Important Ruling for Contractors on Minnesota Public Procurement Law
By Dean B. Thomson, Esq. and Jeffrey A. Wieland, Esq.
In federal procurements, under certain circumstances, bidders can modify their bids after submission to the contracting authority based upon clear and convincing evidence of a mistake, but the federal rule is not followed in many states. Until recently, Minnesota had not squarely addressed the limits of what modifications can be made to a bid after the public opening, but in a recent opinion, the Minnesota Court of Appeals ruled that the price of a bid may never be changed after the bid opening, even if the change in price does not affect which responsible and responsive bidder is lowest. Going further, the court held that making a change to a bid’s price after the bid opening renders the resulting public contract void. The ruling in Rochon Corp. v. City of St. Paul has important implications for bidding on all public contracts in Minnesota.
That case arose from the bidding on the Lofts at Farmers Market Project in downtown St. Paul. The authors represented Rochon Corp. (“Rochon”), the contractor that successfully challenged an illegal practice by the City of St. Paul on a public contract letting.
The City wanted to build a 58-unit apartment building on a site next to the Farmer’s Market in downtown St. Paul. The City’s cost estimate for the Project was $7.5 million, so the Project indisputably fell under Minnesota’s Municipal Contracting Law,1 which requires competitive bidding on municipal projects estimated to cost more than $100,000. In order to take advantage of the Build America Bonds program that was part of the federal stimulus legislation, the City had to have the Project under contract by the end of 2010.
The Advertisement for Bids was issued on November 3, 2010, with bids due by November 22, 2010. It contained the familiar provision stating, “The Owner reserves the right to reject any or all bids, or parts of such bids, and to waive minor informalities and irregularities in bidding.” It also prohibited bidders from modifying or withdrawing bids for sixty days after bid submission.
The City received six bids. Shaw-Lundquist Associates, Inc. (“Shaw”) was the apparent low bidder with a base price of $7,333,000.00. The second and third low bids were disqualified for failure to submit required disadvantaged business participation forms. Rochon was the next lowest bidder, with a base bid of $8,725,000.00.
The day after the bid opening, Shaw sent the City a letter claiming it had made a mathematical error in its bid. Shaw claimed that it’s bid should have been $8,041,411, and it asked to withdraw its bid. The City responded by asking for substantiation of the bid error. Shaw sent a fax to the City indicating that it had entered $68,800 in its bid spreadsheet instead of the intended $688,000 for the Project’s HVAC work.
The City decided that it could not hold Shaw to its original bid, and that it probably could not proceed against Shaw’s bid bond successfully. The City also decided that Rochon’s bid, the next lowest responsible and responsive bid, was more than the City could afford. The City could have tried to rebid the Project on an expedited basis to get the Project under contract before the expiration of the Build America Bonds program at the end of the year. The City also could have tried to get more funding. The City chose to pursue neither of those options.
Instead, the City asked Shaw if it would do the Project for the $8,041,411 amount that Shaw represented its bid should have been. Shaw agreed and the City awarded the contract to Shaw. This was noteworthy for at least three reasons. First, the City abandoned competitive bidding and awarded the contract on the basis of a negotiated bid. Instead of inviting all bidders to correct any errors in their bids, the City gave Shaw alone the opportunity to modify its bid after the bid opening. Second, the City violated its own rule prohibiting withdrawal or modification of bids stated in its Advertisement for Bids. Third, the City allowed Shaw to increase its bid by $708,411 when the alleged error in its bid was only $619,200, which resulted in an unexplained increase in Shaw’s bid of $89,211.
Rochon and two other bidders on the Project protested the contract award to Shaw. The City denied the protest arguing that it had the discretion to allow a modification in a bid after the bid opening provided that the change did not affect which contractor was low. The City characterized the bid modification as a waiver of a bid defect intended to ensure that the public received the best bargain for the least money.
This was an interesting position for the City to take because Minnesota case law is clear that bids on public contracts cannot be modified after the bid opening if that modification gives the bidder “a substantial advantage not enjoyed by other bidders.” The controlling case is Lovering-Johnson, Inc. v. City of Prior Lake.2 In that case, the City of Prior Lake corrected an apparent clerical error on one of the bidder’s bid sheets after the bid opening, changing an amount from an add to a deduct. That change caused the modified bid to be low, and Prior Lake awarded the contract to the bidder with the modified bid. The district court ruled that Prior Lake had not violated Minnesota’s competitive bidding law because the error was a minor clerical error that the city was permitted to waive. The Court of Appeals reversed and held that correction of a bid entry modifying the price of the bid is not a minor irregularity, and that making such a change violates our state’s public bidding law. In so doing, the court stated, in relevant part.
Once a bid has been opened, the public entity has no authority to make any material changes or modifications to the bid. The rule prohibiting material changes once a bid has been opened applies despite provisions in the bid instructions that allow the public entity to waive irregularities.
