Christopher I. McCabe, Esq.

Pennsylvania Bar Institute Sponsors CLE Primer On Mechanics’ Liens And Bond Claims

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On Thursday, December 5, 2013, the Pennsylvania Bar Institute (PBI) is sponsoring a continuing legal education course entitled “Primer on Mechanics’ Liens and Bond Claims.”

I will be a presenter, and I am looking forwarding to sharing my knowledge and experiences on the topic of bonds and bond claims on public construction projects in Pennsylvania.

The flyer on the PBI CLE course can be found here.

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Posted on by Christopher I. McCabe, Esq. in General, Surety and Bonding Leave a comment

Pa. Transportation Bill Increases Prevailing Wage Threshold To $100K For Locally Funded Highway And Bridge Projects

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On November 21, 2013, the House and Senate of the Pennsylvania General Assembly finally passed a $2.3 billion transportation bill.  Governor Corbett is expected to sign the transportation bill on Monday, November 25, in State College, Pa.

The transportation bill includes a provision that increases the threshold for prevailing wages to $100,000, but only for “locally funded” highway and bridge projects. The increase is effective with contracts entered on or after January 1, 2014.

A “locally funded” highway or bridge project is defined as one that is “funded entirely by funds”:

1) paid to counties from the Liquid Fuels Tax Fund;

2) allocated to municipalities under Liquid Fuels Tax Municipal Allocation Law;

3) made available to municipalities from the Highway Bridge Improvement Restricted Account within the Motor License Fund for expenditure on bridge rehabilitation, replacement and removal projects;

4) awarded to municipalities as transportation enhancement grants (under red light enforcement systems);

5) allocated from municipal budgetary sources using revenues derived through municipal taxes or fees; and

6) allocated to municipalities under 58 Pa.C.S.(relating to oil and gas).

For all other public projects, the prevailing wages threshold remains at $25,000.

The full transportation bill can be found here.

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Posted on by Christopher I. McCabe, Esq. in Prevailing Wage Leave a comment

Pa. Board Of Claims Will Continue To Hear Non-Procurement Code Contract Claims

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Does the Pennsylvania Board of Claims have jurisdiction to decide all “contract” claims against the Commonwealth of Pennsylvania?  Prior to 2002, the Board did have such jurisdiction, without question. However, since 2002, with the passage of Act 142, the Board has been faced “with a constant series of jurisdictional challenges” on grounds that its enabling provisions, now contained in the Procurement Code, limit its jurisdiction only to claims under Procurement Code contracts.

In a decision issued on September 11, 2013, the Board said it could and would continue to hear claims arising under non-Procurement Code contracts, even while it declined to hear the particular non-Procurement Code contract claim before it.  The Board found that it was required to read its jurisdictional statute broadly “so as to acknowledge the Board’s historical purpose, serve the public interest and avoid the potential for disruption to existing Commonwealth business and commercial interests should the validity of its non-Procurement Code contractual relations be called into doubt.”  In its ruling, the Board said that it did not believe that the General Assembly intended to radically alter the Board’s jurisdiction.  The Board agreed that restricting its jurisdiction to Procurement Code contracts only “could potentially threaten to disrupt several significant commercial and economic relationships enjoyed by the Commonwealth outside the Procurement Code arena.” The Board also pointed out that the legislative history of the 2002 amendments did not contain any discussion regarding modification of sovereign immunity coverage for contract claims against the Commonwealth.

Indeed, the Board went so far as to proclaim that: “We believe the circumstances … provide strong indication that the General Assembly did not intend to materially change the Board’s function, the scope of sovereign immunity or the long-established public policy served by the Board.”  The Board also found that a broad reading of its jurisdictional mandate “ultimately serves the best interest of the Commonwealth by providing parties contracting with a Commonwealth agency assurance that it may rely upon the agency to fulfill its obligations as well, avoiding the economic disruption that may result from public knowledge of a contrary holding.”

The Board’s decision came in the context of a claim involving a loan made by a Commonwealth agency. In August 2011, Telwell, Inc., filed claims in the Court of Common Pleas of Philadelphia County against Public School Employees’ Retirement System (PSERS).  Telwell claimed that it was owed $500,000 in overpaid interest on a loan made to it by PSERS.  The claim stemmed from the fact that the loan commitment and the note recited different interest rate terms.  The claim was eventually transferred to the Board of Claims.

