Read about the Ohio Supreme Court decision in Cementech issued June 28, 2006

What risks does a public owner run if it rejects a bidder it should have accepted? Earlier this month, a decision from the Summit County Court of Appeals changed the answer to that question, and everyone interested in the legal aspects of construction has been talking about the Cementech decision ever since. This article will tell you why the case may be important, how the dispute got to the Court of Appeals, what the law was before the Cementech decision, and how that may have changed - at least for the time being. The article concludes with a look ahead and some advice on how both public owners and disappointed bidders can protect themselves from costly mistakes.

What the Buzz Is All About

On rare occasions, a court sets out to change the law. On even rarer occasions, it announces its intention to do just that. Both happened earlier this month when, on April 13, the Summit County Court of Appeals issued its second opinion in Cementech, Inc. v. City of Fairlawn.1 The latest decision seems to be the focus of conversation for nearly everyone involved in some aspect of public construction in Ohio.

Why all the attention on a bidding dispute arising from construction of a service road for the City of Fairlawn? For the first time in Ohio, a court said that a disappointed low bidder might be entitled to more than injunctive relief and even more than the cost of preparing its bid. Admitting that “we are setting a precedent,” the Court of Appeals said that if the wrongfully rejected bidder could prove its lost profits, it might recoup them from the City. It sent the case back to the Court of Common Pleas in Summit County so that the bidder, Cementech, Inc., could prove the amount of the profits it lost when another bidder was awarded the contract.

Unless the Ohio Supreme Court decides that the Court of Appeals is wrong, this will become the law of Ohio, or at least the law of the Ninth District (which includes Summit, Medina, Lorain, and Wayne Counties). If the Ohio Supreme Court should decline to decide the issue, earlier decisions in Trumbull County, Cuyahoga County, and Licking County would prevail and make injunctive relief - rather than damages - the only remedy available to disappointed bidders in those jurisdictions. A Supreme Court decision affirming this month’s decision of the Court of Appeals would of course make the Cementech decision the law of the whole State.

How the Case Got to This Point

The dispute arose back in 2001 when the City of Fairlawn opened bids for the construction of a service road, including Addendum No. 1, which added “obtaining and installing 54 Cleveland Select Pear Trees.” Cementech was the apparent low bidder with a bid of almost $600,000. But the City was required by statute2 to select the “lowest and best” bidder, and the City Law Director, reviewing the bids on opening day, determined that the Cementech bid apparently omitted the 54 pear trees. The Law Director wrote to Cementech on the same day with the news that its bid had been rejected because the failure to include the addendum made it non-responsive to the bid specifications.

Cementech protested and received a hearing before the Board of Audit and Review, which agreed with the Law Director. The City Council awarded the service road project to the next lowest bidder, and Cementech filed suit in the Summit County Court of Common Pleas on the last day of 2001.

Cementech’s complaint sought compensatory damages in excess of $75,000 for the City’s alleged breach of competitive bidding law. Alternatively, the complaint sought injunctive relief (including a temporary restraining order, preliminary injunction, and permanent injunction) that would have required the City either to award the project to Cementech or to order the project to be “relet and rebid,” thereby allowing Cementech another opportunity to be awarded the contract for the project.

One week after Cementech filed the complaint, the trial court denied in toto the requested injunctive relief. In a terse two-page order, the court determined that Cementech had failed to establish an entitlement to injunctive relief under the well-established standards for granting such relief in Ohio. Specifically, the court decreed that Cementech had failed to show either (1) a likelihood of success on the merits of its complaint or (2) irreparable harm.

The issue of damages remained for trial, unless the City could get a summary judgment deciding it on purely legal grounds (without the need for a trial). So the City moved for summary judgment, arguing that the City had not abused its discretion in rejecting Cementech’s bid. Because the Law Director could reasonably determine that Cementech’s bid contained a material irregularity (i.e., the omission of the 54 pear trees required by the project specifications), the City argued that there was no basis for liability under the applicable competitive bidding laws. For its part, Cementech opposed the City’s motion by arguing that (1) the City’s Law Director acted without valid authority in rejecting the bid, (2) the pear trees were not required to be included with the bid, and (3) in any event, the omission of the pear trees was not a “material” deviation from the project specifications.

