The Court of Appeals Reverses Monarch,
Restoring Discretion to Public Bidding
By: Maureen P. Taylor
Reprinted from November 2002 ohioconstructionlaw.com
Full text of the Monarch decision
It was wrong for the trial court to substitute its judgment for
that of the Tri-Village school board and to determine that the
board erred in rejecting the lowest bidder on a K-through-12
school construction project.
With this ruling, announced November 19th, the
Court of Appeals for Franklin County ended, for
now, the uncertainty that has permeated public
bidding in Ohio for the last five months. The
decision in Monarch Construction Company v.
Ohio School Facilities Commission, 2002-Ohio-
6281, makes it clear that a public body, such as a
school board, has discretion to investigate and
reject the lowest bidder if, based on the information
available to the public body at the time, that bidder
appears to the public body not to be responsible.
The appeals court unanimously reversed the judgment entered
by the Franklin County Court of Common Pleas on May 30,
2002. The rules of the game are the same as they
were before the announcement of Judge Jennifer L. Brunner’s
67-page opinion, now completely reversed.
Some Background. For any readers new to the controversy,
we will quickly recap the facts giving rise to what appears to
be, so far, the most important public bidding decision in Ohio
in the 21st century. The Monarch case arose in Darke County,
where Tri-Village Local School District sought bids to
renovate and build an addition to a 75-year-old building to
create a K-12 school building. As an “exceptional needs”
project in a district with a severe overcrowding problem, the
construction was to receive aid from the Ohio School Facilities
Commission. So the OSFC needed to approve the
construction contract.
When bids were opened on March 5, 2002, the lowest bid for
the general trades package was Monarch Construction
Company’s bid for $6,187,000. Second lowest was Peterson
Construction Company’s bid for $6,320,000 ($133,000, or
2.15% more). Based primarily on the recommendation of its
Construction Manager, verified by the School
Superintendent’s follow-up call, the School District awarded
the contract to Peterson, the second lowest bidder.
Tri-Village notified Monarch of this decision by certified
mail. The notice stated that Tri-Village had reviewed information
about Monarch’s performance on other projects, among other things, consulted with the OSFC, and reached a
decision: “Monarch Construction Company has been
determined not to be a responsible bidder based upon conduct
and performance issues, management skills, and
ability to execute the contract properly.”
The three factors mentioned come from an Ohio
statute, R.C. 9.312. That statute, which applies to
OSFC contracts but is not applicable to most
public owners unless they agree to be bound by it,
also permits a rejected low bidder to request a
meeting to protest the decision. Monarch
requested such a meeting, which took place at the
OSFC’s offices. To respond to the owner’s
concerns, Monarch brought to the protest meeting
a volume of materials, later distributed in its
entirety to the Tri-Village Board by Tri-Village’s
Superintendent and Board President.
After the protest meeting, and after the Board reviewed the
materials and information provided by Monarch, both the
Board and the OSFC reaffirmed their prior decision. The
Board awarded the contract to Peterson, and the OSFC’s
Executive Director gave written approval for rejecting
Monarch and signed the Peterson contract.
The Trial Court Decision. So Monarch went to court,
asking for a permanent injunction that would prohibit the
OSFC and Tri-Village from contracting with or paying anyone
other than Monarch for the general trades contract on the
Project. At the trial court level, Monarch won. The court said
the School District was wrong to reject Monarch, and it
should either award the contract to the lowest bidder or reject
all the bids and rebid the contract. It also said the School
District could not pay Peterson for any of the work.
The trial court
decision went even further:
It said that the OSFC’s competitive bidding process as
currently practiced is a “sham.”
It declared that the Executive Director of the OSFC has
no authority to approve construction contracts, and
allowing him to do so is “unconscionable.”
It disapproved of the whole process of requesting bids for
alternate design aspects of a project and then waiting
until all the bids are in to determine which alternates, if
any, to incorporate into the finished project. (Surprising,
since the issue of alternates would not have changed the
identity of the low bidder and was, therefore, irrelevant.)
And it declared the general trades contract awarded for
the specific project “void ab initio" (wholly without legal
or binding force from the beginning).
