Procurement Chutzpa of the Day Award, June 3, 2011

I was struck by the audacity of the contractor, and its surety, when reading the Louisana Supreme Court's decision in STATE v. INFINITY SURETY AGENCY, L.L.C., of date May 10, 2011, reported at Leagle.com.

The decision has limited legal value given its narrow technical procedural posture, but it raises some interesting points for debate.

As I read it, the case, in a nutshell, involved a bid for a construction project; the bid required a bid bond and the contract award required a performance bond. The surety for the bid bond was the same surety proposed for the performance bond. It came to light, when the award was made, the contract signed, and the performance bond was required to be submitted, that the surety was not actually authorized to issue either the bid bond or performance bond, and the contractor was unable to obtain a replacement surety for a performance bond.

So, the State sued the contractor and surety on the bid bond, based on contract and misrepresentation legal theories. The contractor and surety argued the state failed to state good legal grounds to sue because, they said, the State should have rejected the bid because, since the bid bond was not authorized, the bid was non-responsive. That's right: they say we aren't responsible to you because you should have rejected our bid!

There are a lot of contract law issues here that I won't go into, except to say that contracts can sometimes be classified as "unilateral", that is when acceptance of an offer is required to be in the form of performance, or "bilateral", that is when the acceptance of an offer is required to be in the form of a promise to perform. A bid solicitation might be characterized as a unilateral offer to fairly consider a bid for award in exchange for the contractor's performance by submitting a bid. The government then promises to enter into a contract with the prospective contractor, which recites the parties' mutual promises, one of which is that the contractor promises to provide a performance bond upon signing of the contract. The solicitation phase could be described as a unilateral contract but for the many decisions which hold that the government is not bound by contract law when it issues a bid.

But apart from strict contract law and the conflicting decisions in that area, it is long part of procurement law that a bid bond is a contract, at least insofar as the surety is concerned. It is insurance paid by the contractor to assure, if the awarded contract is not made, that the State will be compensated for damages arising from having to rebid a project and all the damages that reasonably flow from that circumstance.

The procurement text, Federal Government Construction Contracts, Branca, Silberman and Vento, published by the ABA (2010), discusses the bid bond this way:

"The purpose of a bid bond is to ensure that, in the event that a principal refuses to enter into the contract on which it successfully bid, the government is protected for the additional costs of reprecourement.
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It is important to note that, while a surety issuing a bid bond agrees to provide a payment and performance bond, the bid bond does not guarantee performance of the contract. Rather, failure of the surety to provide a performance and payment bond subjects the surety to liability up to the penal limits of the bid bond...."

The text also notes various defenses a surety might raise, but bidder non-responsiveness is not one of them. The text does note, however, one trial court case supporting the proposition, "[i]f the government fails to follow its own solicitation procedures, theoretically, this can be grounds for both the contractor and the surety to avoid performance."

The case cited is Hanover Area Sch. Dist. v. Sarkisian Bros., Inc., 514 F.Supp. 697 (M.D. Pa., 1981). That case is similar to the Infinity Surety case in that it also involved failure to obtain the performance bond after award, but not exactly the same. In Infinity, the surety was not authorized to issue any bond in the first place; in Hanover, the surety had authority to issue both bonds, but, based on the bid instructions, would not issue the performance bond unless a signed contract was made. After bids were opened, the government adopted a resolution requiring the performance bond before the contract documents were presented, and by the time the government prepared and presented the contract, the 60 day "price guarantee" period had lapsed Since the contractor could not keep the price after that date, the contract was never signed.

In Infinity the bid bond itself was infirm; in Hanover, the contract formation process was infirm.

The Hanover court relied on prior Pennsylvania case law, excerpts of which held as follows:

A contractor normally may not withdraw a proposal without forfeiting its security. This principle is known as the "firm bid rule." However, a bid default cannot occur until "the conditions for bond forfeiture ... fully ripen". The conditions of forfeiture are included in the instruction to bidders, all of which, of course, form a material part of the contract between the parties. Compliance, therefore, is necessary for the enforcement of rights and obligations arising thereunder. In the instant case, forfeiture could not take place unless the bidder either withdraws his bid within 30 days after the bid opening or refuses to execute and deliver the contract documents within ten days after receiving written notice of acceptance. Here there is no indication that these conditions of forfeiture had actually ripened. Rudy merely requested to withdraw its bid, a request which the Commissioners apparently misidentified as an actual withdrawal. The Commissioners, therefore, mistakenly failed to notify Rudy of the acceptance and failed to present the company with the contract papers for execution and delivery. Thus, it is impossible to determine now whether or not Rudy, if put to the test by the Commissioners, would have undertaken the project as the company was obligated to do. Instead, the contract was awarded to another bidder. However, inadvertent their actions may have been, the Commissioners did not perfect their right to collect on the forfeiture of the bid bond.

The Hanover Court concluded that the government had changed the terms of the bid after bid opening to require the performance bond to be produced prior to the contract's execution, and this so materially changed the solicitation procedures that the bid bond could not be enforced.

In Infinity, there was no change in the solicitation procedure. In all of the cases cited in the Hanover case, there were deviations from prescribed procedures by either the government or the bidder; not one of them involved a case of the government failing to detect bid non-responsiveness prior to contract performance. In Infinity, there were affirmative representations made by the surety that it was authorized to issue the bid bond.

It is not a solicitation irregularity, I would argue, when the government relies on that affirmation in making its decision to award the contract. Unless, of course, the bid instructions clearly require the government to test the bona fides of the surety's affirmations prior to award.

There is an old maxim of jurisprudence to the effect that "No one can take advantage of his own wrong". Whether that Common Law notion applies in Civil Law Louisiana, however, I would not know.