The trial court agreed with the City and granted judgment in its favor. The omission of 54 pear trees was material, according to the court, and Fairlawn’s ordinances granted the Law Director the authority to review bids to determine their responsiveness: Did they materially comply with the City’s bid specifications? In this case, the trial court thought that Cementech’s bid did not, so rejecting it was not an abuse of discretion.

So the case took its first trip to the Court of Appeals for Summit County, a trip that started with Cementech’s appeal and ended with the first appellate decision on June 18, 2003.

The first decision focused on the issue of authority. Did the City Law Director exceed his authority when he notified Cementech that its bid had been rejected on the same day the bids were opened, before any bids were even submitted to the City Council? Unanimously, the three-judge panel agreed that this was a mistake. The relevant City ordinance, Section 234.01 of the Codified Ordinances of the City of Fairlawn, established, at best, that the Law Director “had the authority to give a legal opinion as to whether Cementech’s bid met the city’s specifications.” He could advise the City Council, but, according to the court, he could not make the ultimate decision to remove Cementech’s bid from consideration. The Court of Appeals therefore returned the case to the court for further litigation.

Once more the City sought summary judgment, but this time it was turned down. The case went to trial on just one issue: damages. Before trial, the judge requested briefs from both sides on what would be the appropriate measure of damages. As expected, the two views strenuously differed:

• The City contended that Ohio law did not entitle Cementech to recover monetary damages for lost profits. The only remedies available to Cementech were injunctive relief (which had already been denied) and a declaration stating that the City had wrongly rejected the contractor’s bid. A lost profits award on top of these remedies would be bad public policy, as it would effectively make the City “pay twice on the same project.” If there were to be any money damages, the City argued that Ohio law might permit the contractor to recover its bid preparation costs - but only in “extraordinary circumstances,” which the City said were not present in this case.

• Cementech argued that a disappointed bidder should be granted “more than a hollow victory in the form of nominal bid preparation costs.” Allowing the City to wrongly deny a bid without liability for lost profits would do little to prevent cities from ignoring the competitive bidding laws, Cementech argued. Additionally, it argued its entitlement to recover its attorneys’ fees incurred as a result of the City’s wrongful conduct.

Once again, the trial court agreed with the City, capping the potential damages at the bid preparation costs even before trial. Because the City had already paid for the project once, the court determined that public policy dictated that the city’s taxpayers not have to pay for it again. However, relying upon a precedent set in Mechanical Contractors Assn. of Cincinnati, Inc. v. University of Cincinnati3, the court decided that Cementech could recoup its bid preparation costs in the event the jury ruled in Cementech’s favor. Cementech could not, in any event, recover its attorney’s fees because there was no Ohio statute that allowed recovery of attorney’s fees for a prevailing plaintiff in a case like this one, the court said. Cementech effectively abandoned its quest for attorney’s fees at this point.

The case proceeded to trial, with the jury finding in favor of Cementech but awarding it less than the full amount of its bid preparation costs. The $3,725.54 jury award - about half of the requested bid preparation costs - was symbolic. As some jurors explained to Robert Hunt, attorney for the City, in a post-trial briefing, the $25 was for “General Note 25 in the specifications” (the much-debated pear tree clause) and the 54 cents was a penny for each pear tree.

Even though Cementech won, it was not happy with the award. So it appealed for the second time to the Court of Appeals for Summit County. This time it made a plea for the recovery of lost profits and also resurrected the appeal for attorney’s fees. The court heard oral arguments just last month and issued a speedy decision on April 13.

The State of the Law Before Cementech

Generally, courts decide issues based in large part on how earlier courts have decided similar issues. On the issue of damages available to a wrongly rejected bidder, four Ohio courts had issued opinions, and the Cementech court touched on all of them before deciding to go its own way on a public policy argument.

Three of the earlier courts - Trumbull County, Cuyahoga County, and Licking County - had refused to grant money damages to a disappointed bidder. All had followed basically the same reasoning, which first appeared in Hardrives Paving & Construction, Inc. v. City of Niles4.

