n Articles and Rulings

Intellectual Public Procurement:
The Law in Israel

Written by L. Marc Zell, Adv.
(with Craig Rubin, Adv.)

A. Public Procurement and its Legal Basis

1. Constitution and Legislation

Overview of Israel and its Economy

Israel, the Middle East’s only democracy, is located on a narrow stretch of land on the eastern shore of the Mediterranean Sea. A country with a population of slightly more than 6 million, Israel achieved its independence in 1948 after fighting a war of independence against the invading armies of neighboring Arab countries.

Once a small localized economy based on light industry and agriculture, Israel today is a world leader in such areas as electronics and information technology. The Israeli economy has undergone many changes in recent years, and as the result of privatization and new legislation the government has greatly reduced its direct involvement in the economy. The citizens of Israel today enjoy a standard of living that is comparable with that of Western Europe.

Israel is a founding member of the World Trade Organization, a signatory of the GATT Uruguay round and is the only country in world that has entered into free trade agreements with the United States, the European Community and the European Free Trade Association.

Israel is a country that is still building itself and many major infrastructure projects are being carried out or are in the planning stages. Most of these projects are conducted by way of international tender and numerous foreign companies have won such tenders.

Overview of the Israeli Legal Framework

Israel is a parliamentary democracy and is one of only a handful of countries in the world without a written constitution. The 120 member Israeli parliament or “Knesset” serves both as a house of representatives and as the legislative branch of government. There are no restrictions on the legislative powers of the Knesset except for a limited number of “entrenched clauses” found in certain “basic laws” which essentially enact constitutional norms.

Primary Legislation and Implementing Regulations

Primary legislation in Israel is enacted by Israel’s Knesset. Primary legislation often authorizes the government, through government ministers or other public officials, to enact implementing regulations (secondary or subsidiary legislation) pertaining to the primary legislation. Certain areas of the law, as is the case with public procurement, are primarily governed and regulated by the implementing regulations. Most laws enacted by the Knesset expressly state which government minister is responsible for enacting the relevant implementing regulations. In certain circumstances, as is the case with public procurement, the implementing regulations enacted by the relevant ministers must be approved by a committee of the Knesset.

2. Budget Regulations

Procurement conducted by a government entity must specifically be provided for in the entity’s budget. Pursuant to the Budgetary Principles Law, 5745-1985 (the “Budgetary Law”), the amounts to be expended by the government in any fiscal year are to be included in the annual budget of the State of Israel. The budgets of other government entities such as statutory companies, government companies and local governments must be approved by either the Israeli Minister of Finance or the Minister of the Interior.

The Budgetary Law also provides that the contracts of various government organs and entities that are above certain designated amounts must state that the specific transaction is provided for in the entity’s budget and indicate the relevant section of the budget where it is included. In addition, the Budgetary Law provides that unbudgeted-for contracts valued above certain designated amounts are considered void.

3. General Overview of Laws, Implementing Regulations, International and Bilateral Agreements Applicable to Public Procurement in Israel

a. The Three Main Branches of Public Procurement in Israel

Public procurement in Israel can generally be divided into three separate legal regimes:

1. Procurement by government ministries, government companies, government subsidiaries and statutory companies;

2. Procurement by the Ministry of Defense, the Israel Defense Forces and government companies and subsidiaries for which the Minister of Defense is responsible; and

3. Procurement by municipalities and local and regional councils.

Although there are many similarities regarding the basic legal principles and procedures which apply to all three legal regimes, there are various substantial differences, as discussed herein.

b. General Principles of Public Procurement Law in Israel

General Principles

“Tender” has been defined by the Israeli Supreme Court as an “(i)nstitutionalized framework for carrying out negotiations in preparation for signing a contract, by way of competition between different proposals.” (Beit Yules Ltd. v. Raviv Moshe & Co. Ltd., Additional Hearing 22/82, 43 (i) P.D. 441, 480 (1989)).

Israeli public procurement law is grounded on two central policies or foundations: (1) to allow contracting government entities to choose from among as great a number as possible of suitable proposals in order to choose the best one; and (2) to provide all interested parties with the opportunity to compete for a contract on the basis of fair competition and equal conditions (Beit Ariza Rechovot Ltd. v. the Minister of Agriculture, High Court Petition 292/61, 16 (i) P.D. 20, 27 (1961)). In short, the basic principles of Israeli procurement law are intended to ensure the public interest in equality and integrity as well as the economic interest of the procuring entity (see e.g., Gozlan v. Beit Shemesh Local Council, High Court Petition 368/76, 31 (i) P.D. 505, 511 (1976)).

Over the years the Israeli courts, through a series of decisions related to procurement and the tender process, have established a modern body of procurement law which apply to all government entities. These decisions have articulated general principles that must be followed by the procuring government entities during all stages of a tender. These principles include equality, fair competition, reasonableness, good faith, impeccability, and the lack of favoritism, arbitrariness, discrimination and conflicts of interest on the part of the government entity. These principles are considered so important and fundamental to public procurement in Israel that it has been held that the procuring government entity must take steps to prevent even the appearance of impropriety (Herut Ltd. v. the Minister of Health, High Court Petition 794/78, 33 (ii) P.D. 716 (1979), regarding favoritism of certain offerors). In addition, as is the case in other jurisdictions, the law of contract, quasi-contract and torts all apply to public procurement law and tender procedures in Israel.

The Legal Situation before the Enactment of the Mandatory Tenders Law

Prior to the enactment of the Mandatory Tenders Law, 5752-1992 (the “Law”) there was no general statutory requirement that government entities conduct public open tenders when contracting to procure goods or services. Only local governments were required by law to conduct public tenders. Many central government entities, however, were required to procure by way of public tender pursuant to the Finance and Business Rules issued by the Israeli Accountant-General (the “Rules”). Pursuant to the Rules, much discretion was given to the procuring entities, and the Accountant-General allowed for many individual transactions to be performed without the need for a public tender.

Prior to the enactment of the Law government companies were only required to procure by way of public tender if their own specific internal guidelines required this. Since the Rules as well as the specific internal guidelines of other government entities were not legally binding directives grounded in legislation passed by the Knesset and were not made known to the general public, the ability to challenge the tenders of government entities was somewhat limited. The Rules continue to serve as internal procurement procedures for certain government entities even after the enactment of the Law and the promulgation of its implementing regulations. The Rules today, however, are only considered internal instructions of a technical nature, which must conform with the provisions of the Law and its implementing regulations.

The Enactment of the Mandatory Tenders Law

Israeli procurement law underwent a “revolution” on March 3, 1992 when the Law was enacted by the Knesset. The Law went into effect on May 16, 1993. The enactment of the Law was the culmination of a process that had continued for many years and had included various informal proposals as well as formal proposed bills being submitted to the Knesset. An early version of the Law was originally submitted to the Knesset in 1984.[1]

The Law is essentially a very concise framework which specifies those areas where secondary implementing legislation may be enacted. The Law authorizes the Minister of Finance, upon the approval of the Constitution, Law and Justice Committee of the Knesset, to promulgate regulations in certain specified areas in order to implement the Law. The approval required of the Knesset committee insures the parliamentary overview of the implementing regulations. The result, therefore, is that the vast majority of the content and procedures regarding mandatory government tenders in Israel are included in the implementing regulations and not in the Law itself.

In addition, due to the special nature and role of the military establishment in Israel, and the importance and sensitivity of procurement by the Ministry of Defense and the Israel Defense Forces, the Law provides that the Minister of Defense can promulgate separate regulations implementing the Law with regard to procurement by the military establishment.

c. Scope of the Law

The Law essentially provides that all government ministries, statutory companies (companies created through specific legislation), government companies and certain other entities connected to the government may only enter into contracts to procure goods or services through a public tender which grants every person an equal right to participate. Section 2 of the Law provides that:

“The State, all government bodies corporate, religious councils and sick funds, may not enter into any contract for the performance of any transaction in respect of goods or real estate, or for the performance of work or the acquisition of services, except by way of a public tender which provides every person with an equal opportunity to participate in it.”

Section 1 of the Law defines “government bodies corporate” as including government companies, government subsidiaries, and statutory companies (“Government Bodies Corporate”).

d. Implementing Regulations of the Mandatory Tenders Law

In 1993 the Minister of Finance promulgated the Mandatory Tenders Regulations, 5753-1993 (the “Regulations”) which implement the Law and provide the basic procedural rules with respect to procurement by the government entities covered by Section 2 of the Law, other than the defense establishment.

In 1993 the Minster of Defense promulgated the Mandatory Defense Regulations (Defense Establishment Contracts), 5753-1993 (the “Defense Regulations”) which provide the basic procedural rules applicable to procurement by the Ministry of Defense, the Israeli Defense Forces and government companies and subsidiaries for which the Minister of Defense is responsible.

e. Preferences for Local Products and Offsets

The Preference Regulations

In addition to the Regulations and Defense Regulations, other implementing regulations have been promulgated pursuant to the Law. These regulations include preferences for Israeli products and services. Section 3A of the Law, which authorizes the enactment of secondary legislation related to preferences, was not included in the original Law but was only added as an amendment in 1993.[2] These preference regulations have their origin in a pre-Law government decision from February 1984 which required that government entities provide certain preferences for local products and services when conducting procurement.

The Mandatory Tenders Regulations (Preference for Israeli Products and Mandatory Commercial Cooperation), 5755-1995 (the “Preference Regulations”) apply to government ministries and Government Bodies Corporate only. The Preference Regulations therefore cover both government entities that procure pursuant to the Regulations as well as certain entities that procure pursuant to the Defense Regulations. The Preference Regulations provide for a preference with respect to the price criteria of Israeli goods that do not exceed a proposal regarding foreign goods by more than 15 percent (or 10 with respect to procurement by government companies). The Preference Regulations currently do not apply to Israeli services although the Israeli Ministry of Industry and Trade is currently proposing that the Preference Regulations be expanded to provide for a preference with respect to Israeli services as well.

The Mandatory Tenders Regulations (Preference for Products from National Priority Areas), 5755-1995 (the “1995 National Priority Regulations”) and the Mandatory Tenders Regulations (Preference for Products from National Priority Areas), 5758-1998 (the “1998 National Priority Regulations) provide for a preference of between five and fifteen percent with respect to the price criteria in a tender with regard to goods or services of offerors from certain designated national priority areas within Israel. In general, the 1995 National Priority Regulations apply only to government ministries (other than the Ministry of Defense) and the 1998 National Priority Regulations apply only to tenders of the Ministry of Defense.

The Preference Regulations, the 1995 National Priority Regulations and the 1998 National Priority Regulations are similar in purpose to national preference legislation in other countries such as the Buy American Act in the United States.

