March 2003
By ALEXANDER A. MIUCCIO, CIC Legal Counsel
Most public improvement construction projects are required, by statute or regulation, to be awarded to the lowest responsible bidder, whose bid is responsive to the terms and conditions of the contracting agencies' invitation for bids. The competitive bidding laws are designed to promote fairness and to avoid favoritism, fraud or corruption in the bidding process. Through a fair and honest bidding system, competition is encouraged and the public gains the advantage of the best work and supplies at the lowest cost.
A contracting agency may reject all bids and open the contract to a new round of bidding if it is in the public interest to do so. A contracting agency may also negotiate to reduce the lowest bid, because the lower price is to the benefit of the public and does not compromise the integrity of the competitive bidding. Generally, the bid price cannot be increased, because that would create an unfair advantage to the successful bidder and the increased cost would not benefit the public.
The recent case of Embee Corp. v. Ringler illustrates an interesting twist. After an award to the lowest bidder, the contracting agency discovered that the wages set forth in the bid were below the prevailing wages that apply to public works contracts; the agency then sought to terminate the contract, while the contractor sought an increase in the contract price to meet the prevailing wages.
Background
Embee Corp. was a successful bidder on an invitation for bids by New York State's Office of General Services and was informed that it was awarded the contract. Subsequently, the contractor was notified by General Services' counsel that the award should not have been made because the hourly labor rate set forth in the bid proposal was below the prevailing wage rate applicable to the public works project. The invitation for bids provided that prices quoted for the hourly rate be equal to or greater than the prevailing hourly wage rate plus supplemental benefits applicable in the county for which the bid was submitted. General Services sent a notice that the contract was being terminated. The contractor commenced an Article 78 proceeding seeking to enjoin General Services from withdrawing the notice of award of the contract and from terminating the contract; or, in the event that the contract was already terminated, seeking to have the contract reinstated.
The contractor claimed that the decision to terminate the contract was arbitrary, capricious and an abuse of discretion. The contractor also contended that if there was an error in the wage rates, the contract could be amended to provide for the correct rates.
The Contractor's Argument
The contractor argued that it was not given an opportunity to discuss or contest General Services' decision to terminate the contract. It further argued that it was not trying to make General Services live with its error in awarding the bid, but rather they were trying to remedy an inadvertent error by reforming the contract with respect to the hourly rate. The contractor also argued that allowing amendments of bids prior to opening them, but not after, did not serve the policy of attracting responsible compliant bidders. It claimed that the contracting agency could engage in post-bid negotiations with responsible bidders in the public interest, where the record contains no suggestion of favoritism, fraud or corruption. The contractor stated that it had been engaged in public projects for the state for six years. Although it previously did work in both the public and private sector, it now engaged almost exclusively in state projects, and if not permitted to reform its bid, there was a substantial possibility it would be put out of business.
General Services' Arguments
General Services argued that the wage rage of $35 per hour, bid by the contractor, was facially defective and non-responsive to the invitation for bids that provided for prevailing wages, including supplemental benefits, of $56.19 per hour. The agency said the correct rate was available to all bidders at the pre-bid meeting. It further argued that the failure to comply with the proper wage rates was not discovered until after the contract was awarded, due to an error by General Services' office.
General Services also argued that the invitation for bids had a provision permitting the reduction of a bid after bids had been opened, but no provision permitting an increase in a bid. It also argued that public contracts that violate statutory mandates, such as the prevailing wage law, are unenforceable and that erroneous approval of an improper contractual provision cannot bind the state.
Finally, General Services argued that the error was brought to its attention by one of the contractor's competitors, and if the court permitted the bidding error to be "fixed," it would undermine a fundamental principal of public contracting, undermine the integrity of the competitive bidding process and would subject General Services to challenges from other contractors who had complied with the invitation for bids.
Decision
The court determined that errors made by state employees cannot bind the state and that public contracts that violate statutory provisions are invalid. According to the court, the contract was invalid because it materially varied from the specifications and requirements of the invitation for bids and from the applicable prevailing wage laws. The only remaining issue was whether General Services had a rational basis in refusing to allow the contractor to increase its bid, after the bids were opened, in order to comply with legal and contractual requirements.
The court held that the distinction between allowing the lowest bidder to reduce its bid, but not increase its bid, after the bids have been opened has a rational basis in the policies underlying the rules of competitive bidding. Permitting the contractor to increase its bid would allow for the possibility of fraud, corruption or favoritism, even though there was no such evidence in this case. It would also undermine the confidence of other bidders that their bids would be fairly considered. Because General Services' determination to terminate the contract had a rational basis, the court upheld the determination to terminate the contract.
Conclusion
Courts generally try to maintain the integrity of the competitive bidding statutes and are reluctant to interfere with agency decisions unless those decisions have no rational basis. Here, the contract had been awarded in error because the wage rates in the bid proposal did not conform to the prevailing wage laws, as required by the invitation for bids. The decision to terminate the contract and to refuse to permit the contractor to increase his bid was rational, and the court upheld the termination of the contract.
About the author: Mr. Miuccio is a partner in the New York City- based law firm Altieri, Kushner & Miuccio, P.C. and legal counsel to the Construction Industry Council of Westchester and Hudson Valley, Inc. Robert Mark Wasko, senior associate with the firm, assisted in the preparation of this article.