When Telwell filed for summary judgment, PSERS raised the issue of the Board’s subject matter jurisdiction. PSERS claimed that Board’s jurisdiction did not extend to claims arising from a loan made by a Commonwealth agency.  PSERS further argued that it enjoyed the defense of sovereign immunity.  PSERS’s position derived support from the 2002 amendments to the Procurement Code which codified the Board of Claims by moving its jurisdictional provisions into the Procurement Code. Thus, the Procurement Code, at 62 Pa.C.S. § 1724(a), now arguably limits the Board’s jurisdiction to claims arising from a “contract entered into by a Commonwealth agency in accordance with this part…” This “part” is a reference to Part I of the Procurement Code.  Section 102(f.1) of the Procurement Code further provides that “[t]his part does not apply to loans.” Again, this “part” is a reference to Part I of the Procurement Code.  On the other hand, section 1724(c) of the Procurement Code extends the Board’s jurisdiction to “a contract entered into by a Commonwealth agency involving real property interests in which the Commonwealth agency is the respondent.”

Telwell conceded that its claim was not based on a Procurement Code contract, but it argued that the Board needed to retain jurisdiction over claims arising from all contracts with the Commonwealth. While the Board agreed with many of Telwell’s arguments (as noted above), the Board ultimately sided with PSERS, relying primarily on section 102(f.1) of the Procurement Code which explicitly exempted “loans” from its purview, and, by extension, from the Board’s jurisdiction. The Board did not see any neat way around this unambiguous and blanket exclusion.  Nonetheless, in doing so, the Board acknowledged the far reaching and potentially disastrous ramifications of a ruling that it could not hear any claims under any non-Procurement Code contracts, noting that, if a contract claim does not fall within the Board’s jurisdiction, then there is no exception to sovereign immunity and no possibility of redress against the Commonwealth.

While the Board expressed its firm view that it could continue to hear non-Procurement Code contract claims, it appears certain that contract claims arising out of Commonwealth loans cannot be heard by the Board.  This in and of itself is a far reaching decision.  Moreover, there is no guarantee that Board’s expansive view of its jurisdictional legislation will be supported by the courts.

Thus, for this reason and more, the ruling in Telwell is potentially foreboding. A party obtaining a loan from the Commonwealth or a Commonwealth agency is now suitably forewarned – there is no remedy for a breach by the Commonwealth. Moreover, any party entering into a non-loan contract with the Commonwealth or a Commonwealth agency, but outside the purview of the Procurement Code, would be wise to look both ways, and think twice.  If the Commonwealth breaches such a contract, and the contracting party is damaged, the contracting party may well be out of luck, without any recourse or remedy if the arguments in favor of limiting the Board’s jurisdiction hold sway with the Commonwealth Court or the Supreme Court.  Section 1724(b) of the Procurement Code may provide some relief to parties contracting with the Commonwealth. This subsection gives the Board jurisdiction to arbitrate claims arising from “[a] written agreement executed by a Commonwealth agency and the Office of Attorney General in which the parties expressly agree to utilize the board to arbitrate disputes arising from the agreement.”  If the contract is an non-Procurement Code contract, the contracting party should insist that the Commonwealth agency and the AG’s office sign off on using the Board of Claims to hear claims.  This would arguably effectuate a waiver of sovereign immunity.

The Board of Claims decision can be found here.

A hat tip and thanks to West Chester attorney, Paul Drucker, Esq., who brought this decision to my attention.

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Posted on by Christopher I. McCabe, Esq. in Board of Claims, Procurement Code Leave a comment

Philadelphia Inspector General Investigation Leads To Arrest Of City Contractor

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Add arrest to the long list of risks facing City of Philadelphia contractors who fudge their bids and obtain City contracts by lying on their paperwork.

