Legal battle between Sano and competitor Klir exposes the conduct of the Ministry of Defense in tenders

For 16 years Klir has been supplying the IDF with cleaning and hygiene materials worth tens of millions of shekels a year • The competitor, Sano, claims that Klir enjoys unfair advantages in the tenders, and holds true statistics on consumption in the IDF -Following Sano’s petition, the court ordered the freezing of the tender until next week’s hearing

05.07.2017 | Yasmin Gueta

For 16 successive years, Klir has time and again been awarded the Ministry of Defense tender for the supply of cleaning materials and hygiene products to IDF bases, worth tens of millions of shekels a year. Sano Professional, the competitor, now claims that the Ministry of Defense provides Klir with an unfair advantage – which the company exploits using wrongful techniques.

Sano also argues that Klir should be disqualified from participation in the tender as it cheated the Ministry of Defense and did not disclose that it charged double VAT over a period of a year and a half after winning a previous tender.

Last week, Judge Rachel Barkai of the Tel Aviv District Court ordered suspension of the tender process and postponement of the date for submission of offers, following an administrative petition and an urgent motion for interim orders filed by Sano Professional. The petition hearing is set for July 10, and it could interest many suppliers who work with the defense agencies, since many IDF tenders are based on estimates of supply quantities. It is reasonable to assume that the decision issued in respect of this tender will also have implications on other tenders.

At the center of the petition, which was filed through attorneys Menachem Abramovich and Shaked Nissan-Cohen of law firm Hamburger Evron & Co., is a public tender published by the Ministry of Defense in May. The tender is for an agreement on prices for a period of three years, and two further option periods, each for one year, to purchase cleaning materials and hygiene products and to supply 158 items. The monetary scope of the contract was estimated by the Ministry of Defense at approximately 45 million shekels per year, totaling 135 million shekels for a period of three years, in addition to up to 135 million shekels for the option periods. The tender states that the products are to be supplied by the winner in accordance with the demands of the IDF bases, where the prices incorporate all the costs, including supply and transportation.

Sano claims that the method of the tender, and the way in which its documents are worded, give Klir a significant advantage. According to Sano, because of this advantage, Klir has time and again won tenders of the Ministry of Defense, and for the past 16 years is in fact an exclusive supplier of cleaning materials and hygiene products to IDF bases.

According to claims made in the petition, Klir, which was awarded the previous tender, published by the Ministry of Defense in 2014, holds accurate data in respect of actual IDF consumption. Thus, for example, it has information on the frequency of shipments, location of shipments, and the monetary value of each shipment. “These numbers contain everything needed to allow a supplier to make a better estimate of future figures,” the petition states.

From the petition it transpires that while the list the Ministry of Defense provides in the tender does specify the number of units of each product, they are offered as a forecast of annual consumption. The supplier does not know in advance how many products they will have to supply in practice, and it is clearly stated that the numbers are estimates and do not bind the Ministry of Defense in respect of future consumption in practice. The supplier also does not know the frequency of deliveries, the delivery destinations, and the value of a single delivery, with the exception of a figure of a minimal supply value.

Gaps between actual consumption and estimates

In the petition, Sano specifies that it made a request to the Ministry of Defense to obtain true data in respect of past consumption. Among others, the company asked for information in respect of frequency of deliveries, their financial value, and the destinations of deliveries made in the past. Ultimately, the Ministry of Defense did provide data on actual consumption for the years 2014-2017. However, so Sano claims, it then discovered gaps of dozens and even hundreds of percentage points between consumption in practice and the estimates. “These gaps give a significant advantage to the existing supplier, who holds true and accurate numbers, including the actual consumption in each and every year, and not only the total consumption of the last three years, as the Ministry of Defense issued to the other participants in the tender,” it stated.

Sano claims that the gaps in information between Klir and the other participants in the tender provide it with “an advantage in the pricing of the offer, in a manner which raises concern of product price manipulation”

The terms of the tender require that every bidder must propose a price per product unit in respect of each of the items in the list, which comprises more than 150 items. The total of the multiplications of the price per unit of each unit, by the annual consumption estimate noted in the tender documents, constitutes the total proposal of each bidder. The winning bidder is the one whose total proposal is the lowest.

Sano argues that the gaps in information between Klir and the other participants in the tender provide it “a most meaningful advantage in the pricing of its proposal, in a manner that even raises concerns of product price manipulation.” It is also claimed that “the use of an annual consumption estimate that is not based on genuine and precise historic data provides a clear advantage to the incumbent supplier.”

The advantage of the incumbent supplier over the potential bidders is expressed, according to Sano, in that it has the ability to price its proposal using the technique of “price shifting” in such a way as to offer a low price for items that are purchased in practice in smaller quantities than the forecast, and high prices for products that are bought in larger quantities in practice. “This chicanery in pricing the tender offer is possible due to two main reasons: first – the fact that the estimate in the tender is not based on true data, and there are considerable gaps between it and the consumption in practice, without any explanation given for the gaps; and second – information gaps between the existing supplier and the other potential bidders in the tender,” the petition states. “The bidders are not all on the same equal ‘starting line’ as required by the principle of equality, which is the central and most important principle in the law of tenders.”