Mandatory Commercial Cooperation (“Offsets”)

The Preference Regulations also require foreign suppliers (defined as “a producer, supplier or importer of imported goods or a supplier of work not executed in Israel”) that contract with certain government entities for the acquisition of goods or the execution of works the value of which exceeds 2,100,000 New Israel Shekels (“NIS”)[3] to implement “mandatory commercial cooperation” (offsets) in an amount equivalent to 35 percent of the value of the contract. The mandatory commercial cooperation requirement, however, is only a qualification for a foreign supplier to participate in a government tender and is not a criteria for awarding a contract. As described below, such mandatory commercial cooperation is only to be performed if the foreign supplier actually contracts with the Israeli government entity. The requirement to perform mandatory commercial cooperation applies also to contracts above the said monetary value which are not done by way of tender.

f. The Government Procurement Agreement

Israel is a signatory to the 1994 Agreement on Government Procurement that was signed in Marrakech on April 15, 1994 and entered into force on January 1, 1996 (the “GPA”). The GPA, an agreement within the framework of the World Trade Organization, is intended to open up government procurement contracts and tenders of the signatory states to international competition and to remove national preferences and discrimination against foreigners. Article III (1) of the GPA requires that its signatory countries give the products, services and suppliers of other signatory countries treatment “no less favourable” than that given to domestic products, services and suppliers and that signatory countries not discriminate among goods services and suppliers of the other signatory countries when procuring.

The GPA, however, only applies to certain government tenders in Israel. The application of the GPA to a specific tender depends upon the procuring entity, the value of the contract as well as the type of product or service being procured. The GPA applies to tenders of the following Israeli government entities, for contracts valued above the listed thresholds:

Annex I of the GPA – Procurement by all government ministries (except for the Ministry of Defense and the Ministry of Internal Security):

Annex II of the GPA – The municipalities of Jerusalem, Tel Aviv and Haifa

Annex III of the GPA – Various government companies including the Israel Airports Authority, the Israel Ports and Railways Authority, the Israel Electric Corporation, and Mekoroth Water Resources Ltd.:

Pursuant to Section 44 of the Regulations, which provides that the Regulations “shall apply to the extent that they do not contradict any obligation of the State under an international treaty,” the provisions of the GPA are given precedence over the provisions of the Regulations if there is any contradiction between the two. Therefore, when an Israeli government entity is involved in the procurement of goods or services which is covered by the GPA, the Preference Regulations and the 1995 National Priority Regulations regarding preferences for local Israeli products and services shall not apply with regard to suppliers from any other GPA signatory country.

The mandatory commercial cooperation requirements, however, apply to foreign suppliers in Israel even if the GPA applies to the specific government tender. This is due to the fact that Israel, which is considered a “developing country” for purposes of the GPA, negotiated conditions for the use of offsets at the time of its accession to the GPA. These conditions permit Israel to require offsets in the amount of 35 percent of the contract value through the year 2000 and 30 percent for the four years thereafter.[4]

g. Bi-lateral and other Agreements that Effect Procurement by Israeli Government Entities

Israel has also entered into a number of international agreements that apply to government procurement with regard to suppliers from certain foreign states. Article 15(3) of the United States – Israel Free Trade Agreement of 1985 requires that Israel waive all “Buy National” (local preference) restrictions with respect to government agency purchases of at least $50,000 with regard to U.S. suppliers. The government agencies covered by this Article are 13 Israeli government entities which came under the framework of the WTO government procurement agreement that preceded the GPA. A number of important procuring government entities such as the Israel Airports Authority and the Israel Ports and Railways Authority are included among the 13 entities. The Preference Regulations and the 1995 National Priority Regulations will not apply to suppliers from the U.S. with regard to contracts of the 13 covered entities which are above the noted threshold.

In 1987 Israel and the United States also signed the Memorandum of Understanding Between the Government of Israel and the Government of the United States of America Concerning the Principles Governing Mutual Cooperation in Research and Development, Scientist and Engineer Exchange, Procurement and Logistic Support of Defense Equipment (the “MOU”) which relates in part to procurement by the Israeli Ministry of Defense. Within the framework of the MOU the Israeli Ministry of Defense invites U.S. suppliers to submit proposals in certain tenders for the acquisition of defense supplies. The local preferences provided for in the Preference Regulations will not apply with regard to American suppliers which participate in tenders of the Ministry of Defense pursuant to the MOU. Preferences for Israeli suppliers from certain national priority areas which are provided for in the 1998 National Priority Regulations will, however, apply to such tenders.

In 1997 Israel also signed two procurement agreements with the European Community which open up each side’s public procurement markets beyond the provisions of the GPA:

The Agreement between the European Community and the State of Israel on Government Procurement broadens the scope of the GPA with regard to European Community suppliers to cover additional entities and services including Israeli municipalities not covered by the GPA, urban transport entities, maintenance and repair services and medical equipment.

The Agreement between the European Community and the State of Israel on Procurement by Telecommunications Operators opens up the procurement of Bezek (Israel’s sole provider of telephone line service) and Israel’s various mobile telecommunication operators to European Community suppliers. This agreement requires that such Israeli entities not apply any of the relevant local preference rules with regard to European Community suppliers in procurement contracts of greater than $186,000 for supplies and services and $12,189,000 for construction services.

B. Procedure for Award of Public Procurement Contracts

1. Application of Relevant Legislation and Regulations

As discussed above, the government entities included in Section 2 of the Law, other than those that are a part of the defense establishment, are required to procure goods and services by conducting public tenders pursuant to the procedures and rules included in the Regulations.

The following government entities are required to procure pursuant to the Regulations:

1. All government ministries (excluding the Ministry of Defense);

2. Reference units of such ministries;

3. Government companies and subsidiaries;

4. Statutory companies;

5. The Israel Lands Administration;

6. The office of the President, the Knesset, the State Comptroller’s Office and the Knesset Central Elections Committee;

7. Religious councils; and

8. The Sick Funds (the four major providers of medical care in Israel).

Many of the largest government procuring entities are required to procure pursuant to the Regulations, including the Israel Ports and Railways Authority, the Israel Airports Authority, the Israel Electric Corporation and Bezek.

Although the Regulations apply to a wide range of government entities there are some differences regarding the applicability of the Regulations to government ministries, government companies and statutory companies. These differences can be summarized by stating that government companies, due to their commercial nature, are given more latitude in a number of areas including the exemption of certain contracts from the general open tender requirement.

In addition to the Regulations all government entities have detailed internal procedures pertaining to procurement. Such internal rules, however, may not contradict the provisions of the Law or its implementing regulations, including the Regulations. As stated above, the internal procurement procedures set out in the Rules apply to most government ministries.

Tender Committees

Pursuant to Section 8 of the Regulations, each government entity is required to appoint one or more tender committees which are responsible for conducting the tenders of the entity. Most entities have a number of tender committees, each responsible for a different area of procurement. The tender committees of government ministries and statutory companies are required to have no more than five members, who must include the director-general of the entity, the accountant and legal adviser (or their representatives). Government companies are required to have a tender committee of at least three members. Decisions of tender committees are adopted by a majority vote.

Government entities other than government companies and subsidiaries also have special exemption committees which must approve certain decisions of the tender committee regarding exemptions from mandatory open tenders and the holding of closed tenders. One exemptions committee, appointed by the director-general of the Ministry of Finance, acts for all government ministries. Certain other decisions of the tender committees regarding exemptions require the approval of the Accountant-General of Israel or the Director-General of the entity.

Estimates

Before entering into the tender process, most government entities undertake to estimate the value of the proposed transaction. Although not required in the Regulations, as is the case in the Defense Regulations and the regulations which apply to local governments, estimates are carried out for three essential purposes:

1. In order to calculate what type of tender procedure is required (open tender, closed tender, GPA tender, exempt from tender);

2. To ensure the transaction is covered by the budget of the procuring government entity; and

3. To gauge whether the prices submitted by the various offerors are reasonable, overpriced or “dumping” prices.

The estimate is often undertaken by obtaining unofficial proposals from a number of potential suppliers or by having an expert calculation prepared.

2. Types of Procedure

Exemptions from Open Invitation Mandatory Tendering

The Regulations include a long list of transactions which are exempt from the general mandatory tender requirement included in Section 2 of the Law. In addition, the Regulations include a list of transactions that require that a “closed tender” be held.

Section 3 of the Regulations, entitled “Exemption from Mandatory Tender”, includes 30 different categories of contracts regarding transactions in goods, real estate, performance of work or the acquisition of services which do not require the holding of an open public tender and are exempt from the provisions of Section 2 of the Law.

The major exceptions to the general mandatory tender rule which are included in Section 3 of the Regulations are as follows:

1. The value of the contract is not greater than NIS 42,000 (so long as contracts not done by way of tender between the government entity and the specific supplier do not exceed a total of NIS 84,000 during the relevant budgetary year);

2. The contract is required on an urgent basis in order to prevent significant harm;

3. Conducting a public open tender may cause harm to the national security of the state;

4. The contract is a continuation of an earlier contract, made within three years thereof, and the aggregate value is not greater than 50 percent of the earlier contract; or

5. Where special and unusual circumstances justify not holding an open invitation tender.

The value of a contract is defined in the Regulations as being the total amount of payments made pursuant to a contract (including taxes), exclusive of any options.

Section 5 of the Regulations provides for exemptions from public tenders for transactions with certain expert professionals for the performance of work or the acquisition of services.

Section 14 of the Regulations provides for exemptions for foreign transactions if the said transaction is to be with a resident of a foreign country and is to be carried out abroad if:

1. It is a transaction for the acquisition of goods which cannot be acquired in Israel; or

2. The contract is entered into by a foreign branch or representative office of the government entity for its own use.

The Regulations also include provisions which provide for additional exemptions from mandatory tenders for certain contracts of specific government entities. Section 34 provides that a contract of a government company or subsidiary for the performance of a transaction in goods or real estate, the performance of work, or the acquisition of services, shall be exempt from tender if:

1. The contract may harm the company’s profitability, its ability to compete, its business opportunities, its ability to carry out a role with which it was charged by law or its ability to supply an essential service or commodity to the public;

2. The value of the contract is not more than NIS 168,000 (NIS 504,000 for government companies with an annual contract volume of more than NIS 840,000); or

3. The contract is for the sale of goods or the acquisition of services with a resident of a foreign state.

Section 39 of the Regulations provides that a statutory company shall be exempt from the public tender requirement if holding such a tender may harm its ability to carry out a role with which it is charged to fulfill under the law by which it was created or harms its ability to supply essential services or goods to the public.

In addition, Section 23(b) of the Regulations provides that if an open public tender is held and no proposals are submitted or if the tender committee does not recommend any of the submitted proposals, the government entity may enter into a contract without holding a new public tender if it is concluded that there would be no benefit to the procuring government entity in holding another open public tender.

Closed (Restricted Invitation) Tenders

Section 1 of the Regulations defines a closed tender as a “tender in which invitations for proposals are submitted to only certain offerors.” Before the Law and its implementing regulations were in effect it was very common for government entities to hold closed (restricted invitation) tenders when contracting with regard to goods and services.