As a result of an investigation by the Office of Inspector General (OIG), John Hart, owner of Hart Enterprises & Associates, a City contractor and general contracting firm, was arrested and is facing prosecution on ten felony counts of forgery and four misdemeanor counts of unsworn falsifications to authorities. The OIG investigation discovered that Hart Enterprises made numerous misrepresentations in paperwork submitted to the City for five contracts awarded between 2011 and 2012 for work at the Philadelphia International Airport. The OIG also found that the City did not properly screen the paperwork for potential fraud.   Hart Enterprises allegedly forged ten surety bonds submitted to the City, and also allegedly misrepresented its financial history and City tax status.  The OIG has also recommended that the City debar Hart Enterprises.

The investigation also prompted the OIG to issue a policy recommendation report noting several apparent weaknesses in the City’s contracting process.  The report points out that many of the representations made by potential contractors are never independently verified by City officials, allowing dishonest companies to hide negative information and secure City contracts.  The report also found “communication and coordination problems” across City departments, which prevent the City from recouping money from contractors for outstanding wage or tax obligations.  Among the report’s recommendation are more stringent review of contractor qualifications, better communication in the payment hold process, and independent verification of supporting documentation.  According to the OIG, the Hart Enterprises investigation and the policy report are the work of the OIG’s new Contract Compliance Unit, an initiative which is focused on protecting the integrity of the City’s contracting process.

An article in the Philadelphia Inquirer on the OIG investigation and report can be found here.

The OIG policy recommendation report can be found here.

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Posted on by Christopher I. McCabe, Esq. in City of Phila., Phila. Inspector General Leave a comment

City Of Philadelphia Ordinance Imposes New Disclosure Requirement For City Contractors

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City of Philadelphia contractors now have yet another requirement to contend with before they can be awarded a City contract.  This time, contractors must disclose the gender makeup of their boards and executive staff.

On September 6, 2013, Philadelphia Mayor Nutter signed Bill No. 13045701 which amends section 17-104 of the Philadelphia Code and which mandates that prospective contractors for the City disclose the current percentage of female executive officers in the company and the current percentage of females on the company’s executive and full boards; the company’s aspirational goals for the inclusion of females in executive positions and on the executive and full boards; and the intended efforts by the contractor to achieve the aspirational goals.

Bill No. 13045701 can be found here.

The bill was sponsored by Councilwoman Blondell Reynolds Brown who issued a press release touting the bill.  According to the press release, the bill was a recommendation from a 2013 report produced and sponsored by Councilwoman Reynolds Brown and reported out of the City Council Committee on Commerce and Economic Development. In the press release, Councilwoman Reynolds Brown is quoted as follows:

“We cannot manage what we cannot measure.  This bill will offer us the transparency needed to determine if a contractor values diversity in the workplace and in leadership positions.  It requires prospective contractors to put the gender of their leadership in writing, which tells them up front that gender diversity matters. We want to encourage companies to increase the number of women seated at those tables where major decisions are made, because we know that if women are not at the table, issues that are important to us end up on the menu.”

For what it’s worth, the purpose of this new contractor requirement escapes me.  What if a City contractor has no women on its board or on its executive staff?  How does the City intend to use this information?  For example, the City cannot, in a constitutional manner, mandate that only contractors that have women on their staffs or boards be eligible for City contracts or receive preferential treatment in the award of City contracts.  This new requirement is just one more burden added to already burdened City contractors.

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Posted on by Christopher I. McCabe, Esq. in City of Phila. Leave a comment

Retainage Revisited: For How Long Can A Public Owner Withhold Retainage?

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Retainage is always sore point for contractors, especially where an owner holds retainage for seemingly no good reason.  On public works projects, for how long can retainage be withheld? More and more, I am seeing public contracts in Pennsylvania where the public owner – oftentimes townships or local authorities or school districts – will grant itself the right to withhold retainage of 5% and sometimes even 10% until the project is finally completed, including until after the completion of all punch list items.  These contracts are often drafted by the hired architects or engineers who are woefully ignorant, sometimes intentionally, of the legal requirements applicable to public works contracts in Pennsylvania.

Can a public owner in Pennsylvania really hold retainage till the last nail is hammered?  The short answer is no!  The Commonwealth Procurement Code sets forth specific legal requirements for the withholding of retainage on public works contracts in Pennsylvania: 10% until the project is 50% complete, then 5% thereafter.  When must the 5% retainage be released?  At substantial completion, not final completion.

