Category Archives: Legal Brief

Don’t Waive Your Protest: Avoiding problem specifications may require one!

By: Mark W. Leach, Esq.

A state agency just posted a solicitation that would be a great opportunity for your company. There is one specification that may hurt your chances, but you go ahead and submit a bid. Unfortunately, the agency awards the contract to a higher bidder that you know your company could outperform. But for that specification’s wording, you are confident that your company would have won. If you want to file a bid protest, though, you may have already waived it … and you might have been able to avoid the problem altogether.

For many, it’s a surprise to learn that protests can be filed against bid specifications. The catch is, the protest must be filed before bid opening. If a disappointed bidder loses out on a contract award and wants to complain about a restrictive specification, the public agency likely will rule that the bidder waived that protest.

The Federal System

Federal regulations require that protests based on bid terms must be filed before bid opening. Furthermore, if a contractor submits a bid without filing a protest of any specifications, then it has waived all objections to the bid terms. The decision in Parsons Precision Products, Inc., puts it this way: “a bidder who participates in a procurement through the point of bid opening without objection is deemed to have acquiesced in the agency’s statement of the terms and conditions.” B-249940, Dec. 12, 1992, 92-2 CPD ¶ 431.

The rationale for a seemingly harsh rule is a simple one: if a bidder knows of a problem with a bid term, it must make the agency aware in time for the agency to fix the problem. The bidder cannot instead cross his or her fingers, submit a bid, and then complain when a problem it knew about is actually held against it. By not raising concerns prior to bid opening and by submitting a bid, then, a contractor has both deprived the agency the opportunity to fix the problematic bid specification and waived its ability to later protest that bid specification.

Kentucky State Procurements

In Kentucky, the bid protest statute states that:

Any actual or prospective bidder, offeror, or contractor who is aggrieved in connection with the solicitation or selection for award of a contract may file a protest[.]

Many may miss that the statute [1] allows “prospective” bidders to protest, and [2] expressly allows protests of solicitations. Prospective bidders are included because restrictive bid terms otherwise may exclude them from submitting a bid. The solicitation could have a specification that limits potential suppliers due to the listed characteristics of the desired product, or the bid may have past performance requirements that are excessive as compared to the solicited project. Therefore, the statute allows bidders and prospective bidders to protest the solicitation, itself.

The statute and its regulation require protests to be filed within fourteen (14) days of the protestor having reason to know the basis for its protest. When protesting a solicitation, the 14-day clock starts running on the day the solicitation is posted to Kentucky’s e-procurement website.

In its protest determinations (available on-line), the Finance Cabinet has relied on the federal system’s authority. Many protests of solicitations have been denied for reasons of waiver because the protesting contractor submitted a bid for the contract.

Kentucky Local Procurements

If the solicitation is let by a county or other local public agency, there is no express protest process provided by state law. Local public agencies can opt-in to the Local Kentucky Model Procurement Code. Most cities and other public agencies have not opted-in. Even for those that have, however, the local version does not have a protest procedure, unlike the statewide Code. This lack of process can leave a company with little to no recourse. Most public agencies, though, will listen to the concerns of interested bidders. Therefore, while there may not be a formal protest procedure at the local level, voicing concerns about a solicitation can still result in a modification.

Avoiding solicitation protests

Filing a protest typically is a decision fraught with ambiguity. While a contractor does not like losing out on the contract, it also does not want to risk damaging a relationship with the public agency. Further, protests are denied more often than granted. So, the best alternative to filing a protest is not having to file a protest. Fortunately, most procurements provide a method that contractors can take advantage of to potentially fix a problematic bid specification: filing questions with the buyer.

Solicitations typically list an agency point of contact and provide a procedure for filing questions. This procedure gives the agency an opportunity to clarify an ambiguous specification or consider a modification to a bid term that may be unduly restrictive in response to a contractor’s submitted question. Answers to these questions can become formal amendments to the solicitation.

Of course, there is never a guarantee that the answer to the question is the one the contractor wants. However, by pursuing a change or clarification through the question process [1] it may avoid a protest and [2] it gives the agency the opportunity to fix the problem through the relatively informal question process than in response to a protest.

Conclusion

If you have a problem with a bid specification, there is federal and state authority that requires the filing of a protest before submitting a bid and prior to bid opening. Failure to do so can result in your protest being deemed waived and therefore denied. Protests, however, may be avoided through the relatively informal (and lower cost) process of submitting questions seeking modification or clarification to problem bid terms.

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Recovery of Damages for Breach of a Construction Contract

By: J. Mark Grundy – 502-587-3628
Jeffrey A. McKenzie – 502-587-3594

Bingham Greenebaum Doll LLP
3500 National City Tower
101 South Fifth Street
Louisville, Kentucky 40202

Kentucky allows recovery of a variety of damages when there has been a breach of a construction contract or wrongful conduct within the context of a construction job.  Actual and incidental contract damages are generally recoverable unless they are otherwise excluded in the contract.  Oftentimes, construction contracts have liquidated damages clauses which state the precise dollar amount of damages that may be recovered in the event of a breach of the contract.  Kentucky courts enforce liquidated damages clauses as long as they have some reasonable relation to the transaction.

Consequential damages are damages resulting from a party’s breach of contract that are not directly related to the breach of the contract itself.  To be recoverable in Kentucky, such damages must have been a foreseeable consequence of the breach at the time the contract was entered.  Such damages may include delay, lost profits, loss of bonding capacity, financial costs, and unabsorbed overhead.  Generally, the courts will enforce reasonable contract clauses that waive the recovery of consequential damages.

