Chapter Three. Bidding. Patrick M. Miller and Molly Moss

Chapter Three Bidding Patrick M. Miller and Molly Moss 3.01 Introduction...24 3.02 Mutual Mistake...24 3.03 Unilateral Mistake before Award of Contract...27 3.04 Unilateral Mistake after Award of Contract...28 3.05 Responsive Bid Defined...30 3.06 Responsible Bid Defined...30 3.07 Owner s Duty to Inform...31 23

24 Model Jury Instructions: Construction Litigation, 2nd Edition Chapter 3: Bidding 3.01 Introduction The instructions set forth in Chapter Three address a contracting party s efforts to avoid the effects of the contract based on a mistake, a contractor s right to withdraw a bid in limited circumstances, a contractor s compliance with bidding instructions, and an owner s duty to provide material information to the contractor. These instructions address both mutual and unilateral mistakes and, in the case of unilateral mistake, are specifically tailored to the construction bid process. The instructions and comments related to unilateral mistakes address instances in which the contractor refuses to perform services for the owner for the sum stated in its bid. The outcome in these instances often depends on the timing (before or after contract award) of when the contractor notifies the owner of the error and/or whether the owner knew or should have known of the error. The comments also provide examples of specific issues involving mutual and unilateral mistakes arising in the construction context. These instructions also discuss the contractor s duty to comply with bidding instructions. Government contracts are generally awarded to the responsible bidder with the lowest responsive bid. Responsible bidders have the qualifications to fully perform the contract requirements, whereas responsive bids adhere to the invitation for bids in all material respects. Additionally, these instructions address a contractor s right to withdraw a bid due to unintentional clerical or mathematical mistakes as well as an owner s duty to disclose important information not otherwise available to the contractor. 3.02 Mutual Mistake The law recognizes that certain contracts may be unenforceable because the parties to the contract made inaccurate assumptions or mistakes about the factual basis surrounding the contract. Typically, when both parties made

Bidding 25 inaccurate assumptions, the mistake is referred to as a mutual mistake. A mistake is defined as a belief that is not in accord with the facts. A mutual mistake exists when (1) at the time a contract was made, both parties misunderstood a basic fact underlying the contract, and (2) the mistake when identified had a material effect on the parties agreement. A mutual mistake is material when, if the parties had known the real facts, they would not have entered into the contract. If you find that a mutual mistake of a material fact was made regarding the contract, you may find that the contract is voidable (or capable of being set aside). Comment Public policy favors a certain degree of finality in transactions between parties, and, as a general matter, allowing reformation or contract avoidance undermines such a policy. See, e.g., Williams v. Glash, 789 S.W.2d 261, 265 (Tex. 1990). The doctrine of mutual mistake represents an exception to the general rule of contract finality. The doctrine is justified by equitable considerations and by relieving parties of a burden to perform excessive investigation of underlying facts before entering a contract. A mutual mistake has been described as occurring when the written instrument fails to set forth the true agreement of the parties. See, e.g., Hart v. Arnold, 884 A.2d 316, 333 (Pa. Super. Ct. 2005). The Restatement (Second) of Contracts has enumerated three conditions to the voidability of a contract under the doctrine of mutual mistake: (1) The mistake must relate to a basic assumption on which the contract was made. (2) The mistake must be shown to have a material effect on the agreed exchange of performances. (3) The mistake must not be one as to which the party seeking relief bears the risk.

26 Model Jury Instructions: Construction Litigation, 2nd Edition Restatement (Second) of Contracts 152 (1981). The classic illustration of the mutual mistake doctrine is Sherwood v. Walker, 33 N.W. 919 (Mich. 1887). The parties had contracted for the sale of a cow thought to be barren. In actuality, the cow was capable of breeding and was pregnant. The court held that a different understanding about the subject matter of the sale was a mutual mistake sufficient to make the contract voidable at the aggrieved party s option. Id. at 923 (holding that a party who has given an apparent consent to a contract of sale may refuse to execute it, or he may avoid it after it has been completed, if the assent was founded, or the contract made, upon the mistake of a material fact, such as the subject-matter of the sale, the price, or some collateral fact materially inducing the agreement; and this can be done when the mistake is mutual ). The court found that the mistake at issue was not the mere quality of the cow but instead went to its very nature because [a] barren cow is substantially a different creature than a breeding one, with a completely different ultimate use. Id. However, as stated by the Restatement (Second) of Contracts, the mutual mistake doctrine does not apply to make a contract voidable if the party seeking relief bore the risk of the mistake. Restatement (Second) of Contracts 152. A party bears the risk of a mistake in three circumstances: (1) when the risk of mistake is allocated by agreement; (2) when, at the time the contract is made, that party is aware of its limited knowledge with respect to the facts to which the mistake relates but treats its limited knowledge as sufficient; or (3) when the court allocates the risk to that party on the basis that it is reasonable in the circumstances to do so. Id. 154; McNamara Constr. of Manitoba Ltd. v. United States, 509 F.2d 1166, 1169 (Ct. Cl. 1975) (finding that the risk of labor strife was placed, both explicitly and implicitly by the contract[,] on the contractor); see also Backus v. MacLaury, 106 N.Y.S.2d 401 (App. Div. 1951) (holding that when the parties are aware at the time of contracting that there is doubt about a material element of the agreement but execute the contract anyway, the risk of the doubt is an element of the bargain between the parties).