Hardrives. In Hardrives the City had accepted a bid that was just $3.90 higher than Hardrives’ bid for road construction, letting the decision turn on criteria not included in the bid documents (availability to pave additional streets never mentioned in the bid documents, basically some unwritten alternates). Hardrives failed to get a requested injunction to stop the construction. Nor could it get damages in the form of lost profits because the Trumbull County Court of Common Pleas ruled that the City had not abused its discretion when it rejected Hardrives’ bid.

On appeal, the Eleventh District Court of Appeals (which covers Trumbull, Portage, Geauga, Ashtabula and Lake Counties) found that the trial court had been right about some things and wrong about others. For instance, it was right to turn down Hardrives’ request for a mandamus order, as the trial court could not order the City to award a contract to a certain bidder. But the court had been wrong not to grant a declaratory judgment, effectively declaring that Hardrives had a right to the award of the contract because the City had abused its discretion in using “unannounced criteria” to select a bidder. The court had been right, though, on the remaining issue of money damages. The appellate court ruled that they were not available to disappointed bidders, citing two reasons:

1. Injunctive relief and money damages were generally mutually exclusive. Injunctive relief was only available in situations where money damages were not. “Thus, the fact that injunctive relief is available generally indicates that a monetary award is not available for lost profits.”

2. Money damages would go against the public policy underlying the competitive bidding statutes, which is “to protect both the public and the bidders themselves.” Granting an award of money damages to Hardrives would protect the bidders at the expense of the public, “because the public would have to pay the contract price of the successful bidder plus the lost profits of an aggrieved bidder. However, if injunction is the sole remedy, both the public and the bidders themselves are protected.”

The Ohio Supreme Court declined to consider the case, and the reasoning in Hardrives went on to influence other courts.

Cavanaugh and Midwest Service Management. In the next seven years, the Hardrives decision influenced two other courts to reject the availability of lost profits for disappointed bidders: Cavanaugh Building Corp. v. Board of Cuyahoga County Commissioners (Cuyahoga App. 2000)5 and Midwest Service Management, Inc. v. Licking Valley Local Board of Education6.

Cavanaugh arose from a county building project where the low bidder, Cavanaugh, had provided faxed signatures rather than originals on some required forms. Cavanaugh sought an injunction, noting in its Complaint that “an award of lost profits is not an appropriate remedy to an aggrieved contractor under Ohio law.” But at trial, it introduced evidence of lost profits and argued that the County had consented by implication when it failed to object. Still, the trial court refused to award lost profits, and Cavanaugh appealed.

Citing to Hardrives, the Court of Appeals held that “money damages for lost profits is not an available remedy for an unsuccessful bidder against a contracting authority. An unsuccessful bidder is limited to injunctive relief.”

In Midwest Service Management, the Fifth District Court of Appeals (which covers Licking and 13 other Ohio Counties) applied the same reasoning from Hardrives outside the context of construction. This case dealt with a contract to purchase computers, and the low bidder lost out because it had not bid on either of the two brands of computer approved in the specifications. Here, the unsuccessful bidder never sought injunctive relief, asking instead for money damages right away. In addition to questioning whether the Midwest Service Management bid might not indeed be non-responsive, the court found additionally that “monetary damages are not available to an unsuccessful bidder.”

Pointing to the reasoning in Hardrives, the court argued what is basically a syllogism: Premise: If there were a remedy at law (money damages), then injunctive relief would not be available. Premise: We know that injunctive relief is available because of cases like Hardrives . Conclusion: Then a remedy at law must not be available, and a disappointed bidder cannot obtain money damages.

Mechanical Contractors. By the time the Midwest Service Management, opinion came out, the court had to take into account one decision that went the other way, at least in part: Mechanical Contractors Association of Cincinnati, Inc. v. University of Cincinnati7. The Midwest Service Management court acknowledged that Mechanical Contractors had permitted an award of money damages, if proven, but under different circumstances. In Mechanical Contractors, the plaintiffs had first sought injunctive relief unsuccessfully (something missing in the Licking County case), and the plaintiff had been pursuing their claims for years (again, unlike the bidder in Midwest Service Management).

