Rita Gustafsson, Bombardier Transportation Sweden AB

Rita Gustafsson, Bombardier Transportation Sweden AB

By Rita Gustafsson

Good advice does not come for free is a common saying, and coming from a lawyer it usually does not. Additionally, there may be a few caveats, carve-outs and other formalities to indemnify the lawyer providing the advice. So when one does get good advice for free, one should embrace it – especially when it is from a colleague and with no indemnification clause attached to it.

During my first few weeks at Bombardier in Sweden, my predecessor Johan Lagercrantz once advised me to look at an agreement as a mere mean of risk distribution. Negotiating contracts in European, Asian and Latin American markets, this recommendation has many times helped unlock tough negotiations and bring parties closer to each other, hence facilitating not only the closing of the deal, but also the project execution phase.

A buyer and a tenderer with intentions to serve in excellence according to their market demands, both wish to ensure a smooth project execution as well as a fault-free product delivered on time. In a time where globalization and localization are equally important, fundamental legal principles within public procurement are often the same. Common for all EU countries are the guiding principles of proportionality, transparency, equal treatment, mutual recognition and non-discrimination. These principles tend to be found also in other legislations and international legal frameworks. Though the implementation of these principles may vary, public procurement often boils down to fairness and managing the expectations of all stakeholders; the tenderers’ and the buyer’s, the government’s and the tax-payers’ as well as, in the case of trains, the users.

Recently, buyers of trains and railway equipment have started involving another stakeholder – the external law firm – in order to reshape the terms and conditions of requests for proposals.  The target is often to provide an as rigorous framework as possible from a pure buyer’s perspective. The commercial deviations submitted in conjunction with the tender are then evaluated by the law firm as had there been a dispute; if the law firm is convinced that a court would rule in favor of the buyer, the deviation may be accepted and then scored accordingly together with the rest of the bidding documentation. If the law firm rules that a court may rule in the favor of the tenderer, the tenderer and its bid is disqualified.

External lawyers are unfortunately not always familiar with the railway industry, and therefore miss accounting for certain factors in producing the bidding documentation. For example, a train is a product with an exceptionally long life cycle compared to many other goods. This means that the parties do not only need to agree to conclude a contract, but also often need to agree on a number of issues during the design phase, the project execution and during the period of after sales service. A relationship focus, solution orientation and balance of risks help to ensure success throughout the parties’ cooperation.

The consequence of the initiative to shift the balance of the market to a buyer-friendly one unfortunately does not avoid problems, but often risks to just postpone them until the project execution phase. As few serious actors with sound financial management can afford to take on an unlimited number of risks, which are not priced, this leads to one of three scenarios;

  • New entrants on the global market may accept complying with all requirements specified by the customer without pricing risks. Such companies may be competitive in a bidding phase, but lack the required experience during the execution phase, or worse, are not be able to take any financial hits to their commitments, which may inevitably lead to failure to fulfill contractual obligations, insolvency or bankruptcy; or,
  • Companies entering new markets may not be aware of how the principles of public procurement are implemented locally, and may therefore submit fully compliant offers thinking they are free to renegotiate the terms and conditions at a later stage, which may lead the buyer having to retender either because it becomes evident that the tenderer will not be able to fulfill the contractual requirements, or because any small contractual amendment may lead competitors to appeal the award. A retendering procedure is costly both in monetary terms and goodwill. It also risks ruining the timeframe for implementation of for example a new infrastructure project; or,
  • Non-competitive pricing, which for public procuring entities, may be detrimental as price is often one of the determining factors to consider in procurement given the use of governmental funds.

These consequences are hardly favorable for a buyer but rather create uncertainty. In concluding business with the prospect of long-lasting cooperation, it may instead help to try to get into the mindset of the other party – whether buyer or tenderer – and to ensure mapping of the Buyer’s needs, considering what the real needs are, as those are the ones the buyer will pay for.

After all, an agreement is a mere means of risk distribution, and each clause comes with a price tag, be it plus or minus. Creating a platform for long-term cooperation and tools for solving problems, which may occur, rather than penalizing each other, is crucial to success in an ever changing environment where accurate predictability may not always be plausible considering the timespan. Key, is ensuring that the right competencies are in place both on the buyer’s and the seller’s side, in terms of commercial and technical expertise.

Rita Gustafsson is Director Contracts & Legal Affairs at Bombardier Transportation in Sweden, one of the largest transportation companies in the world and one of the few in the industry focused on both rail and aerospace. In her role she focuses on Contract Law, Corporate and Commercial Law, Procurement and Litigation & Arbitration.