THE DISAPPOINTED BIDDER ON PUBLIC WORK: THE MEASURE OF DAMAGES AVAILABLE UNDER MASSACHUSETTS LAW
Those who bid on public work and who feel that an awarding authority has tread - and not lightly - on their rights as bidders typically attempt to protect those rights, in the first instance, by filing a bid protest or by seeking a preliminary injunction or both. This subject matter has been discussed before in Scribbles in the May, 1993 issue and also in the August, 1994 issue. The purpose of this article will be to discuss in far greater detail the case law which describes the two measures of damages available when the awarding authority makes an error: bid preparation costs and lost profits.
Those who deal with the public bid statutes know the drill. You submit a bid, as do the other bidders. Something goes wrong in that someone who should be disqualified is not or the converse happens. You try a bid protest or you go to court or both.
Obtaining an injunction in bid matters in the ordinary case is quite difficult, legally, because of the fact that injunctions are given by "the equity side" of the court. In fact, until 1974, Massachusetts had courts of equity and courts of law, which mirrored somewhat English practice. (Presently, the Massachusetts superior court civil system has but one court, which has equity and law functions.) Greatly oversimplified, courts of law do what is legal and courts of equity (try to) do what is fair. Put another way, a court of law enforces legal obligations fairly strictly in conformance with the contracts parties assume and judges parties' conduct as measured against applicable statutes, case law (decisions by various courts) and so on. Courts of equity, as Paul Harvey might say, try to look at "the rest of the story" and try to accomplish substantial justice. But just as Paul Harvey needs commercials to be able to tell the rest of the story, someone seeking equity has to deal with the difficulties of obtaining equity. Because injunctions for and against certain behaviors and action can be every bit as effective in the short run as judgments, there are certain hurdles that injunction applicants have to jump over before this awesome power can be invoked. A big problem in bid issues is the fact that equity will not exercise injunctive powers if the parties have an adequate remedy at law. Since in bid matters a disappointed plaintiff has the possibility of obtaining either bid preparation costs or lost profits in an action at law, most courts refrain from issuing injunctive relief.
Thus, sooner or later, a bidder who did not get the injunction - but who is still angry, hurt and disappointed - has to evaluate whether or not "to go for it."
The error in the Sardella case was that the Owner revoked an award to a general contractor by mistakenly applying the wrong law as to the effect of the substitution of a bidder who refused to execute a subcontract. The Awarding Authority mistakenly applied C. 149, s. 44I (2) rather than what should have been applied, C. 149, s. 44I (3). Under the former section, when the awarding authority wishes to substitute a lower filed subbidder, if that substitution makes the apparent low bidder no longer low, then the award may be made to the new low general contractor. Under the latter section, however, where a filed subbidder refuses to execute a contract within five days, another subbidder should be selected and the general contract adjusted by the difference in the two amounts but without any consideration of new general bidders or as to how that substitution might otherwise affect the spread of bids among the general bidders. Prior to suits being filed - and prior to the execution of a general contract with what had previously been the third low general contractor, Fred J. Findlen and Sons - the Department of Labor and Industries - previously charged by statute for conducting the bid protest investigations and hearings, which are currently conducted by the Attorney General's Office - found that what the Awarding Authority proposed to do - the incorrect substitution and rescission of award to the low bidder, Sardella - was correct.
As stated by the Appeals Court in Sardella:
"The 'honest and open procedure for competition' among the various bidders that is one of the fundamental objectives of the competitive bidding statute must necessarily entail fair consideration of all the submitted bids in accordance with the applicable sections of the statute. We hold that where such consideration has not been given by public contracting authorities, in violation of statutory provisions, the proper measure of recovery is the reasonable cost of preparing the bid. Many courts have held that it is an implied condition of every invitation for bids issued by a public contracting authority that each bid submitted pursuant to the invitation will be fairly considered in accordance with all applicable statutes. (Cases cited) Should the public contracting authority fail to give such consideration, the implied contract formed by the submission of such a bid is broken, and recovery of bid preparation costs is deemed a proper remedy. (Cases cited)"
"We are not called upon in this case to determine what the measure of damages might be if an authority were to act in bad faith."
