Consortium Contracts: Foundation for effective cooperation among enterprises
Consortium Contracts are a fairly common type of contract in investment and business cooperation activities, and is especially most widely used in bidding activities under the regulation of the Law on Bidding 2023.
Currently, in the context of the relentless development of the economy in general and the construction sector in particular, projects and construction works have been emerging at an increasing rate, but most notably, this present construction companies and contractors with ample opportunities to be selected as the construction contractor for projects or construction works.
While the above scenario is sound in theory, in practice, not any contractor would have the sufficient conditions and capabilities to participate in the bidding. As such, the contractors would often form a Consortium, combining their resources to participate in the bidding or implement the construction works/projects.
What are Consortium contracts?
Definition
First of all, it should be established that “Consortium” means a group (of two or more people/parties) that share a list in order to do something[1]
Consortiums in investment and business cooperation activities or in the bidding and related sectors could be understood as a form of official cooperation of two or more parties in order to participate in the bidding or to implement a certain construction work or project.
In other words, when a contractor joins with one or more other contractors to participate in the procurement process as a single bidding entity, that unit shall be referred to as a Joint Venture Contractor*.
Contractors would often resort to Consortium when their individual capability as contractor could not meet the requirement of the Employer, or to put it in another way, they are not qualified per the standards of the tender documents.
As such, in these cases, Consortium agreements/contracts are the basis for contractor to participate in the bidding[2].
Example: The Joint Venture Contractor awarded Package 5.10 – Long Thanh International Airport, comprises of around 10 contractors.
> See more: CNC assisted in the successful negotiation of the Construction Contract for Package 5.10
From the above definitions, Consortium Contracts could be defined as follow: Consortium contracts are the agreement between two or more parties, for the purposes of enhancing their competitive strength, capability and cooperation during the participation in the process of procurement, contract conclusion, construction contract implementation, and project implementation.
Features
According to the definition of Consortium Contract, it is observed that there are the following notable features:
First, the formation of a Consortium does not constitute a new legal person. Parties enter into Consortium agreement not for the purposes of establishing a new legal person. Their objective lies in the mutual benefits, rights and status as Consortium members. The representative of the Consortium could be one or more Consortium members.
Second, Consortium contracts are temporary in nature as they solely served a single certain purpose, such as participation in a procurement process or implementation of a project. Once the purpose is achieved, the Consortium should also cease their operation
Third, Consortium members are legally and financially independent. Since the formation of a Consortium does not constitute a new legal person and parties only cooperate to implement a project together, therefore, their status as independent legal entities remain and each party shall be responsible for their own work in the Consortium. Each party would also use their own financial resources to perform their assigned work in accordance with the Consortium contracts as there exist no common financial sources within the Consortium.
Furthermore, due to the lack of legal person status, the Consortium could not have ownership of any property or be held legally responsible as any other independent legal entity. Instead, all transactions, commitments, and obligations arising out of the contract entered into with the Employer shall be carried out separately by the Consortium members as assigned therein or per the internal work assignment agreement in the Consortium[3].
Fourth, parties shall be jointly responsible before the principal (Employer) unless otherwise agreed in the Consortium contract. In other words, the Employer might request any member in the Consortium to perform all of the obligations upon the occurrence of issues. Afterward, parties shall agree on the internal allocation of liability in accordance with the concluded Consortium contract.
Fifth, parties shall be responsible for their own assigned work. Parties in a Consortium could agree that each party shall only be responsible for the work undertaken by itself. In that case, the responsibility of each party toward the Employer shall be separate. However, such issues must be explicitly stated in the Consortium contract and approved by the Employer, vice versa, the general principle is that Consortium members shall be jointly held responsible.
