Exemption From a Tender to a Local Authority

The mandatory requirement for holding a tender by any public or governmental authority is set in the Mandatory Tenders Law. The specific mandatory requirement for holding a tender by local authorities is anchored in the Municipalities Ordinance[1], which specifies under section 197 that “no municipality will contract… for purchasing goods or carrying out work not by way of a public tender” (herein: “Municipalities Ordinance”). The interests for preparing a tender by a public body in general and by a local authority in particular, are obvious; ensuring equal winning terms to the competition, while maintaining transparency, proper conduct and integrity in contracting, and eventually allowing the administrative authority to contract in a transaction that will exhaust its economic benefit.[2]

The inherent advantages in holding a tender are so many, that the requirement to hold them also applies to semi-governmental bodies, i.e. water and sewage corporations. The Water and Sewage Corporations Supervisor anchored the requirement to hold a tender within the corporations’ codes, so currently; these corporations are also required to hold public tenders for their various contracting purposes[3].

Nonetheless, the Minister of Internal Affairs has been empowered under section 198 of the Municipalities Ordinance to install regulations, within which he may specify various types of contracts the municipality may contract in without a tender. The minister indeed installed the Municipalities’ Regulations (Tenders)[4] (herein: “Municipalities Regulations”), which count, in section 3 thereof, 14 cases in which the municipality may contract without a tender.

Examples for some of these cases are a contract for transferring land to the municipality, a contract not exceeding ILS 26,000 in value, a contract with a sole supplier in the market, a contract for an urgent order of a service or goods, a contract with the Jewish Agency etc. In this article, as aforesaid, we will focus on the exemption specified under section 3(4) of the Municipalities Regulations, pursuant to which the municipality shall be exempted from holding a tender wherein the service and / or goods order contract was prepared with the sole local supplier of such goods or with the sole local specialist for such work. Furthermore, the regulations specify, that in order to announce the aforementioned as a sole local supplier or specialist, a written confirmation must be obtained from a specialist appointed by the municipality’s Tender Committee, specifying that such supplier or specialist is indeed the only one locally.

Regarding the issue of who is a sole supplier or specialist and how to define him, there were several interesting rulings given by the various instances, including the Supreme Court in its sitting as the High Court of Justice.

Who is a sole local supplier or specialist?

The main ruling on the issue was given in the matter of Ariel Handasat Hashmal[5] by the Supreme Court in its sitting as the High Court of Justice (hereinafter: the “Ariel Case”). This ruling dealt with a case in which the Haifa Municipality’s Tenders Committee had decided to grant an exemption from a tender due to an allegedly sole supplier, for carrying out various works in the city’s traffic-lights system. The petitioner decided to address the High Court of Justice by arguing that the chosen supplier is not a sole supplier, and that the municipality should have held an organized and public tender. The Supreme Court accepted the petition, while laying out the court’s position in regards to an exemption from a tender due to a sole supplier. The Supreme Court had specified that considerations regarding the efficiency and level of compatibility of the goods or the work to the municipality’s requirements and any other considerations should generally be expressed within an announced public tender, and not outside of it. Therefore, section 3(4) of the Municipalities Regulations constitutes an exception to the rule, under which a local authority needs to hold a tender.

However, as an exception, “the exemption must be interpreted by way of reduction, in light of the general rule requiring a public tender to be held. It should be understood from the abovementioned, that the text “sole local supplier” and the text “sole local specialist” in section 3(4) should be interpreted literally and narrowly.[6] Only where there is a certainty that there is only one local supplier or one local specialist, there would be no merit in announcing a tender, as it is obvious that no more than one bid shall be submitted to such tender, and therefore it will be a wasted effort.

Furthermore, it was ruled in the Ariel Case that the specialist’s decision on whether a supplier or a specialist is the sole one in that area, is no more than a legal conclusion resulting from a system of data, to be considered by the specialist in his opinion, and as such it shall be reviewed by the Courts. Therefore, if such decision is wrongful, the Tenders Committee may reject it, and the Court may interfere.

The various Courts had specified that a local authority must specify the “goods” it is interested in purchasing in a consistent manner, and without using any abstract expressions or the name of a specific vendor, as to not create a situation in where the “sole supplier” exemption will be baseless[7]. Moreover, it has been ruled in the case of Maor Shilut VePirsum Muar Ltd. (hereinafter: “Maor Shilut Case”), that the interpretation of the term “goods” should be goods that serve the same, or principally the same function[8]. The aforesaid implies that a local authority may not include redundant standards in the tender, in order to “tailor” the tender to the standards of a certain vendor with whom it wishes to contract not by way of a tender[9].

Finally, there is a certain disagreement between the Courts on whether a municipality that chooses to contract under an exemption from a tender with a sole local supplier, must announce its intention as such in public. One position is that only a public announcement will ensure that only contracts that are indeed  meant to be carryied out under an exemption from a tender – will indeed be exempted from a tender, whereas other contracts will not be carried out similarly. In addition, the announcement will allow any other supplier, who argues that his products are compatible with the municipality’s requirements, try and set the record straight[10]. The other position is that a public announcement is not included in the law provisions applied to a local municipality, and that such a procedure is non-mandatory[11]. it should be noted that the ruling in the matter of Eshcolot Energia Ltd. (in which the court specified that there isn’t a need for a public announcement), is one of the few rulings in which the court had rejected a petition submitted against a government corporation’s decision not to hold a tender due to a sole supplier, and thus in fact the Court has applied the exception to the rule that establishes mandatory tenders.

Can a start-up company be considered as a sole local “supplier” or “specialist”?

Naturally, a start-up company is a company founded for the purpose of developing a unique product, or at least a product with unique, non-market properties. Therefore, it can be argued that it is automatically considered a sole “supplier” in the market and therefore is entitled to an exemption from a tender if it chooses to contract with any municipal or administrative authority. However, upon analyzing the ruling on the aforementioned exemption, it is seen that the decision on who is a sole supplier is not a simple one. As ruled in the Maor Shilut Case, the “goods” that the city is interested in purchasing needs to be intercepted as serving a certain function, and not as goods that are absolutely compatible with the “goods” offered by the start-up with which the municipality is interested in contracting. Under such circumstances, a situation might definitely happen, in which a product made by a start-up company may be unique, but has no unique function, so other products fulfilling the same function, only differently, are in existence, and that negates the company’s sole local supplier status.

Summary

As extensively reviewed hereinabove in this article, the exemption from holding a tender due to a sole supplier has many advantages simplifying the contracting between a local authority and an anonymous supplier or specialist. However, the decision that a certain supplier or specialist are indeed the only local ones appears as an uneasy one, to say the least, whereby the default of the local Courts is that there is a mandatory tender requirement and it will be very difficult to prove that the exemption seeker is indeed a sole local supplier or specialist. Under such circumstances, even if a certain municipality is convinced that it may contract with a vendor under an exemption from a tender due to his status as a sole local supplier, there is high probability that the Court will not second that opinion.

[1]  Mandatory Tenders Law, 5752-1992