Legal Issues in
Procurement
Fiduciary Forum
2008
Presented by Alison Micheli
(LEGIA)
Legal Framework for Procurement
Articles of Agreement
 Legal Agreement
 Procurement and Consultant
Guidelines
 SBDs
Today’s focus will be on several
more problematic aspects within
this framework
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Securities
Conflict of interest
Misprocurement
Securities
Different uses for securities (guarantees)
in the procurement process:
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Bid (tender) security
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Performance guarantee

Advance payment guarantee
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Others (e.g., retention money guarantee, guarantee for
missing bill of lading, maintenance guarantee, etc.)
Securities
Acceptable forms of security
(depending on use):
Unconditional bank guarantee
 Unconditional guarantee (bond) issued by
insurance company/financial institution
 Irrevocable letter of credit
 Performance bond issued by surety
 Cashier’s or certified check
 [Cash deposit]
Securities


All requirements for securities must be disclosed
in the bidding documents.
The security must be in the format included in
the bidding documents or in another substantially
similar format approved by the Client.
Securities
Unconditional guarantee (demand
guarantee)

What is it?
• It is the undertaking of a bank (or insurance or other company) as
GUARANTOR to pay a sum of money to another party (i.e., the
Client) as BENEFICIARY in the event of nonperformance of a
contractual obligation by a third party (i.e., the bidder/contractor)
as PRINCIPAL.
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It is irrevocable, unconditional and payable on
first demand.
It is independent.
It is subject to the laws of the issuing bank’s
country.
Securities
Unconditional guarantees (cont.)
The World Bank has adopted the ICC’s Uniform
Rules on Demand Guarantees (“URDG”) as the
basis for bank guarantees in SBDs.
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What are the URDG?
Why did the Bank adopt them?
Where do we use them?
How do we use them?
Securities
Performance (surety) bond
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Issued by surety (insurance or bonding company).
Undertaking to pay contractor’s debt (as opposed to bank’s
primary obligation to Employer under demand guarantee)
Surety undertakes to pay only upon adjudication or other
proof of default in the underlying transaction and only such
amount as Employer establishes as being owed
As alternative to payment, Surety may undertake to:
• Remedy the defect
• Step into the defaulting contractor’s shoes and complete performance
• Engage a substitute contractor to complete performance.
Securities
Irrevocable (stand-by) letter of credit
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
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Comes from US banking laws (which forbid US credit
institutions from assuming guarantee obligations vis-à-vis
third parties).
Like a demand guarantee, it is unconditional, irrevocable
and payable on first demand, and is independent (i.e.,
legally separate) from the underlying transaction.
Basically fulfills the same purpose as a guarantee.
Securities
Issuer of security:

Bidder/contractor is given choice between:
• a bank/financial institution in the Client’s country.
• a financial institution through a “correspondent” bank/
institution in the Client’s country.
• a foreign bank directly if acceptable to the Client.

Issuer must be “reputable.”
Securities
National Competitive Bidding (NCB)
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Use of forms available domestically, no
mandatory requirements
Clients call securities following their domestic
procedures.
The World Bank has to review acceptability of call
in the context of domestic law.
Securities
Bid Security

Purpose?
• To secure bidder’s obligation to stand by its bid during bid
validity period.
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Form?
• Unconditional bank guarantee or, if Client agrees,
unconditional bond issued by financial institution
• Bid-securing declaration
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Amount?
• As a rule, not to exceed 2%.
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Validity period?
• Twenty-eight days beyond bid validity period
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Evaluation issues
Securities
Bid securities (cont.)
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Evaluation Issues
• “Minor” shortfalls/deficiencies
• Joint Ventures
Securities
Performance security
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Purpose?
• To protect Client against breach of contract
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Form?
• Unconditional bank guarantee or, for Goods and
Works, with Client’s agreement, a surety bond
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Amount?
• “Reasonable” – normally 10%
• For conditional undertakings, should be 100%
• Subject to substantial reduction as implementation
progresses
Securities
Advance payment security
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Purpose?
• Secures Client against breach of obligation to use
advance payment for required contractual purpose.

Form?
• Unconditional bank guarantee, or, for Works, with the
Client’s agreement, a bond.
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Amount?
• In the amount and currency(ies) of advance payment.
• For consulting services, “normally” required to secure
advances in excess of 10%.
Conflict of Interest
Background

1997 Consultant Guidelines
Far-reaching definition
[A] firm hired to provide consulting services for the
preparation or implementation of a project, and any
of its affiliates, shall be disqualified from
subsequently providing goods or works or services
related to the initial assignment (other than a
continuation of the firm’s earlier consulting services)
• Difficult implementation
Conflict of Interest

2004 Guidelines revision was
intended to differentiate between
unfair competitive advantage and
conflict of interest.
• 2004 Consultant Guidelines (CG), paras.
1.9, 1.10, 4.12
• 2004 Procurement Guidelines (PG),
para. 1.08(d)
Conflict of Interest
Conflict between consulting services and
procurement of goods, works or
nonconsulting services (CG 1.9(a), PG
1.8(b))
• Examples:


Consultant prepares project design, affiliate bids on
project
Consultant supervises project being implemented by
affiliate
• Solution?

No waiver, no mitigation
Conflict of Interest
Conflict among consulting assignments (CG para. 1.9(b))

How to identify?
• Where there is a possibility that the objectivity of advice under one
assignment may be influenced by another assignment
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Examples:
• Consultant drafts TORs, then competes for assignment
• Consultant audits its own activities
• Consultant advises Client on privatization of assets where also
representing potential purchaser
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Solution?
• No waiver
• If conflict of interest situation already exists, one assignment should
be dropped or scope redesigned to remove source of conflict
Conflict of Interest
Conflict arising out of relationship with Borrower staff (CG
1.9(c))
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Background
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New definition:
• Consultants (including their personnel and sub-consultants)
that have a business or personal relationship with a member of
the Borrower’s staff (or of the project implementing agency’s
staff, or of a beneficiary of the loan) who are directly or
indirectly involved in any part of: (i) the preparation of the
TOR of the contract; (ii) the selection process for such
contract; or (iii) supervision of such contract
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Solution?
• Resolution of conflict in manner acceptable to the World Bank
Conflict of Interest
Unfair competitive advantage (CG 1.10)
• When?

Often occurs when one consulting assignment follows
another, even though there is no substantive conflict
(e.g., sector study followed by pilot implementation
study)
• Solution?

Borrower must make available to all shortlisted
consultants all information that would give the
“incumbent” a competitive advantage
Conflict of Interest

A few other issues
• Government-owned enterprises or
institutions in the Borrower’s country
(CG 1.11(b) and (c))
• Government officials and servants (CG
1.11(d))
• Affiliates
• “Chinese walls”
Misprocurement
Policy:
The Bank does not finance expenditures
for goods, works or services which have
not been procured in accordance with the
agreed provisions of the legal agreement
and as further elaborated in the
Procurement Plan.
Remedy:
In that case, the Bank will declare
misprocurement, and it is the policy of the
Bank to cancel that portion of the loan
allocated to the goods, works or services
that have been misprocured.
Misprocurement

Notice by TTL and declaration by Country Director
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Misprocurement with cancellation is the policy
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Misprocurement without cancellation is an exception (RVP
decision) provided for in OP/BP 11.00, with reallocation of
the funds to other components of the project
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Misprocurement following World Bank no-objection
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Misprocurement for not seeking World Bank’s no-objection
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Distinction between misprocurement, fraud & corruption
and non compliance with requirements regarding
performance of the contract.
THANK YOU!