In short, the Court of Appeals ruled that Prior Lake violated Minnesota’s competitive bidding laws by making a material change to a bid after the bids had been opened even though the change was made to correct a clerical error.
The City of St. Paul argued that Lovering-Johnson did not apply because the post-opening modification it allowed Shaw to make did not change which contractor was low. The City was essentially arguing that it had the discretion to allow the lowest bidder to modify its bid after the bid opening to recover any money it had left on the table due to a mistake (even though the amount of the correction the City allowed Shaw to make exceeded the amount of the alleged mistake by over $89,000). In reply, Rochon argued that if the City’s practice was allowed, then every contractor would salt its bids with “errors” that could be trotted out after the bid opening to increase its bid to $1 less than the second lowest bid. This would have the effect of robbing the public of the savings that competitive bidding is intended to produce. It would also open the door to rampant favoritism because public entities would have the discretion to allow favored companies to correct bid “errors”.
Rochon immediately sued the City and sought a temporary restraining order. The trial court judge found that Rochon was likely to win on the merits but the court surprisingly declined to issue an injunction stopping the project on the grounds that the harm to the public from stopping the project outweighed the harm from the illegal procurement! Undeterred, Rochon then moved for summary judgment, seeking a declaration that the contract between the City and Shaw was illegal and void because it violated competitive bidding law. Judge Ostby ruled that the City had indeed violated public procurement law and its own stated procedures by allowing Shaw to modify its bid, so she awarded Rochon its bid preparation costs. But she also decided that the change to Shaw’s bid was not “material” and that a declaration that the contract was illegal and void would spawn more litigation, so she refused to issue the declaration. Rochon appealed that decision.
On May 7, 2012, the Court of Appeals issued its ruling in the Rochon case as a published opinion. That means it is binding precedent for all of Minnesota’s district court judges. The opinion is important to contractors because it reaffirms and clarifies several fundamental principles of public procurement law and because it should make it easier for contractors to challenge illegal conduct in public contracting. There are three holdings in the opinion that are important to contractors.
First, the court held that changes to the price of a bid are always material. That holding reaffirms previous cases decided by the Minnesota Supreme Court and the Minnesota Court of Appeals. In Rochon, though, the Court of Appeals went even further and held that it does not matter if the change in bid price affects which bidder is low. The court held that the integrity of public procurement must be above reproach and that standard is “offended anytime a price change is allowed after the opening of all bids.” This ruling should save public entities money because contractors will not be able to recoup money left on the table through correction of alleged bid “errors.” It also ensures a level playing field by denying public contracting officials the discretion to allow some favored contractors to correct their bids while denying that opportunity to others.
Second, the court reaffirmed that public contracts entered into in violation of competitive bidding laws are void. This is important because it is the only remedy to ensure that contractors and public contracting officials obey the laws of competitive bidding. The contracting community has an incentive to police itself because public bodies cannot expend funds on illegal contracts. The law in Minnesota is unsettled on what happens if a contractor performs on a contract that is later declared illegal due to violation of competitive bidding law. There are some cases holding that the contractor cannot be paid at all for the work it had performed and that it must disgorge any payments it had received. There are also cases holding that the contractor can only recover the fair market value of the work performed instead of the contract price. Either way, a contractor performing on an illegal contract runs significant risk of losing a great deal of money.
Third, the Court of Appeals ruled that judges hearing competitive bidding cases must declare public contracts illegal when a violation of competitive bidding is proven. This is important because those declarations will always result in some level of pain to the public entity issuing the contract. Projects will be delayed or made more expensive. It takes a great deal of intestinal fortitude for an elected judge to say that a needed public project cannot go forward because of a faulty bidding process. The Rochon decision makes it clear that judges hearing these cases must make the hard decision and declare an illegally entered contract void.
The Rochon opinion is a clear victory for contractors seeking a fair and level playing field on which to compete. If you have any questions about the Rochon opinion or about public contracting law, please contact Dean Thomson at (612) 359-7624 or Jeff Wieland at (612) 359-7605.
1Minn. Stat. § 471.345 subd. 3.
2Dean Thomson represented the successful bid protestor in that case, too.
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Gary Eidson will be presenting a seminar on "Commercial Real Estate Purchase Agreements: The Most Frequently Negotiated Terms" at the MSBA Convenience Series CLE program on May 15, 2012 at the Minnesota CLE Conference Center in Minneapolis, Minnesota. For more information, please contact Gary at 612.359.7621 or firstname.lastname@example.org.
Dean Thomson will speak at the Minnesota CPA annual Construction Conference on September 19th on "Compliance with Disadvantaged Business Enterprise Requirements: How to Ensure Your Clients are Satisfying Minority Participation Goals." For more information on how to register, contact Dean at email@example.com.
Mark Westra was named to the St. Thomas Opus College of Business Real Estate Advisory Board.
Matt Collins presented on Bonds, Liens and Insurance at the Concentrated Course in Construction Contracts for the Federal Publications Seminars on May 14, 2012.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T