LAW: The Contractor's Side

Dec. 28, 2000
As the U.S. moves toward the construction of "smart" highways as an integral part of our transportation system, state DOTs and localities will be called upon to broaden the horizons of their normal procurement and contracting systems. Undoubtedly, many legal issues will arise as high-tech companies compete for contracts that offer the likelihood of substantial follow-on business in order to maintain compatibility.

Presently, a few cities, states, toll road and turnpike authorities are in the process of procuring electronic toll-collection (ETC) systems.

As the U.S. moves toward the construction of "smart" highways as an integral part of our transportation system, state DOTs and localities will be called upon to broaden the horizons of their normal procurement and contracting systems. Undoubtedly, many legal issues will arise as high-tech companies compete for contracts that offer the likelihood of substantial follow-on business in order to maintain compatibility.

Presently, a few cities, states, toll road and turnpike authorities are in the process of procuring electronic toll-collection (ETC) systems. Many are procuring those systems under state statutes that call for competitive bidding of all construction contracts. The question has come up, however, whether those government entities are required to award contracts after public bidding. That question was considered in the case of In the Matter of AT/Comm, Inc. v. Peter Tufo, 652 N.E.2d 915 (N.Y. 1995), where the New York Court of Appeals made an interesting distinction.

In 1991, the New York State Thruway Authority, together with similar agencies in New Jersey and Pennsylvania, formed an interagency committee (IAG) to evaluate electronic toll-collection systems that would be compatible among the three states. The IAG issued a request for proposals for both "read only" (which scan information from a windshield tag) and "read/write" (which are needed when tolls are determined by entry and exit points) systems.

AT/Comm and Amtech Systems, both ETC-system manufacturers, submitted proposals for the contract to install the ETCs at designated sites along the New York State Thruway.

In 1993, without public bidding, the authority entered into a $1.7 million contract with Amtech for the manufacture and installation of an interim read-only ETC system. This system would be used pending the IAG's selection of a fully integrated read/write system that would eventually replace it.

Upon contract award, AT/Comm filed a petition seeking to enjoin enforcement of the contract between Amtech and the authority, and to preclude the authority from entering into any contract for the implementation of an ETC system without first conducting competitive bidding in accordance with the appropriate New York statutes. When the trial court dismissed the petition, holding that the contract was not governed by public competitive-bidding requirements, AT/Comm appealed to the New York Court of Appeals.

In the litigation, AT/Comm contended that the ETC system constituted an "improvement" of the thruway within the meaning of the New York competitive-bidding statute, thus mandating public bidding. Amtech and the authority contended that the contract for the installation of the ETC system was not a contract for "construction, reconstruction or improvement" of the thruway and, as a result, was not subject to the competitive-bidding requirement. The Court of Appeals agreed with Amtech and the authority.

The Court of Appeals noted that the New York statute requires public bidding where the work undertaken is for the construction, reconstruction or improvement of the actual road or passageway used for traffic. The aim of the E-Z Pass system, however, was not to improve the roadway but to improve the flow of the traffic on it.

The court observed that the technological devices that comprised the E-Z Pass system were predominately electronic-scanning equipment and computer hardware and software. As such, the ETC system was readily removable and served only to enhance speedy toll collection. In this respect, the court found that the E-Z Pass system was more like a provision of goods and services than a physical improvement to the thruway.

The court also found there was no reference in the New York highway law statute or the public authority law statute to structures that are readily removable. In this instance, the court found that the contract involved leased equipment and provided for maintenance services and even additional technical services if requested. The court concluded that the contract contemplated an ongoing relationship with the vendor for elements involving computer software, equipment maintenance and technical assistance and thus could not be construed to fall within the New York competitive-bidding statute for construction.

Comment: Competitive-bidding statutes were enacted by state legislatures to protect the public against fraud, favoritism, corruption, extravagance and improvidence in the award of public contracts. The idea behind such statutes is to require contract-award decisions to be based on objective criteria.

Electronic toll-collection contracts are generally awarded after proposals are technically evaluated by consultants. Public entities need to make sure they are not drafting specifications aimed at favoring one competitor over another. They should also establish criteria on how proposals will be evaluated and make evaluations of competing proposals fairly. Finally, they should ensure that their consultants are not biased. Given the subjectivity involved in this process, the cost of preparing proposals and the potential economic gain of being considered by several governmental entities who seek to make their systems compatible, there is great likelihood for disputes and litigation in the future.

Parvin is a shareholder in the law firm of Leonard, Hurt & Parvin, P.C., which has offices in Dallas, Houston and Austin, Texas; Richmond, Va.; and Washington, D.C. Leonard, Hurt & Parvin engages in many specialties affecting the construction industry, including litigation, alternative dispute resolution, preparation and analysis of contract claims, partnering facilitation, environmental law, employment law, project financing, and disadvantaged business enterprise. You may write him in care of the editor.

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