On this point, section 3941 of the Procurement Code provides:

§ 3941.  Substantial/final payment under contract.

(a) Contract containing provision for retainage.–A contract containing a provision for retainage as provided in section 3921 (relating to retainage) shall contain a provision requiring the architect or engineer to make final inspection within 30 days of receipt of the request of the contractor for final inspection and application for final payment. If the work is substantially completed, the architect or engineer shall issue a certificate of completion and a final certificate for payment, and the government agency shall make payment in full within 45 days except as provided in section 3921, less only one and one-half times the amount required to complete any then-remaining uncompleted minor items, which amount shall be certified by the architect or engineer and, upon receipt by the government agency of any guarantee bonds which may be required, in accordance with the contract, to insure proper workmanship for a designated period of time. The certificate given by the architect or engineer shall list in detail each uncompleted item and a reasonable cost of completion. Final payment of any amount withheld for the completion of the minor items shall be paid upon completion of the items in the certificate of the engineer or architect.

This statutory provision is mandatory, is the express public policy of Pennsylvania, and cannot be altered by a take-it-or-leave-it agreement.  Of course, this means that the contractor must still demand final inspection and apply for final payment before it can demand release of the retainage.  If it does this, the burden then shifts to the public owner to carry out its statutory obligation, and the contractor should then be entitled to release of all retainage, except for the certified punch list amount.

So, if your project is substantially completed, you should request final inspection and final payment.  If you are still owed retainage, except for the punch list, demand release of the retainage. If the public entity holds onto the retainage after it should be released, you are entitled to collect 10% interest on the withheld amount.  If you don’t enforce your rights to retainage, you can be certain that the engineer overseeing the public project won’t either.

An earlier post on retainage can be found here.

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Posted on by Christopher I. McCabe, Esq. in Retainage Leave a comment

Second Tier Subcontractor Recovers On Payment Bond That Waived Safe Harbor Provision

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The Pennsylvania Commonwealth Court recently held in a published opinion that the “safe harbor” provision in the Pa. Procurement Code, which shields sureties from second-tier payment claims where the general contractor has made full payment to its subcontractor, can be waived by contrary language in a payment bond.  This is welcome news for second-tier subcontractors on public works projects.  It is not welcome news for sureties, and will likely result in an immediate revision to “deficient” payment bonds issued on Pennsylvania public projects.

In Berks Prods. Corp. v. Arch Ins. Co., Berks Products Corporation, a second-tier subcontractor, supplied materials on a Wilson Area School District project under a subcontract with a first-tier subcontractor.  Skepton Construction, Inc., the general contractor, paid the first-tier subcontractor in full for the materials in question, but Berks remained unpaid to the tune of $52,679.26.  Berks then sued Arch Insurance Company which had issued a payment bond to Skepton.

Arch’s defense was that, under the “safe harbor” provision found in section 3939(b) of the Pa. Procurement Code, full payment by Skepton to the first-tier  subcontractor was a complete bar to Berks’s claim.  The statutory “safe harbor” states that: “Once a contractor has made payment to the subcontractor according to the provisions of this subchapter, future claims for payment against the contractor or the contractor’s surety by parties owed payment from the subcontractor which has been paid shall be barred.”  The “safe harbor” protects general contractors from having to pay twice – once to the subcontractor, and second to the sub-subcontractor.

In response, Berks argued that certain language of the payment bond waived the “safe harbor.” The specific language in question stated that the bond would remain in full force and effect if either the general contractor (the principal) or its subcontractor failed to pay for labor or materials. Because the first-tier subcontractor failed to pay Berks in full, the trial court found that the payment bond remained in effect and that the “safe harbor” had been waived by Arch.  On appeal, the Commonwealth Court upheld the trial court’s decision.  In its decision, the Commonwealth Court explained its holding as follows:

… the payment bond drafted by Arch herein provided that the bond shall remain in full force and effect until such time as both Skepton, the principal/general contractor, and any subcontractor, such as Tauber, make full payment for any labor and/or materials supplied for the school project. As the trial court noted, this language ensured that a third party such as Berks, which provided labor and/or materials for the project, would get paid in full.