The Regulations provide that in certain instances government entities are to hold closed or restricted tenders instead of a public tender. Such instances are listed in Section 4 of the Regulations and include the following:

1. The value of the contract is not greater than NIS 336,000;

2. A contract for goods with special characteristics and uncommon properties; or

3. A contract regarding R&D.

Pursuant to Section 16 of the Regulations, when a government entity wishes to enter into a contract that requires a closed tender, the tender committee shall approach several suppliers included in its list of potential offerors which each government entity is required to maintain.

A supplier who wants to be included in the relevant potential supplier list of a government entity is required to submit an application to the entity’s tender committee together with all information and documents required by the committee. The supplier shall be added to the list if the tender committee decides that the supplier is “fit” to be included on the list.

If there are less than ten suppliers listed, the tender committee is required to approach all of them with regard to a closed tender. If there are more than ten potential suppliers the tender committee must approach at least five suppliers who are to be chosen, in so far as possible, on a rotating basis.

Limited Tendering under the GPA

Limited tendering (closed tenders) is permitted under the GPA so long as it is “not used with a view to avoiding maximum possible competition or in a manner which would constitute a means of discrimination among suppliers of other parties or protection to domestic producers or suppliers.” Limited tendering is permitted under Article XV of the GPA in the following circumstances:

1. There is no response to an open tender or those submitting proposals do not comply with the conditions of the open tender;

2. The products/services can only be supplied by a particular supplier and no reasonable alternative exists;

3. The existence of extreme urgency; or

4. Procurement made under exceptionally advantageous conditions which only arise in the very short term.

Article VIII of the GPA provides that suppliers from GPA signatory countries are to be allowed to request inclusion in any qualified supplier lists at any time.

Classification of Tenders

Pursuant to Section 9 of the Regulations, when a government entity intends to enter into a contract its tender committee shall classify the contract as to whether it requires an open tender, a closed tender, a GPA tender or comes under one of the many exemptions to the general open tender rule included in Section 2 of the Law. In certain circumstances, such a decision requires the approval of the relevant exemptions committee, the Accountant-General or the Director-General of the entity. Section 42 of the Regulations requires, however, that procuring government entities give preference to holding open public tenders in so far as this is “justified and reasonable under the given circumstances” and do everything possible to prevent a matter from becoming “urgent.”

3. Notices

When a government entity intends to enter into a contract which requires an open tender, Section 15 of the Regulations requires that notice of the same be published in one Hebrew language daily newspaper in Israel, one Arabic language newspaper in Israel as well as on an internet website. Most government entity tender notices appear on the Israeli Government Advertising Office’s tenders website (http://michrazim.lapam.gov.il). Many government entities have also recently begun putting notice of proposed procurement on their own individual websites. The tender committee may, at its discretion, also publish notice of the tender in the foreign press and/or send notice to at least two foreign potential offerors.

Section 15 requires that the notice of proposed procurement include the following:

1. Description of the proposed contract;

2. The contract period, including any options;

3. Required preconditions for submitting a proposal;

4. Where the tender documents and additional information may be received; and

5. The place and last date for submission of proposals.

Where applicable the Preference Regulations as well as the 1995 National Priority Regulations require that the tender notice state that certain preferences will be given to Israeli products with respect to the price criteria. In addition, Section 5(b) of the Preference Regulations requires that if the contract is valued at more than NIS 2,100,000 the tender notice must state that a foreign supplier is required to include with its proposal an undertaking to carry out mandatory commercial cooperation in Israel if its proposal is chosen.

Entities which are required to waive preference regulations for American suppliers pursuant to the United States – Israel Free Trade Agreement also send notices of proposed procurement to the commercial department of the United States Embassy in Tel Aviv. Many other government entities also send notices of proposed procurement to the U.S. Embassy in Tel Aviv.

Many government entities also set up special meetings or “contractor visits” before the deadline for proposals are to be submitted in which potential offerors may meet with representatives of the procuring entity, visit relevant locations and receive additional information regarding the particular tender. These special meetings are often required in order to be able to submit a proposal.

Invitation to Participate Regarding Intended Procurement – Article IX of the GPA

Government entities conducting tenders covered by the GPA are required to publish an “invitation to participate regarding intended procurement” in either the Jerusalem Post or the International Herald Tribune – Ha’aretz (Israel edition), Israel’s two English language daily newspapers.

Each “invitation” to participate in a GPA tender is required to include the following information:

1. Whether the procedure is open, selective or will involve negotiations;

2. The date for starting delivery or completion of the delivery of goods/services;

3. The place where tender documents may be received and the price thereof;

4. Where additional information may be obtained;

5. Economic and technical requirements; and

6. Financial guarantees required.

The notice must also state that the tender is covered by the GPA.

The Tender Documents

As stated above, the notice of tender provides information as to where the tender documents may be obtained. Pursuant to Section 17 of the Regulations payment may be required by the procuring government entity for the tender documents. Israeli government entities almost always charge potential offerors for the tender documents and in general the greater the value of the contract the greater the charge for the tender documents. For large tenders the tender documents may cost thousands of dollars and such fees are not refundable. Many entities will permit potential offerors to review the tender documents before they decide whether they are interested in purchasing them.

The tender documents are considered an integral part of the tender and are often incorporated into the contract that is to be signed by the offerors.

Section 17 of the Regulations also states that the following are to be included in the tender documents:

1. The conditions of the tender and the required conditions to participate therein;

2. An offeror proposal form;

3. The text of the contract, terms of payment and the plans and specifications related to the implication of the contract;

4. The conditions, amount and period of the required guarantee, if any;

5. Some or all of the criteria by which the winning proposal will be chosen; and

6. Any other necessary information or documents.

Tender Documentation – Article XII of the GPA

Article XII of the GPA requires that the tender documents in a GPA tender include all information that was in the notice of intended procurement as well as:

1. The language the proposals are to be submitted in;

2. Economic and technical requirements and financial guarantees;

3. All necessary information and documents; and

4. The criteria to be used for awarding the contract, including factors other than price.

4. Time Limits

The Regulations do not provide for any time limit with regard to submission of proposals. Section 18 simply requires that the tender proposals be submitted at the time and in the place designated in the conditions of the tender. In practice the time limits for submission of proposals vary among the government entities and the type of contract.

Time Limits for Tendering and Delivery - Article XI of the GPA

Article XI of the GPA requires that any prescribed time limit be adequate to allow suppliers of other contracting parties as well as domestic suppliers to prepare and submit proposals before the deadline. The general rule prescribed in this Article of the GPA is that there should be no less than 40 days between the date of publication of the notice and the date for submitting proposals.

5. Qualification of Tenders (Preconditions for Participation in the Tender)

Section 6 of the Regulations provides that participation in a tender shall be conditional upon the following:

1. Possession of necessary licenses or registration required under law in the area which is the subject of the contract;

2. Compliance with any relevant Israeli standards; and

3. Submission of documents required under the Transactions of Public Bodies (Enforcement of Bookkeeping and Payment of Taxes) Law, 5736-1976 (for Israeli entities).

If an offeror does not fulfill all of the preconditions for participation in a tender the tender committee is required to disqualify the proposal.

The government entity may add other relevant conditions as well as condition participation in a tender on relevant experience, extent of activity, annual turnover, personnel requirements and the recommendations of third parties regarding the offeror.

Procuring government entities usually require that foreign offerors have the applicable industrial ratings or similar approval and provide basic incorporation and or other documents related to the company.

Many government entity tender notices simply state that participation in the tender process is subject to the offeror satisfying all of the preliminary requirements in Section 6 of the Regulations.

Section 7 of the Preference Regulations requires that a foreign supplier attach to its proposal a “Foreign Supplier’s Undertaking Form for Commercial Cooperation” in which the foreign supplier undertakes to the State of Israel that in the event it wins the tender it will carry out commercial cooperation at a level of at least 35 percent of the value of the contract or transaction. This undertaking is a standard form, the current version of which was published in Reshumot (the official government gazette) in 1998.[5] Submission of this undertaking, when required, is not a criteria for awarding a contract but is rather a pre-condition for a foreign supplier to participate in the tender.

Qualification of Suppliers – Article VIII of the GPA

Article VIII of the GPA provides that contracting government entities “shall not discriminate among suppliers of other Parties or between domestic suppliers and suppliers of other Parties.” Qualification procedures must be consistent with the following:

1. Conditions for participation in the tendering procedures must be published in adequate time to permit interested parties to complete the qualification procedures, to the extent this is compatible with the efficient operation of the procurement process; and

2. Conditions for participation in tendering procedures must be limited to those which are essential to ensure the offeror’s capability to fulfill the contract in question.

6. Specifications

Where relevant, the tender documents include detailed technical specifications required of the goods or services to be supplied. In this regard, government entities often require documentation showing compliance with relevant standards, laboratory reports and other types of authorizations. Technical specifications often include information regarding technical and design characteristics, methods of operation, methods of installation, quality and dimensions.

If a proposal does not fulfill the technical requirements of a tender (other than minor or insignificant differences) it will be disqualified by the tender committee.

Technical Specifications – Article VI of the GPA

Article VI of the GPA requires that technical specifications related to the characteristics of the products or services to be procured “such as quality, performance, safety and dimensions, symbols, terminology, packaging, marking and labeling, or the processes and methods for their production and requirements relating to conformity assessment procedures prescribed by procuring entities” may not be required in a GPA tender if the purpose of such specification is to create “unnecessary obstacles to international trade.” Technical specifications are to be in terms of performance rather than design or descriptive characteristics and based on international standards, if any.

7. Terms and Conditions Required by Contracting Authority

The Israeli Supreme Court has emphasized the importance of detailing the conditions of the tender in the tender documents and has held that the decision regarding the winning proposal may not be based on details, special characteristics or conditions which were not included in the tender documents (see e.g., Interdko, Commercial Company for Industry Ltd. v. the Kiriat Shemona Municipality, High Court Petition 63/85, 39 (iii) P.D. 324, 328 (1985)).

The conditions of a tender must be clear, unequivocal and reasonable and must be such that they enable the comparison of the various proposals. Every offeror in a tender must be able to understand what factors are to be taken into consideration by the procuring entity when it chooses the winning proposal. The tender committee will disqualify a proposal that does not fulfill all of the required conditions listed in the tender documents.

The contract included among the tender documents is usually a very detailed document which includes all of the conditions and terms of the tender. Many government entities use standard contracts for different types of procurement contracts. Procurement contracts are discussed in greater detail in Section E herein.

