Knowledgebase-Gratuitous Payment for Increased Price of Gasoline Under Garbage Collection Contract


Information Product

Title:Gratuitous Payment for Increased Price of Gasoline Under Garbage Collection Contract
Summary:MTAS was asked whether a city can compensate a contractor for the increased price of gasoline it has taken for the contractor to perform a contract for the city.
Original Author:Hemsley, Sid
Co-Author:
Product Create Date:03/20/2006
Last Reviewed on::03/20/2017
Subject:Solid waste--Collection--Contracts; Contracts--Laws and regulations; Purchasing--Bids proposals and specifications
Type:Legal Opinion
Legal Opinion: Gratuitous Payment for Increased Price of Gasoline Under Garbage Collection Contract public.doc

Reference Documents:

Text of Document: MEMORANDUM



FROM: Sid Hemsley, Senior Law Consultant

DATE: March 30, 2006

RE: Gratuitous Payment for Increased Price of Gasoline Under Garbage Collection Contract



The City Recorder has what appears to be two questions:

1. Can the City hold the person who has the contract to collect the city’s garbage to the price contained in the contract, notwithstanding the fact that the price of gasoline has increased during the life of the contract?

2. Can the City gratuitously give the contractor more money under the contract to compensate him for the increased price of gasoline?

Let me say here that it appears to me that I do not have the contract in question. I have a couple of pages that appear to reflect some of the terms of the contract, but not the contract itself. For that reason, I am shooting in the dark on the questions, but I can generally give you the law regarding additional compensation under contracts.

The answer to question 1 is that the person who holds the contract with the city to collect its garbage can be held to the price contained in the contract. Sometimes contractors have grounds to argue that they are entitled to additional compensation under a contract due to unforseen circumstances that could not be contemplated when the contract was signed, or for extra work they have done under the contract. [See 88 A.L.R.1223.] However, at least since the Iraq War began, it has been predictable that the price of gasoline would change, and probably change upward. I cannot envision the courts being sympathetic with contractors in this situation, who should have anticipated the potentially escalating price of gasoline into account when they submitted their bids. It may be that if the price of gasoline had increased to, say, $10 a gallon, the answer might be different. Whatever the case there, no extra work of any kind is involved in the claim for the extra compensation.

The answer to question 2 is more difficult. There are surprisingly few cases on the question of whether a government can give a contractor what amounts to a gratuity that compensates him for the increased prices he pays in performing a contract. Most of those cases involve states that have constitutional provisions that prohibit additional compensation for the services of contractors. The Tennessee Constitution does not contain such a provision, but even in some of those cases, it is said that even under the common law a government cannot pay a contractor additional compensation for the performance of his contract where there is no additional consideration for the change in the contract. For example, in Dockett v. Old Forge Borough, 240 Pa. 98 (1913), the Court said that the payment to a contractor of additional compensation to reflect unforseen expenses in constructing a sewer due to a wage increase the contractor’s workers won through a strike, was illegal, and could be recovered in a taxpayer’s suit. The city got nothing for the additional compensation it paid to the contractor. Likewise, in Martin, Ginter & Power v. Liberty County Board of Education, 44 S.E.2d 462 (Ga. App. 1947), a Georgia school board awarded a contract for the construction of a school at a certain fixed price. The contractor entered into the contract knowing that the beginning of the project relied on the availability of federal funds. By the time the funds were available and the contractor had started the school, WWII had begun, and prices for materials, labor, etc., had increased. The school board passed a resolution agreeing to pay an additional price of 10% for the school.

The Court said with respect to the resolution increasing the payment to the contractor for the school:

Even though the plaintiffs were not responsible for the increase in the costs of building materials and labor during the delay, and were not responsible for the delay, they took the contract knowing that they could not begin the work until the government made the funds available and they were authorized by the defendant to proceed. They took the risk of rising prices during the interim between the acceptance of the contract and the beginning of the construction thereunder. It would seem also that the resolution of the defendant to add 10% to the contract price was without consideration as to it because the plaintiffs were already bound to do the work for the original contract price. [At 463]

Other cases in this area have been more generous to contractors, but as pointed out in the answer to Question 1, they have been more generous when the contractor has had to do extra work to perform the contract, or conditions that neither party to the contract anticipated at the inception of the contract have occurred that increase the contractor’s price.

But there seems to me a more compelling reason why it is not likely that the city can give the contractor a gratuity: it defeats the purpose of Tennessee’s competitive purchasing laws.

What does the term “competitive bidding” in the Municipal Purchasing Law mean? The Tennessee Supreme Court in State ex rel. Wright v. Leech, 622 S.W.2d 807 (Tenn. 1981), answered that question:

1. “The request for bids must not unduly restrict competition. All persons or corporations having the ability to furnish the supplies or materials needed, to perform the work to be done, should be allowed to compete freely without any unreasonable restrictions.”

2. “It is essential that bidders, so far as possible, be put on terms of perfect equality so that they may bid on substantially the same proposition and on the same terms.”

3. “In order to attain competitive bidding in its true sense, proposals for bids must be invited under fair circumstances which afford a fair and reasonable opportunity for competition.” [Emphasis is mine.]

4. Among other things, the advertisement for bids should include “[s]pecifications of the supplies or equipment to be purchased and the quantity thereof.”

Those standards are not optional, continued the Court, they must be followed.

The obvious fundamental principles of Leech are that all bidders must be put on a level playing field, and that the bidding process actually be competitive. In fact, it is further said in Metropolitan Air Research Testing Authority, Inc. v. Metro. Government of Nashville & Davidson County, 842 S.W.2d 611 (Tenn. Ct. App. 1992), that:

One of the purposes of competitive bidding is to provide bidders with a fair opportunity to compete for public contracts. State ex rel. Leech v. Wright [citation omitted]. Thus, the courts have recognized that the statutes and ordinance requiring competitive bidding impose upon the government an implied obligation to consider all bids honestly and fairly. [Citations omitted.] [At 616] [Emphasis is mine.]

If a government awards gratuities to contractors who, during the life of the contract ask for additional money under the contract because the cost of performing the contract has increased due to changing conditions of which all the parties were aware, or should have been aware, the competitive bid laws are at least partially defeated; the generosity of the government will relieve the contractor of the consequences of his failure–for whatever reason–to take account in his bid of those conditions.

Please remember that these legal opinions were written based on the facts of a given city at a certain time. The laws referenced in any opinion may have changed or may not be applicable to your city or circumstances.

Always consult with your city attorney or an MTAS consultant before taking any action based on information contained in this database.