It is not uncommon for those who invite tenders to require that the tender is accompanied by a Tender Bond or Tender Guarantee. Tender Bonds are usually only used when the contract is a high-value one or where the project being tendered is time critical.
The underlying purpose of a Tender Bond is to demonstrate the commitment of the Tenderer to proceed if it is successful in its bid. It is not unknown for a Supplier to submit a Tender for a Contract and then refuse to proceed with the Contract when it is awarded to it. In those circumstances a Buyer who has the benefit of a Tender Bond will be able to call the Bond and receive some compensation for the extra cost he will incur as a result of the delay he will suffer in getting the contract started. He will either have to enter into negotiations with another bidder or even re-issue the tender and go through the tendering process again.
The value of the Tender Bond will vary but it does not usually exceed 5% of the prospective Contract price.
The wording of the Bond is reasonably straightforward and may be prepared on the headed notepaper of the Bank or other institution providing the Bond.
The Bond creates a contract between the Bondsman/Guarantor and the Beneficiary who is the buyer or developer that issued the tender. Its terms are straightforward – if the Beneficiary makes a written demand, the Bondsman must pay.
In our form of Tender Bond, we have included a requirement that a demand must be accompanied by a statement that the Contract has been awarded to the Supplier but the Supplier has failed to take it up within a specified period.
We have also included a requirement that any demand shall be signed by a director of the Beneficiary/Buyer. Sometimes a Bond will contain a statement that “any demand must bear the confirmation of your (i.e. Beneficiary's) bankers that the signatures on the demand are authentic". This gives at least some protection that a demand is not made without proper authority within the Buyer’s organisation.
The governing law and jurisdiction will usually be that of the Buyer. This can be important in international transactions: if the Buyer is situated in country A and the Supplier is based in country B and provides a Tender Bond from its bank in country B, should the bank fail to honour the demand, the Buyer will need to bring proceedings in country B. This will be more expensive for the Buyer and create more uncertainty than if the Bond is provided by a bank in its own country.
A Buyer should take the precaution of ensuring that the invitation to tender specifies that the Bond is provided by a bank or other financial institution acceptable to it and having a place of business in the Buyer’s territory – i.e. country A in our example. This will enable the Buyer to bring proceedings in its own country’s courts if the Bondsman fails to honour its commitment to pay.
The Bond should be executed (signed) by one or more duly authorised directors or other senior representatives of the Bank and, if English law applies, we recommend the Bond is executed as a deed.