Legal Alerts Mar 22, 2018

Government Contractor Recovers Bid Preparation Costs After Project Wrongly Awarded

California Appellate Court Expands Court’s Equitable Authority

Government Contractor Recovers Bid Preparation Costs After Project Wrongly Awarded

Contrary to prior rulings, an aggrieved bidder may be able to recover its bid costs when a public works project is wrongly awarded to another contractor that is not the lowest responsible bidder — even after the contractor is successful in obtaining a permanent injunction to nullify the contract — a California appellate court ruled this week.
 
In West Coast Air Conditioning Company, Inc. v. California Department of Corrections and Rehabilitation, the court affirmed a $250,000 award of bid preparation costs under a promissory estoppel theory. The theory is a legal principle that a person who reasonably relies on a promise to his or her detriment is entitled to compensation for the resulting damages.
 
West Coast Air Conditioning Company, Inc. challenged the award of a public works contract by the California Department of Corrections and Rehabilitation to Hensel Phelps Construction Co., after Hensel was found to be the lowest bidder with a bid of approximately $88 million. West Coast was the next lowest bidder with a bid of about $98 million. The court found that Hensel’s bid had material typographical errors, and issued an injunction nullifying the award and ceasing work on the project. Because CDCR did not subsequently award the contract to West Coast, West Coast sued to recover its bid preparation costs.
 
Under prior precedent set by Kajima/Ray Wilson v. Los Angeles County Metropolitan Transp. Auth.,  the California Supreme Court allowed a rightful low bidder to recover its bid preparation costs only if the bidder could not obtain an injunction rescinding the award (e.g., if the work was already completed). In West Coast, however, the court allowed both an injunction and bid preparation costs. The court reasoned that the injunction was “ineffective” because CDCR did not award West Coast the bid after the injunction was issued, even though CDCR had no obligation to award the contract to West Coast. The court did not take into account that a public agency has the right to reject all bids and, if the low bid is disqualified, may choose to re-advertise a contract rather than award to the next lowest bidder. Thus, West Coast received a $250,000 windfall even though it would not have received a contract.
 
It is difficult to see how this case serves the public interest, especially considering that the windfall resulted from typographical errors in Hensel’s bid.
 
Even more troubling, the West Coast opinion went to great lengths to argue that the court could have ordered CDCR to award the contract to West Coast. Though mere dicta, the statements from the court are dangerous. The court essentially implied that, had West Coast requested it, the court would have forced CDCR to expend an extra $10 million in public money. As a basic separation-of-powers principle, courts cannot make public agencies enter unwanted contracts. In deciding whether to re-advertise a contract or award it to a second-placed bidder, public agencies may take into account the project funding, the project budget, the estimated costs of the project, alternatives for phasing or reducing project scope, and other critical factors that may be considered before taxpayer money is spent. Simply giving the award to the next-lowest bidder is a haphazard way to administer public dollars. The court’s misguided discussion of this issue is disappointing and troubling, but at least it is not precedent-setting.
 
On the other hand, even though the ruling in West Coast appears to conflict with Kajima, public agencies will want to exercise more caution in awarding bids, as this case may unfortunately result in increased litigation from second-placed bidders. CDCR may still seek de-publication of the opinion and/or review from the California Supreme Court.
 
If you have any questions about this law or how it may impact your agency, please contact the authors of this Legal Alert listed to the right in the firm’s Public Contracts & Construction group, or your BB&K attorney.
 
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Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.

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