not expressly prohibited.

However, Article 34 of the Implementing Regulations now provides that “A legal person, other organization or individual that has a material interest in the bid inviter that could affect the impartiality of the bid invitation may not participate in the bidding.” The Implementing Regulations do not define what constitutes “material interest”, leaving the relevant authorities to determine whether it exists and whether the impartiality of the bid invitation is affected by it.

Material interests need not have an actual substantive adverse impact on the bid invitation and submission activities, just the “potential” to compromise their impartiality. The impact of Article 34 is therefore to prevent subsidiaries, affiliates and other materially interested parties of bid inviters from participating in the bidding process. The provision is likely to have an especially profound impact on bid invitations with respect to build-transfer and build-operate-transfer concession projects.

张晓峰, Zhang Xiaofeng, partner, V&T Law Firm
Zhang Xiaofeng
V&T Law Firm

Limits on use of reserve prices

In the past, if the bid inviter set a reserve price at an auction, it would also commonly set a ceiling for the buying price (i.e. as a multiple of the reserve price).

However, Article 50 of the Implementing Regulations specifies that a reserve price should now serve only as a reference for the evaluation of bids. The fact that a bid quote is close to a reserve price may not serve as a condition for winning the bid, and the fact that a bid quote exceeds upper and lower limits set around the reserve price may not serve as a condition for denying a bid. Additionally, Article 27 specifies that a bid inviter may not set a minimum bid quote, overturning various common past practices.

One important point is that although the Implementing Regulations specify that a reserve price should serve only as a reference when evaluating bids, they fail to address how a specific reserve price may be used in carrying out the evaluation (for example, can it serve as a basis for commercial grading?). This issue will ultimately be resolved after authorities begin exercising their discretion upon implementing the regulations.

Prohibition on use of shortlists

The Invitation and Submission of Bids Law specifies that a bid inviter may not, in the course of the bid invitation process, designate the brand, origin, supplier, of a product or service.

However, in the past, bid inviters sometimes issued a shortlist specifying various brands, origins and suppliers during the course of a bid invitation process that required bidders to select suppliers or contractors from those in a specified group.

Before the issuance of the Implementing Regulations, the extent to which the use of shortlists was regulated varied from place to place. Some regions expressly prohibited their use and others tacitly permitted it.

However, Article 32 of the Implementing Regulations now specifies that a bid inviter may not designate or restrict use of specific patents, trademarks, brands, origins, or suppliers.

Another question is whether the use of certain words by a bid inviter describing technical requirements such as “of equivalent grade” after a listing of brands will constitute a “restriction of brands”. This issue remains unclear and will again have to await interpretation by bid invitation and submission administration authorities.

No performance-related criteria

In practice, many fraudulent bid invitations (also known as “invitations in the light but determinations in the dark”) involve use of unreasonable conditions in order to limit or preclude bidders. Although the Invitation and Submission of Bids Law expressly prohibits this practice, it failed to specify which acts were prohibited. The Implementing Regulations therefore specifically preclude seven types of unreasonable conditions commonly used to restrict or preclude bidders. These include a prohibition against bid inviters using the performance of a specific industry as a condition for being awarded the bid, or for setting other criteria relating to it.

However, where the performance of a relevant specific industry is an important criteria for a bid inviters to use in deciding if a bidder has the capacity to complete a project, the use of performance-related standards should not be rejected out of hand.

However, while restrictions on performance as a criterion for assessing a bid may appear fair, they may also make the entire bid-invitation process uncompetitive. Once the Implementing Regulations come into effect, it will be worth watching how bid invitation documents are structured when defining the method for awarding points relating to industry performance requirements.

The Implementing Regulations also provide more detail on projects for which bid invitations are not required. For example, bid invitations need not be made:

  • where a non-substitutable patent or proprietary technology must be used.
  • where the procurer can itself legally carry out the construction, production or provision.
  • where a concession-project investor that has been selected through a bidding process can itself legally carry out the construction, production or provision.
  • where works, goods or services need to be procured from the original winning bidder, failing which construction or functional requirements will be negatively affected.

The Implementing Regulations also specify five types of fraudulent acts mentioned in Article 33 of the Invitation and Submission of Bids Law and set out in detail the relevant legal liability.

Wang Jihong is the managing partner of V&T Law Firm. She practises in the field of infrastructure development.Zhang Xiaofeng is a partner at V&T Law Firm.

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