May 2025
Winning Tenderer May Not Arbitrarily Change Subcontractors in the Government Procurement Project Allowing Using Subcontract's Qulification (Taiwan)
Article 36, Paragraph 2 of the Enforcement Rules of the Government Procurement Act stipulates: "The subcontractor and the subcontracted part prescribed in the preceding paragraph shall not be changed after contract award, unless it is necessary to do so under special circumstances and with the entity's approval. In such event, the qualifications owned by the new subcontractor shall not be inferior to those of the original subcontractor." The principle outlined in this provision is that since the winning tenderer was recognized by the procuring entity as having the performance capability through the ability and experience of its subcontractors, it should not arbitrarily change the subcontractors in principle.
According to this provision, a winning tenderer may only change the subcontractors when the following three conditions are met: (1) There are special circumstances necessitating a change (hereinafter referred to as the "special circumstances"); (2) The new subcontractors possess qualifications not inferior to those of the original subcontractors for their subcontracted part; (3) Approval from the procuring entity for changing the subcontractors. In practice, if conditions (1) and (2) are met, the procuring entity often agrees to change the subcontractors on the condition that they can ensure smooth performance of the contract. Furthermore, since the bidders' qualifications are specified in the tender documents, the criteria of condition (2) are relatively clear. However, the "special circumstances" in condition (1) is an indeterminate legal concept whose content can only be understood through observing judicial opinions' development. This article uses Taiwan Taichung High Administrative Court Judgement 104 Su-Tzu 21 (hereinafter referred to as the "Judgement") as an example to summarize Taiwan courts' criteria for determining whether the "special circumstances" are met.
In this case, the tender instructions of the procurement stipulated that the bidders must provide proof of their substantial experience or achievements, or alternatively, documentation demonstrating the capabilities of qualified subcontractors. The tender instructions further specified that the winning tenderer may only change the subcontractors in accordance with Article 36, Paragraph 2 of the Enforcement Rules of the Government Procurement Act. Regardless of circumstances, the winning tenderer must obtain prior written approval from the procuring entity before modifying or terminating the subcontract agreement. This indicates a clear intention within the tender instructions that the winning tenderer is generally not allowed to change the subcontractors except under “special circumstances”.
According to the tender instructions, the Judgement held that the winning tenderer should fulfill the contractual obligations through its subcontractor as per the subcontract agreement signed at the time of winning. Even if the "special circumstances" are met, prior approval from the procuring entity and compliance with both tender instructions and the Government Procurement Act are still required for changing the subcontractors. This means that the procuring entity has discretion over whether to approve such changes, and the winning tenderer is not entitled to request such changes.
The Judgement further pointed out that subcontractors’ refusal to provide products or services alone does not solely constitute "special circumstances". Instead, it is necessary to investigate whether such refusal can be attributed to actions by the winning tenderer. Allowing a change of subcontractors when such refusal is attributable to the winning tenderer would effectively grant the winning tenderer the right to change the subcontractors arbitrarily, which contradicts the principle outlined in the tender instructions that the winning tenderer is generally not allowed to change the subcontractors.
Therefore, the Judgement adopted a stringent standard in determining whether the "special circumstances" are met, considering that “special circumstances” are met only when events that are unforeseen before the bidding process occur, necessitating a change of subcontractors to meet the public interest. Otherwise, it would contravene the principle outlined in Article 36, Paragraph 2 of the Enforcement Rules of the Government Procurement Act and the tender instructions that the bidders should carefully conduct the selection of subcontractors before bidding and that changing subcontractors after winning is generally prohibited.
The Judgement elucidated that the purpose of these provisions is to ensure that the bidders possess complete qualifications and performance capabilities. Thus, the bidders must take all appropriate measures to ensure that their subcontractors fulfill the contractual obligations alongside them for their respective subcontracted parts after winning the bid.
In this case, the winning tenderer claimed that "special circumstances" were met due to the original subcontractors’ unilateral price increases, reduced material quality, changes in product manufacturing locations, and refusal to provide products or services. However, upon investigation, it was found that there was an agreement allowing price adjustments based on cost fluctuations between the winning tenderer and the original subcontractor. Furthermore, before receiving any refusal notice from the original subcontractor regarding product or service supply, the winning tenderer had already applied for a change of subcontractors to the procuring entity and requested an amendment of the original subcontract agreement, which included designs and production, so that the winning tenderer purchased only the technical drawings from the original subcontractor, with another company responsible for production.
Based on the aforementioned information, the Judgement concluded that price disputes were foreseeable prior to bidding; thus, the "special circumstances" are not met. Additionally, the Judgement determined that the refusal by the original subcontractor resulted from the winning tenderer’s attempt to seek a change of subcontracts—and since the termination of the subcontract agreement by the winning tenderer occurred even before the winning tenderer received the refusal notices from the original subcontractor—the breakdown in cooperation was attributable solely to the winning tenderer itself; hence, the "special circumstances" are not met under these conditions.
Based on the above, LTP advises our clients to undertake the following preparations before bidding on government procurement projects:
I. Carefully select the subcontractors to ensure they meet the requirements outlined in the tender instructions. Implement appropriate measures to ensure that the subcontractors fulfill their contractual obligations for their respective subcontracted parts alongside the winning tender after winning the bid.
