Sometimes You Just Need to Call it a Day: Court Finds That Contractor Not Entitled to Recover Costs

January was a tough month in the courts for Hensel Phelps Construction Company. Hot off the heels of Hensel Phelps Construction Co. v. Superior Court, a case concerning the 10-year statute of limitations under Civil Code section 941, comes Hensel Phelps Construction Co. v. California Department of Corrections and Rehabilitation, Case No. B293427 (January 28, 2020), a bid dispute case . . .

The Tale of a Bid, a Bid Protest, and Two Cases

A. The Bid and Bid Protest

On March 15, 2015, the California Department of Corrections and Rehabilitation (CDCR) issues an Invitation for Bid for the HVAC project at the Ironwood State Prison. The deadline to submit bids was April 30, 2015. Hensel Phelps Construction Co. submitted a timely bid and was determined to be the “apparent low bidder” with a bid of $88,160,000.

During the bidding process, CDCR issued an amendment containing a question and answer which permitted bidders to supply certain subcontractor information 24 hours after the bid deadline.

On May 1, 2015, Hensel Phelps submitted an “amended bidder declaration” changing the percentages of work its subcontractors would perform in its subcontractor listing due to a mathematical error. However, CDCR took the position that subcontractor percentages could not be altered and rejected Hensel Phelps’ “amended bidder declaration.”

In the meantime. West Coast Air Conditioning Company, the second lowest bidder, submitted a bid protest to the CDCR protesting Hensel Phelps’ bid. However, the CDCR did not review the protest, believing that it did not have jurisdiction to hear bid protests.

On May 18, 2015, Phelps signed a contract with the CDCR for the project. According to the Hensel Phelps Vice President who signed the contract, although he was aware that the CDCR had rejected Hensel Phelps’ “amended bidder declaration” and was further that the subcontractor percentages were incorrect, he believed that the incorrect percentages were an “immaterial deviation” that could be waived by the CDCR.

B. The Bid Protest Case

On May 22, 2015, West Coast filed a petition for writ of mandate in the San Diego Superior Court seeking to invalidate the contract. While the petition was pending, CDCR issued a notice to proceed to Hensel Phelps and Hensel Phelps began work on the project. During the proceedings, and while the project was ongoing, CDCR stipulated that it had paid Hensel Phelps’ first three pay application totaling $3,510,180.64.

On December 9, 2015, the San Diego Superior Court issued a statement of decision setting aside the contract, finding that that Hensel Phelps’ bid “contained numerous mathematical errors,” that “in at least four instances, [Hensel Phelps’] subcontractor percentage listings . . . are inconsistent with the subcontractor prices,” and that this rendered Hensel Phelps’ bid non-responsive.

C. The Cost-Recovery Case

Rather than appeal the decision, Hensel Phelps filed suit against the CDCR under Public Contracts Code section 5110 which provides for recovery by a contractor of its out-of-pocket costs if a public works contract is determined to be invalid due to a defect “caused solely by the public entity”:

When a project for the construction, alteration, repair, or improvement of any structure, building, or road, or other improvement of any kind is competitively bid and any intended or actual award of the contract is challenged, the contract may be entered into pending final decision of the challenge, subject to the requirements of this section. If the contract is later determined to be invalid due to a defect or defects in the competitive bidding process caused solely by the public entity, the contractor who entered into the contract with the public entity shall be entitled to be paid the reasonable cost, specifically excluding profit, of the labor, equipment, materials, and services furnished by the contractor prior to the date of the determination that the contract is invalid if [certain] conditions are met.

At trial, the trial court found that Hensel Phelps’ bid included both its April 30th original bid submission as well as its May 1st “amended bidder declaration,” and that when considering Hensel Phelps’ bid package in full, one of two scenarios should have occurred, either: (1) If the CDCR was required to have accepted Hensel Phelps’ May 1st “amended bidder declaration” the contract might not have been invalidated in the Bid Protest Case; or (2) If the CDCR properly rejected Hensel Phelps’ May 1st “amended bidder declaration” it should not have accepted Hensel Phelps’ April 30th original bid submission and Hensel Phelps should have never been awarded the bid.

In either event, found the trial court, “due to a defect or defects in the competitive bidding process caused solely by the public entity” under Public Contracts Code section 5110, the contract was found invalid, and Hensel Phelps was entitled to recover its out-of-pocket costs.

The CDCR appealed.

The Appeal

On appeal, 2nd District Court of Appeal, focusing on the following language in the Public Contracts Code section 5110: “If the contract is later determined to be invalid due to a defect or defects in the competitive bidding process caused solely by the public entity . . .,” explained that the CDCR and Hansel Phelps each argued that it should be read differently.

According to the Court of Appeal, the CDCR’s position was that Public Contracts Code section 5110 only applies if a contract is invalidated due to a defect or defects in the competitive bidding process. However, Hensel Phelps’ position was that Section 5110 also applies if, after a contract a contract is invalidated, it is determined that the invalidation finding itself was due to a defect or defects in the competitive bidding process.

Let’s break that down a bit. According to the CDCR, Public Contracts Code section 5110 only applies if, due to a defect or defects in the competitive bidding process, a contract is invalidated. In other words, Section 5110 only applies if a contract was approved, but it is determined that it should not have been.

Hensel Phelp’s position is a bit nuanced. According to Hensel Phelps, Public Contracts Code section 5110 also applies if a contract is invalidated, and it is later determined that the finding that a contract was invalid, was in itself incorrect. In other words, Section 5110 also applies if a contract is approved, is later invalidated, and it is later determined that it should not have been invalidated.

Between the two interpretations, the Court of Appeal found that the CDCR’s interpretation was more reasonable:

[W]e conclude CDCR has the better argument. We must consider the key language in the context of the rest of the statute. The first sentence of section 5110, subdivision (a) provides, “When a project for [a public work] is competitively bid and any intended or actual award of the contract is challenged, the contract may be entered into pending final decision of the challenge, subject to the requirements of this section.” It is the next sentence which provides, “If the contract is later determined to be invalid due to a defect or defects in the competitive bidding process caused solely by the public entity, [the contractor may recover].” The “later” in this sentence must refer back to the “pending final decision of the challenge” in the sentence immediately preceding. In other words, the subdivision provides that the parties to a challenged public contract may enter into that contract pending final resolution of the challenge, but if the challenge is resolved by invalidation because the public entity was at fault, the contractor may recover. Phelps’s alternative construction is not reasonable. Phelps would interpret the statute to involve two distinct legal proceedings: (1) a challenge to the contract, which may result in the court invaliding the contract for any number of reasons; and (2) a second proceeding which looks beyond the reasons given for invalidation, to determine whether the court’s invalidation of the contract was caused by any defects in the bidding process caused by the public entity. Nothing in the statutory language suggests there is to be a second proceeding, to consider the reasons for the first court’s ruling.

In short, held the Court of Appeal, Hensel Phelps was not entitled to recovery under Public Contract Code section 5110, because the trial court in the Bid Protest Case held that the contract was invalidated due to a material error in Hensel Phelp’s bid not due to a defect in competitive bidding process.

Conclusion

So, there you have it. Public Contract Code section 5110 allows a contractor to recover its out-of-pocket costs if a public entity approved a contractor’s bid but it is later determined that the public entity shouldn’t have due to a defect or defects in the competitive bidding process. Section 5110 does not apply, and does not permit a contractor to recover its out-of-pocket costs, if a contract is invalidated, and the contractor later argues that the contract should not have been invalidated due to a defect or defects in the competitive bidding process.

#CaliforniaDepartmentofTransportation #HenselPhelps #PublicContractsCodesection5110

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