LAUREL CONSTRUCTION COMPANY, INC. VS. PAINTSVILLE UTILITY COMMISSION
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RENDERED: FEBRUARY 19, 2010; 10:00 A.M.
TO BE PUBLISHED
MODIFIED: MAY 28, 2010; 10:00 A.M.
Commonwealth of Kentucky
Court of Appeals
NO. 2009-CA-000845-MR
LAUREL CONSTRUCTION COMPANY, INC.
v.
APPELLANT
APPEAL FROM JOHNSON CIRCUIT COURT
HONORABLE JOHN DAVID PRESTON, JUDGE
ACTION NO. 08-CI-00138
PAINTSVILLE UTILITY
COMMISSION
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE: COMBS, CHIEF JUDGE; DIXON, JUDGE; BUCKINGHAM,1
SENIOR JUDGE.
DIXON, JUDGE: Appellant, Laurel Construction Company (Laurel
Construction), appeals from an order of the Johnson Circuit Court granting
1
Senior Judge David C. Buckingham sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statutes
(KRS) 21.580.
summary judgment in favor of Appellee, Paintsville Utility Commission. Finding
no error, we affirm.
The Paintsville Utility Commission (Commission) is a municipal
entity that operates the water, sewer and gas services in Johnson and Lawrence
Counties. In February 2007, the Commission entered into a grant assistance
agreement with the Kentucky Infrastructure Authority (KIA) to help fund the
construction of a new water tank in Johnson County. Section 3 of the grant
agreement provided, in relevant part:
B. The [Commission] shall perform and/or cause to be
performed all necessary acts (consistent with KRS 45A
and in accordance with applicable laws) to plan, design
and construct the Project including: the procurement of
land, easements and rights of way; professional services,
including but not limited to architectural and engineering
services; construction contractor(s); and equipment
and/or materials.
The grant money was part of the multi-county coal severance funding provided for
in the Kentucky state budget. The remaining funding for the water tank project
was to come from the Commission’s general fund.
The Commission thereafter hired Sisler-Maggard Engineering, PLLC,
as the design engineers for the project. Joe Sisler served as consultant and design
engineer. After the project design was complete, the Commission posted an
advertisement soliciting sealed bids for a water tank construction project. The bid
documents described the project as the construction of a 100,000-gallon
“[s]tandpipe water tank including access road, site grading, fencing, electrical
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service, telemetry, yard piping and miscellaneous appurtenances.” The bids were
to be accepted until November 15, 2007, on which date the bids would be
publically opened and read.
On November 15, 2007, the Commission unsealed the two submitted
bids for the project at a public meeting. Laurel Construction submitted a bid of
$194,000 to construct a welded-steel, paint-lined water tank. Kentucky Glass
Lined Tanks submitted a bid of $228,491 to construct a glass-lined tank.
On November 19, 2007, the Commission received a letter from Sisler
advising, “We have made an investigation and evaluation of the 2 (two) low
bidders and we are familiar with both contractors. Both contractors are competent
to perform the work. However, in conjunction with our discussions with the
Paintsville Utilities staff, we would recommend as follows: . . . KY Glass Lined
Tank Systems, Inc.” At a December 12, 2007 Commission meeting, the project
was formally awarded to Kentucky Glass Lined Tanks.
On April 3, 2008, Laurel Construction filed an action in the Johnson
Circuit Court against the Commission alleging that the Commission’s rejection of
Laurel’s bid violated KRS Chapter 45A, Kentucky’s Model Procurement Code
(KMPC), and Section 2 of the Kentucky Constitution. Following discovery, both
parties filed motions for summary judgment. On April 27, 2009, the trial court
granted summary judgment in favor of the Commission and dismissed the case
with prejudice. This appeal ensued. Additional facts are set forth as necessary.
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On appeal, Laurel Construction argues that the trial court erred by
granting summary judgment in favor of the Commission and should have, in fact,
granted summary judgment in favor of Laurel Construction as to the application
and violation of the KMPC. Laurel Construction further contends that
notwithstanding the applicability of the KMPC, the Commission’s decision was
arbitrary and not supported by findings of fact. Finally, Laurel Construction
argues that the trial court erred in finding that it failed to exhaust its administrative
remedies.
Summary judgment serves to terminate litigation when there is no
issue of material fact and the moving party is entitled to summary judgment as a
matter of law. Kentucky Rules of Civil Procedure (CR) 56. On a motion for
summary judgment, the trial court must view the evidence in the light most
favorable to the nonmoving party, and summary judgment should be granted only
if it appears impossible that the nonmoving party will be able to produce evidence
at trial warranting a judgment in his favor. Steelvest, Inc. v. Scansteel Service
Center, Inc., 807 S.W.2d 476, 480 (Ky. 1991). Summary judgment “is only proper
where the movant shows that the adverse party could not prevail under any
circumstances.” Id. (Citing Paintsville Hospital. Co. v. Rose, 683 S.W.2d 255
(Ky. 1985)).
The standard of review on appeal when a trial court grants a motion
for summary judgment is “whether the trial court correctly found that there were
no genuine issues as to any material fact and that the moving party was entitled to
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judgment as a matter of law.” Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky. App.
