The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

Bidding on public works projects often leads to conflicts and claims. In a future post I will discuss claims for extra compensation arising from bids below the engineer's estimate-characterized by some (usually public owners) as opportunistic bidder claims. Disputes also arise from disappointed bidders whose bids were not the low bid or from low bidders who lose contracts after a bid protest by a competitor with a higher bid price. 

Most states require public works contracts to be awarded to the lowest bidder. It is believed this inures to the benefit of the public fisc by driving competitive bids to the lowest reasonable price. But how do you reconcile the public's desire for the lowest price with the public's need for safety, quality, and  reliability? In California, these competing interests are addressed by requiring public works contracts to be awarded to the lowest responsive and responsible bidder. In other words, the award goes to the contractor with the lowest bid that fulfills the bidding requirements who can also demonstrate that it is a responsible contractor with the requisite bona fides such as licensure, experience, bonding capacity, etc.

There is an inherent problem with this system: while the lowest bid price is an objective standard, the requirements of responsiveness and reliability are subjective standards that can be manipulated. Yesterday, in a case called Great West Contractors v. Irvine Unified School District, the California Court of Appeal addressed problems that arose when subjective criteria were used to reject the low bids on two school district projects and awarding them to two other contractors at an additional cost to the taxpayers or, as the court put it, "the Irvine School District appears to have paid $800,000 more than was necessary to remodel two elementary schools." To read the opinion click here.

Summarizing the case is relatively simple: Great West submitted the low bids on two school remodel projects. Contractors with higher bids protested claiming Great West was not a responsive bidder due to a question in the bid documents about the existence of additional contractor licenses. The school district rejected Great West's bids and awarded the projects to two other contractors. The Court described the importance of the case as follows:

This case is important for two reasons. First, it presents a challenging problem in public contracting law: How to distinguish a "nonresponsive" bid from a de facto determination that the bidder is not a "responsible" bidder. The difference is significant not only to the bidder, but to the taxpaying constituency of the public entity: A truly nonresponsive bid may be summarily denied by a public entity even if the bid is otherwise monetarily the best for the entity. On the other hand, a determination of nonresponsibility entitles the bidder to a hearing where certain minimal elements of due process must be afforded before the contract can be awarded to the next-best bidder. 

More particularly, this case illustrates the necessity of following the rule enunciated in 2007 by our Fifth District colleagues in D.H. Williams, supra, 146 Cal.App.4th 757 (D.H. Williams). Under the D.H. Williams rule, a public agency cannot reject the bid of the lowest bidder on a public works project on the theory that the bid is "nonresponsive" to the agency's request for bids when, in substance, the real reason for the rejection is that the agency thinks the lowest bidder is "not responsible" -- at least not without giving the lowest bidder the chance for a hearing on whether the lowest bidder really is "not responsible." On the record before us, because D.H. Williams was not followed, the Irvine Unified School District appears to have paid $800,000 more than necessary to remodel two elementary schools.  

The second major reason this case is important is that it presents an object lesson in how evidence that, at least on its face, tends to show favoritism -- indeed, on this record, favoritism most foul -- never got squarely presented to, or considered by, the trial court. The reason? An unfortunate combination of trial court calendaring beyond a petitioner‟s control, and a public entity‟s delay in complying with a request for information. (Readers can judge for themselves, when we recount the facts in detail in part II below, whether "stonewalling" might not be a better word than "delay.")

The Court went on to describe what it considered to be suspicious circumstances leading to the rejection of the low bids on the remodel projects:

Here, one competitor in a bid for a school remodeling contract, for some reason never adequately explained by the public entity, had access to the lowest bidder‟s bid information within 24 hours of the opening of all the bids. Thus, this competitor was able to present a bid challenge almost immediately to the contracting school district based on the allegation that the lowest bidder had omitted to disclose some licenses with which it or its principals had been associated. And that competitor went on to be awarded one of two contracts up for award. after the critical first court hearing in the case.

But when the lowest bidder tried to get a copy of that very same competitor‟s bid (as well as that of another company that was awarded the second contract), the school district did not turn over that information until several weeks later. More pointedly, the information was deliberately not made available until after the critical first court hearing in the case.

