A Way Out for Public Contractors?

Lee Tesser
August 16, 2011 — 1,652 views  

Ever since the inception of public bidding in New Jersey, contractors have to be especially careful in preparing their bid prices for obvious reasons.  First, the prevailing legal standard dictates that public contracts be awarded to the "lowest responsible bidder".  Thus, there is no negotiation post bid and the bid price was locked in upon the bid opening.  Second, if bidders discovered, post bid, that a gross mistake was made in the calculation of their bid proposal, they could not back out without jeopardizing their bonding capacity and/or losing their bid bond. 

Third, similar to performance and payment bonds, bid bonds are issued by sureties under an indemnity agreement which almost universally contains a personal guarantee.  Thus, if a bidder backed out of a public contract, there likely were significant consequences including personal liability.  Fourth, in addition to losing its bid bond and losing money, there is some case law in New Jersey that would support the conclusion that if a contractor on a public works contract backed out, they could be responsible for the difference between their bid and the second low bidder's price.  Fifth, failure to complete a public contract may reflect negatively on the bidder when it bids on future public projects.

Now, the landscape for contractors on public works projects is about to change.  On January 4, 2011, Governor Chris Christie signed a law that will amend and supplement the Local Public Contracts Law to permit a bid for a public works contract to be withdrawn due to a mistake under certain specified circumstances.  The law will take effect on March 4, 2011, sixty days after enactment of this new law.

In the limited review of New Jersey Courts regarding the issue of a bidder's mistake, the court determined that under certain circumstances a bid could be withdrawn on public works contracts due to a mistake in the bid price.  In Conduit & Foundation Corp. v. Atlantic City, 2 N.J. Super 433, 64 A.2d 382 (Ch. Div. 1949), bids were solicited for the construction of a new boardwalk.  The low bidder, after the bids were opened, realized that there was an error in the computation of the price of his bid.  The bidder immediately notified the municipality of his error and requested that his bid be withdrawn.  The municipality notified the bidder that the contract had been awarded to him despite his mistake in the bid.  The Court reasoned that since the bidder immediately notified the municipality of the mistake and withdrew its bid, the bidder in effect rescinded the option it had given to the municipality.  The Court further explained that the bidder's mistake was of great consequence so that enforcement of the contract would be unconscionable, the mistake related to a material feature of the contract, the bidder exercised reasonable care when preparing the bid, and that the municipality would not experience substantial prejudice if the contract was rescinded.  The Court determined that the bidder's error constituted a unilateral mistake and that the contract should be rescinded. 

Similar to the law recently enacted by New Jersey; the court examined several "essential conditions" when rescinding a contract for mistake.  The court looked at if the mistake was of such a consequence that it would be unconscionable to enforce the contract; if the mistake was material to the contract; if the mistake was made despite the party exercising reasonable care and; if rescission of the contract would not result in serous prejudice to the other party, besides the loss of the bargain.  (See also; Cataldo Const. Co. v. County of Essex, 110 N.J. Super 414, 265 A.2d 842 (Ch. Div. 1970) and Intertech Assoc., Inc. v. City of Paterson, 255 N.J. Super 52, 604 A.2d 628 (App. Div. 1992), where the court applied Conduit's "essential factors" and determined that the contracts should be rescinded due to a bidder's error in its bid.)

Courts in other jurisdictions issued decisions which said, generally, that if a bidder can prove a unilateral mistake of significance, it would be in everyone's interest if the bidder be allowed to withdraw its bid without consequence.  Rhode Island Tool Co. v. U.S., 128 F.Supp. 417 (Ct. Cl. 1955) (stating "a rather well-established rule of law seems to be that after bids have been opened the bidder cannot withdraw his bid unless he can prove his desire to withdraw is due solely to an honest mistake and that no fraud is involved.")  See also; Moffett, Hodgkins & Clarke Co. v. City of Rochester, 178 U.S. 373 (1900).

From a practical standpoint, the case law from other jurisdictions and New Jersey's recent amendment makes perfect sense.  No public agency wants a contractor to perform its work where it is clear that the contractor is destined to lose money, may be unable to perform, or perform the work at a great loss.  Certainly, no contractor wants to perform public work with the knowledge of a mistake in its bid price.  This is especially so since any default could have great consequences on a contractor's bonding capacity including an action/claim against its performance and/or bid bond.  Further, from the public owner's perspective, the knowledge that the contractor may be operating at a loss may cause the promotion of change orders and/or claims to make up for that loss.  Under any scenario, no one really has a vested interest in forcing contractors to perform a contract where the bid numbers, in good faith, were severely miscalculated. 

