Procedure of signing for Contract Agreement to FIDIC Contract and Performance Security furnishing by Successful Tenderer as per Rules of International and European Banks for Reconstruction and Development


In its recent practice, while supporting an infrastructure project financed under the loan of one of the International Financial Organizations (accordingly, procurement procedures of such IFO and Conditions of Contract of FIDIC (International Organization of Consulting Engineers) were applied in that project), the team of this Firm faced a debatable issue of signing of a contract between the Employer and Successful Tenderer. To our astonishment, a discussion arose with regard to the consequence of Contract Agreement signing and Contract Performance Security furnishing by the Successful Tenderer. At first sight, the issue is rather unambiguous, but having had a talk with our colleagues, we found out that many employers did hesitate at which contract performance phase following the contract award to the tenderer, the Performance Security should be furnished and when the Contract Agreement making part of FIDIC Contract should be signed, and, just as important, in what sequence those events should take place.

In our endeavour to close the issue of the sequence of Contract Agreement signing and Contract Performance Security furnishing once and for all, we analysed the national statutory regulations, Conditions of FIDIC Contracts, Procurement of Works User Guides of International and European Banks for Reconstruction and Development (IBRD and EBRD, respectively), international statutory regulations, and best practice.
 
Bank guarantee: definition and regulation by the Laws of Ukraine
Article 200 of the Commercial Code of Ukraine and Article 456 of the Civil Code of Ukraine give the definition of a guarantee. A guarantee is a type of security for obligations. Under the guarantee, a bank, another financial institution, insurance company (the Guarantor) warrants to the creditor (the Beneficiary) fulfilment by the debtor (the Principal) of its obligation. The Guarantor is liable to the creditor for any breach of obligation committed by the debtor.
An issue of guarantee is a unilateral transaction legally binding solely the Guarantor (the bank having issued the guarantee). An issue of guarantee is preceded by a contract conclusion between the Guarantor and debtor, the compulsory condition of guarantee being the definition therein of the principal debtor’s obligation secured by the guarantee.
An obligation is a legal relation where one party (the debtor) is obliged to carry out some action (transfer a property, execute a piece of work, render a service, etc.) or refrain from carrying out some action for the benefit of the other party (creditor) while the creditor has the right to require the debtor to fulfil its obligation. Grounds for creation of obligations are contracts, in particular, and other transactions. Thus, at the time of conclusion of contract for furnishing of contract performance security between the Guarantor (the Bank or other financial institution) and the Successful Tenderer, it should be possible to define the principal obligation (in this case, it is the contract to be concluded between the Employer and Successful Tenderer). Here, in pursuance of Article 456 of the Civil Code of Ukraine, the Guarantor’s obligation to the Employer does not depend on the principal obligation, termination or nullity of the principal obligation, in case of a guarantee containing a reference to the principal obligation either. Thus, it is possible to secure the performance of a contract to be concluded in the future but the Employer will not have the right to apply to the Guarantor until the principal obligation has commenced (the contract has been signed). Accordingly, the guarantee period may exceed the validity period of the Main Contract.
By reference to the above regulations, at the time of security furnishing, it should be possible to give a clear definition of the contract which performance is secured; it is being believed that such a contract may be signed in the future.
 
International statutory regulations and best practice
The Uniform Rules for Demand Guarantees of the International Chamber of Commerce, similar to the national statutory regulations, determine a guarantee as an independent in its nature agreement not depending on the Main Contract or Tender on which it is based. Thus, such a Contract or Tender in no way binds a guarantee notwithstanding the reference thereto in the text of Guarantee. In such a case, the reference to the Main Contract, which provides a Guarantee issue, is a compulsory condition the Guarantee should contain.
 
Consequently, either national or international rules or regulations do not determine whether the Contract Performance Guarantee should be signed before or after the Main Contract, but anyway a reference to the Contract to be secured is compulsory. Besides, neither the Uniform Rules for Demand Guarantees of the International Chamber of Commerce, nor the Uniform Rules for Contract Guarantees give any instructions or limitations and restrictions with regard to the sequence of Contract Performance Security furnishing and signing of such a Main Contract. Yet, at the same time, the contents of the regulations also suggest that a Performance Security may be furnished prior to the Effective Date of the Main Contract which performance it is to secure, but thereby it should contain a reference to the Main Contract.
Thus, in order to determine whether Contract Performance Guarantee furnishing precedes Contract Agreement signing or vice versa, one should consult the tender document provisions and FIDIC contract conditions.
 
