Limits on Agencies' Ability to Reject All Bids

• Publication year: 2018
• Author: by Bernard S. Kamine

Limits on Agencies' Ability to Reject All Bids

by Bernard S. Kamine

A graduate of Harvard Law School, Mr. Kamine has been helping contractors, owners and sureties avoid and resolve construction project disputes since 1974. He has been listed as a construction lawyer in Best Lawyers of America since 2007 (best construction lawyer in Los Angeles, 2015), and Southern California Super Lawyers since 2008, and is the author of Public Works Construction Manual - A Legal Guide for California (BNi Building News, 1996), which is cited as a secondary source in Judicial Council of California Civil Jury Instructions (2014 ed.), CACI Nos. 4500, 4501, 4502, 4521, 4522 and 4543.

I. INTRODUCTION

Every invitation for bids that promises to award the contract to the lowest responsible bidder qualifies that promise with a sentence like this: "The agency reserves the right to reject any or all bids." As a general rule, the public agency has the discretion to reject all of the bids. However, the agency cannot abuse that discretion. Such an abuse of discretion can arise not only from an arbitrary or capricious rejection of bids, but also from a bid rejection (1) that is not required by cogent and compelling reasons or (2) that impairs the public interest by damaging the integrity of the competitive bidding system.

The popular understanding is that no matter what goes wrong in a public bid process, a public agency can simply reset it with no questions asked by rejecting all bids. However, as the court explained almost 75 years ago, it's not that simple: "To have a set of bids discarded after they are opened and each bidder has learned his competitor's price is a serious matter, and it should not be permitted except for cogent reasons." Since then, federal courts have continually returned to this touchstone.¹

II. COMPELLING REASONS

In Prineville Sawmill Co. v. U. S., the court held that the successful bidder for the extraction of several species of Forest Service lumber in yet-to-be-determined quantities second-guessed the Service's estimate of those quantities.² The Service had sought bids for a mixture of species with the award going to the bidder with the highest sum of the prices offered per thousand board feet of extracted timber for each species. The per-species quantities would be multiplied by Forest Service's estimates of available quantities from those species. Prineville's bid relied upon its own estimate for one species (Lodgepole Pine), which was much lower than the Forest Service's estimate. The court explains Pineville's bid:

Prineville prepared to follow a skewed bidding strategy at the oral auction, as permitted under Forest Service policy. Under such a bidding strategy, a bidder would submit an unusually high bid for the species which it believes to have been overestimated by the Forest Service and a correspondingly lower than usual bid on the remaining, more accurately-estimated species. The skewed bidding strategy permits the bidder to offer the Forest Service an apparently higher overall price for the total timber than could be offered without skewing the bids. Since the actual purchase price is calculated from the scaled timber values as removed from the site, a skewed bidder awarded the contract would end up paying less for the salvage timber than would a bidder using its bid values against the Forest Service estimates. However, the bidder pays less only if its estimates were indeed more accurate than the Forest Service's.³

After determining that Prineville was the highest responsive bidder, the Forest Service reevaluated its estimates, decided that Prineville's were more accurate (with lower prices corresponding to the higher revised estimates), refused to award the contract, and, relying upon its "right to reject any and all bids," announced that it was rejecting all bids "because of errors in its original estimate" that allowed Prineville to submit the "apparent high bid [that] was not in fact the high bid."⁴

Relying upon Massman, Prineville sued to enjoin the proposed rebidding, arguing that "the Forest Service could reject bids only for a 'cogent or compelling' reason and that the rejection of the bids [here] was not based on a cogent or compelling reason." The Forest Service responded that it had "an 'unlimited' right to reject all bids." On cross-motions for summary judgment, the trial court decided that in rejecting all bids, the Forest Service did not need to explain itself, that its reasoning "did not require a cogent or compelling reason, but is within the discretion of the Forest Service, sustainable absent clear proof of arbitrary or capricious action amounting to an abuse of discretion."⁵ The appellate court reversed, holding, that the Service's right to reject all bids was not unfettered:

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Since the government generally has a duty to treat fairly responsive bids, and since the statute [16 USC § 472a] specifically requires the Service to adopt procedures which insure open and fair competition, we simply cannot accept the government's argument that there is no limitation on the right . . . to reject responsive bids . . . To the extent such rejections are determined to be arbitrary and capricious, an aggrieved bidder is entitled to equitable relief . . . . Nor do we believe that the express reservation contained in the advertisement in which the Forest Service reserved the right to reject all bids allows the Service the discretion to be arbitrary or capricious in rejecting all bids. If the Service could free itself from statutory obligations merely by written warnings to parties with whom it deals, statutes of

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