Intentional interference claims and losing bidders

CONSTRUCTION CORNER

In California, most public works projects are subject to the state's competitive bidding laws which require that interested contractors submit bids for the project and, from these bids, the lowest responsive and responsible bidder is awarded the contract.

Unsuccessful bidders can file a bid protest if they contend that an apparent low bidder's bid is either non-responsive (i.e., the bid is not responsive to the public agency's request for proposals) or that the apparent low bidder is not responsible (i.e., the apparent low bidder does not have the experience and ability to perform the contract). This is all well and good before a contract is awarded.

But what about after a contract is awarded? Is there a remedy available to unsuccessful bidders after an apparent low bidder is awarded a contract and, if so, is that remedy a claim for intentional interference with prospective economic advantage?

In Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc., 2 Cal. 5th 505 (2017), the California Supreme Court addressed this issue following approval by the 2nd District Court of Appeal of an intentional interference with prospective economic advantage claim by two unsuccessful bidders, but denial of the unsuccessful bidders' Unfair Practices Act and Unfair Competition Law claims against the successful bidder.

Roy Allan Slurry Seal

Between 2009 and 2012, American Asphalt South, Inc. was awarded 23 public works contracts totaling more than $14.6 million in Los Angeles, Orange, San Bernardino and San Diego counties. Two of the unsuccessful bidders on those projects -- Roy Allan Slurry Seal, Inc. and Doug Martin Contracting, Inc. -- sued American for intentional interference with prospective economic advantage as well as under the Unfair Practices Act (Bus. & Prof. Code Sections 17000 et seq.) and the Unfair Competition Law (Bus. & Prof. Code Section 17200).

Their claim was that American was able to submit the lowest bids on these projects because it didn't pay its workers prevailing wages and, because Allan and Martin's material costs were essentially the same as American, had American paid its workers prevailing wages, Allan and Martin would have been the lowest bidders on the projects.

The 2nd District Court of Appeal agreed as to Allan and Martin's intentional interference with prospective economic advantage claim, but not their Unfair Practices Act or Unfair Competition Law claims, holding 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." In other words, because Allan and Martin would have been awarded the contracts but for American's failure to pay prevailing wages, Allan and Martin had an "economic relationship" with the public entities awarding the contracts such that they had "the probability of a future economic benefit" that American interfered with by submitting an artificially low bid.

Supreme Court Decision

The California Supreme Court, in a unanimous decision, reversed. The five elements of an intentional interference with prospective economic advantage claim, explained the Supreme Court, are:

1. The existence, between the plaintiff and some third party, of an economic relationship that contains the probability of future economic benefit to the plaintiff;

2. The defendant's knowledge of the relationship;

3. Intentionally wrongful acts designed to disrupt the relationship

4. Actual disruption of the relationship; and

5. Economic harm proximately caused by the defendant's action.

The first element, explained the Supreme Court, contains two parts: "(1) an existing economic relationship that (2) contains the probability of an economic benefit to the plaintiff." However, where "an economic relationship with a third party is too attenuated or the probability of economic benefit is too speculative," explained the Supreme Court, there is no viable claim for intentional interference with prospective economic advantage.

In the context of public works construction, public agencies may award contracts to the lowest responsible bidder, but a public agency may also, after receiving bids, choose not to award a contract at all. Thus, held the Supreme Court, there is no "existing economic relationship" between bidders and a public entity, and Allan and Martin "cannot rely on the outcome of later events to prove that American interfered with an existing economic relationship."

Further, explained the Supreme Court, intentional interference with prospective economic advantage claims have traditionally not protected "speculative expectancies" where there isn't a sufficient degree of certainty that a plaintiff would ever have received the anticipated benefits. As applied to public bidding, explained the Supreme Court, "even if a public entity accepts the lowest bid, it retains discretion to reject all remaining bids if the contract is not consummated with the low bidder." And, further, even if a public entity were to look to the second lowest bidder, the second lowest bidder would still be "required to meet the criteria for responsible bidders and responsive bids" and its bid could still be rejected:

"For these reasons, the public works bidding process differs from the types of commercial transactions that traditionally have formed the basis for tort liability [for intentional interference with prospective economic advantage]. In ordinary commercial transactions, "there is a background of business experience on the basis of which it is possible to estimate with some fair amount of success both the value of what has been lost and the likelihood that the plaintiff would have received it if the defendant had not interfered." By contrast, in these public works contracts, the bidding was sealed, there were no negotiations, all qualified contractors were on equal footing regardless of past contractual dealings, the public entities were required to determine the bidder's responsibility, and they retained discretion to reject all bids. These circumstances counsel against extending a tortious interference claim to the bid process for these public works."

Conclusion

Roy Allan confirms that disappointed bidders on public works projects cannot bring an intentional interference with prospective economic claim against successful bidders who, based on post-award conduct, would not have been deemed the lowest responsive and responsible bidder at the time a public works contract is awarded.