Gravel2Gavel Construction & Real Estate Law Blog

Recently a California Court of Appeal affirmed a superior court’s judgment and order confirming that the City of San Leandro (City) had not abused its discretion by waiving a bid defect and awarding the public project contract to that bidder. The court, in Bay Cities Paving & Grading, Inc. v. City of San Leandro, Case No. A137971 (Jan. 28, 2014), rejected Bay Cities Paving & Grading, Inc.’s (Bay Cities) contention that the City improperly awarded the contract to Oliver Desilva, Inc. dba Gallagher & Burk (hereafter G&B) because G&B inadvertently omitted the first page of its bid bond, a bond required by the contract specifications. The court found that the City had before it the information needed to determine that G&B had satisfied the bid bond requirement when it concluded that G&B was the lowest responsible bidder.

The Bids
On September 4, 2012, the City approved plans and specifications for the construction of a “BART-Downtown Pedestrian Interface Project along San Leandro Boulevard” and called for bids for the work. Prospective bidders were provided a “Contract Book” which contained, among other things, copies of the required proposal form and the City’s standard form of bid bond. The proposal form stated that the “completed proposal form shall be submitted in its entirety,” and “shall be accompanied by a bidder’s bond executed by an admitted surety insurer, naming the City of San Leandro as beneficiary…[¶]…The form of Bidder’s Bond to be used [is] included with the proposal form.”

On October 23, the City opened the bids and confirmed that G&B had submitted the lowest bid and Bay Cities had submitted the second lowest bid. G&B, however, had failed to include the first page of its bid bond. On the same day but only after the City had opened the bids, G&B submitted the first page of its bid bond.

The Bid Protest
On October 26, Bay Cities submitted a bid protest premised on G&B’s bid being “nonresponsive” because its omission of the first page of its bid bond. G&B’s attorney confirmed to the City that G&B’s failure to include the first page “was due to an inadvertent error,” citing legal authority that the City “may waive this irregularity and award the contract to G&B” because “the irregularity is minor and waivable by the City…” In an October 31 letter, the City engineer notified Bay Cities that it had concluded that G&B’s bid was accompanied by an enforceable bond and that G&B’s omission of the first page “can be waived as an inconsequential bid defect.” He also confirmed that G&B would be awarded the contract.

On November 19, Travelers Casualty and Surety Company confirmed that G&B’s bid bond “was approved and authorized by” it, and that the omission of the first page of the bond “did not affect [its] commitment under the bid bond.” The same day, the City Council of San Leandro unanimously adopted a resolution identifying G&B as the lowest responsible bidder, waiving any irregularities in G&B’s bid and awarding G&B the contract.

The Writ of Mandate
On November 20, Bay Cities filed a petition for writ of mandate, and a complaint in Alameda Superior Court. (It also filed an ex parte application for a temporary restraining order contesting the City’s award of the contract to G&B, which the court denied on November 28, 2012).

On January 16, 2013, the court held a hearing on Bay Cities’ petition and, a week later, denied it. The court found substantial evidence to support the City’s decision that G&B’s failure to submit the first page of its bid bond was a “minor irregularity” and did not give G&B “an advantage or benefit not allowed to other bidders.” It further found that the City “reasonably concluded that a court would read page 34 in the context of the form bid bond and enforce the bid bond.” On January 23, the court filed a judgment denying Bay City’s petition and, on February 21, Bay Cities filed a timely notice of appeal.’

The Appeal
Court Confirms Standard of Review Is Substantial Evidence
As a preliminary matter, the Court of Appeal concluded that “the dispositive issue in this case” was reviewable “the substantial evidence standard” because the question of whether “a bid varies substantially or only inconsequentially from the call for bids is a question of fact,” citing Ghilotti Construction Co. v. City of Richmond, 45 Cal. App. 4th 897, 906 (1996). It rejected Bay Cities’ contention that the question before it was a question of law subject to de novo judicial review. It further noted that “the City’s discretion to waive inconsequential or nonmaterial defects in the bids submitted for this public contract project was expressly confirmed in both the San Leandro Municipal Code and in provisions of the “Notice to Bidders” that was issued for this specific project.” The issue before it was whether G&B’s omission of the first page of its bid bond was a “material.”

