Minnestota Court Holds City’s Damages Limited to Amount of Bid Bond on Withdrawal of Bid

City of Lonsdale v. NewMech Companies, Inc.
2008 Minn. App. Unpub. LEXIS 31 (Minn. App. 2008)

The City of Lonsdale solicited sealed bids for construction of a wastewater-treatment plant. According to the terms of the bid form, each bidder submitting a bid form:

“Propose[d] and agree[d], if [the] Bid is accepted, to enter into an Agreement with City in the form included in the Bidding Documents to perform all Work as specified or indicated in the Bidding Documents for the prices and within the times indicated in the Bid and in accordance with the other terms and conditions of the Bidding Documents.”

To be considered for the project, bidders were required to submit a completed copy of the bid form by 2:00 p.m. on the bid opening date. As security for the bid, bidders also were required to include a bond worth five percent of the submitted bid price. Bidders could withdraw without penalty a submitted bid within 24 hours after the bid opening if the bid contained a “material and substantial mistake.” If awarded the contract, the bidder would be required to sign and return a number of copies of the Agreement and other documents included in the bidding packet.

NewMech (“Contractor”) submitted a bid on the project. Before doing so, Contractor solicited subcontractor bids to perform various aspects of the project. Contractor received BNR’s (“Subcontractor”) bid to perform the necessary excavation work approximately 20 minutes before the bidding deadline. Contractor noticed that Subcontractor’s bid was over $ 1,000,000 lower than the competing excavation bid that Contractor had received about one and one-half hours earlier. Because the other bid specifically excluded certain work items, including a PVC pond liner, Contractor contacted Subcontractor to confirm the bid. Subcontractor assured Contractor that its bid was complete. Using Subcontractor’s bid, Contractor submitted a bid form stating that it “will complete the Work . . . for the . . . lump sum price [of] $ 4,910,000″ and attached a bid bond of $ 245,500.

Contractor’s bid was the lowest by a margin of $ 863,600. Because City was concerned about the large difference between the two bids, City requested that Contractor “go back and sit down with [Subcontractor]” and notify City of Contractor’s decision by 2:00 p.m. the following day. By the end of the meeting the next morning, it was clear that Subcontractor’s bid failed to include several items. Rather than withdraw however, Contractor and Subcontractor “assumed they would be able to resolve their differences and proceed with the project.” Contractor therefore, informed City that, although Contractor had “discovered some discrepancies,” it “would proceed with [its] bid.”

Subcontractor subsequently attempted to revise its bid by adding approximately $730,000 for items that it failed to include in its initial bid. Contractor rejected Subcontractors revised bids and informed Subcontractor that it expected it to honor its initial bid.

On August 28th, City passed a resolution awarding Contractor the project. Subcontractor refused to honor its initial bid. Contractor then sent a letter to City informing it that “a material error in the bidding process,” combined with “Subcontractor’s unlawful withdrawal of its bid,” significantly affected Contractor’s “ability to enter into a contract [for the project].” Contractor proposed two alternatives: (1) rebid the excavation subcontract and renegotiate the overall price for the project, or (2) permit Contractor to withdraw based on mutual mistake in the bidding process. City rejected Contractor’s alternative proposals. Contractor subsequently informed City that it was withdrawing its bid.

City awarded the project to the next-lowest bidder, and then sued Contractor for breach of contract, seeking both $ 863,600, the difference between Contractor’s bid and the next-lowest, and $ 245,500 as forfeiture of the bid bond. Contractor, in turn, impleaded Subcontractor as a third-party defendant.

The district court found that Contractor was liable only for the $ 245,500 owed under the bid bond, which was the maximum amount of liability under the bidding contract, and that Subcontractor was responsible for 50 percent of Contractor’s liability, due to its negligence in submitting an incomplete bid.

Holding that Contractor breached only a “bidding contract” with City, as opposed to a “construction contract,” the Court of Appeals affirmed the district court’s decision to limit City’s damages to the amount recoverable under the bid bond – $245,500.

The Court of Appeals noted that had Contractor performed the ‘bidding contract,” the parties would have executed the construction-contract documents and City would have been required to return the bid bond. Contractor had no construction-contract obligations unless it executed the construction agreement. Therefore, Contractor incurred no liability for failure to perform at its quoted price. The bidding contract provided City with both security that Contractor would ultimately execute the construction agreement and a way to recover some of the additional costs in obtaining a substitute if Contractor did not do so.

Noting that neither “the bidding and award documents” nor “statutory or case law” directly addressed whether “recovery for a bidding breach may exceed the amount of the bid bond,” the Court of Appeals held that City did not have a common-law right to expectation damages on a contract that was never formed and that “the more reasonable interpretation” of the parties’ intent was to limit recovery to the amount of the bid bond. Therefore, the Court of Appeals affirmed the district court’s decision.

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