The cheap may be more expensive, also in tenders

The cheap may be more expensive, also in tenders

Yair Aloni, Adv.
November 8, 2022

We all know that the cheap may turn out to be expensive. Does this rule also apply to tenders? Can a public authority afford not to choose the cheapest offer and in what cases can a bidder be denied a win just because it submitted a financial offer that is simply "too good"?

A tender is a competitive procedure usually intended to obtain a service, product or work at the lowest possible price as per the needs of the public authority. The obvious business goal is saving and making a wise use of the budget financed by taxpayers' money. It should be noted that the business interest is not the main purpose in the world of tenders and alongside this interest there are other interests such as: the public interest and the need for an equitable competitive process without bias and more. The law directs the tender committee to choose the lowest or the highest offer, as the case may be, but it allows the committee to exercise discretion and decide for reasoned reasons to deviate from this rule, provided that it gave the bidder an opportunity to present its arguments before taking the decision.

From a business point of view, it is clear that receiving a service, product or work at a low price may benefit the public in the short term and will benefit the public in the future. However, the authority must take into account the need to ensure that the bidder can provide the requested service even in the long term and that the contract will ultimately lead to the best result for the authority. The reason for this is clear: accepting a low offer at any price, which comes at the expense of quality, may actually harm the public interest in the long term. Thus, for example, a reckless engagement with a contractor lacking experience or financial strength, who submits a particularly cheap offer, may drag the public authority into many unexpected damages and expenses, either due to the contractor's lack of financial ability to pursue the project, or due to the need to repair defective works or reperform the work to the required standard and due to many delays that may be caused, including due to the need to change contractors and even publish a new tender.

Thus, for example, our office specializing in the maritime field and filed a petition on behalf of a client against the selection of a tender winner for marine bunkering services at the Ashdod Port, because the winning offer was unrealistically low. On the recommendation of the Court, the petition was withdrawn, however, within less than a year, almost everything prophesied in the petition as the probable result of the low proposal materialized and the Ashdod Port was forced to launch a new tender (which was won by our client) and open proceedings against the first winner for the huge damage caused to the port.

But not any low proposal is required to be disqualified. In a case discussed in September, 2022, the Administrative Court in Tel Aviv refused to intervene in the Tender Committee's decision to reject a bid by a Chinese corporation that submitted a bid in a tender for the design and construction of the "Green Line" and the "Purple Line" of the light rail due to the apprehension that it is a low proposal that may end up in damage the schedule and budget of the project, and even cause the project to halt. In that case, the committee examined the proposal at length in many discussions and after receiving advise and therefore its decision was found reasonable. Similarly, in a case of May, 2006, the tender committee was impressed by the proposal that it was a serious bidder who was able to meet its obligations and the Supreme Court found that the fact that there is no immediate financial gain for the bidder in the bid, by itself, is not a reason for disqualifying the bid and there may be cases where a participant submits a losing or deficit bid that, for it, makes economic sense (such as: absorbing a short-term loss for the purpose of penetrating the market, establishing status, accumulating reputation or a desire to expand areas of occupation).

The decisions of a tender committee, like any administrative body, are subject to rules of administrative law such as: reasonability, proportionally and based on the facts presented to it. Because there is an importance to the procedures conducted before the tender committee which may be exposed to Court review, both in the case of a win and certainly in the case of a loss, it is recommended not to skip the receipt of a professional advice from an experienced lawyer dealing in the field of tenders commencing from the early stages and certainly when the need arises to present the arguments before the committee as it is already known that the cheap may turn out to be expensive.