"We agree with the Appeals Court that in circumstances like those of the instant case the proper remedy is to allow recovery of the cost of preparing the general contractor's bid. (Cases cited) We need not elaborate on the reasoning advanced by the Appeals Court beyond noting that this measure of damages is the fairest in all circumstances, is consistent with the public interest, and furthers the legislative objectives underlying the fair competition for bidders of public works act."
Working chronologically from Sardella, the next case dealing with the subject matter is Roblin Hope Industries, Inc. v. J.A. Sullivan Corporation, 6 Mass App. Ct. 481 (1978). Here, a general contractor rejected a proposed substituted filed subbidder without having any real objection to the "standing and ability" of the subbidder, thus depriving that subbidder from the job. That rejected subbidder brought suit against the general contractor.
Factually, the defendant general contractor (Sullivan) had carried itself for the metal window work on a C. 149, s. 44A-H job. Twice the Bureau of Building Construction asked Sullivan to substitute the lowest filed subbidder - Hope - for itself. In this process, the BBC made a determination that Sullivan did not, in fact, customarily perform such work. Sullivan said that as the general contractor, it had "the inherent right under the Mass. Public Bidding Law for a General Contractor to form his own team" and that "as the General Contractor we are responsible for the complete work as specified." (both quotations from p. 483) Ultimately, Sullivan selected the third low bidder.
At trial, the judge found that the objections offered by Sullivan to Hope were "specious" and "first seized on by Sullivan after institution of this suit in an attempt to justify its refusal of plaintiff." The Court at trial found that Sullivan was not justified in its interpretation of the statute that a general contractor can object to the "standing and ability" of a filed subbidder without giving any reason, and awarded bid preparation costs to Hope, prompting an appeal.
The Appeals Court held that a selected general contractor may reject a substitute subbidder proposed by the awarding authority if the general has in fact objections to that subbidder on standing and ability. The Court found that "the reasons ascribed by Sullivan for its objection to Hope were "specious." (P. 489) The Court said on the following page that:
" . . . the public interest requires that damages be awarded to ensure that the public bidding laws are complied with, as failure to ensure that all bids are treated fairly could result in fewer bids being submitted for public contracts. (Case cited) Moreover, the purposes of this statute are to protect the public and to ensure fair treatment for the bidders, as the title of the statute, "FAIR COMPETITION FOR BIDDERS ON CONSTRUCTION, ETC., OF PUBLIC WORKS," implies. G.L. c. 149, s. 44A-L. (Cases cited) . . . In a case such as this, however, where a private contractor is involved and the general contract price has been adjusted upward by a much greater amount than the bid preparation costs, and there is no way to ensure that this entire increase in the contract amount will go to the subcontractor, an award of damages in the amount of the plaintiff's anticipated profits is required as a deterrent to ensure good faith compliance with the bidding statute." (P. 491)
On second appeal after a trial on what the amount of the lost profits should be, the Appeals Court in the case of Roblin Hope Industries, Inc. v. J.A. Sullivan Corp., 11 Mass. App. Ct. 76 (1980) held that a contractor's fixed overhead expenses would not have increased had the subcontract been performed and, therefore, were not to be considered in determining the anticipated profit. Further, the Court held that an award of damages which amounted to approximately thirty-five percent of the amount of the sub-bid and which represented the anticipated profit on the subcontract was not in excess of what the defendant could have foreseen as the natural and probable consequence of its conduct.
The Appeals Court said on page 357 of the decision in a footnote that: "The term "bad faith" was defined in the charge in a manner generally consistent with Black's Law Dictionary, 127 (5th ed. 1979)." The actual charge - instructions to the jury - is not set forth in the decision.
An etymological digression, to probe the depths of the meaning of these words: "bad faith".
In preparing this article, the 5th edition of Black's Law Dictionary was not available, although the 4th and the 6th editions were!
The definition of 'bad faith' in the 4th Edition (1951) reads as follows:
"The opposite of "good faith," generally implying or involving actual or constructive fraud, or a design to mislead or deceive another or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties but by some interested or sinister motive."