So why did the Mechanical Contractors case go a different way from the other three? It was also a public bidding case, but the initial question was whether the competitive bidding statutes applied at all to the construction of a University building by a private developer who was leasing University land to build a conference center that would then be leased back to the University. The court decided that, despite the lease/leaseback arrangement, the project should have been competitively bid. But it was too late to turn back the clock and start the construction all over again; the building was too far along. The trial court granted an injunction to restrain the University from ignoring the public bidding laws, but the injunction applied only to other, future projects.

The Court of Appeals for Franklin County looked at other cases denying money damages to disappointed bidders - including Hardrives and Cavanaugh - and rejected their reasoning with this explanation:

At first blush, the above rationale upon which monetary damages are denied is logical and pragmatic. However, we are troubled by the reality that the limited relief granted results in a public entity’s potential ability to violate laws intended to benefit the public without fear of any meaningful reprisal which might deter such violations in the future. In addition, we are mindful of the fact that the plaintiffs who pursue such litigation and prevail in attaining a declaratory judgment favorable to all taxpayers might have no recourse in recouping financial losses incurred in the process.

Without some form of money damages, the court felt that the most the plaintiffs could recover for all their efforts would be “a very expensive, hollow victory in the form of a retrospective, virtually inconsequential wrist-slap to the university and a prospective cautionary declaration.” So the Court of Appeals sent the case back to the trial court “for a determination of the nature and extent of damages to be awarded.”

Eventually, the Mechanical Contractors case made its way back to the Court of Appeals, where it was decided that the plaintiffs had not proven their entitlement to any damages, which had been limited by the trial court to their bid preparation costs. Focusing on the issue of whether the bidders had a right to rely on the University’s compliance with the competitive bidding laws, the appellate court on the second time around specifically did not address what monetary damages would have been appropriate if the plaintiffs had been able to prove they were entitled to any.

So this was how the law stood before April 13, 2005:

• Three different Courts of Appeals had held that money damages in general and lost profits in particular were not available to disappointed bidders, for public policy reasons as well as the availability of another remedy. Their only relief was to get an injunction to stop the award of the contract to another bidder, and if they had to appeal the denial of that injunction, they should seek a stay of the judgment so that the construction project would not go forward during the appeal.

• One court had disagreed, holding that, under certain circumstances at least, money damages might be available to a disappointed bidder who had sought injunctive relief and been wrongly denied. Those money damages might or might not include lost profits, as the Court of Appeals never got to that issue.

What Cementech Decided in April

On its second go-round at the appellate level, the Cementech decision focused on two issues: (1) Had the trial court erred in limiting monetary damages to the costs of bid preparation, rather than permitting an award of lost profits? (2) Was it a mistake for the trial court to prohibit an award of attorney’s fees as a matter of law (decided by the judge, not the jury)?

The second issue was an easy one for the court. Cementech had failed to preserve the issue of attorney’s fees for review, as it had not presented a “proffer” of evidence (a showing, outside the presence of the jury, to indicate what evidence it would have presented to the jury if it had been allowed to do so). Without this proffer, the appellate court refused to consider whether the trial court had been right or not when it ruled against the admission of such evidence.

But Issue Number 1 was not so easy. Cementech argued that, as the jury had decided, its bid was lowest and best, so it should have been awarded the bid - or should at least have gotten its requested injunction to prohibit the award to another bidder and declare Cementech the rightful choice. But Cementech was wrongly denied twice. Of course, the City saw it another way, arguing - with the support of Hardrives, Cavanaugh, and Midwest Service Management - that the availability of injunctive relief meant that money damages were not available, nor should they be, for public policy reasons.

The court called the City’s argument based on the availability of injunctive relief “illusory”:

Cementech requested injunctive relief and it was denied. When it was determined that Fairlawn abused its discretion and that Cementech was the lowest and best bid and thus, injunctive relief was improperly denied, the project was already complete. With the project complete, injunctive relief wrongfully denied, a determination that Cementech was the lowest and best bid, and a trial court ruling limiting damages to bid preparation costs, Cementech was left with inadequate relief.

In addition to allowing wrongfully rejected bidders “no real relief,” the preclusion of monetary damages would “allow government entities to go unpunished for ignoring Ohio and municipal laws,” the court said. After looking briefly at the public policy arguments in Hardrives and the cases that followed it, the court weighed one public policy against another, concluding that “protecting the integrity of the bidding process and ensuring wronged parties receive meaningful relief outweigh the risk of citizens paying twice for the same project.”

