Supplier pooling agreement: what to look out for when bidding together?

What is a supplier association agreement?

The submission of a joint bid by multiple suppliers is a fairly common tool used by companies in public procurement. Individual entities join forces to better meet the requirements of the contracting authority. This type of cooperation is based on a supplier association contract. However, it does not only bring benefits, but also risks that can put the company in the middle of legal disputes or cause it to suffer significant financial losses.

So what is a supplier association agreement? It is an unnamed type of contract, which usually takes the form of a cooperation agreement, possibly with elements of a company agreement. It is a legal document that two or more companies enter into with each other in order to bid for and jointly execute a public contract. In this case, it is not a separate legal entity, but a consortium, i.e. a temporary association of entrepreneurs for the purpose of fulfilling a specific contract. Typically, these are entities with different specialisations, which complement each other and together meet the contracting authority’s qualification requirements.

This model also allows smaller companies to participate in large tenders for which they would not meet the qualification requirements on their own.

In which sectors are suppliers most often associated?

In practice, a supplier association agreement is concluded in many sectors, but the most common are construction, IT or engineering and design work. In the construction industry, for example, this is the case where one company provides the rough construction and the other takes care of specialised technological units. In IT, on the other hand, one entity may supply hardware and the other is in charge of software or maintenance. And in the case of engineering and design work, different professionals with different specialisations in design and construction supervision join forces.

What must be included in any contractor association agreement?

A well-drafted contract that clearly defines the cooperation of the various entities is more than important in this case. If the entities are to act as a single entity, they must have a clearly defined relationship and rights and obligations between them. It is not possible for only one of the participating companies to lick the imaginary cream and the other, for example, to shoulder all the responsibilities.

We will be happy to prepare a quality contract that sufficiently covers your relationship with the other company. Just contact us. The main points of such a contract include:

• Division of responsibilities and tasks: who is responsible for what and what activities will each member perform?
• Financial arrangements: what will be the profit share for each entity, how will invoicing be handled, who will cover costs and any financial penalties?
• Communication with the sponsor: One main contractor should always be identified to represent the association.
• Dispute resolution mechanisms: clearly define processes in the contract for disagreements between members of the association.
• Consequences of member resignation: What happens if a member resigns or defaults?

The contract may include penalty mechanisms if a partner fails to meet its obligations and rules for the allocation of liability to third parties.

What are the risks for suppliers when bidding together?

Although pooling allows companies to participate in large-scale contracts, there are some major risks to this model. The first is that most of these associations operate on the principle of joint and several liability. This means that once one member ceases to fulfil its obligations, the other members are liable for their share. This gives the contracting authority the assurance that its contract will be fulfilled, but if a member, for example, goes bankrupt, the remaining members will take the hit.

There is also the risk that if you underestimate the preparation of the contract, the contracting authority may reject your bid. This is most often due to an unclear division of tasks between the individual members of the association, or non-compliance with the tender conditions, where one of the members may not be sufficiently qualified.

Coordination between multiple entities can also lead to delays in the contract or different expectations regarding the quality of performance. Therefore, you cannot do without setting up effective communication in the supplier association in this case.

Another risk is the possibility of problems with the antitrust authority. The Office for the Protection of Competition has on several occasions fined businesses for agreements that were in fact hidden cartel agreements.

The courts have also dealt with supplier association agreements

The Czech and European courts have dealt with several cases related to supplier pooling. Although the pooling of suppliers to submit joint bids for public contracts is a common practice, suppliers have also abused it in the past to restrict competition.

In May 2024, the Office for the Protection of Competition (OPC) uncovered and punished a cartel agreement between several construction companies. They had illegally agreed to participate in tenders and offered their services in public tenders issued by the Railway Administration, specifically for demolition work on buildings, building repair and repair of the building’s outer shell. The Office found that the bids of these companies contained identical itemised prices, which indicated a prior agreement. Such conduct was assessed as an infringement of the Competition Act as the firms acted in concert with the aim of distorting competition. The total amount of the fines for these companies was CZK 7 442 000.

The Supreme Administrative Court of the Czech Republic, in turn, dealt with a case where a member of an association of suppliers failed to fulfil its obligations under a public contract. In this case, the court confirmed that if one member of the association fails to deliver its part of the contract, the entire entity may be sanctioned and the contract terminated. The court’s decision thus clearly shows the emphasis on the principle of joint and several liability mentioned above, where all members of the association are jointly liable for the performance of the contract.

How to avoid problems in the case of a business association agreement?

To avoid problems if you want to join forces with other suppliers, invest in a carefully drafted contract. We recommend consulting with an attorney who is familiar with public procurement and knows what all needs to be covered in such a contract.

Also, thoroughly vet the partners you want to work with. Before you sign a contract, check the financial and professional capacity of each other member of the association.

Set out early on the responsibilities of each company, the control mechanisms and how you will resolve any conflicts with other members.

Summary

A supplier association agreement allows companies to join forces and bid jointly for a public contract, but it also carries significant risks. Getting the allocation of responsibilities, financial arrangements and dispute resolution mechanisms right is key, as most associations operate on the principle of joint and several liability – if one member fails to meet its obligations, this will impact on the others. Errors in the contract can lead to the rejection of a bid by the contracting authority or even to a breach of competition rules, as confirmed by the Office of Competition and Consumer Protection in May 2024, when it uncovered a cartel agreement between construction companies and fined them CZK 7.4 million. The Supreme Administrative Court in turn ruled that if one member fails to fulfil its obligations, the entire association can be sanctioned. To avoid legal problems, companies should carefully vet their partners, invest in a good contract and consult with an attorney.