Sixth, the head of the Consortium does not necessarily have to assume the most significant volume of work. This role often depends on the internal agreement and choice by the Consortium members, which are made based on various factors, such as administrative capabilities, experience in project coordination, ability to work with the Employer, or simply the consent of parties. The head of the Consortium often represent the Consortium to work with the Employer, but that do not translate to the responsibility to undertake the most significant portion of work in the project.[4]
Comparison with Joint Venture Contract (*)
Consortium contracts and Joint Venture Contract are both, in nature, form of cooperation between parties in order to utilize the capability and strength of each party to enhance mutual growth and earn profits. However, there are some significant differences between these two types of contracts:
Similarities:
Similarities of Consortium and Joint Venture
- Utilize the capability and strength of each other: Both forms allow parties to combine their resources and expertise to achieve a common goal
- Enhance growth: The cooperation between parties allows parties to expand their market, share risks, and increase their competitive capability
- For the purpose of earning profits: The ultimate purpose of both form of cooperation is to help the participating parties to earn profits
Differences:
Reasons for the differences between Consortium and joint venture
Legal person status
– Consortium: Do not constitutes a new legal person, parties maintain their independent legal person status
– Joint venture: Establish a new legal person (joint venture), participating members are co-owners
Legal basis
– Consortium: Governed by Law on Bidding
– Joint venture: Governed by Law on Investment and Law on Enterprise
Decision Authority
– Consortium: As there exist no general management mechanism, parties shall agree on the allocation of works and responsibilities
– Joint venture: General management mechanism is established within joint ventures, the decision authority is based on the capital contribution ownership ratio and agreement between the parties
Cooperation duration
– Consortium: Generally short-term and dependent on a specific project or package
– Joint venture: Generally long-term, aiming at long-term business cooperation
Legal liabilities
– Consortium: Parties shall be jointly or severally responsible before the employer, depending on the agreement
– Joint venture: Joint venture shall bear legal liabilities individually, capital contributors shall be responsible within the limit of their capital contribution
Establishment and Implementation of Consortium Contracts
Step 1: Employer commence the procurement
Step 2: Parties of mutual interest share their desires to cooperate
Step 3: Determination of the scope of assigned work
Step 4: Determination of the role of each member
Step 5: Negotiation and conclusion of Consortium Contract
Step 6: Participation in Bidding
Step 7: Termination of Consortium Contract (if not awarded)
Step 7: Negotiation of the Construction Contract with the Employer
Step 8: Conclusion of Construction Contract with the Employer
Step 9: Application for and maintenance of guarantees by the Parties
Step 9: Application for and maintenance of guarantees by one member
Step 10: Parties implement their Scope of Work
Step 11: Parties consult with each other to respond to or file a claim against the Employer
Step 12: Completion of Construction
Step 13: Construction Maintenance
Step 14: Final Account of the Construction Contract with the Employer
Step 15: Termination of Consortium Contract
Separability of Consortium Contracts
Consortium members are subject to two contracts, each with their own purposes, including: consortium contracts, an internal contract, defining the relationship between the consortium members and (ii) construction contract entered into with the principal (Employer), defining the relationship between the consortium and the principal regarding the implementation of a particular project.[5]
Diagram depicting the consortium’s standing in the two contracts
While the consortium is governed by two contracts, Consortium Contracts are relatively independent of Construction Contract, to be specific:
First, Parties in a consortium could terminate consortium contract prior to the bid award (or the conclusion of the Construction Contract between the consortium and the Principal)
Consortium contract often includes provisions on termination of contract in the event of failure to achieve the shared objective, such as failure to win the bid.
Second, the termination of the contract between the consortium and the principal does not automatically result in the termination of Consortium Contract
Example: When one of the consortium members breaches its obligations under the construction contract with the principal, and the other members could not assume the portion of work of the defaulting member in the latter’s stead, the project would be gravely impacted as the agreed construction schedule would suffer delays, which entitle the Principal to terminate the construction contract concluded with the consortium.[6]
This, however, does not mean that the Consortium contract would also be terminated. Instead, the Consortium contract would remain in effect and govern the relationship between the parties, allowing the parties to determine the responsibilities of the defaulting member and apply remedial measures such as penalty or damage compensation.
Third, any member of the consortium could opt out of the Consortium contract during the implementation of the construction contract.
