Stick to the rules

April 3, 2017

A case in Michigan clarifies why agencies must adhere to guidelines for bid security forfeiture

Public entities require bid security to ensure bidders will honor their bids and enter into binding contracts. For the most part, a bidder will forfeit its bid security if it fails to honor the bid. However, a recent case in Michigan serves as a reminder to public entities that they must adhere strictly to the legal and procedural requirements before declaring a forfeiture of bid security. Grand River Construction, Inc. v. Dept. of Transportation, 2016 WL 902277 (Mich. App. Mar. 16, 2016), involved a bid opening on Aug. 1, 2014, by the Michigan Department of Transportation (MDOT) on two construction projects. One project required bid security in the amount of $50,000, while the other required $25,000. Grand River Construction Inc. was the low bidder on both projects and, in accordance with the invitations to bid, MDOT had 49 calendar days thereafter to accept bids.

Subsection 102.15 of MDOT’s 2012 Standard Specifications for Construction outlines the procedures governing MDOT’s award of a contract, and states in relevant part the following:

“The Department will provide the contract and bond forms to the determined low Bidder, at the address on file with the Department. Within 28 calendar days of transmittal, the Bidder must return, and the Department must receive the fully executed contract, bond forms, and other documents required by the Department. The Department may grant an extension of that deadline, if the extension would not impair the Department’s interests. If the Department executes a contract received after the deadline, an extension will be deemed to have been granted.

“If the Department does not receive the signed contract, bond forms, and other documents required within 28 calendar days of transmittal, or an extended deadline, the Department may award the contract to the next low Bidder, or otherwise exercise its discretion.”

On Aug. 6, five days after the bid opening, Grand River’s chief financial officer sent a letter to MDOT explaining that a new estimator had mistakenly underestimated both projects. The letter stated that “[t]his is our first full year starting in MDOT projects. We cannot complete the projects for the submitted price, as they would cause our organization a severe financial hardship. We understand there are penalties of $50,000 and $25,000 [on the projects] for failure to execute the contracts and we are requesting relief from the penalties.”

On Aug. 12, the administrator of MDOT’s Contract Services Division sent a letter to all bidders on the two projects informing them that “the bids received for the above-referenced project[s] have been rejected,” and that MDOT expected to advertise them for re-bid in the future. On Aug. 13, he sent a letter to Grand River stating that MDOT understood the letter of Aug. 6 as announcing that Grand River “is withdrawing [its] bid” on the projects and that, pursuant to Section 102.17, Grand River must pay the bid security to MDOT. The letter included two invoices for the specified bid guaranty amounts.

Grand River responded by letter on Aug. 15 describing in greater detail the circumstances surrounding the underestimated bids and once again requested relief from the bid guarantees. MDOT rejected this second request on Sept. 16 and threatened to withhold proceeds on other ongoing contracts if payment was not forthcoming immediately.

On Sept. 19, Grand River’s attorney sent a letter to MDOT claiming that assessment of the bid guarantees was improper because (1) Grand River never withdrew its bid, but merely requested permission to do so; and (2) MDOT rejected all bids before accepting Grand River’s bid. Grand River sought declaratory relief from the Michigan Court of Claims, which sided with the contractor.

The Michigan Court of Appeals agreed and held that the letter from Grand River’s CFO was not, as MDOT contended, a withdrawal of the bid, but rather a request for permission to do so without penalty. It ruled, however, that even if the letter constituted a bid withdrawal, MDOT was still obligated to follow the procedure set out in Section 102.15. MDOT, therefore, erred by rejecting all bids before following Section 102.15 and thus Grand River was relieved from further obligations regarding its bids.

While this case is clearly a lesson for public entities, contractors must realize that other courts interpreting the contractor’s letters might not agree with this court’s decision, and that other courts might conclude that those letters excused MDOT from sending the contracts to the contractor for execution.

About The Author: Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected].

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