However, when, in the second hearing on the lowest bidder's main request for relief, the lowest bidder tried to proffer evidence that would show how it had been treated differently from the winning competitors, the school district vigorously objected on the ground that the evidence was submitted too late! It doesn't take Hamlet to figure out that something rotten happened in this case. In fact, it suspiciously fits George Washington Plunkitt's definition of honest graft -- the use of tips to gain an advantage over one's rivals in public contracting.

In the end, the Court of Appeal reversed the trial court's decision, holding in favor of Great West which meant Great West could amend its complaint to claim damages for payment of its bid costs. But the injunctive relief requested by Great West had been made moot with the passage of time. The case illustrates the difficulty and even futility of many bid protests in California. Due to the time it takes to file a petition with the trial court for an injunction to prevent the award of the contract to the other guy, and then if you lose, the time to file, and have heard, a writ of mandate with the Court of Appeal, more often than not, during the time necessary for the legal proceedings to roll out, the contract is awarded to the other contractor and the work is started, and sometimes completed, before the legal proceedings are concluded. If an injunction does not occur, the rejected low bidder is left with a claim for damages in the amount of the bid costs. This is not a satisfying solution when you lose profits from a job (and work for your employees) through no fault of your own.

Given the timing difficulties with bid protest, here are a couple of things you could do to speed up the process:

1. Have your lawyer prepare a "canned" public document request for the bid documents of your challenger(s) that you could immediately fill out and serve on the public entity in the event  your low bid is rejected.
2. If you choose to fight it, send a copy of your bid documents to your counsel as soon as possible so a petition for injunction can be filed as soon as possible. Make sure you have available all personnel who may be required to sign affidavits in support of the petition.
3. In the event the trial court can not or will not set the hearing at an early date, have your attorney file an ex parte hearing to shorten the time for the hearing on your petition.

Note: The Court of Appeal made it clear that Great West and its counsel reacted as promptly and as efficiently as possible under the circumstances. On the other hand, the Court went out of its way to suggest the reasons for the school district's motivation in (1) rejecting the low bid and (2) delaying the production of records in response to Great West's request for documents. While I have no idea of the school district's motives, it is noteworthy to point out the Court's strong language about what happened. I'll end this post with one such quote. 

The sweaty haste with which the District consummated the contracts with the third-from-lowest bidders, contrasted with the insouciance and delay with which it honored the lowest bidder's request for records, are all susceptible, of course, to at least an inference that the fix was in from the beginning not to award the contracts to Great West.

You don't read that kind of stuff everyday. At least not in the published opinions of the Court of Appeal.

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Construction claims for non-disclosure on public works projects got a little easier to prosecute yesterday with the publication of the California Supreme Court’s decision in Los Angeles Unified School District v. Hayward Construction. (PDF) The importance of this case is reflected by the list of attorneys who represented the parties, a veritable Who's Who in the legal community.The contractor and surety were represented by veteran construction lawyers John Immordino of Wilson Elser and Joseph Miller of Montelone & McCrory. The school district was likewise well represented by its General Counsel, Roberta Fesler, Gregory Bergman of Bergman & Darcey and lawyers at Jones Day, including Ellwood Lui, a former associate justice of the California Court of Appeal, Second Appellate District, Division 3..

In the Hayward Construction case, and for the first time, the Court was asked to resolve a construction dispute brought solely on a theory of non-disclosure during the bidding phase of a project. The question was whether a contractor can recover extra costs of construction when the plans and specifications are correct, but the public entity failed to disclose information in its possession that materially affected the cost of performance.

The case is also important because it resolves conflicting opinions between four of the California Courts of Appeal. One Appellate Court, followed by the trial court in the Hayward Construction case, held that to recover for nondisclosure, the contractor must show the public entity affirmatively misrepresented or intentionally concealed material facts that rendered the furnished information misleading. Another Court of Appeal held a contractor need not prove an "affirmative fraudulent intent to conceal" when disclosure would have eliminated or materially qualified the misleading effect of facts disclosed. A third Appellate Court suggested that the careless failure to disclose information may allow recovery if the public entity possessed superior knowledge inaccessible to the contractor. And the Appellate Court in the Hayward Construction case broadly held that a contractor need show only that the public entity knew material facts concerning the project that would affect the contractor's bid or performance and failed to disclose those facts to the contractor.

