Two Recent Changes
In The Law
Affect Public Works Bids and Preliminary Lien Notices
William C. Last, Jr.
1. The California Supreme Court Limits Contractors’ Recovery For Wrongfully Denying A Public Contract
In a case entitled Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority, the California Supreme Court addressed the issue of whether a contractor could recover its lost profits when a public entity wrongfully awarded a contract to another contractor. The case is significant for both the Court’s holding and the legal principles discussed therein.
In 1994, the MTA solicited bids to build a Red Line station and tunnels. The lowest bid was from Tudor-Saliba-Perini, but Kajima Ray Wilson successfully protested Tudor receiving the contract because it had not attained the MTA’s DBE goals. MTA then exercised its right to reject all the bids and then re-bid the project. On the re-bid, Tudor-Saliba was awarded the job despite a new bid protest by Kajima. Kajima then filed a lawsuit against MTA seeking a court order awarding the job to Kajima and damages. The trial court ordered MTA to cease using a five percent credit, and awarded Kajima its bidding expenses, unabsorbed overhead and lost profits.
After the Court of Appeals upheld the trial court’s award, MTA appealed the decision to the California Supreme Court. The sole issue before the Supreme Court was whether the lowest responsible bidder who is wrongfully denied a public contract has a cause of action for monetary damages against the public entity, and if so, whether those damages include lost profits. The Supreme Court held that although damages may be awarded, they are limited to bid preparation costs.
The Court recognized that dissatisfied bidders typically seek to enjoin the award of the wrongfully awarded contract and set aside the award to that contractor. However, it is not uncommon that by the time court-ordered relief is granted, the work has been substantially or fully performed. It should be noted that if the award is ultimately set aside, the contractor who performed that work may not be legally entitled to compensation for the work completed prior to the court order setting aside the contract.
The Court’s decision was based on the doctrine of promissory estoppel. Under the doctrine of promissory estoppel, "A promise which the promissor should reasonably expect to induce action or forbearance on the part of the promissee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.” While the legal definition may appear convoluted, the doctrine is best illustrated by an earlier case.
In the seminal construction law decision entitled Drennan v. Star Paving Co., a subcontractor withdrew its bid prior to acceptance by the general contractor, but after the general contractor had used the bid in his master bid for the job, and was awarded the public contract. The Court concluded that there was no contract between the general contractor and subcontractor, but nonetheless held the subcontractor's bid enforceable under a theory of promissory estoppel because of the general contractor's reasonable and detrimental reliance. Thus, once a general contractor lists a subcontractor on a public works project, that subcontractor is legally bound to perform that work. If the subcontractor refuses to perform, the general contractor can recover the difference between the listed bidder and the cost of completing that subcontractor’s work.
The Kajima court relied on the doctrine of promissory estoppel as the legal basis for awarding bid preparation costs. However, the Court refused to award lost profits, reasoning that; in determining what remedy "justice requires," it is incumbent on courts to consider the broad-ranging social consequences of the chosen remedy. Allowing recovery of lost profits whenever a contract is wrongfully denied "could drain the public fisc in response to mere carelessness on the part of low level government officials."
The Kajima Court also discussed a public entity’s authority and discretion to reject all bids and to re-advertise for bids. For example, it is not uncommon for a public entity to reject all bids and re-bid the project when the bids exceed the budgeted amount for the work. Occasionally, a public entity will reject all the bids to avoid a bid protest. Irrespective, if the rejection of all bids is done in bad faith, an unsuccessful bidder should consider informing the governing body of the awarding entity of the reasons why the staff’s recommendation for rejection is in bad faith.
The California Supreme Court has made it clear that a dissatisfied bidder’s primary remedy is to enjoin the award of the contract. It is questionable if the threat of paying bid preparation costs will be a deterrent to public entities improperly awarding contracts.
If an unsuccessful contractor decides to protest the award, it should immediately notify the awarding entity, in writing, as to the nature of the protest. Generally, the bid documents set forth the method for the timing of the protest. The protesting contractor should appear before the public entity at the time and place where the governing body will vote on awarding or rejecting the bid. If the protesting bidder is unsuccessful and desires court intervention, the action must seek to enjoin the award of the contract. Such court intervention should be sought within a few days of the public entity voting to award the contract to another bidder to avoid any argument that the contractor waited too long.
2. The Legislature Changes The Mechanic’s Lien Preliminary Lien Notice Requirements
Existing law requires all persons and laborers who are entitled to a lien upon the property upon which they have bestowed labor or furnished materials or leased equipment, as specified, to enforce such a lien only if he or she has served a preliminary 20_day notice to the property owner that contains certain information, as specified.
In 1999, the Legislature revised the statement that must be included in each preliminary lien notice. As this author stated in an earlier article, the revised language was incomplete.
On an urgency basis, the Legislature revised the required statements in the preliminary 20_day notice, and changed the law so that the inclusion of, or failure to include, language added to the preliminary notice, or the failure to provide an affidavit form or notice of rights pursuant to last year’s legislative changes shall not affect the validity of the preliminary notice.
The new Notice must have the following statement in boldface type:
NOTICE TO PROPERTY OWNER
If bills are not paid in full for the labor, services, equipment, or materials furnished or to be furnished, a mechanic's lien leading to the loss, through court foreclosure proceedings, of all or part of your property being so improved may be placed against the property even though you have paid your contractor in full. You may wish to protect yourself against this consequence by (1) requiring your contractor to furnish a signed release by the person or firm giving you this notice before making payment to your contractor, or (2) any other method or device that is appropriate under the circumstances.
Once again, you should review your preliminary lien notice to determine if it complies with the most recent Notice language change.
This article, ©2000, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for 20 years. Mr. Last also holds a California A & B contractors license. He can be contacted at 650-425-7679. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.