LAW: The Contractor's Side

Decision overturned: no lost profits

Article December 28, 2000
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In my November 1999 column, I wrote an article about Kajima/Ray Wilson v

In my November 1999 column, I wrote an article about Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority, 69 Cal. App. 4th 1458, 82 Cal. Rptr.2d 348 (1999). In that case, the California Court of Appeal awarded Kajima/Ray Wilson damages for lost profits and overhead, bid preparation expenses and bid protest costs based on a finding that the Los Angeles County Metropolitan Transportation Authority’s (MTA’s) rejection of Kajima/Ray Wilson’s bid was arbitrary, violated federal regulations and was an abuse of discretion.

On June 12, 2000, the Supreme Court of California reversed the judgment. In its decision, the court concluded that bid preparation costs were recoverable, but not lost profits under a theory of promissory estoppel.

The court considered whether the lowest responsible bidder that is not awarded a public contract has a cause of action in California for any monetary damages. In California, competitive bidding is largely governed by statute; however, none of the California statutes specifically address whether the lowest responsible bidder that is wrongfully denied a contract can collect monetary damages.

Both Kajima/Ray Wilson and the MTA agreed that if monetary relief was available, it would be available under the promissory estoppel theory. That is, when a public entity solicits bids, it represents, consistent with the statutory mandate, that if the contract is awarded, it will be awarded to the lowest responsible bidder. The Supreme Court found that even though nothing precludes application of the promissory estoppel theory, it really did not fit the disappointed bidder context very well. Promissory estoppel was developed to do rough justice when a party lacking contractual protection relied on another’s promise to its detriment. The imperfect fit arose because the Supreme Court was using promissory estoppel primarily to further certain public policies by creating a damages remedy for a public entity’s statutory violation. In addition, unlike the typical promissory estoppel situation, the MTA retained discretion to reject all bids, meaning that the low bidder had no absolute right to be awarded the contract.

Then the Supreme Court turned to the measure of damages under promissory estoppel, noting that at the time Kajima/Ray Wilson submitted its bid it had reasonably incurred bid preparation costs in reliance on the representation that if the contract was awarded, it would be awarded to the lowest responsible bidder. Because the MTA was authorized to reject all bids, Kajima/Ray Wilson did not know at this point whether the contract would even be awarded, nor did it know whether it was the lowest responsible bidder. Given those uncertainties, the Supreme Court believed that bid preparation costs, not lost profits, were the only cost reasonably incurred.

Then the Supreme Court expressed another concern over awarding lost profits—the lowest bid has been an unprofitable one. Thus, awarding a low bidder the profits it would have earned on the contract appeared to be both vastly disproportionate to the losses actually sustained as a result of its detrimental reliance and necessarily speculative. Indeed, such an award arguably would place the low bidder in a better position than it would have been had it actually performed a contract.

Left disappointed

Kajima/Ray Wilson argued that unless lost profits are recoverable, a disappointed bidder would have little incentive to pursue a valid claim and would ultimately decline to participate in competitive bidding or public works contracts. The Supreme Court disagreed, noting there were numerous cases in which a disappointed bidder had sought to have the contract awarded to another set aside. Finally, and more importantly, the Supreme Court stated it was clear "that neither the doctrine of estoppel nor any other equitable principle may be invoked against a governmental body where it would operate to defeat the effective operation of a policy adopted to protect the public." Because the competitive bidding statutes are enacted for the benefit of the taxpayers, not for the benefit or enrichment of the bidders, the Supreme Court found it difficult to ascertain how the general public benefits by allowing a disappointed bidder to recover lost profits.

The Supreme Court viewed the matter of the award of bid preparation costs differently. It noted that the majority of jurisdictions, either by statute or case law, allow recovery of bid preparation costs based on the reasoning that while competitive bidding statutes are enacted for the public’s benefit, allowing recovery of bid preparation costs encourages proper challenges to misawarded public contracts by the most interested parties and deters public entity misconduct.

As I said in my November 1999 column, it is even more rare when a court awards damages for lost profits and attorney’s fees for the wrongful failure to award a contract to the lowest responsible bidder. Such recovery is rare because the public gets no benefit from the payment of lost profits and the bidder receives profits on a project it may have constructed at a loss.

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