Procuring entities often require certain information regarding the offeror. Such information may include the following:

1. Details on the various entities that make up the offeror;

2. A list of the offeror’s other customers who use the specific product or service;

3. Details of the offeror’s activities and business;

4. The manpower and personnel of the offeror; or

5. The value/quantity of other projects being carried out by the offeror at the same time.

Guarantees

Although not specifically required in the Regulations, procuring entities almost always require that all offerors submit as part of their proposal one or more bank guarantees ensuring performance of the contract by the offeror. Offerors are often required to submit a bank guarantee in an amount equivalent to a certain percentage of their proposals (usually five or ten percent) that is to be in force until the beginning of execution of the contract. Such a guarantee is intended to ensure that the offeror begins carrying out its obligations if its proposal is selected. In addition, offerors are often required to issue a performance guarantee in order to ensure that the offeror completes all of its obligations under the contract if its proposal is selected. The submission of such guarantees is considered a fundamental and essential requirement and the Israeli Supreme Court has held that a proposal that does not comply with the guarantee requirements of a tender cannot be chosen as its winner (see e.g., Y.S.Y. Sheddy Construction, Digging and Development Company Ltd. v. Simcha Urieli and Sons Engineering and Contracting Ltd. et. al, Civil Appeal 1828/93, TAKDIN-ELYON 95 (2) 1266 (1995)). The tender documents are to include information regarding the type, conditions, amount and time frame of any required guarantees.

Price Offered by Offeror - Terms and Conditions

The Regulations do not relate to the price offered by an offeror in a tender and this information is usually included in the tender documents and the contract attached thereto. The tender documents and the contract usually detail the price and payment requirements.

Such requirements usually include information regarding:

1. What is to be included in the price component of the proposal (price for the goods, V.A.T. and other taxes, importation and shipping costs);

2. Payment schedules; and

3. Currency of payment.

9. Tender

The notice of proposed tender described above as well as the tender documents state where and by when the proposals are to be submitted. The proposals are to include all documents and information required in the tender documents, as described above. Pursuant to Sections 18 and 19 of the Regulations a participant in a tender is to submit its proposal to the relevant tender committee in a sealed tender envelope to be deposited into the tender box at the designated location. The various proposals remain in the locked tender box until it is open in order to review the proposals which were submitted by the deadline.

10. Processing of Tender

The tender committee reviews all of the proposals that were deposited into the tender box before the deadline for submission of proposals had expired. The tender committee may not consider a proposal submitted later than the deadline for submission.

Pursuant to Section 20 of the Regulations, as part of its review of the proposals, the tender committee may contact an offeror and request that it clarify details included in its proposal. The tender committee may also correct clerical or arithmetic errors included in a proposal.

Disqualification of Proposals

The tender committee initially reviews the various proposals and disqualifies all proposals which do not conform to the basic conditions and requirements of the tender. Section 20(d) of the Regulations requires that the tender committee disqualify all proposals that are incomplete, mistaken or are based on incorrect assumptions or misunderstandings of the tender, unless the tender committee decides otherwise. The Supreme Court has emphasized the importance of the requirement that a proposal must conform to the conditions of the tender as well as the rule that those proposals which include substantial changes from the conditions of the tender are to be disqualified (see e.g., Hosem Ma’arachot Hagana Aminot v. the Israeli Police, High Court Petition 691/82, 37 (i) P.D. 473, 475 (1983)).

Experts

Although not mentioned in the Regulations, as is the case with the Defense Regulations and the regulations which apply to local governments, the tender committees of entities that procure pursuant to the Regulations may make use of outside experts when examining proposals. This is often done for very technical matters. The tender committee, however, makes all final decisions regarding proposals and such authority may not be placed in the hands of the experts who are only to serve in an advisory role and to make recommendations to the tender committee.

Negotiations with offerors in a tender

In certain limited circumstances, if mentioned in the tender documents and notice of tender, a procuring government entity is entitled to conduct negotiations with those offerors in a tender whose proposals were found to be the most suitable.

Pursuant to the provisions of Section 7 of the Regulations, after such negotiations are carried out the tender committee shall make its final decision or may allow those offerors with whom it negotiated to submit final proposals by a certain date.

The Israeli courts have held that negotiations may also be carried out with the winning offeror after it has been selected by the tender committee with regard to minor changes to the contract, conditions, etc. so long as such changes do not effect the essential conditions and terms of the tender (see e.g., Invest Impect Ltd. v. the Director-General of the Ministry of Health, High Court Petition 118/83, 38 (i) P.D. 729 (1984)).

Negotiations - Article XIV of the GPA

Article XIV of the GPA permits negotiations with offerors if notice that negotiations would be permitted appeared in the tender notice or if no one proposal is obviously the most advantageous in terms of the specified evaluation criteria set forth in the notices or tender documentation.

11. Evaluation of Tenders and Award of Contract

Pursuant to Section 21(a) of the Regulations the tender committee is authorized to choose the most suitable proposal or can elect not to chose any proposal at all, in order to ensure the greatest benefit to the procuring entity.

Section 21(b) of the Regulations includes the general rule for the selection of the winning proposal. This section states that the tender committee shall choose the lowest priced proposal unless the tender committee decides otherwise due to “special circumstances” after it has given the offeror who submitted the lowest priced proposal the opportunity to state its case before it.

Criteria

Section 21(b) also provides that if the tender documents included various criteria by which the winning proposal is to be chosen, as is almost always the case, the tender committee shall select the proposal which provides the most benefits pursuant to such criteria.

Section 22 of the Regulations provides that the criteria included in the tender documents according to which the tender committee will choose the winning proposal shall include all or some of the following:

1. The price;

2. The special properties or quality of the goods or services and their suitability to the purposes of the tender;

3. The experience, expertise and qualifications of the offeror;

4. The degree of satisfaction with the offeror’s performance on previous contracts and recommendations provided by the third parties; or

5. Any other special requirements.

Many government tenders state what criteria break down is to be used to determine the winning proposal (for example: Price 50%, Technical Characteristics 40%, Past experience 10%). The methods of computing such scores is usually, however, not revealed by the procuring entity. Some government entities will only list the criteria to be taken into consideration without providing the relevant percentages.

It should be emphasized, however, that the lowest price submitted in a public tender is given special importance in Israeli tender law and greater scrutiny of the decisions of tender committees will be carried out by the Israeli courts in cases where the lowest submitted proposal is not selected.

When reviewing proposals, the estimate, if there is one, serves as a test of the reasonableness of a particular proposal and is also used to compare different proposals to each other. If all of the proposals seriously deviate from the estimate the tender committee may decide not to accept any proposal and this decision will be usually be upheld by the courts.

Submission, receipt and opening of tenders and awarding of contracts – Article XIII of the GPA

Section 4(b) of Article XIII of the GPA states that “Unless in the public interest an entity decides not to issue the contract, the entity shall make the award to the tenderer who has been determined to be fully capable of undertaking the contract and whose tender, whether for domestic products or services, or products or services of other Parties, is either the lowest tender or the tender which in terms of the specific evaluation criteria set forth in the notices or tender documentation is determined to be the most advantageous.”

Section 4(c) of this Article also provides that “Awards shall be made in accordance with the criteria and essential requirements specified in the tender documentation.”

Preferences with regard to the price criteria

As discussed above, when determining the winning proposal pursuant to the relative criteria the tender committees of certain government entities are required to give preferences to Israeli suppliers with regard to the criteria of price. In general, such preferences will not apply in the following circumstances:

1. GPA tenders with regard to offerors from GPA signatory countries;

2. Tenders of government entities covered by Article 15(3) of the United States – Israel Free Trade Agreement with regard to offerors from the United States; or

3. Tenders which are covered by the Agreement between the European Community and the State of Israel on Government Procurement or the Agreement between the European Community and the State of Israel on Procurement by Telecommunications Operators with regard to offerors from EU countries.

The Preference Regulations

Pursuant to Section 3 of the Preference Regulations, which apply in general to government ministries and Government Bodies Corporate, if a foreign offeror would have won a tender for the supply of goods in accordance with the specific criteria of a tender, the tender committee shall recalculate the criteria of price for Israeli suppliers who have submitted proposals such that the proposed price of each Israeli proposal is reduced by 15 percent (10 percent with regard to government companies and government reference units).

If after such a recalculation is made a foreign supplier still receives the highest weighted score pursuant to the criteria of the tender, the foreign supplier will be designated as having won the tender. If, however, after the required recalculation has been made, an Israeli offeror of goods receives a weighted score that is greater than that of the foreign offeror, the government entity is to propose to the Israeli offeror that it lower its proposed price to the price at which its proposal would have a weighted score equal to that of the foreign offeror. Essentially, a “right of first refusal” is given to the Israeli offeror. If the Israeli offeror agrees, it is to be chosen as the winner of the tender at that price. If the Israeli offeror refuses to lower his price offer, the government entity is to make the same offer to lower the proposed price to the next two highest ranking Israeli offerors in turn, if any, on the condition that each of their weighted scores is not lower than that of the foreign offeror. If no such Israeli offerors agree to lower their proposed price, the proposal of the foreign offeror is to be declared the winner.

1995 National Priority Regulations

The 1995 National Priority Regulations, which apply in general to government ministries other than the Ministry of Defense, provide in Section 5 that if a supplier who is neither a foreign supplier nor a supplier from an “A” national priority area (as defined pursuant to the Encouragement of Capital Investments Law, 5719-1959) would have won a tender in accordance with the specific criteria of the tender, the tender committee shall recalculate the price criteria for those Israeli suppliers from national priority areas such that the proposed price of all such suppliers is reduced by 5 or 10 percent (depending on what type of national priority area they are located in). If a supplier from a national priority area receives the highest score after such a recalculation the procuring government entity is to propose to the supplier (up to four suppliers from national priority area in turn) that it lower its proposed price as described above in the Preference Regulations sub-section (a right of first refusal).

Division of Contracts

If notice of the same was included in the tender documents, Section 21(c) of the Regulations allows the tender committee to select only part of a specific proposal or to choose two or more suitable proposals and divide the contract among them.

In certain circumstances, Section 4 of the Preference Regulations permits the division of very large tenders for the acquisition of goods such that 50 percent of the volume of the tender is awarded to a foreign supplier and 50 percent to a local supplier. Notice of the same must appear in the tender documents.

Sole Proposal

Section 23 of the Regulations provides that the tender committee may select a proposal in a public tender even if it is the only proposal submitted, so long as the reasons for this are recorded by the tender committee. This may not be done in a closed tender unless the exemptions committee gives its approval that the holding of an additional open tender would not provide any benefit to the procuring entity.

12. Post-Award Notifications

Pursuant to Section 21(d) of the Regulations every offeror in a tender is to be notified of the final decision of the tender committee. All offerors in a tender are entitled to review and study the final decision of the tender committee, including the grounds for such decision as well as the terms of the winning proposal. The tender committee may, however, determine that disclosure of certain parts of its decision or terms of the winning proposal are professional or commercial secrets, or will harm Israel’s public or national security, foreign relations or economy, and forbid offerors from reviewing such materials.