Requirements to Contract Performance Security furnishing and Contract Agreement signing according to Standard Tender Documents of International Financial Organizations (in the context of IBRD and EBRD) and FIDIC contract conditions
Judging from the analysis of the national statutory regulations and international rules not giving any requirements to the sequence of Contract Agreement signing and Contract Performance Security furnishing, a number of conditions should be pointed out, contained in the Standard Tender Documents on Procurement of Goods, Works, and Non-Consulting Services, which are applied in procurements out of the funds of the International Bank for Reconstruction and Development and European Bank for Reconstruction and Development as well as General Contract Conditions and Contract Forms applied in the implementation of projects out of the funds of IFOs (the FIDIC Multilateral Development Bank Harmonised Edition).
Conditions of the Standard Tender Documents of the IBRD and EBRD contain approved Security Forms to be submitted by the Tenderers and Successful Tenderers. For example, according to the Forms of Tender (Tender Application) Security, the Employer has the right to demand the bank having issued the guarantee to pay the Bank Guarantee amount in case the Successful Tenderer has failed to sign the Contract Agreement and/or furnish the Contract Performance Security within 28 days starting from the award date. Namely, if the Successful Tenderer has signed the Contract Agreement but has failed to furnish the Contract Performance Guarantee within the specified period the Employer has the right to demand the Guarantor Bank to pay the due amounts against the Tender Guarantee (which secures the Contract signing and Performance Security furnishing).
Moreover, according to the conditions of the Standard Tender Documents approved by the IBRD, i.e. paragraph 41.2 of the Instructions to Bidders (ITB), with regard to the projects declared before the year 2017, and ITB, paragraph 47.1 with regard to the projects declared in the year 2017 and afterwards, within 28 days from the day of receiving the Contract Agreement (which under the rules of the Bank, is sent to the Successful Tenderer along with the tender acceptance notice or immediately thereafter), the Successful Tenderer shall sign the Contract Agreement specifying the date and send it back to the Employer. Paragraph 36.1 of the Standard Tender Documents approved by the EBRD contains a similar condition. That is, the tender documents conditions reserve the right to decide about the date of Contract Agreement signing for the Successful Tenderer.
The Performance Security Form (being an Annex to the General Conditions of FIDIC Contract) contains wordings used by the Guarantor Bank for the purpose of Guarantee issue, which runs as follows: “We have been informed that the Employer has concluded Contract No.___ of ___ with the Beneficiary for the performance of _____...”
Thus, notwithstanding that under the national statutory regulations and international rules the Performance Security may be furnished prior to the signing of the Contract itself, in projects implemented out of funds of the IFO, as admits the context of approved Forms of Contract Performance Security and based on the conditions of Standard Tender Documents of the IBRD and EBRD and FIDIC Multilateral Development Bank Harmonized Edition, initially the Successful Tenderer and Employer sign the Contract Agreement on grounds of which the Successful Tenderer receives the Contract Performance Security from the Guarantor Bank. Here, the Employer has no grounds either to reject the Contract Agreement signed by the Successful Tenderer, or require to sign the Contract Agreement in the “formal signing ceremony” (which is not obligatory required at all and is a “hats-off” of the Employers’ bureaucratic apparatus to their Soviet-era past), or demand any prior furnishing of the Contract Performance Security. Analysis of international best practice gives substantiation to the mentioned attitude, e.g. in FIDIC Conditions of Contract for EPC Turnkey Projects (General Conditions, Guidance for the Preparation of the Particular Conditions, Forms of Tender, ed. 1999) as well as in many explanatory statements to the cl. 4.2  of a FIDIC Contract.
And in case the Employer refuses to sign the Contract Agreement justifying its refuse to do so by the absence of performance security or necessity of holding a “formal signing ceremony” upon providing of the Performance Guarantee, in order to sign, this can be an evidence of the incompetence of the Employer’s responsible personnel or a Customer’s willing to protract signing of the Contract due to some reasons.
 
 
Sources and regulations:
  1. Civil Code of Ukraine
  2. Law of Ukraine on Financial Services and State Regulation of Financial Markets
  3. Uniform Rules for Demand Guarantees of the International Chamber of Commerce (1992)
  4. Uniform Rules for Contract Guarantees (1978)
  5. Standard Tender Documents: Procurement of Works. User Guide. Approved by the EBRD
  6. Standard Tender Documents for Procurement of Works. Approved by the IBRD
  7. Standard Tender Documents: Request for Proposals. Approved by the IBRD
  8. FIDIC Multilateral Development Bank Harmonised Edition
 
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