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Monday, January 27, 2014

Bid Case in Indiana

Last week, we noted Michael Dorelli and Kimberly Cohen's recent article in the Indiana Law Review on developments in contracts law in Indiana.   This week, we will be summarizing some of the important cases discussed in that article.  

SchoolEast Porter County School Corporation v. Gough, Inc. is a pretty typical bid case.  Gough, Inc. (Gough) submitted a bid of around $3 million to the East Porter County School Coporation (the County) on some additions, presumably to school buildings.  Just after the deadline for the submission of bids, but likely before the bids were unsealed, Gough tried to withdraw its bid, claiming that its bid was the result of an inadvertent clerical error.  One month later, the County awarded the contract to Gough.  Gough's president notified the County that the bid was incorrect and stated that Gough would not accept the contract.  Gough returned the contract to the County unsigned.

When the County tried to enforce the contract, Gough brought suit, seeking a declaration that its bid be rescinded and its bid bond released.  The County counterclaimed, alleging breach of contract by both Gough and its bid bonding agency, Travelers Casualty and Surety Company of America (Travelers).  The trial court granted the Gough and Travelers summary judgment, citing a 1904 case that permitted excuse of a contractor's bid based on mistake.  

The law in Indiana excuses bids based on mistakes in calculation or clerical errors but not based on errors in judgment.  Gough's presidnet submitted an affidavit in which he stated that on the day that Gough submitted its bid, its total of the bids of its subcontractors and its own cost estimates came to just over $3.3 million.  "For psychological reasons," Gough wanted to get the bid below $3.3 million, but they spoke of trying to get to 299 or 2998.  They thus mistakenly wrote down a bid of $2.998 million, which they then arbitrarily cut down to $2,997,900, when they apparently intended $3,299,700.  Gough then quickly realized that the error would result in a $200,000 loss on the project, so Gough attempted to pull the bid.

The Court of Appeals found that, as a result of the error, the minds of the parties never met and the County "would obtain an unconscionable advantage" as a result of Gough's mistake.  Because Gough timely notified the County of the mistake, the County was not in any way harmed by its withdrawal of its bid.  As a result, the Court ruled that the County had no right to enforce Gough's erroneous bid, nor did Traveler's have any obligation to pay its bid bond.  

I have no problem with this result, but the "meeting of the minds" language strikes me as misplaced in this context.  Many contracts professors dislike the phrase "meeting of the minds" because it suggests that subjective agreement on terms is what is required when the test for whether or not a contract formation is objective.  Twenty bishops could attest to Gough's president's veracity and still he would be bound if a contract had actually been formed.  But here no contract was formed because the bid was withdrawn before it was accepted.  In this circumstance, courts should really only ask two questions.  First, was the bid irrevocable?  If so, Gough should bear the burden of its own mistake -- and the existence of the bond suggests that the parties have allocated the burden.  If not, the second question is whether the bid was relied upon, and it was not.  So really the case should turn on whether or not the bid was irrevocable and not on whether the parties "minds" met or on how the court categorizes Gough's mistake.

This is not to find fault with the Court in this case, which simply followed Indiana precedent.  But the case nicely illustrates the difficulties in distinguishing between clerical or calculation errors and errors of judgment.  Sure, Gough's principals made a clerical mistake reducing their bid by $330,000 when they meant to reduce it by only $30,000, but one could also argue that the decision to reduce the bid is a judgment, especially when one does so for "psychological reasons."  Once they made the decision to reduce their bid, the fact that they committed a clerical error in carrying out that judgment is epiphenomenal.  

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