This decision could tilt the playing field in favor of unpaid second-tier subcontractors, but only if the payment bond mirrors the language found in the Arch payment bond, or if there is other language that defeats the “safe harbor.” On the other hand, the ruling may be fleeting as sureties can easily overcome the holding by modifying any troublesome language in a payment bond.

If you are a second-tier subcontractor on a public project in Pennsylvania and remain unpaid, you should demand a copy of the payment bond and examine it carefully to determine whether the surety has waived the benefit of the “safe harbor.”  Better yet, contact experienced counsel for assistance in getting paid.

The Commonwealth Court decision can be found here.

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Posted on by Christopher I. McCabe, Esq. in Court Decisions, Surety and Bonding Leave a comment

Federal Indictment Charges Massive DBE Fraud In North Carolina

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Well, the proverbial shoe has dropped, and once again the U.S. Department of Transportation’s Disadvantaged Business Enterprise (DBE) program is in the news, with still another warning for contractors who have to comply with the DBE rules applicable to federally funded contracts.

This time, the locus is North Carolina.  The crime is conspiracy, money laundering, mail fraud, and wire fraud.  The companies charged are a paving contractor and the sham DBE it used.

On July 24, 2013, the U.S. Attorney’s Office for the Western District of North Carolina announced charges against Boggs Paving, Inc., and some of its executives, as well as Styx Cuthbertson Trucking Company Inc., the DBE firm used by Boggs.  This is from the official FBI press release:

According to allegations contained in the indictment, beginning in 2003 and through the present, Boggs Paving Inc. (“Boggs Paving”) fraudulently obtained federally and state funded construction contracts by falsely certifying that a disadvantaged business enterprise (“DBE”) or a small business enterprise (“SBE”) would perform and be paid for portion of the work on such contracts. USDOT’s DBE program provides a vehicle for increasing the participation of disadvantaged business enterprises in federally funded transportation-related projects. The indictment alleges that Styx Cuthbertson Trucking Company Inc. (“Styx”), a road construction hauler based in Monroe, North Carolina, owned by Styx Cuthbertson, was a certified DBE and SBE used by the defendants as a “pass through” entity to obtain such contracts.

To create the illusion that Styx was doing and being paid for the necessary work, the indictment alleges that, among other things, the conspirators ran payments through a nominee bank account in Styx’s name but funneled checks back to Boggs Paving and its affiliates, which were not DBEs or SBEs but were doing the actual work. The indictment further alleges that each time a deposit was made into the nominee account as supposed payment for construction work performed by Styx, a Boggs Paving employee would immediately cut a check from that Styx nominee account to the Boggs entity or another firm that had actually performed the work. In return, according to allegations contained in the indictment, Styx Cuthbertson received a kickback for allowing his name and DBE status to be used by Boggs Paving.

The seriousness of the charges can be found in the potential sentences.  This is also from the official FBI press release:

The conspiracy charge carries a maximum of five years in prison. Each wire and mail fraud count carries a maximum of 20 years in prison. The money laundering conspiracy charge carries a maximum of 20 years in prison. The money laundering charge carries a maximum of 10 years in prison. Each of the charges also carries a $250,000 fine

Needless to say, this is another wake-up call for contractors working on federally funded state highway projects.  Dot your i’s and cross your t’s!  Look before you leap!  And don’t even think about scamming the DBE program by using sham DBEs or “pass-throughs.”  If the DBE can’t perform, don’t use it. If the DBE doesn’t have equipment to perform, don’t use it. If the DBE doesn’t have the financial resources to get the job done, don’t use it. If you have any doubts about the DBE, do your due diligence.

If you can’t meet the DBE goal set for the federally funded contract because you cannot find any bona fide and capable DBEs available to perform the work, document and show your good faith efforts to meet the DBE goal, and then fight like hell for the contract award if you are the low bidder but are denied the contract.  Under the DBE regulations, a contractor cannot be denied the contract merely because it did not meet the DBE goal.  But a contractor can be charged with a crime if it meets the goal by knowingly using sham DBEs.  What’s worse? Losing the contract, but staying out of jail, or winning the contract, but going to jail?  Sounds like a no brainer to me.

