Forbes Russia 24 April, 2012
How not to be included into black list of suppliers for procurement
In spring 2012 procurement market players celebrate an anniversary of appearance of letter AK/9281 issued by the Federal Antimonopoly Service on sureties non-complying with requirements of the Federal law No. 94 “On procurement”. Unfair surety is the most popular method used for withdrawal of the supplier from the contest to win the contract.
Moreover, in 2011 by Moscow Department of FAS most companies were included into the blacklist of unfair suppliers because of the sureties.
What is the blacklist?
Being in the list means the following for the companies: within two years company cannot be involved into procurements, and customers neither are nor entitled to enter into agreements with suppliers from the blacklist.
There are two reasons for the companies to be included into the blacklist. The first one is when the company being the preferred bidder on the stage of signing contract was recognized “avoiding entering into contract” (refusing to enter into contract, has not provided all necessary documents, the customer “didn’t like” the surety of the supplier). The second reason is when the contract with supplier was cancelled due to the court’s decision because of gross breach of fulfillment of the contract (the supplier hasn’t built the object, breached the terms, etc).
Under Federal Law of the Russian Federation No. 94-FZ "On State and Municipal Procurement of Goods, Works and Services" the customer is entitled to request for contract performance security from the supplier. This is an additional guarantee protecting the customer from advance payment loss and non-fulfillment of contract. Current legislation provides for the following securities: bank guarantee, surety agreement and others. Please note that in any case the supplier, not the surety, is the performer under contract.
How ordinary letter of Antimonopoly services which contradicts to the Constitution of the Russian Federation, became an instrument for stealing a win from the preferred bidder – that is the question. Today a fair supplier has to be responsible for actions he didn’t commit and therefore included into the blacklist for two years, and FAS considers this absolutely legal and justified. Let’s see how this scheme works.
Court sides with the supplier
Imagine an ordinary company which participated successfully in procurements in the Russian regions for a long time and construction agreements were its only source of income. In April 2011 “Project institute “Volgastroyproject” took part in public auction for procurement to conduct an audit of Moscow Eastern administrative district roads repair quality.
According the results of auction the company was second, but soon the preferred bidder for some unknown reasons avoided entering into profitable contract, therefore under the Law No. 94-FZ the second winner becomes the first.
The fair company provided all documents necessary for entering into contract in due terms, including surety documents with copies of financial statements. But a few hours before the signing of contract the customer contacted by phone with tax authorities and revealed that the annual balance of the surety contradicts to the data available to the tax authorities. Moscow customer immediately refused to enter into agreement with the winner and reported to the FAS all details of telephone conversation. This was enough for the Federal Antimonopoly service. For some unknown reasons the FAS didn’t plan to make an inspection at all.
Information received from the customer became the ground for blacklisting of “Project institute “Volgastroyproject”. The supplier, suspended by such a Jesuit way from the procurement, went to court for justice. Just a while ago it was absolutely impossible in Russia to prove illegality of FAS’s decision on blacklisting the supplier due to the “bad surety”.
Moscow Arbitration Court for the first time in its practice took a decision in favour of blacklisted company and explained that the bidder is not responsible for the surety and for the content of its financial statements. The Ninth Court of Appeal in January 2012 found this decision legal.
Herewith the judges of both courts recognized the fact that the letter of the FAS “on unfair surety” interprets the law No.94-FZ “On procurement” broadly and very specifically. The bidder is not obliged to examine the financial statements of the surety which are sealed by the tax authorities. Besides, the bidder has no legal mechanisms to conduct an audit or lax inspection of the other legal entity.
Inadequacy of the surety is not equal to non-provision of security documents and subsequent charge of the company in avoidance of entering into profitable contract. Moreover, it is not reason for the FAS to blacklist the supplier.
At the moment the Federal Antimonopoly service is trying to challenge the court decision which takes away their instrument for lynching undesirable suppliers, in the Appeal court. The Service issued one more letter No. IA/4178 which continues to regulate the procurement market, violating the law with impunity and blaming the supplier for actions of unfair surety.
How to protect yourself from “bad surety”
I think that if current FAS’s practice of suppliers blacklisting remains unchanged, the presumption of supplier’s innocence would be cancelled and all the suppliers would be declared rogues and budget thieves. Rogue companies undoubtedly exist, but in Russia there are a lot of fair companies which conduct their business on long-term basis and value their reputation.
Nowadays the procurement market participant should be very careful when choosing a surety. If you don’t know the surety which is legal entity very well, aside from the documents requested under the Law, you should check whether the surety is blacklisted as unfair surety – this information is available on websites of the Federal antimonopoly service.
However, it’s better and safer not to get through to unfamiliar companies, since it’s quite problematic to examine whether they have assets. FAS, for example, suggests to “go to the addresses” - to look at the buildings which were indicated in the financial statements of the surety. You can also try to request the Tax authorities for the financial statements of the surety. Although it’s unlikely that tax authorities will give you any essential response, in case of reference to arbitration this will be the confirmation of the fact that the participant took reasonable care.
The best way to protect you from unfair sureties is to work with reliable companies you trust or use a real bank guarantee though it’s much more expensive than “grey” bank guarantees.
The state should make only two steps to protect budget and business from unfair sureties. Firstly, to make and legitimate the list of unfair sureties by analogy with the list of unfair suppliers. Ministry of Internal Affairs and Federal Antimonopoly service make an effort to do that: they publish lists of unfair sureties from October 2011 regularly. In discussed project of the Federal Contract system the state is also planning to provide and legitimate the list of unfair sureties.
Secondly, the rules of interaction between the FAS, police and tax authorities should be created so unfair sureties could be blacklisted and inspected by tax authorities as well and prosecuted, if necessary.
I think that if the surety proved him in procurement market as a liar and a deceiver, the state should react adequately and the unfair surety must bear responsibility for illegal actions.
Notice:
Federal Law “On procurement” dd. 24 July, 2009 (as amended 23 July 2012) provides that the surety agreement excluded from the forms of security for contract. The need to exclude the surety relates to non-efficiency of this form of security. Now the participant of procurement willing to take part in auction may use one of the following forms of securities: bank guarantee or money transfer to the account of customer by analogy with the deposit.