The Appeal. Such a decision, if allowed to stand, could have
a chilling effect on public owners. A radical departure from
well-established precedent, it would change the law of public
bidding based on one judge’s opinion. So the OSFC,
represented by the Attorney General, the School District,
represented by Bricker & Eckler, and Peterson Construction
Company, represented by Kegler, Brown, Hill & Ritter,
appealed the decision to the Tenth District Court of Appeals,
the appellate court for Franklin County. Monarch Construction
was represented by Schottenstein, Zox & Dunn. The
Ohio School Boards Association filed an amicus brief in
support of Tri-Village’s position.
The Court of Appeals panel of three judges allowed construction
to go forward by acting quickly to grant a stay of the trial
court’s decision. Shortly after the briefs were completed, it
heard oral arguments—delivered to a packed courtroom—on
October 16, 2002. One month and three days later, the court
delivered its opinion, a complete reversal.
The three parties appealing the trial court’s decision raised a
total of 20 issues (including several duplicates), and the Court
of Appeals agreed with them on 14. The remaining six were
not rejected but were declared “moot,” no longer necessary to
decide because of the court’s decision on the other 14. The
court sent the case back to the Franklin County Court of
Common Pleas with instructions to enter judgment for the
OSFC, Tri-Village, and Peterson.
The Court’s Reasoning. The appellate court’s decision was
streamlined, only 13 pages. After reciting the facts and listing
all 20 issues raised in the briefs, it pared the questions to three:
whether Tri-Village abused its discretion in determining
that Monarch was not a responsible bidder for
purposes of the general trades contract portion of the
Tri-Village project,
whether OSFC failed to comply with the pertinent
statutory law in the procedure it employed to approve
Tri-Village’s contract with Peterson, and
(3) whether any deficiency in that procedure renders Tri-
Village’s contract with Peterson unenforceable.
To answer the first question, the court relied on the leading
decision in public bidding law to date, Cleveland Construction,
Inc. v. Ohio Department of Administrative Services
(1997), 121 Ohio App. 3d 372, also from the Court of
Appeals for Franklin County. The Cleveland Construction
case set the standard for what Monarch needed to prove, by
“clear and convincing evidence,” to prevail: “that the award
[of the contract to Peterson] constituted an abuse of discretion
and resulted in some tangible harm to the public in general, or
to [the contractor] individually.”
An abuse of discretion occurs only when a decision is “unreasonable,
arbitrary or unconscionable.” Even a mistake of fact is
not an “abuse of discretion.” For this explanation the court
turned to an Ohio Supreme Court decision, City of Dayton ex
rel. Scandrick v. McGee (1981), 67 Ohio St. 2d 356.
From these two cases, Cleveland Construction and Scandrick,
the court derived the standard the trial court should have
applied: “The trial court was required to review the evidence
that was before Tri-Village at the time Tri-Village decided
Monarch’s status, and determine whether Tri-Village, based
upon the evidence before it, abused its discretion in rejecting
Monarch as the lowest responsible bidder.”
Had the trial court done that? In a word, no. “Instead,” the
unanimous Court of Appeals said, “the record indicates the
trial court substituted its judgment for that of Tri-Village.”
The Court of Appeals looked at the Construction Manager’s
investigation of Monarch—the primary basis for Tri-Village’s
rejection—and found it satisfactory, even though it was different
from the process followed by the Department of Administrative
Services and approved in Cleveland Construction.
In reviewing contracts for the entire state, the Department of
Administrative Services uses a committee to investigate
bidders, and the committee asks standardized questions and
fills out standardized forms. Must a school district do the
same? The trial court apparently thought so, but the appellate
court disagreed: “Cleveland Construction does not state or
even suggest that all competitively bid contracts must be bid in
accordance with the procedures the director of administrative
services used.”
The two courts also disagreed on the emphasis given to one
allegedly poor project in the Construction Manager’s investigation
of Monarch. The trial court thought there should have been a
weighing, with one poor project outweighed by four good ones.
The Court of Appeals again said no. The Construction Manager,
Turner, had provided Tri-Village with information on all five
projects but had recommended rejection because the poor project
was recent and was similar to the Tri-Village project. That
procedure passed muster with the Court of Appeals:
Because Tri-Village systematically investigated
Monarch through Turner and based its decision on the
information it received through the investigation
Turner conducted, Tri-Village’s decision to reject
Monarch was not arbitrary, even though it was not
undertaken with the same procedures used in Cleveland
Construction.
In deciding differently, the trial court had made two mistakes,
according to the Court of Appeals. It “seemingly did not apply
an abuse of discretion standard,” but instead substituted its
own judgment for Tri-Village’s. And it “further erred in
allowing and inviting evidence that was not before Tri-Village
following the protest meeting.” According to the Court of
Appeals, “If the abuse of discretion standard permitted that
kind of hindsight, the discretion of the school boards indeed
would become virtually non-existent.”