So the court ruled that Cementech should have been permitted to present evidence of its lost profits and that the trial court had erred in capping the monetary damages at the cost of bid preparation.

It has been widely misreported that the Court of Appeals ordered the City to repay $90,922 in lost profits, but that is nowhere in the opinion. Cementech did make a proffer of what its evidence on lost profits would have been, but according to David Leneghan, attorney for Cementech, that amount was $85,000. Robert Hunt, attorney for the City, said that this proffer was based on the profits envisioned by the second lowest bidder, the contractor who actually was awarded the job. Those anticipated profits would seem to be a poor yardstick to measure what profits might have been earned had the contract been awarded to a lower bidder.

In concluding its discussion of monetary damages, the Court of Appeals ended with two paragraphs that are sure to be quoted in many an argument about public bidding for years to come:

This Court recognizes that we are setting a precedent, but we find that our decision is necessary to protect the integrity of the bidding process and to ensure that government entities take responsibility for their actions and follow proper procedures and laws, thus properly representing their constituents. We find that Fairlawn must be held accountable for abusing its discretion and that Cementech must be able to present evidence of lost profits.

We must note that the preferred method of resolving bidding disputes is injunctive relief, as that relief would prevent double payment and better serve the integrity of the bidding process. However, based on the facts of this case, injunctive relief is no longer available and the only available adequate remedy for Cementech beyond costs for bid preparation is lost profits. Compliance with bidding procedures and thorough review of motions for injunctive relief can reduce the necessity of awarding lost profits.

What Happens Next?

The Court of Appeals clearly intended that the case would go back to the trial court for a determination of the amount of lost profits that Cementech should be able to recoup from the City. But the appellate courts may not be done yet. The City has already made a motion to the Court of Appeals asking that court to certify a conflict between its decision and Hardrives and the two cases that follow its reasoning. The Court of Appeals granted that motion on May 5, 2005, narrowing the issue to this question: Does the availability of injunctive relief if timely filed but denied preclude an award of lost profits in a municipal contract case? The Supreme Court will accept briefs and hear arguments on that issue.

Even without a certified conflict, the City might have gotten its appeal heard by the Ohio Supreme Court if it could have made a sufficiently convincing case that the appellate court’s decision had created an issue “of public or great general interest” warranting further review.

What Should Happen While We Wait?

For the time being at least, one Court of Appeals has set a precedent saying that a public owner who wrongfully rejects a low bidder risks having to pay whatever lost profits that low bidder can prove in court. Nobody - neither owners nor contractors - can afford to take that decision lightly. Until it is clear whether the Supreme Court will tackle the issue and what it may say if it does, everyone involved in public bidding should take some extra precautions.

Public Owners. Public owners need to recognize that they have more discretion to reject a bidder as “not responsible” than they have to reject a bid as “not responsive.” The bid standards - lowest responsible bidder (the standard for schools and libraries) and lowest and best bidder (the standard for cities and counties) - relate to the quality of the bidder. Bids must also be responsive, that is, the bid must respond to the bidding documents in all material respects and contains no irregularities or deviations that would affect the amount of the bid or give the bidder a competitive advantage8. Responsiveness deals with the quality of the bid.

Anything public owners can do to incorporate responsiveness into the announced criteria for evaluating a bidder as responsible or the lowest and best bidder should help their rejections to stand up in court. For instance, it would help to announce that one criterion for evaluating a bidder’s responsibility will be the attention to detail demonstrated in its bid preparation, with any deviation from the bid requirements seen as one sign that the bidder might be equally inattentive on the job.

The issue in Cementech involved an addendum. Public owners should include specific provisions in their Instructions to Bidders that address what happens if a bidder does not acknowledge an addendum. While these provisions cannot guarantee a result, they should provide helpful guidance to a court that is asked to review the public owner’s decision rejecting a bid because the bidder failed to acknowledge an addendum. The following is an example of such a provision:

If a Bidder fails to indicate on its bid form receipt of all Addenda through the last Addendum issued by the Architect, the bid of such Bidder will be deemed to be responsive only if:

1. The bid received clearly indicates that the Bidder received the Addendum, such as where the Addendum added another item to be bid upon and the Bidder submitted a bid on that item; or

2. The Addendum involves only a matter of form or is one that either has no effect or has merely a trivial or negligible effect on price, quantity, quality, or delivery of the item bid upon.