The definition of 'bad faith' in the 6th Edition reads as follows:
"The opposite of "good faith," generally implying or involving actual or constructive fraud, or a design to mislead or deceive another or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties but by some interested or sinister motive. Term "bad faith" is not simply bad judgment or negligence but rather it implies the conscious doing of a wrong because of dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that it contemplates a state of mind affirmatively operating with furtive design or ill will. Stath v. Williams, Ind . App. 367 N.E. 2d 1120, 1124. An intentional tort which results from breach of duty imposed as consequence of relationship established by contract. Davis v. Allstate Ins. Co., 101 Wis.2d 1, 303 N.W. 2d 596, 599."
Where the first sentence of the definition was identical from the 4th to the 6th Editions, it is reasonable to infer that the 5th Edition read in the same manner.
We checked another author for another definition. In Law Dictionary, Barrons's Legal Guides (Steven H. Giftis, 1996), the words "bad faith" are defined as: "breach of faith, willful failure to respond to plain, well-understood statutory or contractual obligations." 124 F.2d 875, 883. "Good faith means being faithful to one's duty or obligation; bad faith means being recreant thereto." 235 N.W. 413,414. It is thus the absence of good faith." (Emphasis supplied)
Massachusetts case law is not exceptionally helpful in getting a precise or all-inclusive definition of this phrase. Most of the few cases discussing this concept deal with real estate transactions and brokers' commissions. One case discusses obligations among principals in a corporation. Another arises out of a bankruptcy. In other words, the Massachusetts decisions of this phrase do not deal specifically with the competitive bid process.
In the case of Spiegel v. Beacon Participations, Inc. 297 Mass. 398, 416 (1937), the Supreme Judicial Court attempted to define "bad faith":
" "Bad faith" is a general and somewhat indefinite term. It has no constricted meaning. It cannot be defined with exactness. It is not simply bad judgment. It is not merely negligence. It imports a dishonest purpose or some moral obliquity. It implies conscious doing of wrong. It means a breach of a known duty through some motive of interest or ill will. It partakes of the nature of fraud. (Cases cited)"
Returning our attention to Bradford & Bigelow, the Appeals Court affirmed the jury's verdict. As stated on page 359 of the decision:
"These most pertinent Massachusetts decisions leave undecided the issue whether failure of officers or agencies of the Commonwealth itself (and not merely a private general contractor or a local government or a public authority) to consider public contract bids fairly, in good faith, and in compliance with the applicable competitive bidding statutes, will subject the Commonwealth to liability for profits lost by the bidder to whom the contract should have been awarded in all fairness. The public objectives of public competitive bidding statutes, discussed by the Supreme Judicial Court in the Sardella case and by this court in that case and in the Roblin Hope cases, seem to us to be equally cogent, whether it is the Commonwealth which is soliciting bids or some political subdivision or authority doing so. Failure to give fair consideration in good faith to all bids in either situation will tend to discourage bidders and to destroy public confidence in the competitive bidding system. Upon adequate proof that agencies or officers of the Commonwealth have set aside in bad faith an award of a contract to a qualified low bidder, the cases already mentioned should be extended appropriately to permit recovery by the bidder of its lost profits."
"was "not the clearest case in the world . . . there was sufficient evidence to warrant the jury deciding it. We agree that the evidence, and especially a variety of permissible inferences therefrom, about DLI's actions on the "prevailing" wage issue made it proper for the judge to submit the case to the jury." (Page 361)
Two years later, in the case of Peabody Construction Co. Inc. v. City of Boston, 28 Mass. App. Ct. (1989) there was further discussion on the bad faith issue. This case represented an appeal of a failure to give an injunction, so that there is no underlying court-issued judgment. In bidding on a school renovations contract, the City of Boston contended that Peabody, the low bidder, did not meet the MBE/WBE requirements of the bid in that it listed a minority business which was not certified by the city but was certified by SOMWBA. The city would not accept Peabody's late application for certification by the city of its minority subcontractor, K&R Construction, Inc., and entered into a contract with the third low bidder. Peabody contended in its brief that the city's action raises "a serious question . . .about fair dealing and good faith on (the city's part) . . ."
