M.J. Paquet, Inc. v. New Jersey Department of Transportation

171 N.J. 378, 794 A.2d 141 (2002)

Opinion Date: April 4, 2002
Business Law
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PUBLIC BIDDING— Even though New Jersey law has not adopted the concept of an equitable adjustment, this court applied the federal law concept to a case in which a governmental agency modified a contract, thereby increasing or decreasing the cost for a contractor to perform.

This case dealt with whether “an equitable adjustment should be awarded to a successful bidder of a public contract whose performance is rendered impracticable during the course of the contract.” The New Jersey Department of Transportation (DOT) accepted a bid from a contractor based, in part, on an estimate submitted to the contractor by a potential subcontractor for bridge painting work. Just before the bid submission deadline, the contractor received a significantly lower estimate for the bridge painting work. “Rather than redoing its bid submission, [the contractor] did not amend the original figure for the bridge painting work; instead, it lowered the price of several other ‘common’ items in the contract to offset the inflated price of the bridge painting work.” This is what is called an “unbalanced” bid. After the contract was awarded, OSHA changed its regulations regarding the cleaning and painting of existing bridges already painted with lead-based paint. As a result, the contractor informed the DOT that compliance with the new regulations would substantially increase its costs. It requested additional compensation, but the DOT decided to delete the bridge painting work from the contract. The contractor objected, arguing that the DOT was not authorized to delete the painting work or, in the alternative, could not delete the entire line item because the line item was inflated. The lower court agreed that the DOT could delete the bridge painting work, but made an equitable adjustment to the bid price, deleting an amount equal to what the bridge painting component should have been had the contractor submitted a “balanced” bid. The Appellate Division agreed with the lower court that the DOT could delete the bridge painting work, but held that an equitable adjustment was not warranted because “DOT specifications prohibited unbalanced bids and purportedly barred recovery.” On further appeal, the New Jersey Supreme Court, held that DOT “properly deleted the bridge painting work from the contract pursuant to the principle of impracticality. However, under the unique circumstances of this [particular] case, [the contractor was] entitled to an equitable adjustment.”

The Court had no trouble finding that the revised OSHA regulations created “new and unforeseen” work that was “essential” to the satisfactory completion of the project. Further, the unforeseen work revisions were not covered under any provision for which there was a bid price. Therefore, the revisions required because of the new OSHA regulations, constituted “Extra Work” as defined in the contract. As Extra Work, the DOT was entitled to elect to delete it, which triggered the doctrine of impracticality because the contractor “could not complete the work without additional adequate compensation and DOT would not consent to pay the additional amount that the contractor sought for the additional work. “Thus, both parties’ performance under the contract became impracticable.” The bid specifications did not provide for an equitable adjustment. “Moreover, New Jersey has not adopted the concept as a form of equitable relief in public contracts.” Nonetheless, the Court looked to federal law for guidance. Federal public contracts “contain equitable adjustment clauses safeguarding the contractor in circumstances where the government modifies the contract, thereby increasing or decreasing the cost to the contractor for the work to be performed.” The problem here was that the contractor had “submitted a bid that contained an inflated amount for the pay items related to the bridge painting work and an understated amount for other pay items in the contract.” Apparently, the Appellate Division had not disagreed with the principle of equitable adjustment, but only found it inapplicable to this particular contract. What it did was to look at the specification which said that the DOT would “not consider any claim for additional compensation arising from the bid on an item, or group of items, inaccurately reflecting the cost of such work or containing a disproportionate share of the bidder’s anticipated profit, overhead and other costs.” It was undisputed that the contractor’s bid included an inflated amount of cost, overhead and anticipated profit in the bridge painting work, while other bid items understated the same items. The contractor contended that it was “not making a ‘claim for additional compensation’ from the DOT” by requesting that the entire amount originally stated as the cost of bridge painting not be deleted from the contract. The DOT considered “it of no moment that the payment sought by [the contractor was] not compensation over and above the original contract price in that [the contractor] would have received the payment had the inflated bid item not been deleted from the contract.” Instead, “the gravamen of the DOT’s claim [was] that [the contractor’s] claim for compensation arose from an unbalanced bid item or items.” The Court found the contractor’s interpretation reasonable and the DOT’s interpretation of the phrase “claim for additional compensation” plausible. Nonetheless, the Court believed that the phrase “claim for additional compensation” was capable of various interpretations, and found the specification in question to be ambiguous. According to the dictionary consulted by the Court, the term “additional” meant “existing or coming by way of addition.” The same dictionary defined the term “addition” as “[t]he result of adding: anything added: INCREASED, AUGMENTATION.” Therefore, by its plain meaning, the phrase “claim for additional compensation” meant a claim for “increased” or “augmented” compensation. The contractor asserted that it was not seeking “additional compensation” because it was not seeking an “increase” or “augmented” compensation over the original contract price. Instead, it was seeking compensation only for the non-bridge painting work in the contract that it had completed and for which the DOT had promised to pay. Further, “[w]here a court determines that an ambiguity exists in a government contract, the writing is to be strictly construed against the draftsman, the government entity.” For that reason, the Court concluded that the contractor was not barred from seeking an equitable adjustment from the DOT. “Moreover, even if there were no such ambiguity, independent equitable grounds also require that [the contractor] receive[d] an equitable adjustment from the DOT. That remedy keeps the contractor whole when the Government modifies [a] contract.” The Court understood that “[t]he rationale for prohibiting contractors from receiving additional compensation arising from an unbalanced bid is to deter contractors from submitting such bids, ... and, we surmise to penalize them for doing so. The practice of submitting unbalanced bids is ‘admittedly susceptible of fraud and collusion.’” Here, however, “there was no evidence of fraud, collusion or front- end loading in [the] record.” Therefore, the Court found that the public policy concerns were not present in this case.

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