October 25, 1993
Recently you contacted me with a question concerning the Municipal Purchasing Act. It seems the city is engaged in a massive enlarging project of the gas system that involves laying thirty-three miles of new line and relocating ten miles of old line. Bids were let out on the project on a unit price basis. One clause in the contract allows the city to enlarge or reduce the project size by up to 25% with the same unit price. You want to know whether there is any applicable law on whether the project may be expanded in that manner without violating the Municipal Purchasing Act of 1983.
Only one Tennessee case comes close to addressing the subject, Browning-Ferris Industries v. City of Oak Ridge, 644 S.W.2d 400 (Tenn. App. 1982). The City of Oak Ridge had an ordinance similar to the Municipal Purchasing Act mandating competitive bids on public contracts. The city put out a RFP for solid waste disposal and reserved the right to reject all bids, which it later did. The city then entered into negotiations with the hauler it had been using. Another hauler filed suit claiming this procedure violated the ordinance.
The city defended by claiming that it merely extended the contract with the previous hauler through a clause which allowed negotiations for an extension. The Court of Appeals refused to buy this argument. It pointed out that:
Courts have, however, drawn a distinction between a provision in a public contract giving the governmental entity a right to extend the duration of a contract under identical terms and a provision which merely authorizes further negotiations.
The Court then cited with approval two cases from the State of Washington, Miller v. State, 440 P.2d 840 (Wash. 1968), and Savage v. State, 453 P.2d 613 (Wash. 1969), to illustrate the point. In Miller the state used a negotiation clause to extend the duration of a contract. The Washington Supreme Court held that this was improper since the contract was expired and not being let out pursuant to an option but instead was subject to competitive bidding. Savage is the exact opposite. The contract in question is that case allowed the state the option to extend the contract for one year periods up to three additional years. The Court ruled this was proper since new, successive contracts where not being created but instead one single contract was being extended at the option of the state for the same terms. The Court stressed that the renewal must clearly be an option and not a clause for future negotiations.
I believe the Savage fact pattern fits the situation you have. The city clearly has the option to either expand or lesser the scope of the project up to 25%. It is contained within a single contract that does not increase the unit price. It is also worth pointing out that this increase or decrease provision is a standard in the construction industry in contracts of this type. Indeed, for a contractor to be able to predict just how much material he will need on a job of this size would be impossible. This portion of the contract must stay fairly fluid. As stated in United States v. Anderson County, Tennessee, 575 F.S. 574 (E.D.Tenn. 1984), standard contract law also applies to public contracts. To apply a strict interpretation of the Municipal Purchasing Act to this standard contract clause would clearly dilute this principal, a result that I don't believe the legislature intended when it passed the Act.
Since all the bidders knew of this provision and simply set the prices up around unit price, not total job size, I cannot see where either they or the public are harmed. An extension of this contract would fit neatly within the legislative rationale for the statute.
Public bidding statutes are intended to promote public interest by aiding governments in procuring best work or materials for lowest practical price, providing bidders with a fair forum for competing for government contracts, and protecting the public from it's officials self-dealing, extravagance, and favoritism. Computer Shoppe, Inc. v. State, 780 S.W.2d 729 (Tenn.App. 1989).
I have enclosed the Oak Ridge case due to its relevance. Please feel free to contact me if I may be of any further assistance on this or any other matter.
Very truly yours,
MUNICIPAL TECHNICAL ADVISORY SERVICE