|Legal Opinion: |
Text of Document: MEMORANDUM
FROM: Sid Hemsley, Senior Law Consultant
DATE: March 8, 2004
RE: Rejecting Any And All Bids
You have the following question with respect to the recent opinion I gave relative to the right of the City to waive or correct a mistake in bids: Can the city reject all the bids and start the bid process over again?
The answer is yes, but unless the city has a good faith reason for taking such action, it faces some potential legal and economic consequences.
Paragraph 15 of the bid proposal provides that, “The City reserves the right to accept any Proposal or to reject any or all Proposals....” In this case there were two bids on a solid waste collection and disposal contract, one by Barker Brothers, the other by Waste Management. As I pointed out in my opinion dated March 3, the city cannot waive or correct Barker Brother’s bid, which reflects two mathematical errors.
There is no Tennessee case on the question of how much discretion governments have to reject any and all bids when a provision in the bid proposal contains such a provision. Generally, governments have very broad discretion in this area; however, that discretion is not unlimited. The heavy weight of authority in the United States is that even when there is such a provision in a bid proposal, the government’s decision to reject any and all bids cannot be arbitrary and capricious. [See 10 McQuillin, Municipal Corporations, § 29.77, and the cases cited therein.]
Tennessee is in the Sixth U.S. Circuit Court of Appeals. For that reason, the Sixth Circuit case of Owen of Georgia, Inc. v. Shelby County, 648 F.2d 1084 (1981), is important. In that case, Shelby County, Tennessee, rejected all the bids on a certain construction contract because all of them exceeded the budgeted amount. The bid proposals contained a provision authorizing the county to reject any and all bids. The county rebid the contract, and awarded the bid to the second lowest bidder. That case turned on the question of the meaning of “lowest and best bidder” under Tennessee law, and whether the second lowest bidder to whom the contract was awarded was the lowest and best bidder.
Indeed, on the question of rejecting any and all bids, the Court declared that:
While the county had the authority to reject all bids, as it did when the first bids were submitted here, contracts subject to the provisions of the Restructure Act cannot properly be awarded to a party other than the lowest and responsible eligible bidder unless that bidder is disqualified on the basis of an enumerated criterion or similar “good cause” reason. [Citations omitted] [At 1093-94]
But that language probably should not be read too far. Shelby County had a good faith reason to reject all of those bids: they were all over the budgeted amount. In fact, there is considerable language in that case, citing Tennessee law, speaking of the necessity for fairness in the bid process. Similar language is found in many of the cases in which it is held that a city cannot act in an arbitrary and capricious manner in rejecting any and all bids. In my previous opinion on March 3, I also pointed to the Tennessee Supreme Court case of State ex rel. Wright v. Leech, in which the court spoke similarly with respect to competitive bidding. That case probably applies to government decisions to reject any and all bids.
The courts will go a long ways to uphold the right of governments to reject any and all bids, but I doubt they would go that far under the facts in your City’s case. If I understand those facts correctly, the City has no legitimate reason to reject the lowest bid. It cannot point to any defect or deficiency in the bid, to any difficulties with the bidder’s proposed or past services, to the bidder’s financial stability, to the bidder’s integrity, to any policy decision on the part of the city related to a change in the kind of garbage service needed or desired, or to any other good faith reason it should not award the bid to the lowest bidder.
If the city does not award the contract to the lowest bidder, what are the bidder’s remedies?
In Tennessee any bidder has standing to challenge the award of a bid on the ground that the bid process was illegal in some manner. [See Metropolitan Air Research Testing Authority, Inc. v. Metro. Government of Nashville & Davidson County, 842 S.W.2d 611 (Tenn. Ct. App. 1992); Browning-Ferris Industries of Tennessee, Inc. v. City of Oak Ridge, 644 S.W.2d 400
(Tenn. App. 1983); Owen of Georgia, Inc. v. Shelby County, 648 F.2d 1084 (6thCir. 1981)].
It is also said in Browning-Ferris Industries of Tennessee, Inc., above, that:
A contract entered in violation of bidding statutes or ordinances is void and it is not necessary to show that the governmental authority acted in bad faith or fraud was involved. Johnson City Realty Co., 166 Tenn. 655, 64 S.W.2d 507 (1933). [At 403]
That does not mean that the unhappy bidder gets the contract at issue. The unhappy bidder’s remedy is recovery of the cost of preparing his bid, and perhaps the cost of his lawsuit to that end. In Browning-Ferris Industries v. City of Oak Ridge, 644 S.W.2d 400 (Tenn. Ct. App. 1982), the Court awarded the unhappy bidder the reasonable expenses for preparing and presenting its bid. In Owen of Georgia, Inc. v. Shelby County, above, the Court found the county liable on a sort of implied contract theory that, “In its solicitation of bids pursuant to the Restructure Act, Shelby County clearly promised to award the contract to the lowest financially responsible bidder if it awarded the contract at all.” [At 1095] The measure of damages, continued the Court, was “the expenses it incurred in its unsuccessful participation in the competitive bidding process as well as the costs incurred in its successful attempt to have the award to Pidgeon-Thomas rescinded as having been made in the violation of the statute.” [At 1096]
But if the City rejects all the bids, there is no award of a contract to set aside. However, presumably, where all the bids were rejected for no good faith reason, the unhappy bidder can still recover the cost of his bid and the cost of his lawsuit. [See Planning and Design Solution v. City of Sante Fe, 855 P.2d 628 (N.M. 1994).] Of course, the city would have the additional expense of going though the bid process all over again.
It also seems to me that from a practical standpoint the city should be very careful about abusing the competitive bid process. If the city has a practice of awarding bids based on factors not truly related to the best interest of the city, it may find itself paying higher prices for the goods and services it needs.