Revocability of offers and tenders in the construction industry

von | 24. Juni 2016 | Commercial Law

Whether there is a contract between the parties or not and if so what are its terms: these are common issues in construction litigation. The general rule is that the valid formation of a construction contract just like any other contract requires mutual assent by both parties expressed by the common mechanism of offer and acceptance. Whilst according to [for instance English] common law a third element, known as the consideration element, must be met, civil law jurisdictions usually do not require further elements to be met for a valid contract.

However, peculiar to contract formation in the construction industry are sometimes bidding processes and often complicated tendering procedures. Unlike an invitation to tender or a call for tenders which constitute an invitatio ad offerendum, generally any submitted tender is a valid offer if it contains sufficient details in order to determine the contracting parties, the subject matter of the contract and – maybe – the price. However, in French and German law the pricing element is not an essential element, because if the parties did not agree to a price the courts may evaluate the work and replace the missing element by court decision (see Sect. 632 German Civil Code).

However, sometimes the party submitting the tender as offeror might have failed to comply with specific tendering procedures contained in the invitation to tender. Sometimes further work may be requested to explain the tender and sometimes the offeror may withdraw or revoke its offer for commercial reasons or even for his convenience.

The question whether an offer is revocable is treated differently in common law and civil law jurisdictions. The traditional view that common law takes is that the offeror is free to revoke his offer at any time until the offeree has dispatched acceptance (Mailbox-Rule). If the offeror wants to make an irrevocable offer it has be accompanied by additional consideration so that it can be upheld as an option contract (compare the Canadian case Ron Engineering), unless there is a statue that adopts some type of firm offer rule (e.g. UCC 2-205).

The German Civil Code takes a different view that relies upon the opposite logical assumption, so that all these concepts are not at issue at all. The general rule under the German statue is that no offer ever can be revoked after it has been received by the offeree (§ 130 section 1 sentence 2 German Civil Code as construed by the Reichsgericht in RGZ 63, 91). Revocation will only have the effect to revoke the offer if is received by the offeree before or at the same time as the offer, afterwards the revocation will not have any effect on the power of acceptance at all. If the offer states a certain date until which the offeror will be bound by the offer and this date passes by without receipt of the acceptance by the offeror, then the offer ceases to exist. This is similar to common law jurisdictions that have adopted the firm offer rule except for the fact that the German statue does not require anything else than a fixed date to make an offer firm. If the offer under the German statue does not state a certain date until is has to be accepted then it must be accepted within a reasonable time. This is similar to the equitable principle that an offer can expire under the doctrine of lapse of time. Anyway if German law is applicable, the employer can even validly accept the offer when it has been withdrawn. In France the situation seems to be similar: the tender is likewise open for a reasonable time when no specific date has been mentioned in the offer. Moreover, revoking or withdrawing the offer before this time subjects the revoking offeror to potential liability in torts. In England and in other common law countries however a tender may be withdrawn at any time before its acceptance unless one of the aforementioned complex exceptions to this rule applies.

Since there is absolutely no chance to reconcile these distinct approaches there is only way left: to be aware of of the problem and to face the problems arising from the withdrawal of a tender during the formation period. THus quite often employers will ask for a bid guarantee or bidding bond in order to ensure that tenderers will not revoke their tenders during the procurement proceedings.

To make things even more confusing the Unidroit Principles (UP) have on one hand adopted the common law approach in art. 2.1.4, by providing that an offer may be revoked if the revocation reaches the offeree before acceptance has been dispatched but one the other hand the UP have adopted certain exception to the Mail-Box rule, that are inspired by civil law jurisdictions. These are that an offer can not be revoked if the offer indicates that it is meant to be irrevocable either by setting a fixed date until which acceptance is expected or otherwise without requiring anything else to make an offer firm; or  that it was reasonable for the offeree to rely upon the irrevocability of the offer and that the offeree has acted upon reliance of the irrevocability. Thus, under the Unidroit Principles the tender may be irrevocable if the tender indicates for example that price and other conditions are not good after 1st of December.

As already mentioned, in common law countries employers usually counter the risk of revocability by requesting a Bidding Bond. In such case the tenderer will be required to provide either a bond or a guarantee to cover the costs of re-tendering and other loss and damages, should the tenderer withdraw the tender before time. This has become a certain international standard supported by the World Bank as well. Clause 13 of the Instructions for Bidders in the Standard Bidding Documents for Works of the World Bank provides:

The bid submitted by the bidder shall comprise the following: duly filled-in Form of Bid and Appendix to Bid, Bid Security, priced Bill of Quantities, alternative offers where invited, and any information or other materials required to be completed and submitted by bidders in accordance with these Instructions to Bidders. The documents listed under Sections VII and VIII shall be filled in without exception, subject to extensions thereof in the same format and to the provisions of Sub-Clause 17.2 regarding the alternative forms of bid security.

Likewise the FIDIC books (Rainbow Edition 1999) contain a model form of a bid security and consider this as normal international trade custom in the international construction industry (compare annex B [Example Form of a Tender Security] of the Silver Book).

Notwithstanding the widely accepted international practise in any ordinary case with a connection to Germany or France common law engineers and contractors should take into account that their bids or tenders will generally be treated as irrevocable. They should also note that this problem arises whenever the invitation to tender provides that German or French law shall govern the contract, as the presumptive proper law of the contract applies to such type of pre-contractual issues. No bid security, bidding bond or other document will then be necessary to constitute a binding offer, if the contract would be governed by German or French law, this being a rule in accordance to art. 8 of the Rome Convention on the law applicable to contractual obligations opened for signature in Rome on 19 june 1980, being in force in UK since 1990 by means of the Contracts (Applicable Law) Act 1990 and replaced by the Rome I Regulation in December 2009. Especially when participating in a public procurement procedure of German or French public authorities each tender will be binding until the end of the submission period.

By the way it seems to be worth to note that the Commencement Date under FIDIC triggers the Contractor´s duty to proceed with with due expedition to execute and complete the Works (including the design, if any). However any missing notice of the Commencement Date does not affect at all the existence or validity of th Contract. The same applies to the FIDIC MDB harmonised versions of the FIDIC Red Book, 2010 et seq.

WARNING: the material contained in these notes is a simplified guide to some of the major topics in German construction law. It is not intended as a substitute for legal advice on individual transactions, and does not necessarily stand on its own. Whilst the contents are believed to be correct, the author cannot accept any responsibility for errors or omissions.