Court Confirms Basic Rule of Competitive Bidding
The court recited the “basic rule of competitive bidding:” “[B]ids must conform to specifications, and that if a bid does not so conform, it may not be accepted. [A] bid which substantially conforms to a call for bids may, though it is not strictly responsive, be accepted if the variance cannot have affected the amount of the bid or given a bidder an advantage or benefit not allowed other bidders or, in other words, if the variance is inconsequential.” Strict compliance with bidding requirements is important to “maintaining integrity in government” and, open competitive bidding, avoids bidders surreptitiously undercutting each other. This rule does not preclude the contracting entity from waiving “inconsequential deviations.” “[A] deviating bid must be set aside despite the absence of corruption or actual adverse effect on the bidding process” only if the deviation is “capable of facilitating corruption or extravagance, or likely to affect the amount of bids or the response of potential bidders.”

Court Affirms Missing 1st Page Of Bid Bond Was An Inconsequential Deviation
To be an “inconsequential deviation,” it must neither (1) give the bidder an unfair competitive advantage nor (2) “otherwise defeat the goals of insuring economy and preventing corruption in the public contracting process.” This is “evaluated from a practical rather than a hypothetical standpoint, with reference to the factual circumstances of the case” and “viewed in light of the public interest, rather than the private interest of a disappointed bidder.” It warned that it “would amount to a disservice to the public if a losing bidder were to be permitted to comb through the bid proposal or license application of the low bidder after the fact, [and] cancel the low bid on minor technicalities, with the hope of securing acceptance of his, a higher bid.” Id.

Reviewing the evidence in the record, the court first found “[s]ubstantial evidence establishes that G&B used the City’s standard bid bond form.” Having used this form, the first page of the form contained three blank places for: “(1) the name of the principal (i.e., the bidder), (2) the name of the surety, and (3) the date of the submission of the bid.” The first two items of information were included on the second page of the bid bond submitted by G&B. The court found that “there can be no dispute that the City had actual notice of the date the G&B bid was submitted.” The remainder of the text on the first page of the bid bond was standard text. Relying on these findings, the court concluded that, “when the City determined which contractor was the lowest responsible bidder it had before it the information needed to make clear that G&B had, indeed, satisfied the requirement of supplying the requisite bid bond.” It then affirmed the superior court’s judgment and order.

Court Rejects Arguments That Issue Before It Was A Question Of Law
The court went on to reject Bay Cities other arguments: (1) “the City’s attempted contract with G&B is null and void as a matter of law because G&B’s failure to provide a bidder’s bond violated a statutory requirement;” (2) “the question of whether the absence of the face page of G&B’s bid bond from its original bid package rendered the bond unenforceable was a question of law;” (3) “the City committed legal error by using its standard bid bond form to supply information that was missing from G&B’s bid package;” and (4) “the defect in G&B’s bid could not properly be waived as an inconsequential or immaterial deviation because it gave G&B an advantage or benefit over other bidders.”

The court considered Bay Cities’ last argument to be its “most developed theory on appeal” because “a bid defect cannot be considered inconsequential if it gives the bidder an unfair competitive advantage.” According to Bay Cities, “G&B had an unfair advantage in the bidding process because the defect in its bid would have allowed it to reject the project without incurring liability under its bidder’s bond.” First, Bay Cities contended that the omitted page gave “G&B the actual option of deciding after bid opening whether it wanted to be bound by the bid bond.” The record undermined this theory because “the City determined that G&B’s original bid was supported by a valid bid bond” because it “had the signature of the obligor and the bonding company at bid opening, which would make the bond enforceable.”

Second, it contended that “the very act of omitting a page of the bid bond from the original bid package gave G&B a competitive advantage over other bidders because it created an opportunity for G&B to dispute the validity of its bid bond.” The court found this logic flawed because It “comes from characterizing any opportunity to dispute the validity of a bond as a competitive advantage in the bidding process itself.” It noted that “any of the bidders for this project could conceivably have disavowed its contract with the surety that issued its bidder’s bond by arguing that the bond was unenforceable for one reason or another.” The City, however, “made a factual determination that the omitted page from G&B’s original bid package did not create an actual unfair advantage because the information that was submitted established compliance with the bid bond requirement.” The court was not willing to permit Bay Cities to “undermine that factual determination by relying solely on speculation.”

Court Affirms Superior Court’s Judgment And Order In Favor Of City
The court confirmed that “an actual competitive advantage arises only when a bid defect establishes an actual ground for a successful bidder to withdraw its bid without incurring liability under its bond.” Ultimately, it found that Bay Cities “abstract theory of a potential competitive advantage does not undermine the City’s determination or otherwise prove that the City abused its discretion.”