The full FBI press release can be found here.  An article in the Charlotte Observer newspaper reporting on the federal charges against Boggs and its executives can be found here.

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Posted on by Christopher I. McCabe, Esq. in DBE/MBE/WBE Leave a comment

Subcontractor Officially Debarred From City Of Phila. Contracts

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On June 21, 2013, the City of Philadelphia debarred a subcontractor (and its owner) for violation of the City’s minority contracting rules.  The subcontractor, JHK, Inc., a subcontractor to prison health contractor Corizon Health Services, Inc., was debarred for two years for falsely representing its role as a woman-owned subcontractor in an agreement with Corizon.  JHK was supposed to provide first-aid services to prison inmates as a subcontractor to Corizon.  In fact, JHK provided no services.

Philadelphia Inspector General Amy L. Kurland had this to say about the debarment:

“This debarment sends a strong and definitive message: The City of Philadelphia will not tolerate businesses that circumvent the City’s antidiscrimination policies. We will continue working with Procurement, Finance and the Law Department to ensure that legitimate M/W/DSBEs have a fair shot at the contracting opportunities they deserve.”

Corizon itself previously entered into a $1.85 million settlement with the City and agreed to strengthen its corporate compliance program by reviewing all of its subcontracting agreements to ensure compliance with City anti-discrimination policies.  My post on that action can be found here.  The Inspector General’s executive summary of its investigation into Corizon and JHK can be found here.

In its press release, the Inspector General claims that this is the first involuntary debarment in the City’s history.  However, based on my own personal experience with the City’s Law Department, this claim is probably mistaken as I believe that, during the tenure of the late Procurement Commissioner Louis Applebaum, the City officially debarred a City prime contractor for falsifying invoices on a number of City contracts.

The lesson here? At the risk of beating a dead horse, don’t lie or cheat on public contracts, not to mention on any contract.  The risk is too great and the reward too little.

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Posted on by Christopher I. McCabe, Esq. in City of Phila., DBE/MBE/WBE, Phila. Inspector General, Responsibility Leave a comment

Bidder’s Response To RFP Does Not Create Contract

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In an unpublished opinion issued in November 2012, in a case brought by two disappointed bidders involving contracts awarded in 2002, the Commonwealth Court revisited some core principles of public bidding which are worth repeating.

The underlying facts concerned an Request for Proposals issued by Hazleton Area School District for school bus transportation contracts.  The school district awarded the contracts, not to the lowest bidders, but to other bidders based upon the model year of the buses proposed for the contracts. The low bidders sued and challenged the award and also asserted a tortious interference claim against the competing bidders.

As a preliminary matter, the Court noted that the low bidders’ standing as taxpayers did not also give them a cause of action for breach of contract or tortious interference.  Taxpayer standing does not translate into a claim for damages.

The Court first held that the bidders’ response to the school district’s RFP did not create a binding contract with the school district.  The bidders argued that the circulation of the RFP constituted a unilateral contract offer which was accepted by the school district.  The Court rejected this position and reiterated the long-standing rule in Pennsylvania that an invitation to bid or an RFP is merely an invitation for an offer and is not an offer itself.  Rather, the bid is the offer which the public entity is free to accept or reject.  Thus, the Court held that the issuance of the RFP did not bind the school district to award the bus contracts to the low bidders.

Second, the Court held that there was no interference by the other competing bidders with the low bidders’ “prospective” business relationship with the school district.  The competing bidders were free to ask the school district to consider the age of the buses in making its decision to award the bus contracts. This sort of conduct was privileged and could not subject the other bidders to a tortious interference claim by the disappointed bidder.

The moral of the story?  Bid protests are not easy to win, especially where the bid protests are based on unwarranted extensions of the law and where counsel argue points that have no support in public bidding law and muck up their clients’ claims with silly theories like tortious interference with contract.

The decision in Yurcho v. Hazleton Area School District can be found here.

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Posted on by Christopher I. McCabe, Esq. in Bid Protests, Court Decisions Leave a comment