LAW: The Contractor's Side

Rejected by MTA, accepted by court

Article December 28, 2000
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It is a rare occurrence when a contractor recovers from a public owner for the failure to award a contract. It is even more rare when a court awards damages for lost profits and attorneys’ fees under such circumstances.

In Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority, 69 Cal. App. 4th 1458, 82 Cal. Rptr.2d 348 (1999), the Court of Appeal held that the MTA’s application of a "unwritten" policy to grant only 5% DBE credit of bid amounts designated for those identified as "brokers" to Kajima/Ray Wilson’s bid was arbitrary, violated federal regulations and was an abuse of discretion.

It’s subcontractor, not broker

In November of 1994, MTA solicited bids for the construction of the Hollywood/Highland Station and Tunnels. The three lowest bids received were from Kajima/Ray Wilson at $68,912,089, the second bidder at $69,887,867 and the third bidder at $72,970,345. The contract was awarded to the second bidder despite the fact its bid was almost $1 million more than Kajima/Ray Wilson’s bid. MTA justified its selection of the second bidder on the grounds that its DBE credits, at 30.88%, exceeded the goal, while those of Kajima/Ray Wilson, at 29.51%, fell short. Interestingly, Kajima/Ray Wilson fell short solely because it mistakenly checked the box identifying the trucking firm as a "broker," while the second bidder correctly checked the box identifying the trucking firm as a "subcontractor." Unknown to Kajima/Ray Wilson, MTA utilized an unwritten policy to grant only a 5% DBE credit of the bid amounts designated for "brokers," while it awarded 100% credit of the bid amounts designated for "subcontractors." Had Kajima/Ray Wilson received the same percentage credit for the trucking firm as the second bidder, its DBE credit would have exceeded the 30% goal.

Kajima/Ray Wilson filed suit against the MTA seeking an injunction as well as damages. Following a bench trial, the trial court issued an injunction commanding that MTA stop utilizing its 5% broker policy and awarded damages to Kajima/Ray Wilson in the amount of $44,869 for bid expenses, $89,223 for bid protest expenses, $300,000 for unabsorbed overhead, $350,000 for loss of profits, prejudgment interest, as well as legal costs not to include attorney’s fees.

In deciding the appeal, the court noted that it is important to consider the purpose of requiring governmental entities to have public bidding of public works contracts, which is to "ensure full compliance with competitive bidding statutes as a means of protecting the public from misuse of public funds," to give all qualified bidders "a fair opportunity to enter the bidding process, thereby stimulating competition in a manner conducive to sound fiscal practices" and to "eliminate favoritism, fraud and corruption in the awarding of public contracts."

The court then reviewed the evidence finding that Kajima/Ray Wilson had described the trucking firm’s work as "trucking," and had initially checked the box identifying the participation as that of a "subcontractor." However, prior to submission of the bid, Kajima/Ray Wilson changed the designation by checking the "broker" box. The second bidder described the same work as "excavation, overhaul, furnish backfill material" in its bid and had checked the box identifying the firm as a "subcontractor." After the bids were received, the MTA called Kajima/Ray Wilson and stated there was a problem with the DBE participation. The MTA representative advised Kajima/Ray Wilson that the trucking firm’s participation had been listed as a "broker" instead of a "subcontractor" and that Kajima/Ray Wilson would receive only 5% credit for the work.

Paragraph 4.7 of MTA’s DBE Program Manual recognizes "truckers" as a separate class of DBE firm. An expert witness testified that pursuant to the federal regulations it is improper for the MTA to give a different DBE credit to different bidders for substantially the same work performed by the same subcontractor. Another expert witness testified that the MTA had failed to conduct a sufficiently throughly evaluation of the scope and nature of the work.

Policy unjust

Based on the evidence, and in light of the fact that the 5% policy was unwritten, unannounced and unknown to Kajima/Ray Wilson, the court concluded that MTA’s application of the policy to Kajima/Ray Wilson’s bid was arbitrary, violated federal regulations and was an abuse of discretion.

The court noted that while a governmental entity may have the right to reject all bids, it has no right to act arbitrarily in disregard applicable regulations in letting a public works contract. For such action, the public entity may be held responsible under a theory of promissory estoppel, even in the absence of an intent to defraud. The court then noted that the purpose of promissory estoppel is to make the agreed party as whole as possible, and as a result the trial court retained broad discretion to fashion whatever remedies are appropriate to "do justice." The court decided there was no reason to preclude recovery of any specific type of damages, including lost profits and overhead.

The MTA challenged the award of bid preparation expenses and bid protest costs. Based on the evidence, the Court of Appeal awarded such costs, including outside attorney’s fees and costs of in-house legal counsel.

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