Equitable Adjustment Not Available to Remedy “Wholly Artificial” Bids

The Massachusetts Appeals Court has declined to award an equitable adjustment to a contractor who bid $0.01 to excavate a cubic yard of rock from a project site. See Celco Construction Corp. v. Town of Avon, 87 Mass. App. Ct. 132 (March 2, 2014).  The contractor constructed its bid based on its belief that the amount of rock on the site would be considerably less than the unverified estimate indicated in the contract bid documents, so that its low unit price would give it a competitive advantage when compared to the other bidders who assigned a unit price to rock removal that more closely approximated the actual cost.  When the amount of rock turned out to be 2524 cubic yards, and not 1000 cubic yards, as estimated, the contractor sought an equitable adjustment.  Initially, the contractor sought to increase the contract from $0.01 per cubic yard to $220 per cubic yard, and eventually dropped the request to $190 per cubic yard.

Massachusetts General Laws, c. 30, § 39N, which governs equitable adjustments in public construction contracts, provides that in all public construction contracts (such as the one at issue here), there must be a provision allowing either party to request an equitable adjustment in the contract price “if, during the progress of the work, the contractor or the awarding authority discovers that the actual subsurface or latent physical conditions encountered at the site differ substantially or materially from those shown on the plans or indicated in the contract documents.”  The contractor argued that the approximately 1500 more cubic yards of rock presented an appropriate occasion for an equitable adjustment to compensate it for the increased costs it incurred to remove the additional rock.

The Court disagreed, noting that there was nothing to suggest that the nature of the rock itself, and the means to remove it, differ in any way from what was anticipated in the contract.  The Court decided that in a contract in which the contract price is comprised of the aggregate of line items for various elements of the work, which in turn are based on unit prices for the quantities involved in each line item, no equitable adjustment is warranted by reason of a variation in the estimated quantities, standing alone, as compared to a deviation in the condition or character of the physical condition.  The Court confirmed that an equitable adjustment is required only when the contractor encounters a material difference in the “actual subsurface or latent physical conditions . . . at the site . . . of such a nature as to cause an increase or decrease in the cost . . . of the work.” 

The Court included in its opinion advice for all contractors in bidding on public construction jobs (and on all jobs in general): “Had [the contractor] in its bid assigned to rock removal a unit price reasonably approximating its estimated cost for such removal, instead of assigning the wholly artificial and unrealistic value of one penny, it would be in no need of adjustment to the contract price.  Put another way, [the equitable adjustment statute] is designed to protect contractors from unknown and unforeseen subsurface conditions, not from the consequences of their decisions to bid a unit price for the performance of work that is wholly unrelated to their anticipated cost to perform the work.  In such circumstances, it defies logic to invoke ‘equity’ as a basis for adjustment to the contract price.”

An Alternative to Bid Protests – California Court Allows Second Low Bidder to Sue Low Bidder Directly

In Roy Allan Slurry Seal, et al. v American Asphalt South, Inc. (2/20/2015), the court held that if a low bidder is only able to secure the bid by paying its workers less than the required prevailing wage, then second low bidder is entitled to bring a direct law suit against the low bidder.

The broader facts are as follows.  From 2009 to 2012, American Asphalt outbid Roy Allan Slurry Seal and Doug Martin Contractor on 23 public works projects valued at more than $14.6 million.  The disappointed contractors, Allan and Martin, later jointly sued American Asphalt, contending that they would have been the low bidders on those projects if American Asphalt’s bid had included labor costs based on the statutorily required prevailing wage.  American moved to dismiss the claims, arguing that that Allan and Martin did not have the required existing relationship and reasonable probability of being awarded the contracts to show intentional interference with prospective economic advantage.  After various conflicting lower court rulings on the issue, the matter was eventually presented to the California Court of Appeals, which denied the motions, stating:

The second-place bidder on a public works contract [may] state a cause of action for intentional interference with prospective economic advantage against the winning bidder if the winner was only able to obtain lowest bidder status by illegally paying its workers less than the prevailing wage... if the plaintiff alleges it was the second lowest bidder and therefore would have otherwise been awarded the contract, because that fact gives rise to a relationship with the public agency that made plaintiff’s award of the contract reasonably probable. 

 

The usual course of action in a case such as this would be for the second low bidder to file a bid-protest with the awarding authority, or to challenge any subsequent bid based upon such conduct.  However, this carries strong implications as the same principle could allow a second low bidder to sue the low bidder directly any time that it can show that that a low bidder knowingly used cut corners to secure the bid.  For example, contractors who commit wage-hour violations may be subject to challenge from the second low bidder, contending that they carried a lower labor number than appropriate in their bid.  If the second low bidder can show that the difference allowed the winning contractor to secure the bid, the contractor may be subject to significant liabilities.

Arbitration Waiver Violates Chapter 93A

A Massachusetts Superior Court Judge has held that a contractor’s failure to register with the Commonwealth under Mass. Gen. Laws. Chapter 142A constitutes an injury under Mass. Gen. Laws c. 93A (the Massachusetts Consumer Protection Statute). See Groleau v. Russo-Gariele, Norfolk Superior Court, Civil Action No. 2012-01818.  Chapter 142A regulates the home improvement contracting industry and allows a homeowner to submit disputes under the Home Improvement Contractor Arbitration Program (“HICARB”).

The homeowner hired the contractor to perform work on her home.  The contractor told the homeowner she needed to sign an “Affidavit/Home Improvement Contractor Law Supplement to Permit Application” in order to get a building permit.  The affidavit identified the contractor as a “Home Improvement Contractor” and contained language at the bottom indicating that homeowners dealing with unregistered contractors did not have access to HICARB.  At the time, the contractor was not registered with the Commonwealth.  He did not inform the homeowner of this.

Prior to completion of the project, the contractor stopped working on the property and sued the homeowner for unpaid amounts.  The homeowner counterclaimed alleging breach of contract, as well as violations of Chapters 142A and 93A.  At the conclusion of the jury-waived trial, the judge found that the homeowner owed the contractor $1,988.  However, he also found that the contractor violated Chapter 142A by operating without a certificate of registration.  The judge found that the homeowner could show actual damage stemming from the contractor’s failure to register because she lost the ability to arbitrate the dispute, which may have resulted in significant additional attorneys’ fees.

In finding that the homeowner sustained “injury,” the judge found that the contractor abandoned the project without justification, given that he was not owed substantial funds, and had accepted payment for work he had not performed.  The judge held that the abandonment caused additional costs attributable to the completion of work within the scope of the contract and deprivation of occupancy of the property that the homeowner otherwise would have enjoyed.  The judge dismissed the contractor’s argument that signing the affidavit waived the plaintiff’s right to arbitrate, noting that Chapter 142A makes it unlawful for any agreement for residential contracting services to contain a provision that would waive any rights conveyed to the owner under that chapter.  Additionally, the judge held that the affidavit did not actually waive the owner’s statutory rights by its terms.  The affidavit also does not waive Chapter 142A rights in a clear and conspicuous way as would be expected in a consumer transaction in which a business owner claims a consumer has waived consumer protection rights.  The judge noted that the information in the affidavit referencing unregistered contractors was merely a “notice” and is not suggestive of a waiver of statutory rights is signed by the homeowner.

The judge entered judgment for the homeowner on her Chapter 93A claim, which allows her to submit a motion for the contractor to pay her legal fees and costs.  This case shows how the courts will work to invalidate written agreements that require a consumer to give up a statutorily protected consumer right and will also invalidate agreements that include waivers which are not “clear and conspicuous.”