Bidding 27 3.03 Unilateral Mistake before Award of Contract In this case, the contractor refused to perform the work for the sum stated in its bid. The contractor claims that its bid contained a clerical error resulting in a lower bid than intended. A clerical error is an error similar to a typo or an obvious math error. A low bidder is entitled to withdraw its bid in the case of an unintentional and substantial clerical error identified before the owner awards the contract. Therefore, a contractor cannot be required to perform work for the owner at the price stated in its bid if it proves the following by a preponderance of the evidence: (1) Its bid contained a substantial clerical error (typo or math error). (2) The price bid was submitted in good faith. (3) The contractor informed the owner of the mistake before it awarded the contract. An error in judgment or a misunderstanding of project requirements does not constitute a unilateral mistake. Comment This principle is a corollary to the general rule that an offer is revocable until actually accepted. See, e.g., Restatement (Second) of Contracts 36(1)(c). But see Dep t of Transp. v. Am. Ins. Co., 491 S.E.2d 328, 330 (1997) (stating that the common-law rule is not applicable in the context of submission of bids to the Georgia Department of Transportation). The methods of revocation set forth as required in this instruction are distilled from common understandings and customary practice in the industry. See, e.g., Water Works Bd. v. Jones Envtl. Constr. Inc., 533 So. 2d 225 (Ala. 1988). In general, relief is available for unilateral mistakes that are the result of a clerical or arithmetical mistake, not for errors in judgment. See Goldberger Foods Inc. v. United States, 23 Cl. Ct. 295, 311 (1991) (citations omitted). The Restatement (Second) of Contracts illustrates this principle: In response to B s invitation for bids on the construction of a building according to stated specifications, A submits an offer to do the work

28 Model Jury Instructions: Construction Litigation, 2nd Edition for $150,000. A believes that this is the total of a column of figures, but he has made an error by inadvertently omitting a $50,000 item, and in fact the total is $200,000. B, having no reason to know of A s mistake, accepts A s bid. If A performs for $150,000, he will sustain a loss of $20,000 instead of making an expected profit of $30,000. If the court determines that enforcement of the contract would be unconscionable, it is voidable by A. Restatement (Second) of Contracts 153 (illustration 1). In First Baptist Church of Moultrie v. Barber Contracting Co., 377 S.E.2d 717 (Ga. Ct. App. 1989), a contractor who made a clerical mistake (incorrect addition) in submitting a bid was permitted equitable relief and allowed to rescind his bid, despite previously agreeing not to withdraw the bid for a period of 35 days after the opening of bids, because the owner was promptly notified and, having actual knowledge before forwarding the contract, the owner was not prejudiced thereby. Note: Many states have statutory provisions allowing a bidder to withdraw a bid in public projects if certain time limits and other constraints are met. For example, Colorado s statutory scheme allows for the withdrawal of inadvertently erroneous bids, but the bidder must submit proof of evidentiary value that clearly and convincingly demonstrates that an error was made. Colo. Rev. Stat. 24-103-202(6). 3.04 Unilateral Mistake after Award of Contract In this case, the contractor refused to perform the work for the contract price because it contends it made a mistake that excuses its obligation to perform. Specifically, the contractor alleges [a mistaken belief about facts underlying the contract] motivated it to submit the bid [or accept the contract]. The contractor contends this belief was a mistake because [insert true facts]. The contractor contends if it had known the true facts, it would not have submitted its bid [or entered into the contract]. In general, the law does not allow a contractor to avoid the effects of a contract because the contractor did not understand material issues

Bidding 29 underlying the contract. There is an exception, however, if the other party to the contract had reason to know of the contractor s material mistake or if the other party s actions caused the contractor to make a material mistake. If the contractor s bid was sufficiently close to the other bids received or to the owner s own estimates of the cost of the work, you can presume that the owner did not know or have reason to know of a mistake by the contractor. As a result, the contractor is required to perform the contract for the amount bid and accepted by the owner. If you find that the owner had reason to know of the contractor s mistake because there was a large discrepancy between the bid submitted by the contractor and other bids, you may determine the owner should have known there was a mistake in the contractor s bid. Comment This instruction relies on Restatement (Second) of Contracts 153 and 154. Section 153 states the general rule that the mistaken party is only allowed to void the contract based on its own clerical mistake if (1) it does not bear the risk of the mistake, (2) to enforce the contract would not be unconcionable, and (3) the non-mistaken party had reason to know about the mistake. Section 154 explains the circumstances under which a party bears the risk of its mistake. In this regard, a party bears the risk of a mistake in the contract if the risk is allocated to that party as an element of the parties bargain, if the party is aware at the time the contract is made that it has only limited knowledge of the matter about which it subsequently discovers it is mistaken and treats this limited knowledge as sufficient, or if the court deems that the mistake is reasonable in the circumstances in light of that party s position in the bargaining structure. See Restatement (Second) of Contracts 154. In the construction context where a bidding process has occurred, a determination of the owner s knowledge of the contractor s mistake is often dependent on the price differential between the mistaken bid and the next lowest bid. There is no precise mathematical formula to determine what price discrepancy is sufficient to put the owner on notice; rather, it is highly dependent on the circumstances and the usual variation in bidding prices for a project of the same nature. See Handle Constr. Co. v. Norcon Inc.,