13. Cancellation of the Procedure

Pursuant to various decisions of the Israeli courts, government entities may cancel a tender in a number of circumstances, including when all of the proposals are for amounts which are much greater or much lower than the estimate, when there are no proposals that fulfill the required pre-conditions for participation or other essential conditions of the tender, or where there are serious flaws in the tender.

The Israeli courts have, however, emphasized the importance of not canceling a tender, in so far as this is possible. The Israeli Supreme Court has ruled that canceling a tender after the tender box has been opened and then publishing a new tender is not desirable and all steps should be taken to prevent such actions because this opens the doorway for contracting with an offeror who was not entitled to win the original tender. This in turn damages the principle of equal competition (see e.g., “Menorah” Izi Aharon Ltd. v. The State of Israel – Ministry of Housing, Civil Appeal 6283/94, 51 (i) P.D. 21 (1995)).

C. Procedure for Award of Ministry of Defense Contracts

1. Application of Relevant Legislation and Regulations

As stated above, the Law applies to the Israeli “defense establishment” which is defined in the Law as including the Ministry of Defense, the Israel Defense Forces and its dependent units, and the government companies and subsidiaries for which the Minister of Defense is responsible. The government companies and subsidiaries for which the Minister of Defense is responsible (“Defense Companies”) include such important entities as Israel Aircraft Industries and Israel Military Industries. There are also certain differences between the application of the Defense Regulations to the Ministry of Defense (which is defined for purposes of the Defense Regulations as including the Israel Defense Forces) and Defense Companies.

As stated, the basic procedural rules pertaining to the defense establishment are included in the Defense Regulations which are promulgated by the Minister of Defense after consulting with the Minister of Finance and receiving the approval of the Constitution, Law and Justice Committee of the Knesset. The Ministry of Defense also procures pursuant to the “Ministry of Defense Rules”, which implement the directives included in the Defense Regulations. Most of the other entities that procure pursuant to the Defense Regulations also have internal directives and procedures regarding procurement and tendering.

In addition to the Priority Regulations which apply to the defense establishment, the 1998 National Priority Regulations apply to certain Ministry of Defense contracts published after July 15, 1998.

Foreign Military Financing

Section 14 of the Priority Regulations provides that the Priority Regulations shall not apply to defense establishment imports which are financed by the support funds of a foreign country. Such funds refer to procurement by the defense establishment which is paid for with the military aid or “foreign military financing” (hereinafter “FMF”) given to the government of Israel by the United States of America. In recent years the United States has provided Israel with approximately $1.8 billion in FMF annually.

International Agreements

The GPA does not apply to procurement by the defense establishment. In addition, Section 19 of the Defense Regulations provides that the Defense Regulations shall apply so long as they do not conflict with an obligation of Israel pursuant to an international treaty or a reciprocity agreement concluded before the Law went into effect. The MOU is covered by the parameters of this section.

Tender Committees

The various tender committees of the Ministry of Defense make decisions with regard to ordinary tenders. Ministry of Defense tender committees are required to include among its members a “public representative.” These public representatives are appointed to sit on the Ministry of Defense tender committees by the Director-General of the ministry. In general, the public representatives do not participate in meetings of the various tender committees regarding transactions which are classified as secret.

The Ministry of Defense also has special tender committees for extraordinary tenders, discussed below (which do not include public representatives), and special exemption committees responsible for exempting or recommending exemptions from certain mandatory tendering requirements.

Defense Companies also have their own tender and exemption committees.

Estimates

The Defense Regulations require the Ministry of Defense, although not Defense Companies, to calculate an estimate of the value of the transaction before the date for submission of proposals has passed. Such estimates are almost always carried out by Defense Companies as well.

Section 13 of the Defense Regulations require that the estimate be calculated by one of the following methods:

1. The price in Israel based on the updated value of previous contracts entered into by the Ministry;

2. The price in a foreign country (including costs for insurance and transportation to Israel);

3. The market price in Israel;

4. The maximum price set by a relevant price control law;

5. The valuation of an assessor; or

6. A cost calculation.

2. Types of Procedure

Exemptions from Open Invitation Mandatory Tendering

Unlike the Regulations, the Defense Regulations do not state that preference is to be given by the tender committees to holding open tenders. In addition, unlike the entities that procure pursuant to the Regulations and the regulations which apply to local governments, most of the procurement conducted by the defense establishment is done by way of closed tender (or is exempt from mandatory tendering).

As is the case with Section 3 of the Regulations, Section 3 of the Defense Regulations includes a comprehensive list of transactions for which the Ministry of Defense is exempted from holding a mandatory open tender. Most of these exceptions also apply to Defense Companies.

Transactions which are exempt from mandatory tender include the following:

1. The value of the transaction is not greater than NIS 16,800 (or not greater than NIS 42,000 if during the budget year no transaction was performed without a tender with the supplier on an identical subject);

2. A transaction with the only supplier of the goods or services in Israel or with the only entity which has the scientific capability, technology or infrastructure to supply the goods or services;

3. A transaction regarding the testing or initial development of an innovative idea;

4. A transaction which is the continuation of an earlier transaction (within three years thereof), on terms no less favorable than the original transaction and so long as the aggregate of the new transaction is not greater than the original;

5. A transaction which is urgently required;

6. A transaction for the acquisition of vital services or goods (does not apply to Defense Companies;

7. A transaction for the performance of auditing, architectural work, legal work or economic consulting, or the performance of other professional work that requires special qualifications, expertise, know-how, or special trust with the provider of such services; or

8. A transaction, the disclosure of which may cause substantial harm to Israel’s national security, economy or foreign relations.

Section 3(37) also includes a very expansive “basket” exemption which provides that a transaction will be exempt from an open tender when there are special and unusual circumstances which justify this. Such an exemption requires the approval of the Minister of Defense.

Section 4 of the Defense Regulations includes very important exemptions from the mandatory tender requirements for certain transactions with a resident of a foreign country or transactions that are to be performed in a foreign country. Such exempted foreign transactions include the following:

1. Certain transactions which are carried out with foreign country support funds, are carried out in a foreign country or when the assisting country requires that the transaction be carried out with certain specific suppliers (this refers to FMF). In certain circumstances covered by this exception it is necessary, however, to request written proposals from at least three suppliers; or

2. Transactions for the acquisition of goods or services when there is no producer of such goods or no provider of such services in Israel. In certain circumstances covered by this exception it is necessary, however, to request written proposals from at least three suppliers.

Section 24(b) provides for similar “foreign transaction” exemptions for Defense Companies. Section 24(b) does not, however, include an exception for transactions which are carried out with foreign country support funds.

Section 24(a) of the Defense Regulations also includes a number of other transactions for which Defense Companies are exempted from holding public tenders. These include transactions where holding a public tender would have a negative effect on the company’s business opportunities, competitiveness, profitability, ability to carry out a task which it is required to perform under law or its ability to supply the public with a vital service or commodity.

Pursuant to Section 24(a)(2) of the Defense Regulations, Defense Companies are exempt from open mandatory tenders in transactions valued at not more than NIS 168,000 (NIS 504,000 for companies with an annual contract volume of more than NIS 840,000).

Section 17(k) of the Defense Regulations provides that in an open tender where no proposals are submitted or where the tender committee has decided not to accept any of the submitted proposals, the procuring entity may contract without holding a new open tender.

Closed (Restricted) Tenders

Section 5 lists various transactions for which the Ministry of Defense shall hold closed tenders. Pursuant to Section 25 of the Defense Regulations most of these transactions also apply to Defense Companies. Such transactions include the following:

1. A transaction the value of which is not greater than NIS 168,000;

2. A transaction which has been given a security classification of “restricted” or higher;

3. A transaction regarding scientific work or R&D;

4. A transaction for the performance of professional work which requires special qualifications, expertise or special know-how; or

5. The acquisition of goods which require that the Ministry of Defense invest in infrastructure (does not apply to Defense Companies).

When the Ministry of Defense holds a closed tender, at least 5 suppliers who are included on its relevant list of recognized suppliers (discussed below) shall be asked to submit proposals. The suppliers who are asked to submit proposals shall be chosen by certain criteria including security classification, quality assurance, reliability and financial strength. If the relevant list of suppliers includes less than ten suppliers then all are to be approached. All suppliers on the relevant list may participate in the closed tender, even if they were not specifically approached.

When holding closed tenders, Defense Companies (who are not required to have recognized supplier lists) are required to contact a number of potential offerors based on their suitability for the implementation of the transaction.

Many of the closed tenders which are carried out by the defense establishment are considered “secret” and those participating are required to maintain certain rules regarding secrecy.

Extraordinary Tenders

Pursuant to Section 7 of the Defense Regulations, extraordinary tenders may be held by the Ministry of Defense with regard to certain transactions that are classified as requiring closed tenders. The tender committee for extraordinary tenders can carry out negotiations with the offerors who pass the initial thresholds of suitability in a tender. After negotiations, the offerors with whom such negotiations were held may submit final proposals.

Pursuant to Section 27 of the Defense Regulations, Defense Companies may also conduct negotiations in certain closed tenders.

3. Notices

Pursuant to Section 11 of the Defense Regulations, notice of all public tenders must be published in two daily Hebrew language newspapers. The information that must be included in the tender notice is essentially identical to what is required pursuant to the Regulations. The Defense Regulations provide that notice of a proposed tender may also be published abroad “in other ways.”

Where applicable, the Preference Regulations as well as the 1998 National Priority Regulations require that the tender notice state that a preference will be given to Israeli products with respect to the price criteria. In addition, Section 5(b) of the Preference Regulations requires that if the contract is valued at more than NIS 2,100,000 the tender notice is to state that a foreign supplier must submit as part of its proposal an undertaking to carry out mandatory commercial cooperation if its proposal is chosen.

Tender Documents

Pursuant to Section 12 of the Defense Regulations, the tender documents in an ordinary open tender must include the following:

1. Terms of the tender and pre-conditions to participate therein;

2. Contract terms (including time table, terms of payment and related specifications);

3. The text for the offeror’s proposal and the offeror’s undertakings;

4. Any guarantees required, including information regarding conditions, amounts, and time period; and

5. Any other important information and documents that are necessary to guarantee the fair and orderly conduct of the tender as well as to ensure receipt of a proposal that will provide the maximum benefit to the contracting entity.

The tender documents in an extraordinary tender must also include the criteria for selection of proposals, including the weight assigned to them.

4. Qualification of Tenders

Recognized Suppliers and Contractors

Section 9 of the Defense Regulations permits the Ministry of Defense to make participation in a tender conditional upon the offeror being a recognized supplier or contractor. This section does not apply to Defense Companies. Almost all tenders of the Ministry of Defense require offerors to be so recognized. Although not covered by the parameters of Section 9 of the Defense Regulations, most Defense Companies also have their own recognized supplier lists.

