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By John W. Ralls
The
California Supreme Court has ruled that when the lowest
responsible bidder is wrongfully denied a public contract,
it may recover bid preparation costs but not lost profit
under a theory of promissory estoppel. Kajima/Ray Wilson
v. Los Angeles County Metropolitan Transportation Authority,
____ Cal.4th ____, 2000 D.A.R. 6173 (Cal. 2000)
The
MTA solicited bids for construction of a subway station
and tunnels. After a bid protest was filed, the MTA threw
out the first round of bids. After a second round of bidding,
the MTA awarded the contract to the second low bidder (Tutor-Saliba).
The MTA justified the award on the ground that the low bidder
(Kajima) had not satisfied the DBE participation goal. The
low bidder identified a particular trucking firm as a "broker"
while the second low bidder identified the same firm as
a "subcontractor." The MTA had an unwritten policy
granting only a 5 percent DBE credit for entities identified
as "brokers" while awarding 100 percent credit
for those identified as "subcontractors."
Kajima
filed suit against the MTA based on a theory of promissory
estoppel and seeking to recover its bid and protest expenses,
unabsorbed overhead expenses and lost profit. After a bench
trial, the trial court awarded Kajima damages in each category.
The Court of Appeal affirmed.
The California Supreme Court granted review and reversed.
(The Supreme Court considered only whether the award of
bid preparation costs and lost profit was appropriate because
the MTA had waived review of the award of bid protest costs
and overhead costs.)
With
respect to promissory estoppel, California follows §90
of the Second Restatement of Contracts, which provides:
"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. The remedy granted for breach may be limited
as justice requires."
The
court stated that "allowing recovery of some measure
of damages once injunctive relief is no longer effectively
available furthers the purposes of the competitive bidding
laws by encouraging proper challenges to misawarded public
contracts by the most interested parties and deterring government
misconduct." The court concluded that it was appropriate
to award the low bidder its bid preparation costs because
the low bidder had reasonably incurred those costs in reliance
on the representation that if the contract was awarded,
it would be awarded to the lowest responsible bidder.
However,
the court held that justice did not require the award of
lost profit. The court pointed out, among other things,
that the MTA was authorized to reject all bids and that
the lowest bid may prove to be unprofitable.
The
court also indicated that fashioning a remedy for a bidder
wrongfully denied a contract is a matter more appropriately
left for the legislature.
The
court also made a few observations concerning the way in
which the issue has been treated in other jurisdictions.
Some jurisdictions bar recovery altogether. A majority of
jurisdictions allow recovery of bid preparation costs and
in some cases bid protest costs but not lost profits. "These
jurisdictions generally reason that while the competitive
bidding statutes are enacted for the public's benefit, not
the aggrandizement of the individual bidder, allowing recovery
of bid preparation costs encourages proper challenges to
misawarded public contracts by the most interested parties,
and deters public entity misconduct." The conclusion
that "disappointed bidders may recover lost profits
as damages is a distinctly minority position."
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