June 2005 |
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In This Issue
Public Owner May "Pay Twice" for Bidding Improprieties
In a case with potentially far reaching ramifications within the state of Ohio and beyond, a City in Summit County has been determined to be liable for a disappointed bidder's lost profits. The City awarded a contract to a bidder that was ultimately determined by a jury to have been someone other than the "lowest and best bidder," and the jury awarded bid preparation costs as damages. The Court of Appeals reversed the trial court's decision, limiting the contractor's recovery to bid preparation costs, and ruled that the contractor be entitled to lost profits on the contract that should have been awarded to the disappointed bidder. Traditionally, Ohio courts have either enjoined the award to one other than the lowest responsive and responsible (or lowest and best) bidder, leaving the owner the ability to rebid and avoid any direct economic loss. In the alternative, in cases where the bidding irregularity is proven later, courts have awarded some nominal damages such as the cost of preparation of a bid. However, this may very well be the first case in Ohio that has ruled that an award of lost profits is proper, meaning, public authorities who award contracts to someone who should have not been awarded the contract may be faced with "paying twice" for the work in the form of lost profit damages. In the case of Cementech v. Fairlawn, 2005 Ohio 1709, the Summit County Court of Appeals stated "we find that injunctive relief does not preclude monetary damages because such a preclusion would leave companies like Cementech with no real relief and allow government entities to go unpunished for ignoring Ohio and municipal laws." The Court went on to state:
In view of this case, contractors will be encouraged to initiate litigation and recover lost profits when they believe they have wrongfully denied a contract, and public owners will approach tough bidding decisions with greater trepidation than before, knowing that the wrong decision may cost them dearly. This case is currently being appealed by the City to the Supreme Court of Ohio. If the Supreme Court of Ohio decides to exercise its jurisdiction and hear the case, this may not be the final word on this important issue. Design Professionals Fail to Recover Damages for Wrongful AwardIn contrast to the case described on page 1, where a contractor was able to recover lost profits for a wrongful bid award, the Court of Appeals for Lorain County has ruled that no money damages may be awarded under Ohio's Professional Design Services Law, which governs procurement of design services on public construction projects. Current Source, Inc. v. Elyria City School Dist., 157 Ohio App.3d 765, 2004-Ohio-3422. The Court ruled that there was no ability for a disappointed proposing designer to recover money damages even when a public authority fails to comply with the provisions of the Design Services Law. The Court stated that the sole remedy was to seek a court order declaring the contract void. This means that designing architects, engineers and surveyors who are unhappy with the process followed by a public authority will be limited to challenging the unlawful award of the contract to the other firm, but will likely not be able to recover money damages in any event. Watch for Hidden AIA Software Contract ChangesMore and more contract documents are being prepared with proprietary software programs created by the American Institute of Architects (AIA), Associated General Contractors (AGC) and other trade associations. Unlike previous versions of the software that prominently set forth the revisions to the standard contract form, recent software allows changes to be made that may not be apparent to the casual reader of a "familiar" contract form. Now, "clean copies" of modified standard forms can be printed with only minor indications of where the form language has been changed – perhaps in a material way. In addition, AIA and AGC allow substantial revisions to be made to these generally accepted forms without its identity as a standard form being removed, defeating the intent of "consensus" documents. For example, many subcontractors encounter documents that purport to be the subcontractor-friendly AIA A-401, but the documents have been modified in a material way, making them hostile to subcontractor rights. Those reviewing printed association forms, such as the AIA and AGC, unfortunately should no longer assume that they are unmodified. Instead, these documents should be read word by word and reviewed for any marks in the margin that hint that revisions have been made. Beware of Stealth RetainageOhio statutorily limits retainage on public works to 8 percent on the first half of work and (assuming satisfactory performance) 0 percent on the second half; for an effective rate of 4 percent. Interest on the retainage is paid to the prime contractor. However, many public authorities including some schools utilizing OSFC funds are beginning to hold back "stealth retainage" in the form of a "backloaded" schedule of values that withholds excessive amounts for project closeout documents, meeting attendance, and other routine project matters. The end result is an effective retainage rate far in excess of typical contractor and subcontractor profit and grossly in excess of the state's statutory retainage rate. Like traditional retainage, a backloaded schedule of values is an inefficient method of securing satisfactory project performance as it cannot be used to target only those who prove to have performance problems on an as-needed basis, and unnecessarily increases construction costs. Contractors and subcontractors may want to approach public owners and their construction managers to secure elimination of this "stealth retainage" or challenge these withholdings in court. Absent some change, voluntarily or with the assistance of the legislature or the courts, contractors and subcontractors will simply have to pad their bids with the hidden costs of financing jobs in this fashion. Firm NewsPresentations and PublicationsDon Gregory recently spoke on the subject "How to Get Paid for Your Work Everytime" at the national convention of the Ceilings and Interior Systems Construction Association (CISCA) in Washington, D.C.. In addition, he presented "Negotiating Equitable Subcontracts" at the national convention of the National Demolition Association in Las Vegas, Nevada. Stu Harris wrote "Force Majeure Clauses" and "Lien Issues Effecting Material Suppliers," two recent articles published in Code News. Gregory Recognized in Construction LawDon Gregory has been recognized as one of "America's Leading Construction Lawyers" by Chambers USA, The Best Lawyers in America, and the International Who's Who of Construction Lawyers for 2005. Growth in Kegler Brown's Construction AreaKegler Brown is pleased to announce Michael Madigan will be joining the firm after he takes the Ohio Bar, with his goal being to practice construction law fulltime. Mike is a civil engineer whose background includes serving as a project engineer for a major contractor in northeastern Ohio. The firm is also pleased to announce Eric Travers, an experienced construction lawyer with a Washington, D.C. firm, will join Kegler Brown once his Ohio Bar admission process is complete. CreditsKegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by Donald W. Gregory for the Construction Law practice group. To subscribe to any Kegler Brown publication, please use our Subscribe Form. To unsubscribe from any Kegler Brown publication, please use our Opt-Out Form. This publication, as well as an archive of previous publications, is also available from our Publications Archive. The Construction Law Newsletter is designed to provide general information about the subjects discussed. It is not meant to be all-inclusive or comprehensive. Kegler Brown is not rendering any legal or professional advice by way of this publication. © 1989-2008, Kegler, Brown, Hill & Ritter Co., L.P.A.
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