Star Equipment, Ltd., Manatt’s, Inc., and Short’s Concrete Cutting Co. recently secured a victory in the Iowa Supreme Court when the Court, in Star Equipment, Ltd., v. State of Iowa, Iowa Department of Transportation, Case No. 12-1378 (Jan. 31, 2014), reversed the district court’s ruling on the scope of remedies available to subcontractors under Iowa Code § 573.2 for unpaid work. For the state projects, the Iowa Department of Transportation (IDOT) had waived the requirement of a construction surety bond because the general contractor qualified as a Targeted Small Business (TSB). Ruling in favor of the subcontractors, the Court construed Section 573.2 “as a waiver of sovereign immunity that allows subcontractors to recover from IDOT the unpaid balances TSBs owe for work on public improvements.” It went on to rule that the subcontractors, as prevailing parties, are eligible, in the district court’s discretion, to recover their reasonable attorneys’ fees from IDOT.

The Public Projects
In 2010, IDOT hired Universal Concrete, Ltd. as the general contractor for improvements to rest areas along Interstate 80 in Adair County. Universal Concrete qualified as a TSB. Iowa Code § 15.102 defines TSB as “a small business which is fifty-one percent or more owned, operated, and actively managed by one or more women, minority persons, or persons with a disability provided the business meets all of the following requirements: (1) Is located in this state. (2) Is operated for profit. (3) Has an annual gross income of less than four million dollars computed as an average of the three preceding fiscal years.” Because Universal Concrete was a TSB, IDOT waived the construction surety bond requirement, as permitted by Iowa Code § 12.44.

Universal Concrete subcontracted with Star Equipment, Manatt’s, and Short’s Concrete to supply rental equipment, furnish ready-mix concrete and provide cement cutting services, respectively. None of these subcontractors had direct contractual relationships with IDOT. The work was completed in 2011, and IDOT gave its final acceptance of the projects on September 1, 2011. Universal Concrete, however, failed to pay in full the three subcontractors. IDOT had retained only $3,436.75 of the monies owed to Universal Concrete for the projects.

The Claims Against IDOT
Star Equipment, Manatt’s, and Short’s Concrete filed claims in the amount of $10,851.44, $15,685.55, and $5,775, respectively, with Universal Concrete and IDOT, seeking the balances owing for their materials and work. On October 13, 2011, Star Equipment filed a civil action against Universal Concrete and IDOT, as well as against Manatt’s and Short’s Concrete (to adjudicate their competing interests in the funds retained by IDOT). Each of the subcontractors contended Iowa Code § 573.2 imposes liability on IDOT for the amount that their claims exceeded the retained funds. IDOT agreed that the subcontractors were entitled to payment from the retained fund. It denied, however, the subcontractors’ claims that exceeded the retainage.

The District Court’s Order Limited the Claims to IDOT’s Retainage
On January 20, 2012, it granted IDOT’s motion to dismiss the subcontractors’ claims to the extent they exceeded the retained funds. It concluded that, “in the absence of a bond, the subcontractors’ remedy against the state is limited to the funds the Iowa Department of Transportation (IDOT) retained on its contract with the TSB.” On July 3, 2012, the district court awarded all of the retained funds to Manatt’s because it had filed its IDOT claim first. (The district court entered additional orders in favor of the subcontractors against Universal Concrete. The subcontractors’ default judgments against Universal Concrete remain unsatisfied.) Manatt’s and Short’s Concrete filed a joint appeal and Star Equipment filed a separate appeal, appeals that were later consolidated, seeking IDOT’s payment of their claims and attorneys’ fees.

The Iowa Supreme Court’s Reversal of the District Court’s Order
The Court recognized that Star Equipment, Ltd. presented questions of first impression on the meaning and constitutionality of Section 573.2, a statute governing “subcontractors’ remedies for unpaid work on public improvements when the state waives the performance bond for a general contractor that is a “Targeted Small Business” (TSB).”

Because mechanic’s liens do not attach to government-owned facilities, Chapter 573 of the Iowa code was enacted “to provide other protections to secure payment for those working on public improvements.” Section 573.2 states, in relevant part:

Contracts for the construction of a public improvement shall, when the contract price equals or exceeds twenty-five thousand dollars, be accompanied by a bond, with surety, conditioned for the faithful performance of the contract, and for the fulfillment of other requirements as provided by law….