As stated by the Court on pages 105-106 of the decision:
"However, if a bidder has complied with all requirements but is deprived of the contract through some conduct of the awarding authority tantamount to bad faith, then the recovery of lost profits is the measure of damages. (Case cited) It appears that Peabody is charging the city with bad faith in rejecting its bid. If proved at a trial on the merits, Peabody would be able to recover its lost profits."
In the case of Petricca Construction Company v. Commonwealth, 37 Mass. App. Ct. 392, 640 N.E.2d 780, 783-4 (1994), a low bidder sought an injunction requiring the Highway Department to comply with an order of the Department of Labor and Industries. The injunction was given by the superior court judge but then dissolved by a single justice of the Appeals Court. The full Appeals Court dismissed the appeal on the grounds that the appeal was moot and said Petricca could pursue the Owner for bid preparation costs.
In this case the Appeals Court was very critical of awarding authorities who wish to order rebidding for the purpose of obtaining a lower price. This case was decided under C. 30, s. 39M. (This is, of course, the competitive bid statute which controls the procurement of "public works" while C. 149, s. 44A-H is the competitive bid statute controlling the procurement of "public buildings". It is familiar learning that principles of both statutes and the cases interpreting them are intended to complement and interpret each other.)
The Appeals Court stated that:
"Similar objectives are found in this State's scheme. Read in conjunction with G.L. C. 149, s. 44 A- 44M, the legislative goals of s. 39M are two-fold. First, to create an open and honest competition with all bidders on an equal footing. Interstate Engr. Corp. V. Fitchburg, 367 Mass. 751, 758, 329 N.E. 2d 128 (1975). Absent such a restriction, an awarding authority would be free to rebid a contract until a preferred bidder submitted the lowest bid price, and thwart one of the important legislative goals. (Case cited) Second, s. 39M enables the public contracting authority to obtain the lowest eligible bidder. Interstate Engnr. Corp. V. Fitchburg, supra, 367 Mass. At 757, 329 N.E. 2d 128. In reviewing the conduct of awarding authorities in regard to bid protests, we think equal weight should be given to the two stated purposes of the statute. While there is no Massachusetts case directly on the point, other courts have made clear that awarding authorities may not reject bids simply to obtain a lower price. (Several cases cited and emphasis added)
"The single justice found it "(m)ost significant . . . . that Petricca (did) not establish ( ) that it w(ould) suffer, should injunctive relief be withheld, immediate or irreparable harm that (could) not be adequately compensated by a final judgment for money damages should it prevail on the merits. (Cases cited) He concluded that Petricca could recover bid preparation costs if upon trial it turned out that Petricca's bid was unfairly rejected. Such a consolation prize pales in comparison to an award of the contract. Petricca has not argued that the Commonwealth was guilty of any "bad faith." See (Case cited), so that an action for lost profits was out of the question. At the time Petricca sought injunctive relief, the award of the contract was at stake. Without a preliminary injunction, whatever profits it may have received upon completion of the work, would be lost forever, and could not be recovered in an action at law. At that junction, bid preparation costs "fall ( ) far short of being equivalent of the potential to win the contract." Modern Continental Constr. Co. v. Lowell, 391 Mass. At 837, 465 N.E.2d 1173."
"An awarding authority may not continue to rebid a project in the hope of obtaining a lower price when the original bids exceed the budget. The awarding authority must make significant changes in order to put all bidders on an equal footing under Interstate Engineering Corp. V. City of Fitchburg, 367 Mass 751 (1975). To rebid without changes puts the original bidders at a disadvantage because their prices are already known and the lowest bid becomes the target for other bidders in the second round."
"In circumstances involving failure by a public authority to consider bids fairly and in good faith, this court has suggested that lost profits may be recoverable, as they are when a general contractor, in a public bidding setting, in bad faith deprives a sub-bidder of its contract. Bradford & Bigelow, Inc. v. Commonwealth, 24 Mass. App. Ct. 349, 358-359, 509 N.E.2d 30 (1987). Amanti suggests Barnstable acted unfairly by including an unlawful requirement that it should have known, on the basis of experience in a bidding contest in 1989, was unlawful. At most, however, the conduct of Barnstable exhibited confusion about how to ride the W/MBE horse. There was no bad faith directed at Amanti or any other bidder. The occasion recalls the observation of Justice Holmes that a dog knows the difference between being stumbled over and being kicked. Holmes, The Common Law 3 (1881). Amanti was stumbled over."