Public owners also should consider including a provision in their Instructions to Bidders that gives the public owner the authority to make a final and binding decision whether a bidder is the lowest responsible bidder/lowest and best bidder and/or the bidder’s bid is responsive. The following is an example of such a provision:

By submitting its bid, the Bidder agrees that the Owner’s determination of whether it is the lowest responsible bidder (or lowest and best bidder) and/or whether its bid is responsive shall be final and binding on the bidder and all other persons.

If the public owner adopts this type of provision, it should give the bidder a reasonable opportunity to present its position for consideration.

Additionally, owners should take this opportunity to review their bid evaluation and award procedures. In most cases, the public owner, acting through its board or council, must take official action in awarding or rejecting a bid. If a bid is rejected, the basis for the rejection should be specified in the resolution. Depending on the facts and the bid evaluation criteria, the basis for the rejection could be because the bidder is not a responsible bidder (or the lowest and best bidder) and also because the bid was not responsive. A bidder who makes a mistake in its bid, a responsiveness issue, often will have issues related to whether it is a responsible bidder or the lowest and best bidder as well.

Depending on the applicable bid award statute, the public owner should consider rejecting all bids and rebidding the project or applicable division of the Work.

Contractors. Contractors, in the midst of rejoicing over the latest decision, may not realize that they need to act, too. The Cementech case is not over yet, and it is still not clear that Cementech will actually recoup any of its anticipated lost profits. That depends not just on what the Ohio Supreme Court may or may not say; it also depends on Cementech’s ability to prove what profits it would have made, had it gotten the contract.

The difficulty of such proof should be obvious. Profits made by the same contractor on another job are not necessarily proof of what it would have made on this job. Nor are profits made or anticipated by a different contractor on the same job. After all, that contractor probably had different charges for overhead, different allocations of its workforce, and a different - and higher - bid to start with. Contractors need to anticipate, as they prepare their bids, that they may someday need to establish what profits they anticipated when they were bidding the job. Whatever they can do at this early stage to document the assumptions they made about profits may prove beneficial if they turn out later to be the low but disappointed bidder. Such documentation could keep them from winning a “hollow victory” saying they should have gotten the job but it is too late to do more than reimburse them for the money they lost in preparing their wrongly rejected bid.

We are sure the Cementech decision will continue to be the topic of conversation for some time to come. Any new developments in the case will be covered in future issues of this journal and ohioconstructionlaw.com.

Footnotes

1. Cementech, Inc. v. City of Fairlawn, 160 Ohio App. 3d 450, 827 N.E.2d 819 (Ct. App. 9 Dist. Summit Cty. 2005). The court’s earlier decision, issued June 18, 2003, was a focus of the June 2003 “What the Courts Are Saying” column in ohioconstructionlaw.com.

2. R.C. § 735.05.

3. Mechanical Contractors Assn. of Cincinnati, Inc. v. University of Cincinnati, 119 Ohio Misc.2d 109, 774 N.E.2d 795 (Ct. of Claims 2002).

4. Hardrives Paving & Construction, Inc. v. City of Niles, 99 Ohio App. 3d 243, 650 N.E.2d 482 (Ct. App. 11 Dist. Trumbull Cty. 1994).

5. Cavanaugh Building Corp. v. Board of Cuyahoga County Commissioners, 2000 WL 86554 , (Ohio App. 8 Dist. Cuyahoga Cty. 2000).

6. Midwest Service Management, Inc. v. Licking Valley Local Board of Education, 144 Ohio App.3d 443, 760 N.E.2d 837 (Ct. App. 5 Dist. Licking Cty. 2001).

7. Mechanical Contractors Assn. of Cincinnati, Inc. v. University of Cincinnati, 141 Ohio App.3d 333, 750 N.E.2d 1217 (Ct. App. 10 Dist. Franklin Cty. 2001).

8. See R.C. § 9.312.

Reprinted from Finley’s Ohio Municipal Service, with the permission of the publisher and copyright owner, West Group.