In the event that one or some of the consortium members refuse or unable to implement the construction contract concluded with the principal, thus gravely impact the schedule, quality, and efficiency of the package, the Principal could terminate the contract with that/those members.[7]
In this case, the remaining members of the consortium shall proceed with the work formerly assigned to the terminated member. However, if the remaining member are not sufficiently qualified or experienced to carry out this portion of work, the principal shall appoint another contractor or initiate contractor selection in accordance with the regulation.[8]
To sum up, Consortium contract possesses certain separability from the Construction Contract, as the former is not fully dependent on the latter and capable of maintaining the independence its own duration and contractual obligations.
Structure for the organization and decision authority of the Consortium
In the organizational model of the Consortium contract, powers and responsibilities are allocated as follows:
Hierarchical structure within the consortium
- Supreme body: Consortium Parties
- Executive body: Management Board/Executive Board
- Management positions within the Consortium:
- Project Director
- Project Deputy Director
- Head Accountant
- Construction Manager
- Safety Manager
- Quality Manager
- Support Department: Secretary
Fundamental Content of Consortium Contracts
Consortium Contract often have the following fundamental clauses:
- Definition
- Objective
- Cooperation Principles
- Consortium name
- Participation Ratio
- Allocation of Responsibilities
- Preparation of Bidding document
- Negotiation of the Construction Contract
- Opening of Bank Account
- Financial Management
- Regular Meeting
- Decision
- Compensation
- Transfer
- Termination
- Applicable Law and Language
- Confidentiality
- Dispute Resolution
- Miscellaneous
> See more on the details of the consortium contract prepared by our team at: https://hopdongmau.net/san-pham/thoa-thuan-lien-danh/.
Frequently Asked Question
Consortium in bidding is an effective solution for contractors who do not have sufficient qualification or experience to independently participate in a package. Below are ten frequently asked questions regarding consortium in bidding:
- When is consortium establishment necessary in bidding?
Once a contractor find that it does not have the sufficient qualifications or experience to meet the requirement of the package, the cooperation with other contractors under the form of a consortium would allow for increase in the overall qualifications, thus meeting the requirements set by the tendering party.
- Could inexperienced contractors participate in bidding under the form of a consortium
Yes. Contractor could link up with other partners to participate in the bidding. However, requirements of the tender documents should be taken into account, especially the criteria on “Qualification and Experience of each member shall correspond to the assigned work”.
- What are the regulations on the consortium naming?
To avoid confusion, the consortium name in all of the bidding document must be consistent. The name of the consortium shall be agreed by the parties. Regarding the bid security, the contractor listed therein could be either the consortium name (example: “Consortium A + B”) or name of the consortium member responsible for the bid security for the whole consortium (“example: Contractor on behalf of Consortium A + B + C”).
- Who shall be responsible for the bid security within the consortium?
According to the regulations, in the case of a consortium, each member could be responsible for their own bid security or the members could agree on a member who shall be responsible for the bid security for the whole consortium. The total value of the bid security, however, must not be lower than figure required in the tender document.[9]
- What are the mandatory contents of a consortium contract?
Consortium contract must be signed by a legitimate representative of each member and specify the followings[10]:
+ Responsibilities of the head of the consortium
+ General and individual responsibilities of each member for the entire scope of work of the package.
- Would the entire consortium be affected by the breach committed by a consortium member?
If one of the consortium members breaches a legal prohibition in bidding, the whole consortium could be banned from participating in the bidding activities. However, in certain cases, only the breaching member will be banned, while the other members may still be allowed to proceed with the bidding.[11]
- Are foreign contractors required to form a consortium with domestic contractors?
For international bidding held in Vietnam, unless there is no domestic contractor sufficiently qualified to undertake any work in the package, foreign contractor must either form a consortium with domestic contractors or utilize domestic subcontractors.[12]
- In the event that the consortium won the bid, who shall perform the conclusion of the contract between the employer and the contractor?
According to the regulations, for consortium, all members participating in the consortium must directly sign and stamp (if applicable) in the contract; for centralized procurement in framework agreements, all members participating in the consortium must directly sign and stamp (if applicable) in the contract or consortium members shall, in accordance with the assignment in the consortium contract, sign and stamp (if applicable) in the contract with the entity requesting for centralized procurement.[13]
- If the consortium contract is not attached to the bidding document, could it be supplemented later?
