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Monday, October 5, 2015

Suing in tort based on facts arising from procurement dispute

DFS: "We Have a Very Direct Beef With Lotte"
DFS and Lotte Duty Free were back in court today over a dispute on a lucrative concession contract to operate duty free shops at the AB Won Pat International Airport.

DFS, the previous concessionaire, is continuing to challenge the awarding of the contract while Lotte maintains they never did anything improper.

It’s been well over two years since the issue surfaced. The concession contract at the Guam Airport was up for procurement in early 2013. DFS and Lotte Duty Free submitted bids, along with two others, and Lotte, being the lowest bidder at the time, got the deal.

But DFS challenged the decision on allegations that the Guam International Airport Authority and Lotte Duty Free were in collusion. After filing a lawsuit and taking the case through the judicial system as well as the Office of Public Accountability, the case landed back in the Superior Court’s hands.

A total of 20 charges were filed, but 19 of the 20 were dismissed. The remaining charge that still stands has to do with TORT claims or civil claims caused by wrongful acts that resulted in serious loss or economic harm.

Attorney for Lotte Duty Free, Cesar Cabot says Lotte has already filed motions for dismissal of the TORT claims because he believes it to be improper and illegal. What DFS is saying is that this was a corrupted procurement process and that’s very different," Patrick Civille, legal counsel for DFS GUam, answered back.
Second-lowest bidder for public contracts may sue lowest bidder who paid less than prevailing wages
Public agencies have little, if any, discretion when awarding public contracts because they are required to award the contract to the lowest bidder, subject to certain minimum qualifications. These limitations are designed to protect the public and its financial interests, not the bidders.

Losing bidders typically can contest the award only by challenging the bid itself via bid protest, or the bidding process.

A California Appellate Court recently held that second-lowest bidders on public contracts may sue the successful lowest bidder for intentional interference of prospective economic advantage when the lowest bidder won the contract only because it paid its workers less than the wages required by law.

In Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc., 234 Cal. App. 4th 748 (2015), plaintiffs alleged they would have been awarded public contracts worth almost $15 million if defendant had not decreased its costs by illegally underpaying its workers.

Assuming the facts to be true, the court found that plaintiffs’ allegations were sufficient to create a cause of action against the winning bidder who paid less than prevailing wage. Consequentially, contractors who fail to pay the prevailing wage may now be liable under tort law in addition to prevailing wage laws.
The court’s holding is limited to losing bidders who can show that they were the actual and lawful lowest bidders.

ROY ALLAN SLURRY SEAL, INC. v. AMERICAN ASPHALT SOUTH, INC., 234 Cal. App. 4th 748 (2015) [Note: The following is excerpted and/or paraphrased without full context, order or citations. Read the original for accuracy and for all the other issues and information omitted here.]
May the second place bidder on a public works contract state a cause of action for intentional interference with prospective economic advantage against the winning bidder if the winner was only able to obtain lowest bidder status by illegally paying its workers less than the prevailing wage? We hold that the answer is yes if the plaintiff alleges it was the second lowest bidder and therefore would have otherwise been awarded the contract, because that fact gives rise to a relationship with the public agency that made plaintiff's award of the contract reasonably probable.

Allan and Martin jointly sued American in those five counties for intentional interference with prospective economic advantage and other torts, alleging that American had only been able to submit the lowest bid by paying its workers less than the statutorily required prevailing wage. (Lab. Code, §§ 1770, 1771 [contractors on public works projects must pay the prevailing wage, as determined by the Department of Industrial Relations].) Allan and Martin alleged that each was the second lowest bidder, as to, respectively, 17 and 6 of the contracts and would have been awarded those contracts as the lowest bidder had American's bid included labor costs based on the prevailing wage. Plaintiffs contend that their bid submissions created the required economic relationship for the intentional interference with economic advantage tort.

The tort of intentional interference with prospective economic advantage (intentional interference) provides a remedy to those "who suffer[] the loss of an advantageous relationship" due to the actions of "a malicious interloper." "[T]he mere fact that a prospective economic relationship has not attained the dignity of a legally enforceable agreement does not permit third parties to interfere with performance." The tort is considerably more inclusive than actions for interference with contract, and therefore does not depend on the existence of a valid contract.

In order to state a cause of action for this tort, a plaintiff must allege five elements. [To win, proof is required.]

First, the existence of an economic relationship with some third party that makes it reasonably probable the plaintiff will gain some future economic benefit. This protects the expectation that the relationship will eventually produce the desired benefit, not the speculative expectation that a potentially beneficial relationship will arise.

Second, the defendant must have knowledge of the plaintiff's economic relationship.