“Real deception”

This is not the first time that Sano comes to court because of a Ministry of Defense tender. In 2014 the Ministry of Defense issued two tenders, one for the purchase of cleaning materials and hygiene products, and the second for the purchase of disposable dishware. Then too Sano asked the Ministry of Defense for figures and when its request went unanswered, it filed a petition for their receipt. Ultimately, the Ministry of Defense deigned to provide Sano with the figures on the actual consumption in the years that preceded the tender, and Sano agreed to withdraw the petition it filed. In that instance the Tender Committee decided that Klir, which had offered to supply the products for 21.7 million shekels was the cheapest bid, and it therefore was awarded the tender. Sano, in contrast, offered to supply the products for 23.1 million shekels.

Sano, however, now claims that in 2015 the company, to its disbelief, had become aware that in practice the Ministry of Defense pays Klir prices that are higher than those it offered in the tender. Upon discovering this, Sano contacted the ombudsman at the Ministry of Defense, questioning the legitimacy of Klir being awarded the tender. Sano received a reply that the prices in the delivery certificates attached to its letter matched the prices that Klir offered in the tender, and that the gaps found arose from the addition of VAT.

Sano claims that they accepted this explanation at first, and decided not to re-engage in the matter. However, a pricelist of the products paid by the IDF recently came into its possession, which includes both the price before VAT and the price inclusive of VAT. “From this pricelist it transpires that the reply given by the Ministry of Defense is not correct, and that the prices shown in the delivery certificates do not include VAT, and are higher than the prices stated in Klir’s offer in the tender,” the claim emphasizes.

Sano again contacted the Ministry of Defense and demanded an urgent inquiry into the matter, which was referred to the relevant functions at the Ministry of Defense. The response of the Legal Adviser to the Ministry of Defense was received last week, and this time it was a different one. It was claimed that “a malfunction had occurred” in the computer system of the Ministry of Defense in the wake of a system upgrade implemented in 2016 and, due to this error, VAT was added on to prices that already incorporated VAT, resulting in the gaps in pricing.”

Sano now claims that “the attempt of the Ministry of Defense to classify this bad faith conduct, to put it mildly, as a ‘malfunction’, which has no effect on the previous tender or on the current one – will not work.” As to Klir, it emphasizes that its conduct “severely damages its credibility, in a way that does not match expectations of a supplier to the Ministry of Defense, which is bound by a high level of credibility in view of the sensitivity of the information that comes into its hands.”

Klir’s conduct, Sano claims, also constitutes a breach of the terms of the contract with the Ministry of Defense, in which the parties agreed on fixed prices for products, whereas in practice, Klir charged much higher prices. “This conduct is unfair and improper in the relations between Klir and the Ministry of Defense, and even amounts to actual deceit and theft, at the expense of the public coffers.”

“Sano unlawfully obtained documents from the IDF”

Klir, for its part, yesterday filed with the court a response to the petition through Adv. Roy Blecher, in which it claims that “Sano Professional used classified and confidential documents that it obtained through convoluted means from various IDF units or from the Ministry of Defense, unlawfully, and while, prima facie, perpetrating criminal offenses.” According to Klir, “This illicit conduct of Sano Professional is a direct continuation of similar incidents in which it hacked into the classified military procurement system and produced, unlawfully, classified and confidential information on Klir and IDF units which contracted with it in a tender.”

As to the claims pertaining to Klir’s conduct following the VAT overcharge, Klir emphasizes that these are unfounded claims. According to Klir, “Sano’s claims that Klir chose to remain silent, while collecting sums overpaid to it, are absolute lies.” Klir emphasizes that it, as a supplier, has no control over the products that will be ordered by the unit placing the order, or on the amount of payment it receives from the Ministry of Defense, and that the entire system is fully controlled by the unit placing the order and by the financial division at the Ministry of Defense.

Klir adds that no defect occurred in its engagement with the Ministry of Defense. It notes that in 2016 an upgrade was made in the computerized procurement system of the Ministry of Defense, which upgrade led to the malfunctions that impacted on, among others, the transactions of Klir vis-à-vis the Ministry. Klir claims that it informed the Ministry of Defense immediately and in real-time on every change in the system that was not clear.

The Ministry of Defense said in response: “There is no basis for the claims made by Sano. The Ministry of Defense manages the tender in accordance with the law and does not give any advantage to any of the contenders. Contrary to what it claims, Sano did receive during the course of the tender all the information requested and even beyond that. In addition, there is no basis to the claim that Klir allegedly cheated the Ministry of Defense. The company immediately notified the Ministry about the computer error in the payment of VAT, which led both to overpayment and to a shortfall in payment to the company. The State’s position in its entirety will be presented as is customary to the court.”