Pursuant to Section 10 of the Defense Regulations, the Ministry of Defense is to keep lists of Israeli suppliers by subject category. A special committee, which includes a public representative, approves the inclusion of suppliers on such lists pursuant to criteria determined by the Ministry of Defense. Different criteria may be used for different supplier lists. The criteria used for inclusion on such lists include the following:

1. Maintenance of quality assurance systems;

2. Security clearance;

3. Financial strength;

4. Ability to deliver goods or perform services or work within a defined monetary framework; and

5. Reliability in past transactions.

Section 9 of the Defense Regulations also permits the Ministry of Defense to make participation in a tender conditional on additional relevant conditions pertaining to the offeror. Section 26 of the Defense Regulations permits Defense Companies to do the same. Such conditions include the following:

1. Experience;

2. Capability;

3. Qualifications;

4. The scope of activity;

5. Location of business; or

6. Recommendations of third parties.

5. Processing of Tender

Disqualification of Proposals

Pursuant to Section 17(e) of the Defense Regulations, and unless the committee decides otherwise and records it reasons for the same, proposals shall be disqualified in the following circumstances:

1. The proposal is based on incorrect assumptions;

2. The proposed price is unreasonable in light of the estimate; or

3. The proposal includes intentional errors which are intended to mislead the tender committee.

Subject to Section 17(f) of the Defense Regulations, the tender committee is required to disqualify proposals that do not comply with what was requested in the tender documents or where the offeror added a reservation or fundamental change to the tender conditions.

Pursuant to Section 17 of the Defense Regulations, the tender committee may also do the following when reviewing the proposals:

1. Examine the proposals with the assistance of experts;

2. Correct arithmetic or clerical errors if there is only one possible correction thereto; or

3. Clarify with an offeror the particulars of its proposal.

6. Evaluation and Award of Tenders

Selection of Winning Proposal

After examining all properly submitted proposals the relevant tender committee must make its determination pursuant to the relevant criteria discussed below. The tender committee may decide, however, not to choose any proposal at all. Section 17(h) of the Defense Regulations provides that “in general” if the proposals diverge by more than 25 percent from the estimate the tender committee shall not choose any proposal.

Criteria for selecting the winning proposal

Open Tenders of the Ministry of Defense

Pursuant to Section 14(c) of the Defense Regulations, in ordinary tenders the criteria for selecting the winning proposal shall be the price, unless other criteria are listed in the tender documents, or if the tender committee decides that there are special reasons which justify otherwise.

Extraordinary Tenders of the Ministry of Defense

Section 7(a)(1) of the Defense Regulations provides that in extraordinary tenders the proposals are to be evaluated pursuant to the price, and the professional, technical or administrative requirements of the transaction and their relevant weights as described in the tender documents.

Tenders of Government Companies and Subsidiaries for which the Minister of Defense is Responsible

Pursuant to Sections 28(b) and 29 of the Defense Regulations the tender committees of Defense Companies are to choose the lowest priced proposal or may select the winning proposal pursuant to one or more of the following criteria:

1. Price;

2. The quality of the goods or services offered, their special properties and suitability for the procuring government entity;

3. Qualifications, expertise, experience, and credibility of the offeror;

4. Recommendations of third parties; or

5. Other special requirements.

The Preference Regulations

Pursuant to the Preference Regulations, which are described above, the tender committee is required to recalculate the price criteria in tenders where a foreign offeror of goods would have won the tender such that a 15 percent preference with regard to the price criteria is given to proposals submitted by Israeli suppliers of goods.

U.S. suppliers who participate in tenders of the Ministry of Defense pursuant to invitations within the framework of the MOU are considered Israeli suppliers (and not foreign offerors) for purposes of the Preference Regulations.

As stated, the Preference Regulations do not apply to imports of the defense establishment which are paid for through foreign country support funds (FMF).

1998 National Priority Regulations

Pursuant to the 1998 National Priority Regulations, which apply in general to Ministry of Defense tenders published after July 15, 1998, if an offeror of goods or services who is neither a foreign supplier nor a supplier from an “A” national priority area in Israel would have won a tender, the tender committee of the Ministry of Defense is required to recalculate the criteria of price from between five to fifteen percent for Israeli suppliers from certain national priority areas. The application of the 1998 National Priority Regulations is very similar to that of the 1995 National Priority Regulations described above and the “right of first refusal” is to be given Israeli suppliers from certain national priority areas.

U.S. suppliers who participate in tenders of the Ministry of Defense pursuant to invitations within the framework of the MOU are considered, for purposes of the 1998 National Priority Regulations, as suppliers from the center of Israel (an area not designated as a national priority area). Therefore the preferences provided for in the 1998 National Priority Regulations will apply even if American suppliers have submitted proposals.

Sole Proposal

Pursuant to Section 17(i) of the Defense Regulations the tender committee may decide to choose a proposal even if it was the only proposal submitted or it is the only proposal that remains after the other proposals were disqualified.

Division of Tender

Section 17(j) of the Defense Regulations provides that in certain circumstances the tender committee may decide to choose several suitable proposals and divide the contract between them or contract with regard to only part of the transaction if notice of this possibility was provided in the tender documents.

7. Post-Award Notifications

Pursuant to Section 17(m) of the Defense Regulations all participants in a tender are to be notified of the decision of the tender committee. In ordinary open tenders all offerors are to be notified of the price of the winning proposal as well. Within 30 days of such notice all participants in an ordinary open tender are entitled to inspect the winning proposal unless the tender committee has decided not to allow inspection of all or part of the wining proposal due to reasons of state security or professional or commercial secrecy. There is no such right of inspection in closed or exceptional tenders.

D. Procedure for Award of Municipal Contracts

1. Application of Relevant Legislation and Regulations

As noted above, local governments in Israel do not procure pursuant to the Law and its implementing regulations but rather pursuant to separate legal regimes that have been in effect for decades in Israel.

There are three types of local governments in Israel: municipalities (cities), local councils, and regional councils (collectively “Local Governments”). There are approximately 60 municipalities, 140 local councils and 60 regional councils in Israel. Each of the three types of Local Governments is required to procure pursuant to separate, albeit very similar, sets of regulations. These regulations are promulgated by the Israeli Minister of the Interior.

Mandatory Tender Requirement

Section 197 of the Municipalities Ordinance [New Version] (the “Municipalities Ordinance”) provides that “(a) municipality shall not enter into a contract for the transfer of any real estate or goods, the ordering of goods or the execution of work, except by way of open tender.” The implementing regulations with regard to Section 197 are the Municipalities Regulations (Tenders), 5748-1987 (the “Municipalities Regulations”)

A similar public procurement requirement is included in both the Local Councils Order (A), 5711-1950 (the “Local Councils Order”) which applies to local councils and the Local Councils Order (Regional Councils), 5718-1958 (the “Regional Councils Order”), which applies to Regional Councils.

Section 192 of the Local Councils Order provides that “(t)he [local] council shall not enter into a contract for the transfer of real estate or goods, the ordering of goods or the execution of work except in accordance with the provisions of the fourth schedule [of the Local Councils Order].” The parallel section of the Regional Council Order, Section 89, provides that “(t)he [regional] council shall not undertake to transfer real estate or goods, to order goods or the execution of work except in accordance with the provision of the second schedule [of the Regional Councils Order].” The relevant schedules of the Local Councils Order and the Regional Councils Order set out the procedures and rules for tendering.

Unlike Section 2 of the Law, neither the Municipalities Ordinance, the Local Councils Order nor the Regional Councils Order require mandatory open tenders for the acquisition of services. In effect, however, Local Governments issue tenders pursuant to the Local Government Regulations for the procurement of services as well as goods.

The Municipalities Regulations, the Local Councils Order and the Regional Councils Order (collectively the “Local Government Regulations”) are very similar and most of their sections, including section numbers, are identical to each other.

In addition to the three separate Local Government procurement regimes mentioned above, local councils and municipalities may also jointly procure goods and services pursuant to the Local Councils (Joint Public Tenders) Law, 5732-1972 (the “Joint Tenders Law”) and the Local Councils (Joint Tenders) Regulations, 5733-1973. The Joint Tenders Law provides that local councils and municipalities may enter into a contract for the supply of goods or services or the execution of works on the basis of a joint public tender. When such tenders are held the participating entities set up a joint tender committee. Appropriation for cost of such a tender must be included in the approved budgets of the participating Local Governments or it must be approved by the Minister of the Interior. The Joint Tenders Law also provides that the Minister of the Interior may order that a contract related to sewage systems be made only by means of joint tender. Tenders issued pursuant to the Joint Tenders Law are not, however, common in Israel.

Government Procurement Agreement

As stated above, the GPA applies to certain tenders of the municipalities of Jerusalem, Tel Aviv and Haifa. The Preference Regulations, which implement mandatory commercial cooperation rules in Israel, were promulgated pursuant to the Law and therefore technically do not apply to these three municipalities. There is, however, no parallel secondary legislation promulgated pursuant to the Municipalities Ordinance. In practice, the Preference Regulations are applied by the three municipalities and the ICA with regard to the mandatory commercial cooperation required in GPA tenders of the three municipalities.

Agreement Between the European Community and the State of Israel on Government Procurement

This agreement provides that in certain tenders the 15 percent local preference rule included in the Local Government Regulations, discussed below, shall not apply. Section 2, Article 4 of this agreement provides that “With respect to the procurements above a threshold of 550,000 SDR [approximately $800,000] by the municipalities not covered by the …GPA [Jerusalem, Tel Aviv and Haifa], Israel shall treat products, services and suppliers of the EC no less favourably than domestic products, services and suppliers.”

Tender Committees

As is the case with the government entities that procure pursuant to the Law, each Local Government in Israel has a tender committee. These tender committees are made up of members of the council of the Local Government entity. As a result, the selection and make-up of tender committees involves local politics and coalition considerations.

Unlike government entities that procure pursuant to the Law, the tender committees of Local Governments do not have the final word regarding procurement and as described below, only have the power to recommend a proposal to the mayor or the head of the regional or local council.

Estimates

Section 11 of the Local Government Regulations requires that the tender committee prepare a detailed estimate of the value of the relevant contract before the last date for submission of the proposals.

2. Types of Procedure

Exemptions from Open Invitation Mandatory Tendering

As is the case with the Regulations and the Defense Regulations, Section 3 of the Local Government Regulations includes a long list of exemptions from the general mandatory tendering rule. The list of exemptions included in the Local Government Regulations is much more limited than those included in the Regulations and the Defense Regulations. Other than the exceptions included in Section 3, Local Governments do not have any discretion regarding whether or not to issue an open invitation tender and there is no general “basket” exemption referring to urgent situations (other than as described below) or “special or unusual circumstances.” Section 3 exemptions apply to the following transactions:

1. The value of a contract is less then certain minimum amounts:

   1. NIS 105,000 (for municipalities) -

   2. NIS 51,500 (for local councils) -

   3. NIS 51,500 (for regional councils);

2. A contract with the only supplier of the goods or work in Israel;

3. A contract for the performance of scientific work;

4. A contract for the urgent ordering of goods or the execution of works in order to save life or property; or

5. A contract for the performance of professional work that requires special knowledge and expertise (such as planning, surveying and appraisal work).