Third, the defendant must have engaged in wrongful acts designed to disrupt the plaintiff's relationship. This requires allegations that the defendant engaged in an independently unlawful act separate and apart from the acts of interference and that the defendant either intended to interfere or acted with the knowledge that interference was certain or substantially certain to occur. However, and it is enough that the defendant was aware its actions would frustrate the legitimate expectations of a specific, albeit unnamed, party.

Fourth, the plaintiffs' economic relationship was actually disrupted.

Fifth, the plaintiffs suffered economic harm that was proximately caused by the defendant's interference.

The competitive bidding laws for public works contracts are designed to protect the public, not bidders. Therefore while public agencies are generally expected to accept the bid of the lowest responsible bidder, they still have discretion to reject all bids or accept one of multiple bids that have tied as the lowest.

Based on appellate decisions applying this principle in various contexts, which we discuss post, American contends that losing bidders are barred from suing their successful competitors for intentional interference because there was no existing relationship with which to interfere and no reasonable probability that any contract would ever have been awarded.

In Swinerton & Walberg Co. v. City of Inglewood-L.A. County Civic Center Authority (1974) 40 Cal.App.3d 98, 101 [114 Cal.Rptr. 834] (Swinerton), the plaintiff was allowed to state a cause of action for promissory estoppel against the winning bidder for conspiring with the agency to award it the contract.

The California Supreme Court, in Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1157 [131 Cal.Rptr.2d 29, 63 P.3d 937] (Korea Supply), considered the pleading requirements of an intentional interference cause of action brought by the agent of the losing bidder on a contract to supply military radar equipment to the government of South Korea. The agent alleged that the winning bidder obtained the contract by providing bribes and sexual favors to key Korean officials, in violation of the federal Foreign Corrupt Practices Act of 1977. (15 U.S.C. § 78dd-2.)
The agent alleged that its principal's product was superior and its bid was significantly lower than the defendant's bid, that but for the defendant's misconduct its principal would have been awarded the contract, and that as a result the agent lost the commission it would have otherwise obtained.
Korea Supply stands for the proposition that specific intent to disrupt a plaintiff's business expectancy is not an element of the intentional interference tort; however, essential to Korea Supply's proximate cause discussion is the notion that the defendant intentionally interfered with the losing bidder's viable contractual expectancy.

Implicit in this this argument is the allegation that the various public entities were required to award the contract to the lowest responsible bidder and that plaintiffs satisfied all the requirements necessary to qualify for those contracts, and that but for the alleged misconduct it was plaintiffs who in fact submitted the true and lawful lowest bids.

The bidder-versus-public agency decisions are based on the principle that the public contracting laws are designed to protect the public. While that policy makes sense in order to protect taxpayers from damage awards against a public agency on top of the contract price that went to the successful bidder, its application in this context is far from clear. This action seeks damages from only the winning bidder and therefore does not call for protection of the public. And while taxpayers gain some financial benefit by contracting with businesses that pay less than the statutorily required prevailing wage, American does not contend, and we believe no court would hold, that such an advantage is worthy of judicial protection.

As Korea Supply suggests, a bidder on a government contract who submits a superior bid and loses out only because a competitor manipulated the bid selection process through illegal conduct has been the victim of actionable intentional interference. This is consistent with the notion that the true lowest bidder may bring a mandate action to compel the public agency to reverse its previous decision improperly awarding a contract. Absent some enforceable right, such mandate actions would not be possible.

We conclude that an actionable economic expectancy arises once the public agency awards a contract to an unlawful bidder, thereby signaling that the contract would have gone to the second lowest qualifying bidder. We see no reason to cut off any legal effect from the winning bidder's misconduct simply because it precedes the completion of the bidding process. Assuming that the timing had some legal significance, the defendant's wrongful conduct persists throughout the bidding process, well past the time when it is wrongly awarded the public works contract. In short, by continuing its unlawful conduct after wrongly winning the contract, the defendant interferes with an expectancy that would have otherwise materialized.

In any event, we limit our holding to losing bidders who can show they were the actual and lawful lowest bidders on a public works project.
The takeaway, for me anyway, is that the tort of interference with prospective economic advantage is not leverage to set aside a procurement award; it is really not a "protest" case cognizable under procurement statutes at all.   It is a plain vanilla tort claim against a person alleged to have caused economic harm to the plaintiff.

Unlike procurement standing however, where "remote" parties, such as agents and subcontractors are denied the right to protest, this tort does recognize that tort claimants need not be directly affected if their damages are merely proximate. 

In short, though this case applies a procurement-like concept of next-in-line-for-award limitation on use of the tort by another bidder, it does provide a means of redress in damages for an aggrieved "true" low responsible bidder that is not available under procurement statutes.

It will be interesting to see if this gets appealed to the Supreme Court, and in any event how far this decision will be carried.

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