Recent Appellate Court Case Addresses Relief For A Material Error In A California Public Works Project Bid.
William C. Last, Jr.
In the fast-paced process of gathering information for a bid and then submitting it to another party, it is not uncommon for errors to be made. If a contractor does comply with the rules for withdrawing a faulty bid before it is accepted, he or she may incur substantial losses on the project.
A January 6, 2004 appellate court decision, entitled Emma Corporation v. Inglewood Unified School District, reestablishes the importance of a general contractor sending a timely and complete notice of a bid error to the California public entity. This article will discuss the holding in the Emma case, the general contractor's right to withdraw a bid and the rights of the party who received the defective bid to enforce it. The first section of the article will discuss the law for prime contractors on public works projects for the State of California and lesser public entities. The second section will discuss the holding in the Emma case.
The Requirements of For A Prime Contractor To
Withdraw A Public Works Bid
Bid documents usually require that the bid shall remain open to acceptance for a specific period (e.g. 60 days). On most public works projects a bid bond is required. On public works projects, the bid bond is intended to act as security that the contractor will enter into a contract if the bid is accepted. If the lowest responsive and responsible bidder refuses to enter into a contract that has been awarded to it by the public entity, the bid bond will be forfeited. Consequently, if an error is made in the bid, the contractor will want to avoid the forfeiture of the bid bond.
California Public Contract Code section 5100 et seq. sets forth how a prime contractor can be relieved from a bid error and thus the forfeiture of the bid bond. Basically, those sections of the Public Contract Code set forth a method for relief and the grounds for relief.
California Public Contract Code section 5101 states that a bidder shall not be relieved of the bid unless the public body consents. If the public body refuses to consent to the requested relief, the contractor must, within 90 days of the bid opening, file a lawsuit that seeks such relief.
The court can only grant such relief if the following grounds exist: "(a) A mistake was made; (b) He or she (the contractor) gave the public entity written notice within five days after the opening of the bids of the mistake, specifying in the notice in detail how the mistake occurred; (c) The mistake made the bid materially different than he or she intended it to be; and (d) The mistake was made in filling out the bid and not due to error in judgment or to carelessness in inspecting the site of the work, or in reading the plans or specifications."
The cases interpreting this section emphasize the necessity of providing a timely five-day written notice that includes sufficient facts for the public entity to determine that the error was material and not an error in judgment. Permitted errors can include, but are not limited to: (1) failing to include a subcontractor's price in the bid; (2) failing to carry over numbers from one bid sheet to the next; and (3) combined clerical and judgmental errors.
The bid relief sections of the Public Contract Code also state that if a bidder claims a mistake or forfeits the bid security, it shall be prohibited from further bidding on the project in question. If the lowest responsive and responsible bidder withdraws its bid or forfeits the security, the public body may, at its discretion, award the bid to the next lowest bidder. In the event the next lowest bidder refuses to enter into the contract, that bidder's bid bond shall then be forfeited.
The Emma Court Holding Requires The Public Body To Act Fairly In Enforcing the Requirements
In the Emma case a prime contractor submitted the lowest responsive bid to the Inglewood Unified School District. Emma included a bid bond for 10 percent of the bid, which would be forfeited if Emma won the contract but refused to perform. After submitting the bid, the contractor wanted to withdraw the bid based on its mistake in failing to include substantial costs in the bid.
In essence, Emma failed to include a subcontractor's bid that resulted in their bid being $800,000 to low. The District was aware that Emma's bid was materially lower then the other bidders. While Emma sent a timely notice to the District that advised them of the error it failed to include all the information required by the Public Contract Code section 5103. The District was also aware that Emma's bid withdrawal request failed to include all the information required by the pertinent code section, but failed to so inform Emma.
The court found that as part of a deliberate strategy, the District told Emma it would contact Emma if it needed more information. Yet, the District failed to inform Emma that the withdrawal request was incomplete. After the bid withdrawal period lapsed, the District claimed Emma failed to comply with the bid withdrawal requirements. The District then awarded Emma the contract at its original bid price. When Emma refused to enter into a contract, the District gave the contract to the next lowest bidder.
Emma sued the District for rescission and exoneration of the bond. The District cross-complained for contract breach, seeking the difference between Emma's and the next lowest bid, and payment of the bond.
The Emma case is notable since the appellate court held that the school district was estopped from enforcing the contract since it deliberately misled the contractor in a manner that prevented the contractor from complying with bid withdrawal statutes in a timely manner.
While the public works bidding statutes are primarily for the benefit of the public, the Emma court found that are some limitations. The Emma court pointed out that Public Contract Code section 100 states that: "The Legislature finds and declares that placing all public contract law in one code will make that law clearer and easier to find. Further, it is the intent of the Legislature in enacting this code to achieve the following objectives: (a) To clarify the law with respect to competitive bidding requirements. (b) To ensure full compliance with competitive bidding statutes as a means of protecting the public from misuse of public funds. (c) To provide all qualified bidders with a fair opportunity to enter the bidding process, thereby stimulating competition in a manner conducive to sound fiscal practices. (d) To eliminate favoritism, fraud, and corruption in the awarding of public contracts." (Emphasis added by author) The Emma Court also pointed out that the bid withdrawal statutes are designed to protect the bidder.
In granting the contractor relief the Emma court relied on the doctrine of equitable estoppel. The court included in its decision the following quote from an earlier appellate court case: "Equitable estoppel may be asserted against the government in some circumstances.... The requisite elements for equitable estoppel against a private party are: (1) the party to be estopped was apprised of the facts, (2) the party to be estopped intended by conduct to induce reliance by the other party, or acted so as to cause the other party reasonably to believe reliance was intended, (3) the party asserting estoppel was ignorant of the facts, and (4) the party asserting estoppel suffered injury in reliance on the conduct.... [T]he doctrine of equitable estoppel may be applied against the government where justice and right require it.... Correlative to this general rule, however, is the well-established proposition that an estoppel will not be applied against the government if to do so would effectively nullify a strong rule of policy, adopted for the benefit of the public....." (Medina v. Board of Retirement (2003) 112 Cal.App.4th 864)
While the Emma court concluded that equitable estoppel should not be applied unless the specific facts support its application, the School District's deliberate conduct as to Emma warranted its application.
Finally, it is important to note that District has sought review of the appellate court holding by the California Supreme Court. If review is granted the Supreme Court it may uphold the appellate court decision or overrule it.
While the Emma case granted relief to a contractor who failed to comply with all the requirements of Public Contract Code section 5103, the court made it clear that the doctrine of equitable estoppel can only be applied when the public body's conduct is such that all the elements of the doctrine are established. As a practical matter contractors whose bids include a material error should not rely on the holding in the Emma case as an excuse not to comply with the relief statute requirements.
Despite the holding in Emma, if a general contractor has submitted a bid that contains an error, it should review the statutory requirements for withdrawing the bid with care. Thus, if a prime contractor submits a bid that includes a material error which meets the requirements of Public Contract Code section 5103, it should immediately comply with the notification requirements of that section.
Under all circumstances, if the potential exposure for damages for improperly withdrawing a bid is significant, a contractor should seek the advice of legal counsel. Such timely legal advice may avert a financial disaster for the contractor.
©2004 This article was written by attorney William C. Last, Jr. Bill Last has specialized in Construction Law for more than 24 years and represents contractors throughout California. Bill holds a California "A" and "B" license and is active in a number of construction trade associations. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (http://www.lhfconstructlaw.com/ ). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.