30 Model Jury Instructions: Construction Litigation, 2nd Edition 264 P.3d 367 (Alaska 2011); Orbas & Assocs. v. Sec y of the Navy, 863 F. Supp. 1186 (E.D. Cal. 1994); R.J. Sanders Inc. v. United States, 24 Cl. Ct. 288 (1991); A.J. Colella Inc. v. Cnty. of Allegheny, 137 A.2d 265 (Pa. 1958). There also may be circumstances in which the nature of a mistaken bid is apparent on its face. For example, when the bid submitted was for $13,873 and the intended bid was $113,873, the omission of the first digit is a facially apparent deficiency. See Bethel Plumbing & Heating Co. v. Gen. State Auth., 32 Pa. D. & C.2d 533 (1963). 3.05 Responsive Bid Defined In this case, the plaintiff [disappointed contractor] claims that the defendant [government entity] was required by law to award the proposed construction contract to the plaintiff because the plaintiff was the lowest responsible and responsive bidder. In order for the plaintiff s bid to be responsive, it must comply with all material aspects of the invitation for bids. If the plaintiff s bid only alters from the bidding instructions in an immaterial manner, the plaintiff s bid can still be determined responsive. Comment To be considered responsive, the bid must comply in all material respects with the invitation for bids. Federal Acquisition Regulation, 48 C.F.R. 14.301; 1 Construction L. (MB) 2.02[7], at 2-40, 41 (Oct. 11, 2013). In the parlance of government contracting, a responsive bidder is one whose bid conforms to the material elements of an invitation to bid ; a responsible bidder is one who has the necessary resources and experience to perform a given job. See Abadie v. D.C. Contract Appeals Bd., 916 A.2d 913, 915 (D.C. Ct. App. 2007). 3.06 Responsible Bid Defined In this case, the plaintiff [disappointed contractor] claims that the defendant [government entity] was required by law to award the proposed construction

Bidding 31 contract to the plaintiff because the plaintiff was the lowest responsible and responsive bidder. In order for the plaintiff to be considered responsible, it must possess the minimum resources necessary to perform the project work. You must determine whether the defendant was correct in determining the plaintiff was not responsible. The plaintiff has the burden of proving that it was responsible. Factors that make a bidder not responsible include lack of financial resources, inability to comply with schedules, insufficient qualifications to perform the work, failure to have required licenses, and ineligibility to perform the work under applicable laws and regulations. Comment In the parlance of government contracting, a responsive bidder is one whose bid conforms to the material elements of an invitation to bid ; a responsible bidder is one who has the necessary resources and experience to perform a given job. See id. Within the context of federal contracts, the minimum responsibility requirements include financial resources, ability to comply with proposed schedules, performance record, ethical record, experience and skills, access to equipment and facilities, qualifications, and eligibility under applicable laws and regulations. See Federal Acquisition Regulation, 48 C.F.R. 9.104-1. 3.07 Owner s Duty to Inform In this case, the plaintiff [contractor] seeks [[additional compensation] or [to void the contract]] based on its allegation that the defendant [government entity] failed to inform the plaintiff of certain information known to the defendant at the time of bidding but not disclosed to the plaintiff. With respect to construction contracts with government entities, the law creates a presumption that the government entity has superior knowledge of the subject matter of the contract and project requirements. In these situations, the government entity will be required to disclose its superior knowledge. The contractor will be entitled to relief when the contractor can demonstrate the following four elements:

32 Model Jury Instructions: Construction Litigation, 2nd Edition (1) The contractor started to perform without knowing about a fact that affects the time or cost of performance. (2) The government entity knew that the contractor did not know about the fact and the contractor had no reason to know. (3) The specifications misled the contractor or did not notify the contractor that it should inquire about the existence of the fact. (4) The government entity did not disclose the fact. Comment According to the Restatement (Second) of Contracts: A person s nondisclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only: (a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material. (b) where he knows that the disclosure of the fact would correct a mistake of the other party as to the basic assumption on which the party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. (c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effects of a writing, evidencing or embodying an agreement in whole or in part. (d) where the other person is entitled to know the fact because of the relation of trust and confidence between them. Restatement (Second) of Contracts 161; see also Restatement (Second) of Torts 551(2). Also, with respect to government contracts: [t]he doctrine of superior knowledge is generally applied to situations where (1) a contractor undertakes to perform without vital knowledge of a fact that affects performance costs or duration, (2) the government was aware the contractor had no knowledge

Bidding 33 of and had no reason to obtain such information, (3) any contract specification supplied misled the contractor or did not put it on notice to inquire, and (4) the government failed to provide the relevant information. See Giesler v. United States, 232 F.3d 864, 876 (Fed. Cir. 2000).