Bid shopping violates state's unfair trade law

August 11, 2010

Since before the pyramids were built, subcontractors have complained vociferously about the practice of bid shopping. It should be remembered, however, that for every victim of bid shopping, there is at least one beneficiary.

In September, the Connecticut Court of Appeals ruled that the failure of a general contractor to award an electrical contract to the subcontractor it listed in its submission to the public owner on a school construction project violated the state's Unfair Trade Practices Act. The court found that, as a matter of law, bid shopping, as practiced in the case before it, was immoral, unethical, oppressive, or unscrupulous, giving rise to the jilted subcontractor's ability to recover its lost profits.

Connecticut is one of many states that have enacted unfair trade practices laws. The Connecticut version allows private parties to sue to collect damages where an injury results from unfair or deceptive acts or practices in the conduct of any trade or commerce. Specifically, the statute provides a remedy for a person (or corporation) that has sustained an ascertainable loss as a result of conduct that is immoral, unethical, oppressive, or unscrupulous.

In the case before the court, the subcontractor, Johnson Electric Company Inc., filed a complaint against the general contractor, Salce Contracting Associates Inc., in which it alleged that the general contractor had violated the trade practices law by failing to award it a subcontract to do the electrical work on a public school project. In submitting its bid to the school district, the general contractor was required to list its subcontractors.

In its bid solicitation, the general contractor submitted a price for electrical work higher than the price the subcontractor quoted to the general contractor. After the award of the construction contract to Salce, it asked the subcontractor to reduce its price to reflect a lower bid price that Johnson had offered to a competing general contractor. When Johnson refused to lower its price, Salce entered into a contract with a different electrical subcontractor.

There was ample evidence that subcontractors routinely provide different bids to different general contractors based on multiple factors, including prior experience with general contractors. There was also evidence that it was industry practice that the named subcontractor would actually receive the work. In addition, there was also a finding that it was unethical, unfair, and inconsistent with normal industry practice for a general contractor to engage in bid shopping among nonlisted subcontractors.

Unethical behavior

Salce, the general contractor, defended the bid shopping on the grounds, among others, that there could not be a violation of the unfair trade law without evidence that it had engaged in a repeated course of misconduct. The court of appeals rejected this notion, finding a single incident could be actionable.

The general contractor also attempted to defeat the claim on the basis that its conduct in engaging in bid shopping did not meet the statutory unfairness standard, claiming that its conduct was merely passive in refraining from doing an act.

The court of appeals squarely found that bid shopping was unethical behavior that violated the state's Unfair Trade Practices Act. The court conceded that perhaps an unethical deviation from accepted trade practices that causes only minor injury might not be actionable, but that was not the case here. The court found that the general contractor deliberately refused to conform its conduct to an established trade practice in the construction industry, and that the general contractor took these actions for the sole purpose of maximizing its profits.

Recovering lost profits

The evidence was that the electrical subcontractor submitted a bid proposal in the amount of almost $597,000. The subcontractor's president testified that its standard profit margin was 8% of the price quoted to the general contractor. The general contractor argued that since the subcontractor had offered to do the job for different sums for different general contractors, the 8% profit margin did not prove ascertainable damages. This argument was rejected.

Lessons learned

One of the facts that might limit applicability of this case to other bid shopping scenarios is that the general contractor listed the subcontractor in its bid to the owner. However, a fair reading of the case does not appear to base the outcome on this fact. There is broad language in the case finding bid shopping to be unethical as a matter of law, since it violates industry practice; thus, general contractors who engage in this conduct may be liable to the injured subcontractor even if the general contractor did not list the subcontractor in its bid submission to the owner. It may simply be enough for the subcontractor to show that the general contractor used its bid in giving its price to the owner.

         
 

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