The Kentucky Fairness in Construction Act (“KFCA”), adopted in 2007, contains exculpatory clauses regarding damages.  The Act states that certain types of clauses in contracts are unenforceable, including no damages for delay clauses, which attempt to waive the right of a contractor or subcontractor to recovery costs, time or damages for delay, which are in control of the real owner of the property or the public facility.  The Act applies to commercial properties, not residential properties and certain utilities.  Therefore, delay and disruption damages may be recovered as consequential damages, unless too remote or if they violate the provisions of the KFCA.

In addition, Kentucky has a statute, Ky. Rev. Stat. Ann. § 371.180, that provides “any provision contained in any construction services contract purporting to indemnify or hold harmless the contractor from the contractor’s own negligence or from the negligence of his or her agents, or employees is void and wholly unenforceable.”

Attorneys’ fees are not recoverable as damages unless provided for in statute (such as provided in Kentucky Building Code) or by the contract.  The Kentucky Building Code is a unique and powerful statutory provision that requires payment of either the cost to repair to bring the property up to code compliance, payment of the diminution in fair market value of the property because of code infractions, plus a possible award of the cost of litigation, including attorneys’ fees.  See Ky. Rev. Stat. Ann. § 198B.130.

Kentucky allows statutory interest on pre-judgment amounts if those amounts are liquidated, and post-judgment interest at a statutory rate.

Kentucky will allow stigma damages only where there has been a “physical injury to the property.”  Mercer v. Rockwell Int’l Corp., 24 F. Supp. 2d 735 (W.D. Ky. 1998).

Kentucky allows for the recovery of punitive damages if there is tortious wrongful conduct, which is malicious or wanton in nature.  Punitive damages are not available for breach of contract.

The Kentucky Supreme Court has clarified that Kentucky follows the economic loss doctrine, stating that where there is only economic damage, and no personal injury, then contract principles rather than tort principles apply.  Kentucky courts strongly favor arbitration clauses, and will resolve any ambiguity in a contract provision regarding arbitration in favor of arbitration.  Kentucky has a statute for arbitration procedure, providing for very limited appeal of arbitration damage awards absent manifest injustice, or a clear accounting error.  The actual procedure for arbitration is usually provided for in the contract, along with provisions as to recoverable damages.

Does a Contractor’s Commercial Liability Insurance Cover Construction Defects?

By: Joseph L. Hardesty

One of the most frequently disputed insurance coverage issues in the construction industry is whether a commercial general liability insurance policy covers defective construction work.  In Kentucky, the Kentucky Supreme Court has held that CGL insurance, standing alone, does not cover a contractor’s construction defects.  However, the Kentucky Supreme Court and a subsequent federal court decision have raised the possibility that damages that result from defect work may be covered under a contractor’s CGL insurance policy.

In the case of Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., decided in 2010, the Kentucky Supreme Court addressed the issue of whether a homeowner’s claim for defective construction against a homebuilder is, standing alone, a claim for property damage caused by an “occurrence” under the homebuilder’s CGL policy. The case was brought by buyers of a newly constructed home against their homebuilder, claiming that the homebuilder’s work was so defective that the home was beyond repair and would need to be razed.  The homebuilder sought to recover damages to remediate the defective work under its CGL policy.  The policy provided that the CGL carrier would pay those sums that the insured becomes legally obligated to pay as damages because of “property damage” caused by an “occurrence.”  The policy defined “occurrence” as an “accident.”  The court found that construction defects were not an “accident.”  The court adopted the majority view that a contractor’s CGL insurance policy does not cover defective construction work.  The court relied on the doctrine of fortuity in reaching this conclusion.  The court found that under the doctrine of fortuity, for there to be an “accident” for which there is coverage, it must be shown that the loss was not intended and that the loss was a “chance event” beyond the control of the insured.  The court reasoned that the defective work was not an “accident” even though the builder did not intend to build a defective house because the term “accident” is something that does not result from a plan or design and does not result when a third party controls the event.  Therefore, the court concluded that the defective work was not “fortuitous” or an “accident,” because the homebuilder had control over the construction of the house.

Hence, the Kentucky Supreme Court has made it clear that the cost of remediating construction defects is not covered under a CGL policy.  However, in a footnote in the decision, the court left open the question of whether property damage that results from construction defects is covered by a contractor’s CGL policy.

This issue was addressed by the United States District Court for the Eastern District of Kentucky in the case of Liberty Mutual. Fire Ins. Co. v. Kay & Kay Construction, Inc. This case involved a claim by Walmart for damage to the foundation of one of its newly constructed stores due to defective site work by a subcontractor.  The issue in the case was whether the site work subcontractor’s CGL policy covered the resulting damage to the Walmart foundation.  In an order issued on January 13, 2012, the court held that if defective work damages something other than the insured’s work, it is an occurrence/accident covered by the contractor’s CGL policy.  In other words, the court held that a CGL policy does not cover an accident of faulty workmanship but it does cover faulty workmanship that causes an accident.  Hence, the court held that the resulting damage to the Walmart foundation caused by the defective site work was covered by the site work subcontractor’s CGL policy.

Based on these cases, the rule in Kentucky would seem to be that a contractor’s defective work, standing alone, is not covered by a CGL policy and the cost to repair that work is not covered.  However, damages that result from defective construction work may be covered if the Kentucky state courts choose to follow the federal district court’s ruling in Liberty Mutual.