Thus, N.J.S.A. 40A:11-2 has been amended to include the definition of a "mistake" which is defined as follows:

"Mistake" means, for a public works project, a clerical error that is an unintentional and substantial computational error or an unintentional omission of a substantial quantity of labor, material, or both, from the final bid computation.

The key component of the amendment to New Jersey's bidding law, is that the mistake must be unintentional and go to the heart (i.e. substantial) of a bidder's calculations of labor, material, or both.  It must be clear that the mistake was unintentional.  The intent being to allow contractors out for good faith mistakes and not because: (1) the contractor became too busy with other more profitable jobs; (2) have cash flow problems that interfere with the smooth running of the job; or (3) run into problems with their surety in getting bonds.

Utilizing the definition set forth above, N.J.S.A. 40A:11-23.3 was added to allow the withdrawal of a bid due to a mistake on the part of the bidder.  The most important aspects of the new law can be summarized as follows; first, the new amendment applies solely to county or municipal work.  Second, a bidder may request (in writing) a withdrawal of the bid within 5 business days of the bid opening.  Third, the request for withdrawal shall include evidence, including documentation that a mistake was made with great consequence such that: a) the enforcement of the contract, if actually made, would be unconscionable; b) the mistake relates to a material feature of the bid; c) the mistake occurred notwithstanding the fact that the bidder exercised reasonable care in preparation of the bid; and d) the bidder making the mistake is able to get relief by way of withdrawing the bid without serious prejudice to the contracting unit, except for the loss of the bargain to the contracting unit.

 

Fourth, the public entity shall review the request for bid withdrawal no later then the next meeting of the governing body.  Fifth, the review by the purchasing agent, its legal counsel, or chief administrative officer shall be performed "in good faith" along with a recommendation to the governing body.  Sixth; in the event that the public owner grants the request for withdrawal, it shall return to the bidder its bid bond.  Seventh, the public owner may continue with the award process (presumably to the next low bidder) but the bidder whose bid has been withdrawn may not participate in the bidding for the same project.

Much of the legislation will require on-going interpretation by the courts (for example, what does "reasonable care" mean in number 3c above or what does "serious prejudice" mean in number 3d above).  Perhaps more interesting, what makes enforcement "unconscionable" (3a)? What if a bidder's submission clearly shows a significant mistake and notwithstanding the mistake, the contractor will be profitable?  Is profitability ever a factor in the test of unconscionability?  What if the mistake relates to a non material feature of the bid but still is of great financial consequence such that the contractor will suffer if required to perform? 

Several other issues may also arise such as: How exactly will a public entity determine when a contractor exercised "reasonable care" in the preparation of a bid?  Will the bidder's take-off sheets/estimating be enough?  Can a bidder simply submit an affidavit from its estimator as to the mistake?  Can a bidder, post bid, "fudge" numbers and documentation to get out of a job (presumably this is covered under the "good faith" standard)? 

Last, and again, what is "serious prejudice" (3d)?  What if the mistake is significant but time doesn't permit another round of bidding?  What if that township building and police station needs to be opened in 60 days and the public entity feels that it cannot allow withdrawal of the bid due to time constraints?

Yet, it is clear that the law now permits bidders to seek relief in the event that they are certain that a gross mistake has been made in their bid.  Again, from a practical standpoint, bidders will be sure to review their bids when they recognize that on a $3,000,000.00 project, for example, their bid was $700,000.00 lower than the next few low bidders.  Even if their bid proves to be less disproportionate than this example, bidders might be encouraged to review their numbers before undertaking a project that will be financially problematic.  Of course, bidders must be diligent and timely in their request for withdrawal of the bid under the strict five day time period.

In sum, the new law recognizes the basic concept of fairness and equity in the public bidding arena.  It recognizes the interests of both good faith public contractors and governmental entities.  While being the lowest responsible bidder in this economy is always a good thing, you should always scrutinize whether your bid number is accurate and not just "low".  If not, you should immediately take action pursuant to this revision to the Local Public Contracts Law.

Lee Tesser

Tesser & Cohen

Lee M. Tesser is a Partner at Tesser & Cohen whose firm specializes in Construction Law and Construction Litigation. Mr. Tesser is a construction arbitrator for the American Arbitration Association.