If the requirement for a bond is waived pursuant to [Iowa Code] § 12.44, a person, firm, or corporation, having a contract with the [TSB] or with subcontractors of the [TSB], for labor performed or materials furnished, in the performance of the contract on account of which the bond was waived, is entitled to any remedy provided under [Chapter 573]. When a bond has been waived pursuant to [Iowa Code] § 12.44, the remedies provided for under this paragraph are available in an action against the public corporation.

Typically, subcontractors on public improvements left unpaid by the general contractor would be able to collect from funds retained by the state or through claims against a surety bond, as contemplated by Iowa Code §§ 573.16, 573.18, 573.22. In the instant case, the retained funds were insufficient and IDOT had waived the bond because of Universal Concrete’s status as a TSB.

The Court, analyzing Chapter 573, summarized that:

“Chapter 573 provides an additional protection for subcontractors in the form of a retained percentage fund. Section 573.12(1) requires the state entity, or “public corporation,” in charge of the project to pay the general contractor monthly. Iowa Code § 573.12(1). From the amount payable to the general contractor, the public corporation is allowed–but not required–to retain up to five percent of the amount owed. See id. Section 573.13 specifies that the retained amount “constitutes a fund for the payment of claims for materials furnished and labor performed.” [Iowa Code] § 573.15 (providing under what circumstances the retained amounts may be used to pay those who have furnished materials).

Subcontractors owed money on public construction projects may submit their claims to the responsible public corporation. [Iowa Code] § 573.16. If necessary, the court is tasked with adjudicating these claims and is directed to award a claimant the costs of the action. [Iowa Code] § 573.18. The court may tax reasonable attorney fees as costs. [Iowa Code] § 573.21. If the retained percentage is sufficient, the public corporation pays the claimants from that fund. [Iowa Code] § 573.18. If no claims are submitted against the retained funds, or if excess funds remain after all claims have been satisfied, the balance is released to the general contractor. [Iowa Code] § 573.14.” (Footnote omitted).

It next analyzed the legislative history of Chapter 573 — entitled “Labor and Material on Public Improvements.” It found that this chapter was intended to protect “subcontractors and materialmen through retainage procedures and by requiring general contractors to obtain surety bonds for state government construction projects,” citing Iowa Supply Co. v. Grooms & Co. Constr., Inc., 428 N.W.2d 662, 665-66 (Iowa 1988). It went on to conclude that the subcontractors’ argument that the second paragraph of Section 573.2 entitles them to collect from IDOT the amounts owed by the TSB because the bond requirement had been waived and the retainage was insufficient to “fit[] with the plain text of the statute and with the legislative explanation accompanying the statutory amendment adding this provision.” This interpretation is consistent with the further purpose of Chapter 573 “to protect subcontractors and materialmen against nonpayment,” citing Farmers Coop. Co. v. DeCoster, 528 N.W.2d 536, 537 (Iowa 1995), and the “specific purpose of the 1988 amendment to section 573.2 is to extend protections for subcontractors when the bond is waived for a TSB.”

It found that IDOT’s interpretation of Chapter 573 “would undermine both goals.” It further disagreed with IDOT’s challenge that Section 573.2, so interpreted, is unconstitutional under article VII, section 1 of the Iowa Constitution. It found that “[t]he evils sought to be avoided by article VII, section 1 are not present here. IDOT has assumed liability for its own benefit–improvements to state-owned facilities.” “Article VII, section 1 does not prohibit the state from paying the subcontractors after the TSB’s default. That statute puts IDOT in the position of a coprincipal, not a surety, with its TSB, Universal Concrete.”

In summary, it held that “Section 573.2 permits the subcontractors to recover from IDOT amounts they could have recovered from the surety if IDOT had not waived the bond.” Section 573.2 “constitutes the state’s express consent to be sued,” citing Anthony v. State, 632 N.W.2d 897, 902 (Iowa 2001). It further confirmed that “the subcontractors, as prevailing parties, are eligible, in the district court’s discretion, to recover their reasonable attorney fees from IDOT, including fees incurred obtaining the default judgments against Universal Concrete and the additional fees incurred litigating against IDOT in district court and on appeal.” It remanded the matter to the district court to determine whether the subcontractors should be awarded their attorney fees and, if so, to calculate the amount of the award for each subcontractor.

Photo: Brent, Iowa State Supreme Court, Taken May 7, 2008 – Creative Commons