Not completely satisfied with everything Tri-Village did, the
Court of Appeals pointed out that the notice sent to Monarch
did not properly advise of the reasons for Monarch’s rejection.
Apparently, the notice should have been more detailed. But the
protest meeting made up for any deficiency, and there was no
harm to Monarch. In fact, as the Court of Appeals pointed out,
Monarch’s president stated that he had no additional evidence
he needed to submit at the protest meeting.
So the appellate court answered the first question negatively.
Tri-Village had not abused its discretion in determining that
Monarch was not a responsible bidder. In fact, “Tri-Village,
through Turner, adequately investigated Monarch and based
its decision on the information gathered. Moreover, that
information supports Tri-Village’s decision.”
The OSFC’s Procedures. Turning to its second and third
questions, the appellate court next reviewed the role of the
OSFC in approving the contract with Peterson. Here, the trial
court had been both “arguably” right and definitely wrong:
The trial court arguably was correct in concluding
OSFC has failed to follow the specific mandates of
the law in approving contracts, as the voting members
of OSFC did not vote to approve the contract
awarded to Peterson, but instead delegated the
authority to OSFC’s executive director. However,
even if the trial court were correct in its conclusion
regarding OSFC’s approval of the contract, the
ramifications of that legal discrepancy are not as the
trial court determined.
The law makes a big distinction between contracts that are
“void ab initio”—as the trial court said Peterson’s contract
was—and those that are merely “voidable.” Contracts in the
second category can be salvaged by later actions of a contracting
party, while those in the first category cannot be. According
to the Court of Appeals, the trial court put Peterson’s
contract in the wrong category. It was really a voidable
contract, so the OSFC’s later action to ratify it was “permissible
and lawful.”
To bolster this decision, the Court of Appeals went back 148
years, to the Ohio Supreme Court decision in State of Ohio v.
Executor of Buttles (1854), 3 Ohio St. 309. The Buttles court
had laid down the rule that any contract an entity could
lawfully make it also could lawfully ratify and adopt after the
fact. The Court of Appeals agreed and found that the OSFC
and its voting members unquestionably could have approved
the contract with Peterson. The Tri-Village Board had the
authority to make the contract, and the OSFC had the authority
to approve it. Therefore, even after the fact, the OSFC had
the authority to ratify the contract that had earlier been
approved on its behalf by the OSFC’s executive director.
Peterson’s contract was therefore enforceable, and the trial
court erred in ruling that Tri-Village could not pay Peterson.
No more needed to be said. The Court of Appeals ruled that
all other issues were moot.
Nothing in the Court of Appeals opinion specifically mentioned
the issue of alternates, which the trial court had
introduced gratuitously into its decision. However, the Court
of Appeals did sustain Tri-Village’s assignment of error
related to alternates.
What Next? When an Ohio Court of Appeals speaks, it
usually has the last word. But not always. A dissatisfied
party can ask for a review by the Ohio Supreme Court if the
case involves a substantial constitutional question or a
question of public or great general interest.
If Monarch chooses to make such a request, it must do so
within 45 days of the Court of Appeals’ entry of judgment.
So the deadline for such a request will be January 3, 2003.
The Supreme Court could decide to hear such an appeal, or it
could turn down the request.
For now at least, the law on public bidding in Ohio is back
where it was before the trial court’s decision in Monarch on
May 30, 2002. School boards and other public entities have
discretion to evaluate the lowest bidder and to determine if
that bidder is responsible. When a systematic investigation
makes it appear that bidder is not responsible, they have the
discretion to reject that bidder and to investigate the next
lowest bidder in the same way.
After the Court of Appeals decision in Monarch, public
entities may want to provide somewhat more detailed notice
to any bidder they reject. That was the only area where the
court found any fault with Tri-Village’s actions. But other
than that, the law is exactly what it was after the Cleveland
Construction decision. As
long as owners exercise their discretion reasonably and not
arbitrarily, courts will not second-guess their decision.
If the law changes again, as it has been known to do in Ohio,
we promise to keep you informed. In the meantime, public
owners can breathe a collective sigh of relief. They are once
again in the driver’s seat.
Follow-up Note: The case was not heard by the Ohio Supreme Court.