SUMMARY OF THE FACTS

Hayward entered into a contract with a school district to complete the work of the original contractor who was in default. The scope of the work was based on a 108 page “pre-punch list” and required Haywood to correct the defective, missing and incomplete work on a time and material basis up to a guaranteed maximum price.

Shortly after beginning work, Hayward informed the district there were significant deficiencies in the existing work that had not been noted on the pre-punch list and could not have been detected by a visual inspection. As a result, Hayward made a claim for extra compensation to perform this additional work. The district then sued Hayward and its surety and Hayward filed a cross-complaint against the district, alleging misrepresentation and concealment. In support of these theories, Hayward alleged the district failed to disclose the extent of the defects in the existing construction, and failed to disclose information that would have put Hayward on notice that some of its assumptions about the scope of the required work were erroneous.

After losing a motion for judgment of the pleadings in the trial court, Hayward won at the Court of Appeal, and then the school district appealed to the California Supreme Court.

THE COURT'S DECISION

The California Supreme Court affirmed but narrowed the court of appeal’s opinion in Hayward Construction, holding that a contractor need not prove an affirmative fraudulent intent to conceal. Rather a public entity may be required to provide extra compensation if it knew, but failed to disclose, material facts that would affect the contractor's bid or performance.

In narrowing the Court of Appeal's opinion, the California Supreme Court stated:

[W]e conclude the Court of Appeal's rule was, in turn, overbroad in suggesting that recovery may be had for any failure to disclose material information. Rather, we hold that a contractor on a public works contract may be entitled to relief for a public entity's nondisclosure in the following limited circumstances: (1) the contractor submitted its bid or undertook to perform without material information that affected performance costs; (2) the public entity was in possession of the information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information.

The Court noted the circumstances affecting recovery may include, but are not limited to, positive warranties or disclaimers made by either party, the information provided by the plans and specifications and related documents, the difficulty of detecting the condition in question, any time constraints the public entity imposed on proposed bidders, and any unwarranted assumptions made by the contractor. The public entity may not be held liable for failing to disclose information a reasonable contractor in like circumstances would or should have discovered on its own, but may be found liable when the totality of the circumstances is such that the public entity knows, or has reason to know, a responsible contractor acting diligently would be unlikely to discover the condition that materially increased the cost of performance.

The is an important case in the construction industry. The risks of the bidding process became a little less risky. The uphill battle for contractors claiming extra work for unknown conditions got a little easier. They will still have to overcome the Spearin rule stated by the U.S. Supreme Court nearly a hundred years ago, that a contractor can not avoid its contractual obligations or seek additional compensation for performing them merely because unanticipated circumstances are encountered. Contractors will still have to get past disclaimers and other contractual language that attempt to place the burden of unanticipated conditions on them. But the Hayward Construction case now gives them some relief when making a claim for non-disclosure: they do not have to prove an intent to defraud; only a failure to disclose material facts that would affect the contractor's bid or performance.When such a claim arises, the contractor should make a demand for all documents in the owner’s possession, custody or control relating to the conditions of the project.

As for the parties in the Hayward Construction case, they are back in the trial court preparing for trial.

NOTE: Nine amicus curiae (friends of the court) briefs were filed in the Supreme Court of California on behalf of various organizations. Such briefs are often filed in appeals concerning issues of broad public interest. Four amicus curiae briefs were filed on behalf of various construction industry organizations, including the Associated General Contractors Association of California and the American Subcontractors Association. Five amicus curiae briefs were filed on behalf of various governmental organizations, including the California School Boards Association and The League of California Cities. The filing of these briefs by outstanding lawyers and law firms is another indication of the importance of the Hayward Construction case to the respective interests of construction professionals and public entities in California.

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