If it is found that the consortium contract is not included in the bidding document, the contractor could supplement it later to clarify its eligibility, qualification, and experience. However, this supplement must not change the nature of the bidding document, and must be approved by the tendering party.
- Could a consortium member transfer their assigned work to another member?
The laws prohibit the transfer of assigned work from one contractor to another contractor subsequent to the bid award, even if the transfer is made within the consortium.[14]
An adequate understanding and compliance with regulations on consortium in bidding would increase the chances of contractor winning bid, while also ensure smooth implementation of the contract
Conclusion
Consortium contracts serve an important role in the cooperation between parties, allowing for optimal utilization of each party’s strength in order to achieve a common goal. The establishment of construction contract must specify the rights, obligations, responsibilities of the parties, the structure for management, profits distribution, and dispute resolution.
Contact Information
In the field of construction, CNC is proud to have earned the trust of Clients, for the professionalism, credibility, and credentials demonstrated by CNC.
In Vietnam, CNC also proud to be a leading law firm, who dedicate all resources into the development of legal services related to construction, such as in-depth Construction Contract Advisory Services and Construction Contract Management Services
These are the two services that CNC is renowned for in the legal market. The brand name CNC itself is based on the combination of Construction Contracts and Counsel
From our perspective, 50% of the project’s success is attributable to the meticulousness and dedication to the contract negotiation, and the remaining 50% shall be decided by the supervision of the Construction Contract Implementation. As such, it is CNC’s wishes to accompany Clients until the project is handed over and put into operation, whilst ensuring no dispute shall take place during the process.
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(*) Translator’s Note: For clarity purposes, the term “joint venture” is used as the common translation of both “liên doanh” and “liên danh”. As a result, the common translation for “nhà thầu liên danh” is “joint venture contractor” instead of “consortium contractor”. Similarly, as there are comparisons between “liên danh” and “liên doanh” in this article, the term joint venture could not be used to cover both “liên danh” and “liên doanh” since it would result in confusion. Therefore, “consortium” is used as the translation for the term “liên danh” instead.
[1] Vietnamese Dictionary (2003), Editor: Hoang Phe, Institute of Linguistics, Da Nang Publishing House
[2] Clause 26, Article 4, Law on Bidding 2023
[3] Ahmed M. Elsawi, (2018), The civil liability of the consortium members for the individual mistake of one member, International Journal of Engineering & Technology, No. 7 (2.13) (2018) 272-274
[4] Joseph Russell Milton, (1979), International Consortia: Definition, Purpose and The Consortium Agreement, Fordham International Law Journal, Volume 3, Issue 2
[5] Samira Kolbehdari & Mohamad Hossein Sobhiyah, (2014), Effects of Negotiations about the Formation of Construction Consortium on Consortium Successful Performance in Iran’s Construction Industry, International Journal of Management, Accounting and Economics, Vol. 1, No. 5, December, 2014, ISSN 2383-2126, pg. 376
[6] Point b, clause 2 Article 145 Law on Construction 2014; Dispatch No. C3070/BXD-KTXD sent to the Project Management Board for Traffic and Agricultural Construction in An Giang Province on guidelines for termination of contract with consortium members
[7] Point c, clause 22, Article 131, Decree No. 24/2024/ND-CP on elaboration of and measures for implementation of the bidding law regarding contractor selection
[8] Point d, dd, clause 22, Article 131, Decree No. 24/2024/ND-CP on elaboration of and measures for implementation of the bidding law regarding contractor selection
[9] Clause 7, Article 14 Law on Bidding 2023
[10] Clause 26, Article 4, Law on Bidding 2023
[11] Point c, clause 1, Article 125, Decree No. 24/2024/ND-CP on elaboration of and measures for implementation of the bidding law regarding contractor selection
[12] Point i, clause 1, Article 5 Law on Bidding 2023
[13] Clause 3, Article 67, Law on Bidding 2023
[14] Point a, clause 8, Article 16, Law on Bidding 2023
