Introduction to Bid Security
Aside from serving as a guarantee for bid participation, bid security is also one of the most important elements that determine a tender document’s validity.
In practice, there have been many cases in which contractors and employers are not selected simply due to avertable mistakes regarding the preparation and submission of bid security. For that reason, the article
“Bid Security in Bidding and Selection of Employer” will provide and facilitate clients with detailed guidance on issues related to bid security, such as the procedure to obtain the bid security, important considerations, the format of the Bid Security, and widely-used applications for support forms.
How does Bid Security work?
Bid Securities are guarantees of the Guarantor (usually credit organizations or branches of foreign banks – “Bank”) toward the Trustee (“Tenderee”) to ensure the bidding participation obligations of the Holder (“Contractor” or “Employer”).
Accordingly, the Contractor or Employer submit the bank issued security to the Tenderee to guarantee the bidding participation obligation of Contractors and/or Employers within the specified time as stated in the Invitation to Tender or Request for Tender.
Purposes of Bid Security
Bid Securities afford the Tenderee more tools and flexibility at their disposal to address the obligations of Contractors and/or Employers, thereby having improved protection of benefits against non-compliance with the obligations per bidding participation by Contractors and/or Employers.
Especially, the Tenderee may either directly request the Bank to perform the undertaken obligations per the Bid Security, or directly request Contractors and/or Employers to perform the obligations. If Contractors and/or, Employers still do not perform the required obligations (including the rectification or monetary compensation), the Tenderee may request the Bank to perform the required obligations.
Function of Bid Security Flowcharts
The function and basis for the submission, as well as the resolution of Bid Security are demonstrated in the following flowchart:
When are Bid Securities necessary?
Bid Securities may be used in the bidding process for the selection of Contractors or Employers, to be specific:
Situations where Bid Securities are required
Note: Contractors and/or Employers must provide bid security prior to the tender closing date; in case of two-stage tenders, Contractors are to provide bid security during the second stage
Bid Security Value
Depending on the scale and the nature of each specific package or project, the value of bid security is specified in the invitation to tender or request for tender. Accordingly:
Value of Bid Security
Duration of Bid Security
The duration of Bid Security is specified in the invitation to tender or request for tender, which is usually 30 days longer than the duration of an invitation to tender or request for tender
Duration of Bid Security
Extension of Bid Security Duration
After the tender closing date, if the Tenderee extends the duration of the invitation to tender or request for tender, the Contractor and/or Employer have two options: either accept the extension or reject the extension for the duration of the invitation to tender or request for tender.
Depending on the choice of Contractors and/or Employers on whether to extend the duration of invitation to tender or request for tender, the legal consequences will likely vary, to be specific:
Different consequences for the duration of the extension of invitation to tender or request for tender
Resolution of Bid Security
Depending on the circumstances and context, the Tenderee may have to return or confiscate the bid security. To illustrate:
Resolution of Bid Security
Significant Risks of Bid Security
Despite the merits and important contributions to the process of bidding and selection of employers, the application of bid securities also contains some risks to the parties involved. Accordingly:
Banks
The action or inaction pertaining to the fulfilment of guarantee obligation may lead to various risky outcomes, to name a few:
- The possibility of not being able to recover the sum used for the guarantee obligation from the Holder or recover with great difficulty. Since Holders often have high credibility, banks often agree to provide guarantees without requiring Holders to perform guarantees or the value of guarantees performed is not equivalent to that of guarantees provided.
- Occurrence of dispute, thereby costing further financial resources and time for the lawsuit or for the recovery of bond
- Filing explanations to the State’s Bank or state agent on the failure to perform the guarantee obligation
- Decrease in the Bank’s credibility
Trustees
The exercise of rights to bid security within the context of Vietnam may prove to be difficult for Trustees as there are a significant number of potential risks. For example:
- Annulled Guarantees due to inappropriate credit limit allocation between the Bank and Contractors, Investors, the Bid Security signed by unauthorized individuals, or the Bid Security with forged signatures and stamps
- Burden of proof in cases of conditional bid security (specific violation of Contractors,
- Occurrence of disputes, thereby incurring further costs and losses of time for lawsuits against Banks or Contractors and/or Employers, or for complaints filed to the State’s Bank and other competent authorities
- Another attempt at tender or negotiation with other Contractors and/or Employers under less favorable conditions
Holders
Depending on the decision of the Bank or Trustee, the Holder is either entitled to or obliged to perform certain legal obligations, to illustrate:
- Compensation obligation or rectification obligation towards Trustees due to failure to comply with requirements set by the invitation to tender, requests for tender
- Mandatory Acknowledgment of Indebtedness to Banks, which directly affects credibility
- The possibility of failure to meet the requirements set out in the invitation to tender, request for tender due to not being able to obtain bid security or the obtained bid security is not consistent with the form and conditions established in the invitation to tender, request for tender.
- Participation in lawsuits as either the plaintiff or defendant or person with related interests and obligations.
- Decrease in the credibility of Contractors and/or Employers
Reference Forms for Bid Security
Drafting of highly practical Bid Securities would not only facilitate the Tenderee to standardize the document, as well as reduce the possibility of Contractors or Employers being eliminated due to avertible mistakes by allowing proper preparation of bid securities but also allow the Bank to issue Bid Security without much modification.
Moreover, the availability of standardized form(s) for Bid Security would also mitigate the chances of dispute and create a framework for parties’ implementation.
Based on practical experience and other relevant stipulations regarding this issue, CNC is pleased to introduce the following two commonly used Bid Security forms for Clients’ reference and consideration.
Sample No. 1: Vietnamese Bid Security Form for State-funded Project enclosed with Circular No. 03/2015/TT-BKH-DT dated May 06th, 2015.
Sample No. 2: Vietnamese Bid Security Form for Private Projects with Foreign Elements.
Sample No. 3: Application for the Release of Bid Security.
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For further support, please contact us via email or phone as indicated below:
Ms. Nguyen Thi Kim Ngan | Senior Associate
T: (+84-28) 6276 9900
Ms. Nguyen Thi Hong Tra | Associate
T: (+84-28) 6276 9900
CNC|A Boutique Property Law Firm
28 Mai Chi Tho, An Phu Ward, Thu Duc City, Ho Chi Minh City
Vietnam
T: (+84-28) 6276 9900| F: (+84-28) 2220 0913
cnccounsel.com | contact@cnccounsel.com