II. Specifically stipulate supply prices or price adjustment provisions in letters of intent and subcontract agreements with the subcontractors. Utilize back-to-back clauses to prevent the subcontractors from arbitrarily raising prices or refusing supply after winning the bid.
Public construction is a key focus for LTP. LTP will continue to monitor the developments in legal amendments and judicial opinions within this field.
According to this provision, a winning tenderer may only change the subcontractors when the following three conditions are met: (1) There are special circumstances necessitating a change (hereinafter referred to as the "special circumstances"); (2) The new subcontractors possess qualifications not inferior to those of the original subcontractors for their subcontracted part; (3) Approval from the procuring entity for changing the subcontractors. In practice, if conditions (1) and (2) are met, the procuring entity often agrees to change the subcontractors on the condition that they can ensure smooth performance of the contract. Furthermore, since the bidders' qualifications are specified in the tender documents, the criteria of condition (2) are relatively clear. However, the "special circumstances" in condition (1) is an indeterminate legal concept whose content can only be understood through observing judicial opinions' development. This article uses Taiwan Taichung High Administrative Court Judgement 104 Su-Tzu 21 (hereinafter referred to as the "Judgement") as an example to summarize Taiwan courts' criteria for determining whether the "special circumstances" are met.
In this case, the tender instructions of the procurement stipulated that the bidders must provide proof of their substantial experience or achievements, or alternatively, documentation demonstrating the capabilities of qualified subcontractors. The tender instructions further specified that the winning tenderer may only change the subcontractors in accordance with Article 36, Paragraph 2 of the Enforcement Rules of the Government Procurement Act. Regardless of circumstances, the winning tenderer must obtain prior written approval from the procuring entity before modifying or terminating the subcontract agreement. This indicates a clear intention within the tender instructions that the winning tenderer is generally not allowed to change the subcontractors except under “special circumstances”.
According to the tender instructions, the Judgement held that the winning tenderer should fulfill the contractual obligations through its subcontractor as per the subcontract agreement signed at the time of winning. Even if the "special circumstances" are met, prior approval from the procuring entity and compliance with both tender instructions and the Government Procurement Act are still required for changing the subcontractors. This means that the procuring entity has discretion over whether to approve such changes, and the winning tenderer is not entitled to request such changes.
The Judgement further pointed out that subcontractors’ refusal to provide products or services alone does not solely constitute "special circumstances". Instead, it is necessary to investigate whether such refusal can be attributed to actions by the winning tenderer. Allowing a change of subcontractors when such refusal is attributable to the winning tenderer would effectively grant the winning tenderer the right to change the subcontractors arbitrarily, which contradicts the principle outlined in the tender instructions that the winning tenderer is generally not allowed to change the subcontractors.
Therefore, the Judgement adopted a stringent standard in determining whether the "special circumstances" are met, considering that “special circumstances” are met only when events that are unforeseen before the bidding process occur, necessitating a change of subcontractors to meet the public interest. Otherwise, it would contravene the principle outlined in Article 36, Paragraph 2 of the Enforcement Rules of the Government Procurement Act and the tender instructions that the bidders should carefully conduct the selection of subcontractors before bidding and that changing subcontractors after winning is generally prohibited.
The Judgement elucidated that the purpose of these provisions is to ensure that the bidders possess complete qualifications and performance capabilities. Thus, the bidders must take all appropriate measures to ensure that their subcontractors fulfill the contractual obligations alongside them for their respective subcontracted parts after winning the bid.
In this case, the winning tenderer claimed that "special circumstances" were met due to the original subcontractors’ unilateral price increases, reduced material quality, changes in product manufacturing locations, and refusal to provide products or services. However, upon investigation, it was found that there was an agreement allowing price adjustments based on cost fluctuations between the winning tenderer and the original subcontractor. Furthermore, before receiving any refusal notice from the original subcontractor regarding product or service supply, the winning tenderer had already applied for a change of subcontractors to the procuring entity and requested an amendment of the original subcontract agreement, which included designs and production, so that the winning tenderer purchased only the technical drawings from the original subcontractor, with another company responsible for production.
Based on the aforementioned information, the Judgement concluded that price disputes were foreseeable prior to bidding; thus, the "special circumstances" are not met. Additionally, the Judgement determined that the refusal by the original subcontractor resulted from the winning tenderer’s attempt to seek a change of subcontracts—and since the termination of the subcontract agreement by the winning tenderer occurred even before the winning tenderer received the refusal notices from the original subcontractor—the breakdown in cooperation was attributable solely to the winning tenderer itself; hence, the "special circumstances" are not met under these conditions.
Based on the above, LTP advises our clients to undertake the following preparations before bidding on government procurement projects:
I. Carefully select the subcontractors to ensure they meet the requirements outlined in the tender instructions. Implement appropriate measures to ensure that the subcontractors fulfill their contractual obligations for their respective subcontracted parts alongside the winning tender after winning the bid.
II. Specifically stipulate supply prices or price adjustment provisions in letters of intent and subcontract agreements with the subcontractors. Utilize back-to-back clauses to prevent the subcontractors from arbitrarily raising prices or refusing supply after winning the bid.
Public construction is a key focus for LTP. LTP will continue to monitor the developments in legal amendments and judicial opinions within this field.
