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By Keith L. Slenkovich
Thelen Reid Brown Raysman & Steiner LLP
A
recent decision by the New Jersey Supreme Court illustrates
the perils a contractor faces if it submits an unbalanced
or front-end loaded bid for a construction project. M.J.
Paquet v. New Jersey Department of Transportation, 171
N.J. 378, 794 A.2d 141 (N.J. 2002). The court explained
that when a construction bid is unbalanced because it contains
below market prices for some work and inflated prices for
other work, the contractor faces the risk of losing out
if the inflated bid items are deleted by change order. The
court nevertheless found that because of some unique facts
in the case, the contractor was entitled to recoup the losses
it incurred because of its unbalanced bid.
Facts
In
October 1992, the New Jersey Department of Transportation
solicited bids to rehabilitate several highways, including
painting 12 bridges in northern New Jersey. The specifications
required bidders to estimate the cost, overhead and anticipated
profit for each pay item of work, with the contract being
awarded to the overall low bidder. The bid specifications
required that the bidding contractors submit "balanced
bids" and further specified that NJDOT would "not
consider any claim for additional compensation arising from
the bid on an item, or group of items, inaccurately reflecting
the cost of such work or containing a disproportionate share
of the bidder's anticipated profit, overhead and other costs."
Paquet
prepared its pay items for painting the bridges using an
estimate received from a potential subcontractor. However,
shortly before submitting its bid, Paquet received a substantially
lower estimate from another subcontractor, O.J. Painting.
Paquet contended that because it was "impractical"
to revise the pay items corresponding to the bridge work,
Paquet did not make any changes in its allocation with respect
to the several painting items. Rather, Paquet lowered the
prices of other pay items so that its overall bid, but not
the painting pay items, reflected the O.J. Painting cost
savings. The result was that Paquet submitted an unbalanced
bid in which the pay items relating to the painting work
included inflated amounts for cost, overhead and anticipated
profit.
Paquet
was awarded the contract, and NJDOT approved the subcontracts
with the listed subcontractors, including O.J. Painting.
Shortly
after Paquet was awarded the contract, the Occupational
Safety and Health Administration revised its rules regarding
the removal of lead-based paint. Paquet submitted claims
for the additional anticipated costs caused by the OSHA
change, which NJDOT rejected. Pursuant to contract specifications
and because the parties could not agree on a revised price
for the bridge painting work, NJDOT opted to delete the
bridge painting work from Paquet's contract, issuing a deductive
change and reducing the contract price accordingly.
Paquet
brought suit for breach of contract and unjust enrichment,
claiming that it was entitled to an equitable adjustment
in the form of the difference between the original painting
bid and the O.J. Painting bid. The trial court ruled in
Paquet's favor but was reversed by the Appellate Division.
Paquet petitioned for review to the New Jersey Supreme Court,
which agreed to hear the case.
Ruling
The
Supreme Court reviewed the contract provisions in question
and, not finding applicable New Jersey law on the subject
of equitable adjustments, reviewed federal law. Following
this review, the Court ruled in favor of Paquet, awarding
it an equitable adjustment equal to the difference between
the original bridge painting bid and the O.J. Painting bid,
minus any overhead and profit Paquet had built into the
bridge painting bid items. However, the Court made clear
that it was basing its ruling on several unique facts that
the Court found were "unlikely to recur" in another
case.
The
first factor was the contract language at issue. The proscription
against "unbalanced bids" was ambiguous under
the circumstances. The Court noted that the "unbalanced
bid" specification only prohibited "claims for
additional compensation" and found that under one interpretation
of this language, Paquet actually was not making a claim
for additional compensation. Because Paquet was not seeking
compensation over and above the original contract price,
the Court reasoned, Paquet reasonably could have understood
the language not to preclude the type of claim Paquet was
making.
The
second factor was that the painting work at issue was not
scheduled to be performed until near the end of the project.
The Court reasoned that Paquet's innocent explanation for
the unbalanced bid was more believable than if Paquet had
engaged in traditional front-end-loading to free up cash
flow at the beginning of the project.
The
third factor the court found significant was that NJDOT
had approved the O.J. Painting subcontract, which contained
the reduced bridge painting cost. The court reasoned that
NJDOT was on notice of the unbalanced bid.
Finally,
the Court found that NJDOT would be unjustly enriched if
it were permitted to delete the entire cost of the bridge
painting work, finding that "the plain fact is that
Paquet performed hundreds of thousands of dollars worth
of work for which it was not compensated."
The
Paquet case teaches three important lessons. First,
there is an inherent risk in the practice of front-end-loading
a construction bid. While the Paquet court ultimately
permitted equitable adjustment of the contract price to
address problems arising from the unbalanced bid, the Court
made clear it was only doing so because of the unique factors.
Second,
because the specifications for competitively bid construction
projects are provided by the owner, they generally will
be construed liberally in favor of the contractor. This
may mean that, as in the Paquet case, contract specifications
that might at first blush appear to preclude a particular
type of claim may contain an ambiguity which can be exploited
in a contractor's claim for additional compensation.
Finally,
the Paquet case reflects the general reluctance of
the courts to allow a contract clause to confer a windfall
benefit on an owner when a contractor makes an innocent
mistake in its bid documents.
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For more information about the issues covered in this report, please contact Keith L. Slenkovich in our Silicon Valley office at 408-282-1821 or at kslenkovich@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2002 Thelen Reid Brown Raysman & Steiner LLP
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