Oct 14

Lowest Responsible Bidder Denied Contract Cannot Recover Lost Profits

California’s Supreme Court recently reversed a court of appeal’s decision that affirmed a lower court’s denial of bid preparation costs to a “disappointed” bidder on a public contract. (Kajima/Ray Wilson vs. Los Angeles County Metropolitan Transportation Authority.)

In November 1994, Kajima/Ray Wilson was the lowest bidder on a public project building a station and tunnels for the Los Angeles Metropolitan Transportation Authority. However, Kajima was not deemed to be the lowest responsible bidder because it purportedly failed to meet the MTA’s goals concerning the percentage of work using disadvantaged business enterprises on the project. The contract was awarded to the second lowest bidder, despite a nearly $1 million difference between the two bids.

Both Kajima and the second lowest bidder selected and designated the same DBE contractor. In its bid, Kajima identified the contractor as a broker. The second lowest bidder identified the same DBE as a subcontractor. Unknown to Kajima, the MTA’s policy awarded only 5 percent DBE credit of bid amounts designated for entities identified as brokers, but awarded 100 percent credit for those identified as subcontractors. Had Kajima identified the DBE contractor as a subcontractor, instead of broker, it would have exceeded the MTA’s minimum DBE goals.

Kajima filed suit against the MTA seeking, among other relief, monetary damages resulting from its round-one bid and protest expenses, its round-two bid and protest expenses, unabsorbed overhead expenses and its lost profit on the MTA contract. The trial court awarded Kajima its bid expenses, bid protest expenses, unabsorbed overhead and lost profits. The court of appeals affirmed the decision. The MTA appealed, limiting its appeal to the issue of Kajima’s entitlement to an award of lost profits.

Granting review, a unanimous Supreme Court reversed the decision, holding that bid preparation costs, but not lost profits, were recoverable under a promissory estoppel theory. In its decision, the court noted, “bid preparation costs are the only ones reasonably incurred by a participant in a competitive bidding process since the process is an uncertain one with the agency awarding the contract having discretionary control over the award; the lowest bid may be an unprofitable one because “any miscalculation or unanticipated rise in costs may erode or even extinguish the bidder’s profit margin;” lost profit awards are not required for unsuccessful bidders to participate in competitive bidding for public works contracts as indicated by the number of lawsuits by “disappointed” bidders in many states which limit damages to bid preparation costs; the competitive bidding statutes are enacted for the benefit of the public, not for the benefit and enrichment of bidders; and the law in the majority of jurisdictions is similar.

Peter Goetz, Esq.

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