People get very hot under the collar, even emotional, about bid matters, particularly where they should be the low bidder and contract awardee. Whether or not the awarding authority has made a mistake sufficient to justify the award of any damages is the first question. Assuming the mistake is sufficient and keeping in mind the costs of superior court litigation (drafting pleadings, filing fees, sheriff fees, deposition costs, witness fees, attorneys' fees, court appearances and trial), going beyond the seeking of a preliminary injunction in the majority - possibly, the vast majority - of cases makes no sense. This is purely because of the economic facts of life: it costs a lot more to support three years of litigation, which is usually how long it will take these cases to get to trial, than one can get if one is only awarded bid preparation costs.
As the above review establishes fairly clearly, without some significant evidence of 'bad faith' - whatever that is! - in a significant majority of the cases, bid preparation costs will be the applicable standard of damages.
A couple of final thoughts. One can get quicker service in court. Thus, in filing an action seeking injunctive relief, there can be a preliminary hearing almost immediately and a full-blown hearing on the requested injunctive relief within twenty days. This is compared with waiting for about one month or more to go to a bid protest hearing and then waiting four to six weeks for a decision. (Two or three years ago I had two bid protests and had to wait for six months to get a decision!) Court is more expensive than administrative bid protests through the Attorney General’s Office, generally, although less so for those who do a lot of this work. That is because of the fact that the briefing involved (the legal research and writing ), which is the single largest element of cost, is likely to be about the same in either endeavor.
Many inexperienced bid protesters submit protests which do not include any analysis in depth of the bid law issues, thinking the Attorney General’s Office already knows the law and/or will do the legal research to determine the legal precedents applicable to the issue. This is a huge mistake because of the fact that the protester has the burden of proof of a violation of the bid law and because the Attorney General’s Office acts more like a referee among the parties than a judge. Also, the Fair Labor Practices Division of the Attorney General’s Office claims it is overworked and under-staffed and doesn’t have the requisite time and personnel for its own independent legal research in any depth. (Having said this, the quality of the written decisions is often quite high.)
One big problem with courts is that to the extent that the public owner can effectively argue the ‘public interest’ element in having the job go forward as presently constituted, most – but not all – judges are less likely to give an injunction, which in the court business is seen as an extraordinary remedy. Another problem with the court injunctive process is that one of the ‘tests’ that a plaintiff - the party seeking the injunction - must meet is that ‘there is no adequate remedy at law’. As an example, if your ex-spouse is going to fly to Bongo Bongo* tonight out of Logan with the kids in violation of previous court ordered visitation rights or joint custody agreements, the only possible justice available to you is to seek an injunction ordering her not to go. This is because of the fact that if the kids go to Bongo Bongo, the injured spouse’s ability to see his/her kids is dramatically reduced or even completely eliminated.
Where, on the other hand, one who is seeking an injunction can have the injury redressed by the award of monetary damages, then this test is not met. As paltry as bid preparation costs are in the real world, frequently, judges see them as a satisfactory financial result.
*Bongo Bongo is a volcanic island fourteen miles due east from Newark, New Jersey, where only Portuguese is spoken and where each man is allowed to have up to fourteen wives, fifteen if at least three of them are short. While most men are, generally, very physically relaxed, the headaches involved with having fourteen (or fifteen) mothers-in-law are legendary.
This article is not intended to be specific legal advice and should not be taken as such. Rather, it is intended for general educational purposes only. Questions of your rights and obligations under the law are best addressed to legal professionals. Sauer & Associates sees as part of its mission the providing of information and education to the contractors it daily serves, which will hopefully assist them in the conduct of their business. Articles are available on a number of construction subjects (e.g. rights under payment bonds, how to present payment bond claims, the mechanics’ lien law, how to file a demand for direct payment) on this website.
Copyright, Jonathan Sauer, 1997