Section 3(11) of both the Local Councils Order and the Regional Councils Order provides that the Minister of the Interior may exempt a certain contract from the mandatory tender requirement. This exemption is not, however, included in the Municipalities Regulations.

In order to prevent the circumvention of the Local Government Regulations through the minimal amount exception included in Section 3, Section 5 provides that if the Local Government intends to enter into a number of contracts for essentially the same goods or works, they will be considered one contract for purposes of the Local Government Regulations.

Pursuant to Section 22(h) of the Local Government Regulations, the mayor or the head of the local or regional council may contract with a supplier without the holding of a tender if a majority of the members of the council has given its approval because holding a new tender would serve no useful purpose. This may be done if no proposals are submitted in a particular tender, the tender committee decides not to recommend any of the submitted proposals or the local council does not authorize the decision of the mayor or the head of the local or regional council to contract with an offeror who was not recommended by the tender committee as described below.

“Small” Tenders

Pursuant to Section 8 of the Local Government Regulations, Local Governments may hold “small” tenders (similar to closed tenders under the Regulations and the Defense Regulations) for contracts valued at certain amounts:

1. For municipalities – between NIS 105,000 and NIS 510,500;

2. For local councils – between NIS 51,500 and NIS 257,750;

3. For regional councils – between NIS 51,500 and NIS 257,750.

The tender committee of each Local Government is to maintain a list of recognized suppliers and contractors entitled to participate in small tenders and the standards according to which these suppliers and contractors will be asked to submit proposals. Any supplier or contractor may request from the tender committee of a specific Local Government to be included in its lists of recognized suppliers and contractors.

Invitations to submit proposals in a small tender are to be sent to at least 4 or 6 recognized suppliers, depending on the value of the proposed procurement. In certain circumstances invitations may be sent to two or more foreign suppliers if there are no local suppliers. A supplier or contractor included in the recognized supplier list may participate in a small tender even if it was not among the suppliers or contractors invited to submit a proposal in the specific small tender.

3. Notices

Pursuant to Section 9 of the Local Government Regulations, if a Local Government wishes to contract in a transaction that requires an open invitation tender, the mayor or head of the local or regional council is required to provide notice of the same in at least two daily newspapers in Israel. Notice of the open tender may also be published abroad or sent to at least two foreign suppliers or contractors.

The notice requirement included in Section 9 of the Local Government Regulations is much simpler than the notice requirement included in the Regulations and the Defense Regulations. The notice must include a description of the proposed contract, the time and place proposals are to be submitted, and where the tender documents may be acquired. Local Governments, however, usually include much more information in the notices of procurement than required in this section.

Tender Documents

Receipt of tender documents is conditional upon payment to be determined by the Local Government. Section 10 of the Local Government Regulations require that the tender documents include the following:

1. The conditions of the tender, including pre-conditions for participating in the tender;

2. The required wording or proposal form in which the offeror undertakes to fulfill its obligations if it contracts with the procuring Local Government;

3. A copy of the proposed contract;

4. The timetable and conditions of payment;

5. The plan and specifications related to executing the contract;

6. Particulars regarding the necessary bank guarantees; and

7. Any other required information, including information regarding the experience and abilities of the offeror.

4. Time Limits

Section 12 of the Local Government Regulations provides that the time limit for submission of a proposal is to be determined pursuant to the subject of the contract and its conditions, but shall not be less than seven days nor more than 90 days after notice was published. The chairman of the tender committee may, however, set a later submission date.

5. Terms and Conditions Required by Contracting Authority

Pursuant to Section 10 of the Local Government Regulations, the procuring Local Government may condition participation in a tender on certain conditions. The conditions required by the contracting Local Government must however be logical, reasonable and relevant.

Section 13 of the Local Government Regulations also makes reference to various conditions that are often required by Local Governments. This section states that an offeror must submit as part of its proposal various documents, including the authorization of a tax assessment official or accountant regarding the fact that the offeror’s records are kept pursuant to law, and authorization of registration in the Registry of Contractors.

GPA Tenders

All foreign suppliers who submit a proposal in GPA tenders of the municipalities of Jerusalem, Tel Aviv and Haifa are required to submit as part of their proposal an undertaking that if they contract with the municipality they will undertake mandatory business cooperation in Israel equivalent to 35 percent of the contract price.

6. Processing of Tender

Section 15 of the Local Government Regulations provides that the proposal envelopes are to be opened no later than 14 days from the last day submission of proposals was permitted in the specific tender. Unlike the case with the opening of tender proposals by government entities that procure pursuant to the Regulations and the Defense Regulations, the chairman of the tender committee of a Local Government is required to provide notice as to the time and place that the proposal envelopes will be opened and recorded. All persons are entitled to be present and witness the opening of the submitted proposals.

Disqualification of Proposals

Pursuant to Section 20 of the Local Government Regulations, the tender committee is to disqualify proposals in the following circumstances:

1. The tender committee has a reasonable basis to suspect that the offeror intended to mislead the tender committee by including intentional mistakes or tricks in its proposal (after giving the offeror the opportunity to be heard);

2. The proposal is based on a mistaken understanding of the tender or the proposed price is not logical (after giving the offeror the opportunity to be heard); or

3. The proposal was not submitted in accordance with the provisions of the Local Government Regulations or the conditions of the tender, or the proposal included basic changes to the conditions of the tender.

Pursuant to Sections 18 and 19 of the Local Government Regulations, the tender committee may correct mathematical errors included in a proposal or clarify with an offeror particulars included in its proposal. The tender committee may also correct “technical” non-mathematical mistakes that were made in good faith by an offeror.

Experts

Pursuant to Section 18 of the Local Government Regulations, the chairman of the tender committee may provide a copy of all of the proposals to an expert designated by the tender committee so that he may review them and provide his opinion regarding the various proposals, including their advantages and the mistakes included therein. The role of the expert is to assist the tender committee through all of the stages of the tender.

Negotiations

Unlike government entities that procure pursuant to the Law, Section 18A of the Municipalities Regulations, the Local Councils Order and the Regional Councils Order, added in 1997, specifically forbids Local Governments from negotiating with offerors in its tenders. Negotiations may only be conducted with the offeror of the winning proposal with regard to minor changes.

7. Evaluation and Award of Tenders

Unlike the tender committees of government entities that procure pursuant to the Law, the role of the Local Government tender committee is only to “recommend” a particular proposal to the mayor or the head of the local or regional council.

Pursuant to Section 21 of the Local Government Regulations, after disqualifying proposals pursuant to Section 20, the tender committee is to determine which is the least expensive submitted proposal and then select which proposal it is to recommend. The Local Government Regulations give great significance to the price criteria.

Selection of the proposal to be recommended by the tender committee is covered by Section 22 of the Local Government Regulations, which provides as follows:

1. Preference is to be made to acquire Israeli produced goods so long as the price is not more than 15 percent higher than the price for imported goods, and the required quality requirements and the other conditions of the tender are met;

2. The tender committee is to recommend the proposal with the lowest so long as the proposed price is fair and reasonable when taking into consideration the estimate;

3. If the tender committee decides to recommend a proposal that is not the cheapest, it must record its reasons for the same;

4. The tender committee may recommend a proposal that is not the cheapest after considering the qualifications, experience and ability of the offeror to fulfill the tender conditions. The reasons for such a decision must be recorded and the offeror who had submitted the cheapest proposal must first be given the opportunity to be heard.

The tender committee may, however, elect not to recommend any of the submitted proposals whatsoever subject to its recording its reasons for this decision.

With regard to the cheapest proposal, the Israeli Supreme Court sitting as the High Court of Justice held in Btai Ilanot Building and Development Company v. the Arad Local Council, High Court Petition 707/80, 35 (ii) P.D. 309, 311 (1981) that “(t)he cheapest price is not necessarily the cheapest nominal price, but rather means the cheapest monetary price – after taking into consideration the conditions of payment.”

Unlike the Regulations and the Defense Regulations, the Local Government Regulations do not state that other criteria may be considered by the tender committee when choosing the winning proposal. The Israeli courts, however, have carved out an exception to the general requirement that the cheapest proposal is to be selected called the “comparative strengths” rule. This exception permits a Local Government tender committee to select a higher priced proposal after a relative comparison of the different strengths of the various proposals has been completed. This rule may only be applied, however, if the differences in price of the proposals are not very great. The Israeli Supreme Court sitting as the High Court of Justice has ruled in this regard that the greater the difference in the prices submitted by the various offerors, the greater the weight that should be given to the cheapest proposed price and the lesser the difference in the submitted prices, the greater the relative weight that may be given to other elements (ability, expertise, etc.) (see Printz v. the Municipality of Jerusalem, High Court of Justice Petition 417/82, 37(i) 169, 175 (1983)).

In general, the tender committees may not decline to recommend the lowest submitted proposal in a small tender based on the offeror’s supposed lack of ability, qualifications or experience since it is assumed that the particular offeror would not have been approached and requested to submit a proposal if it did not have the necessary ability, qualifications and experience.

The GPA and the Agreement Between the European Community and the State of Israel on Government Procurement

The 15 percent preference rule include in the Local Government Regulations will not apply to GPA tenders of the municipalities of Jerusalem, Tel Aviv and Haifa with regard to suppliers from GPA signatory countries. This 15 percent preference shall also not apply to Israeli municipalities in certain tenders with regard to suppliers from the European Community pursuant to the Agreement Between the European Community and the State of Israel on Government Procurement.

Sole Proposal

In general, if only one proposal is submitted, or if only one submitted proposal remains after the other proposals have been disqualified, Section 22(f) of the Local Government Regulations provides that the tender committee is not to recommend it to the mayor or the head of the local or regional council unless the committee’s reasons for the same are recorded.

With regard to Section 22(f) the Supreme Court has however held that “(t)his regulation should be interpreted in light of the principles of equality and fairness which are the basis for procurement law. Therefore, if there is no concern that the proposed price is greater than the market price or that the proposal was submitted as a sole proposal as the result of a conspiracy between offerors…the proposal should be accepted despite the fact that it is the sole proposal.” (“Menorah” Izi Aharon Ltd. v. State of Israel - Ministry of Housing, Civil Appeal 6283/94, 51 (i) P.D. 21, 27 (1995)).

The Recommendation of the Tender Committee

After selecting the “winning” proposal, the tender committee recommends it to the mayor or the head of the local or regional council. The mayor or the head of the local or regional council may reject the recommendation of the tender committee if he records his reasons for the same and informs the members of the local council. The mayor or the head of the local or regional council may even decide to contract with an offeror who was not recommended by the tender committee if authorization for this is given by the local council. Such a decision will only be upheld by the courts if based on legitimate reasons.

