Exclusion of Insurance Bonds in Public Procurement

The Lahore High Court, in the case of M/s Jalal Construction Company vs. The Secretary, C&W Department, Government of Punjab and others, addressed critical legal issues regarding the exclusion of insurance bonds as acceptable forms of performance security in public procurement contracts.

Background:

The petition was filed by multiple government contractors (collectively referred to as "Petitioners") who were aggrieved by the decisions of various procurement agencies under the Federal Government and the Provincial Government of Punjab. These agencies required the Petitioners to provide performance securities exclusively in the form of bank guarantees, explicitly excluding insurance bonds or guarantees. The Petitioners challenged this requirement, arguing that it was contrary to the applicable procurement laws, discriminatory, and violative of their rights under the Constitution of Pakistan.

Key Issues:

Legality of Excluding Insurance Bonds as Performance Security: The Petitioners argued that the exclusion of insurance bonds was arbitrary and without legal basis, particularly when the Standard Bidding Documents (SBDs) formulated by the Pakistan Engineering Council (PEC) permitted the use of insurance bonds or guarantees from insurance companies with an AA rating from PACRA or JCR.

Applicability of PEC Standard Bidding Documents: The Petitioners contended that PEC, a statutory body under the PEC Act of 1975, had developed SBDs that were widely adopted across Federal, Provincial, and Local Governments. They argued that these documents should be binding on all public procurement processes, as directed by the Executive Committee of the National Economic Council (ECNEC) in its 2007 decision.

Constitutional Challenge and Alleged Discrimination: The Petitioners also claimed that the exclusion of insurance bonds constituted discrimination under Article 25 of the Constitution of Pakistan, 1973, which ensures equality before the law. They argued that excluding a valid form of security that was commonly accepted in the industry unfairly restricted their ability to participate in public procurement.

Court's Analysis:

Mandate of PEC and ECNEC’s Decision: The Court examined the statutory framework of the PEC Act, 1975, and the role of ECNEC in guiding public procurement. It was clarified that while the PEC is responsible for setting standards for engineering contracts and developing SBDs, its mandate does not extend to compelling all public procurement agencies to adopt these documents without alteration. The ECNEC’s directive was found to be advisory, aimed at promoting standardization but not having the force of law to override statutory provisions or regulations enacted by other competent authorities.

Provincial Procurement Authority and Autonomy: The Court emphasized the autonomy of the Punjab Procurement Regulatory Authority (PPRA) established under the PPRA Act, 2009. The Punjab PPRA has the statutory authority to develop its own SBDs and rules for public procurement within the province. The Court found that the Punjab PPRA’s decision to exclude insurance bonds was within its lawful powers, reflecting a conscious policy decision to safeguard public funds and ensure timely realization of securities.

Federal Procurement Framework: At the Federal level, public procurement is governed by the Public Procurement Regulatory Authority Ordinance, 2002, and the Public Procurement Rules, 2004. The Court noted that, under these regulations, Federal procuring agencies are required to use SBDs prescribed by PEC unless they conflict with Federal procurement laws. The Federal PPRA retains the discretion to develop and enforce its own SBDs.

Discretion of Procuring Agencies: The Court underscored that procuring agencies possess the discretion to define acceptable forms of performance security in their SBDs. It was highlighted that these agencies are entitled to exclude certain forms of security, such as insurance bonds, if such exclusions are deemed necessary for ensuring the integrity and financial security of public procurement processes. The Court rejected the argument that such exclusions were discriminatory, noting that all bidders were subject to the same conditions and requirements under the respective SBDs.

Case Law: The judgment referenced several key decisions, including Messrs Ghulam Muhammad & Sons vs. WASA, Faisalabad (2022 MLD 1216) and A.M. Construction Company (Pvt) Ltd. vs. Province of Punjab (2023 CLC 616), which affirmed the legal principles governing the discretion of procurement agencies in setting terms for performance securities. Additionally, the case of Nisar Ahmed Khan vs. National Highway Authority was cited to reinforce the position that procuring agencies have the right to exclude specific forms of guarantees as part of their lawful policy-making authority.

Court's Conclusion: The Lahore High Court concluded that the exclusion of insurance bonds by procurement agencies under both the Federal Government and the Provincial Government of Punjab is lawful and in compliance with the relevant statutory and regulatory frameworks. The Court affirmed the discretion of procuring agencies to determine the forms of performance security that best protect public interests and financial integrity. It held that the PEC’s SBDs, while serving as a benchmark, do not have mandatory applicability over public procurement agencies.

The Punjab PPRA and Federal PPRA are empowered to develop and enforce their own procurement regulations and SBDs, including the exclusion of insurance bonds. The exclusion of insurance bonds is not discriminatory, as it applies equally to all bidders and aligns with the lawful discretion of the procurement agencies.

The Court dismissed the petitions, directing the Respondents (procuring agencies) to issue fresh notices to the Petitioners to furnish security in the requisite form as stipulated in the applicable SBDs within 28 days. Failure to comply would result in action being taken against the Petitioners according to the terms of their contracts.

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