New Jersey Superior Court Appellate Division Reforms Unit Price in Public Contract Where Contractor Knew Estimated Quantities Were Grossly Understated and Had Unbalanced Its Bid To Take Advantage of Error

Dugan Construction Company, Inc. v. New Jersey Turnpike Authority
941 A.2d 622 (N.J. Super. Ct. App. Div. 2008)

The Superior Court of New Jersey, Appellate Division, recently had to decide whether a contractor was entitled to the contractual per unit price for the removal of substantial quantities of groundwater where the estimated quantity in the bid documents was grossly understated and contractor failed to bring the error to the public entities’ attention. Analyzing the case utilizing principles of patent ambiguity and reformation, the Court held that the mistake in the bid documents warranted reformation of the contract and the contractor was only permitted to recoup the actual value of the work performed.

The New Jersey Turnpike Authority (“NJTA”) issued a request for bids for work which included remediation of soil and groundwater (the “Project”). The Schedule of Items of Work attached to the bid request required the bidders to provide unit prices for certain items of work. Among the items were unit prices for storage, handling and transportation of approximately 2200 gallons of hazardous wastewater and 55 gallons of non-hazardous wastewater. Dugan Construction Co., Inc. (“Dugan”) was the successful bidder on the Project. Dugan bid $50 per gallon for non-hazardous wastewater and only $4 per gallon for hazardous wastewater.

Shortly after being awarded the contract, Dugan arranged to subcontract the groundwater removal portion of its work. It obtained a bid from JCA Associates which presented alternate methods of removal under which 42,840 or 255,680 gallons of groundwater would need to be removed. Dugan also contacted a waste disposal entity and arranged to dispose up to 200,000 gallons of wastewater. Ultimately, Dugan disposed of approximately 200,000 gallons of wastewater. Based upon the removal method utilized, Dugan was only required to pay JCA $57,000 for its services.

The Contract required bidders to review the bid documents and bring to NJTA’s attention any ambiguities or errors. Despite the obvious error in the stated 55 gallons of non-hazardous liquid waste and Dugan’s knowledge of the error, Dugan did not bring the issue to NJTA’s attention.

Dugan made an application to be reimbursed for the full 200,000 gallons of groundwater removed at the $50 per gallon unit price listed in its contract. This resulted in Dugan’s demand to NJTA for more than $9.5 million for disposal of non-hazardous wastewater. NJTA refused to pay Dugan and Dugan in turn sued NJTA for the $9.5 million.

NJTA filed a motion for summary judgment arguing that Dugan was aware of the error in the estimated number of gallons of wastewater to be removed and failed to report the error in accordance with the contract. NJTA’s expert opined that Dugan intentionally unbalanced its bid in an effort to obtain unreasonable profits. The court rejected Dugan’s claim that notice was provided via daily well logs provided to NJTA during the two week removal process. The trial court ruled in favor of NJTA on its motion for summary judgment motion ruling that bid documents and the estimated 55 gallons for non-hazardous wastewater were “patently ambiguous.”

Dugan appealed the trial court’s ruling to the Appellate Division. The Appellate Division agreed with the trial court’s conclusion that there was evidence that Dugan knew of the mistake at the time it put together its bid proposal and that Dugan intentionally provided an unbalanced bid in order to unreasonably increase profits. The Appellate Division also concurred with the trial court’s determination that Dugan had an obligation under the contract to report known errors to NJTA and its failure to do so deprived NJTA the opportunity to issue a change order.

The Appellate Division considered the patent ambiguity doctrine relied upon by the trial court. It explained that the doctrine provides that if a patent ambiguity exists in the bid request, the contractor is required to seek clarification from the owner prior to submitting a bid. The court explained that where patent ambiguity exists, the ambiguity will not be construed against the draftsman, as is usually the case in contract interpretation. Although endorsing the doctrine of patent ambiguity, the Appellate Division concluded that the situation was more akin to a mistake and turned its analysis to equitable principles of reformation and rescission.

Recognizing that the contract was already performed, the Appellate Division noted that reformation, rather than rescission, of the contract was the appropriate remedy. Noting that reformation is appropriate where there is mutual or unilateral mistake, the court set forth the elements of a claim for rescission, opining that the same elements are relevant to the analysis of reformation. Those elements included: (1) a mistake which would result in an unconscionable contract if enforced; (2) the mistake is material to the agreement; (3) the party making the mistake exercised reasonable care; and (4) the relief from the mistake would not seriously prejudice the other party. The court further reviewed cases where relief was afforded to contractors and/or owners on public contracts in the face of unilateral mistakes under certain circumstances.

Finding that an error existed in the estimated quantities for non-hazardous wastewater, that Dugan knew of the error and did not bring it to NJTA’s attention, and that without reforming the contract the contract would be unconscionable, the Appellate Division permitted Dugan to only collect a fair price for the work provided. As a result, the Appellate Division remanded the case for the trial court to enter judgment in the amount of $52,300, the determined value of the work provided by Dugan’s subcontractor. The court further ruled that Dugan was not entitled to interest in light of its inequitable conduct.

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