It should be emphasized, however, that pursuant to Section 4 of the Local Government Regulations, if it is necessary to hold a tender with regard to a particular contract, the local council, mayor or head of the local or regional council may not discuss any proposals regarding the transaction which were not first reviewed by the tender committee in accordance with the Local Government Regulations.

Post-Award Notifications

Section 22(i) of the Local Government Regulations provides that after the tender committee has made its final decision and recommendation each offeror may review the committee’s decision as well as the winning proposal. Local Government tender committees, however, usually notify all offerors of their decision regarding which proposal it recommended.

9. Cancellation of the Procedure

Section 23 of the Local Government Regulations provides that the Local Government may cancel a tender if the tender committee so decides and the mayor or the head of the local or regional council approves this decision.

If a tender has been cancelled a new tender may not be issued if there is no essential difference between the two unless the tender committee is of the opinion that the circumstances which led to the canceling of the original tender have changed. A new tender may be issued, however, if in the original tender no proposals were submitted or if the tender committee reviewed only a single proposal which it decided not to recommend.

E. Implementation of Public Procurement Contracts

1. Public Procurement Contracts

The implementation and contents of public procurement contracts are not governed by the regulations discussed above but rather by the Israel tort and contract law. The contents of public procurement contracts vary according to the contracting government entity, the subject matter (goods, services, etc.) and the scope of the contract.

As stated above, the contract to be signed with the winning offeror must be included amongst the original tender documents. Only minor changes may be made to the contract after the winning proposal has been selected. Such contracts, which are drafted by the procuring entities, are often very one sided and protective of the entity.

Clauses in government procurement contracts often cover the following subjects:

1. Time tables for completion of services or delivery of goods;

2. Payment schedule;

3. Payment of taxes (V.A.T., stamp);

4. Contractual penalties for late performance or delivery, defective performance or delivery of defective goods;

5. Quality examinations and overseeing of work by the government entity;

6. Acceptance of goods and services by the government entity;

7. Default and termination clauses;

8. Cancellation of the contract by the government entity;

9. Indemnification clauses for damages caused to third parties;

10. Insurance to be taken out by the supplier;

11. Supplier guarantees;

12. Secrecy provisions;

13. Bank guarantees ensuring the execution of the contract to be provided by the supplier;

14. Non-transferability of the contract by the supplier;

15. Which court has jurisdiction;

16. Intellectual property rights; and

17. . Extension of the contract to include additional goods or services.

2. Mandatory Commercial Cooperation and the Industrial Cooperation Authority

As referred to above, the Preference Regulations require a foreign supplier to include as an integral part of its proposal in tenders for the acquisiton of goods or the execution of work valued at greater than NIS 2,100,000 an undertaking to execute mandatory commercial cooperation in an amount that is not less than 35 percent of the value of the contract if the foreign supplier wins the tender. Only if the proposal of the foreign supplier is selected will it actually be required to enter into a mandatory commercial cooperation agreement with the Industrial Cooperation Authority (“ICA”) and perform such commercial cooperation.

The mandatory commercial cooperation provisions of the Preference Regulations also apply to contracts above the NIS 2,100,000 threshold which are not made by way of tender. These provisions do not, however, apply to imports by the defense establishment which are paid for using FMF funds.

The role of the ICA, a branch of the Israeli Ministry of Industry and Trade, is to monitor and coordinate the commercial cooperation activities of foreign suppliers following their contracting with government entities. The ICA monitors the overall implementation of the undertakings and agreements for commercial cooperation and administers fulfillment files in accordance with the progress reports submitted by foreign suppliers.

A government entity may only sign a contract with a foreign supplier after it has received the approval of the ICA that the foreign supplier has signed a mandatory commercial cooperation agreement with the ICA in which it undertakes to the State of Israel to perform the required 35 percent commercial cooperation. Such an agreement may take two different forms:

1. An agreement covering a specific transaction; or

2. An umbrella mandatory commercial cooperation agreement that covers all the foreign supplier’s transactions with government entities in Israel.

Such umbrella agreements may be entered into when the foreign supplier has total contractual ties with government entities totaling more than NIS 4,200,000. Such umbrella agreements make it unnecessary to obtain separate agreements for each specific transaction of the foreign supplier.

Pursuant to Section 6 of the Preference Regulations, commercial cooperation can be carried out by way of local Israeli subcontracting, investments, the transfer of know-how, R&D, or the acquisition of products, services or work in Israel. Commercial cooperation cannot, however, include expenses related to promoting the sales of the foreign supplier in Israel or the acquisition of shares in Israeli companies to which the Securities Law, 5728-1968 applies, unless such acquisition qualifies the purchaser as an “interested party” (i.e. acquires at least five percent of the company).

The foreign supplier is required to complete the 35 percent commercial cooperation during the period of time in which the contract with the government entity is in effect. The ICA may, however, extend this time period.

In certain circumstances, such as where the procurement is of a special nature or may have an “adverse effect” on the government entity, and on express application by the government entity, Section 8 of the Preference Regulations permits the ICA to grant an exemption or to approve commercial cooperation at a rate lower than the required 35 percent.

The ICA gives “credits” for the implementation of commercial cooperation based on semi-annual reports submitted by the foreign supplier’s liaison officer. After receiving the reports, the ICA verifies the reported transactions with the Israeli entities and manufacturers mentioned in the reports.

Pursuant to Section 8 of the Preference Regulations and the standard mandatory commercial cooperation agreement used by the ICA, credits for commercial cooperation are calculated by the ICA as follows:

1. Subcontracting and the purchase of Israeli goods, work or services will be credited at 100 percent of their contracted price;

2. Direct investment in advanced technology or industry in Israel will be credited at 150 percent of the value of such investment;

3. Funding of industrial R&D in Israel (provided that at least 50 percent of the ownership of the fruits of such R&D or of the rights to make use thereof shall remain in the hands of the Israeli R&D entity) will be credited at 150 percent of the funding amount.

In certain large tenders in the field of technology, the ICA, if it feels it is important in order to advance Israeli industry and technology and if there are entities in Israel capable of entering into subcontracting contracts with a foreign supplier, may require that one of the following be included in the tender documents:

1. A provision that a foreign offeror undertake, within the said 35 percent undertaking, to have local subcontracts of at least 20 percent of the contract price; or

2. A provision that preference will be given to proposals for imported goods which include local subcontracts included therein.

3. Remedies for Offerors and Contractors

Until 1991 almost all litigation related to tenders and the tendering process was heard before the Israeli Supreme Court sitting as the High Court of Justice. In 1991 the court ruled in David Pasternak Ltd. v. the Ministry of Housing, High Court Petition 991/91, 45 (v) P.D. 50 (1991) that from that point on the district courts would have jurisdiction to hear all challenges to tenders and the procurement process. Only in unique situations would a challenge to a tender be heard by the Supreme Court sitting as the High Court of Justice.

To date, Israel has not established any special challenge or pre-award protest procedures in accordance with Article XX of the GPA, and the district courts have jurisdiction to hear challenges to tenders covered by the GPA as well.

Where resort to the courts is in order, a legal procedure called an “Originating Summons” is usually used to protest against defects in tenders. The Originating Summons is a motion to the court submitted together with an affidavit. A hearing date on the merits is usually set within 3-4 months. At the time of the Originating Summons, an aggrieved offeror can request that the district court grant a temporary declarative order or injunction that will essentially “freeze” the tender procedures until the court rules on the challenge at the hearing date.

A party can challenge a tender at any stage of the tender process, beginning from before notice of a tender is published and through the post-contract signing stages.

An aggrieved offeror may request that the district court issue an order requiring a government entity to undertake any of the following actions:

1. To contract by tender in situations where it intended to contract not by way of tender;

2. To make changes to the conditions of a tender;

3. To disqualify the proposal of another offeror;

4. To cancel the tender;

5. To hold a new tender;

6. To declare that the offeror petitioning the court is the winner of the tender; or

7. To cancel the contract signed with the winning offeror.

The district court will grant the requested relief only if there is a “substantive defect” (the violation of an essential tendering principle). Such relief will not be granted where there is only a technical defect which does not give an advantage to any party. A defect may be substantive even though it was committed by the government entity in good faith. Although one defect might not be considered substantive in and of itself, a number of defects in a tender when added together may be sufficient to allow the court to grant the requested relief (see e.g., S. Geter (Film Needs) Ltd. v. the Minister of Health, High Court Petition 825/78, 33 (ii) P.D. 566 (1979)).

Even if the defects claimed by an offeror who has turned to the district court may be sufficient to warrant relief by the court, the claim may be barred for a number of reasons including the following:

1. Laches – A party who is aware of a defect regarding the tender or the tendering process must immediately protest with regard to the same or else it waives its rights to later protest (see e.g., Tiulei Hagalil Ltd. v. the State of Israel – Ministry of Transportation, High Court Petition 126/82, 36 (iv) P.D. 44 (1982)). The only exception to this rule is if the defect is related to the proposal of another party (see e.g., Yeda Computers and Programs Ltd. v. the State of Israel – the Ministry of Defense, Civil Appeal 4683/97, TAKDIN ELYON 97 (4), 712 (1997)).

2. “Clean Hands” – A party whose proposal/behavior is flawed can usually not protest a similar flaw in the proposal/behavior of another party (see e.g., Mispanot Israel v. the Israel Electric Corporation, Civil Appeal 6926/93, 48 (iii) P.D. 749 (1993)).

3. Exhaustion of administrative remedies - Before challenging a tender in court the party must first turn to the government entity and seek the requested relief.

4. The party has not included all parties with an interest as defendants/respondents in the proceedings.

5. The tender transaction has already been completed or it is too late to stop its implementation.

In addition to an Originating Summons and the relief that may requested in connection therewith, a party can also file a civil claim for damages against the government entity. Such a claim may be based on contract or tort law. In certain circumstances, a harmed offeror may even be able to be compensated for its lost profits (see e.g., Israel Electric Corporation v. Malibu Israel Ltd., Civil Appeal 700/89, 47 (i) P.D. 667 (1990)).

[1] Mandatory Tenders Law Proposed Bill, 5745-1984 (submitted to the Knesset on November 5, 1984).

[2] Mandatory Tenders Law (Amendment no. 3), 5753-1993, Sefer Hahokim, 1419 at page 108 (May 11, 1993).

[3] US$ 1 = approximately four NIS. The monetary amounts included in this chapter are approximate. Pursuant to the relevant regulations these amounts are updated every year (or month) pursuant to the rate of change in Israel’s cost of living index.

[4] Israel’s Note to the GPA – Appendix I.

[5] Yalkut Hapersumim, 4614 at page 2148 (February 1, 1998).

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