1996). Because summary judgment involves only legal questions and the
existence of any disputed material issues of fact, an appellate court need not defer
to the trial court's decision and will review the issue de novo. Lewis v. B & R
Corporation, 56 S.W.3d 432, 436 (Ky. App. 2001) (internal footnotes and citations
omitted). See also Goldsmith v. Allied Building Components, Inc., 833 S.W.2d
378, 381 (Ky. 1992).
The KMPC, Chapter 45A, was enacted by the legislature in 1978 and
became effective on January 1, 1979. Its stated purposes are:
(a) To simplify, clarify, and modernize the law governing
purchasing by the Commonwealth;
(b) To permit the continued development of purchasing
policies and practices;
(c) To make as consistent as possible the purchasing laws
among the various states;
(d) To provide for increased public confidence in the
procedures followed in public procurement;
(e) To insure the fair and equitable treatment of all
persons who deal with the procurement system of the
Commonwealth;
(f) To provide increased economy in state procurement
activities by fostering effective competition; and
(g) To provide safeguards for the maintenance of a
procurement system of quality and integrity.
KRS 45A.010(2). The KMPC imposes heightened requirements and reviewing
standards on “every expenditure of public funds by this Commonwealth under any
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contract or like business agreement.” KRS 45A.020(1). Such expenditures
include competitive sealed bidding on public contracts, such as the project at issue
herein. KRS 45A.080; KRS 45A.365. Pursuant to the KMPC, government
determinations about the expenditure of public funds, including those with regard
to competitive sealed bidding, “shall be final and conclusive unless they are clearly
erroneous, arbitrary, capricious, or contrary to law.” KRS 45A.355(2).
Furthermore,
The decision of any official, board, agent, or other person
appointed by the Commonwealth concerning any
controversy arising under, or in connection with, the
solicitation or award of a contract, shall be entitled to a
presumption of correctness and shall not be disturbed
unless the decision was procured by fraud or the findings
of fact by such official, board, agent or other person do
not support the decision.
KRS 45A.280.
Importantly, however, the provisions of the KMPC only apply to a
local governmental agency if the agency in question chooses to adopt them. KRS
45A.343(1). See also E.M. Bailey Distributing Company v. Conagra, Inc., 676
S.W.2d 770, 774 (Ky. 1984). When the KMPC does not apply to a government
entity’s actions, the code’s “clearly erroneous, arbitrary, capricious, or contrary to
law” standard is replaced with the standard established by Kentucky common law.
As our Supreme Court noted in Pendleton Brothers Vending, Inc. v.
Commonwealth of Kentucky Finance and Administration Cabinet, 758 S.W.2d 24,
24-27 (Ky. 1988),
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The general rule in Kentucky if the KMPC is not
involved, as stated in HealthAmerica Corp. of Ky. v.
Humana Health Plan, et al., Ky., 697 S.W.2d 946, 948
(1985), is that “absent a showing of fraud, collusion or
dishonesty, a disappointed bidder [as such] has no
standing to judicially challenge the award of a public
contract to another bidder.”
....
We acknowledge the state of the law applicable to public
purchasing before the advent of the KMPC, as expressed
in cases such as A & W Equipment Co., Inc. v. Carroll,
Ky., 377 S.W.2d 895 (1964) and Fosson v. Fiscal Court
of Boyd County, Ky., 369 S.W.2d 108 (1963), was to
assume that when a government agency awarded a
contract to one other than the lowest bidder, that award
was being made to the best bidder, and one who
challenged the bid was required to make specific
allegations of fraud or collusion, or similar misconduct,
at the outset of the lawsuit in order to state a case. See
also, Bankamerica-Blair Corp., et al. v. State Highway
Comm., et al., 265 Ky. 100, 95 S.W.2d 1068 (1936).
It is undisputed herein that neither the City of Paintsville nor the
Commission has adopted the KMPC. Nevertheless, it is Laurel Construction’s
position that the KMPC applies to this case as a result of the language contained in
the grant agreement between the Commission and KIA. We disagree.
First and foremost, we do not find that the language of the grant
agreement brings the project within the scope of the KMPC. The agreement did
not require the Commission to proceed in accordance with the KMPC but rather
only parenthetically referenced the Commission’s acts as being consistent with
KRS Chapter 45A. Second, even if this Court were to hold that the Commission
contractually agreed to be bound by the KMPC, Laurel Construction was not a
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party to the grant agreement and, thus, is without standing to assert a violation.
We agree with the trial court’s reasoning on this point:
Under Kentucky law, . . . for a breach of contract
as a stranger to the contract, the party must show that he
is an intended third-party beneficiary of that contract.
Sexton v. Taylor County, 692 S.W.2d 808, 810 (Ky. App.
1985).
....
In this case, Laurel Construction cannot show that it is an
intended beneficiary of the contract. The provisions of
the agreement do not indicate that the agreement was
made for the actual and direct benefit of Laurel
Construction. On the contrary, the agreement’s
provisions state “the parties agree that the obligations
imposed upon them are for their respective benefit . . .”
And “[i]in the event of default by the Grantee . . . [KIA]
may declare this Agreement void from the beginning
without further obligation to the Grantee and may
commence appropriate legal action to enforce its rights
under this Agreement . . . .” This language shows an
intent between the parties that no other parties have rights
thereunder.
Since Laurel Construction cannot show that the
grant assistance agreement was made for its actual and
direct benefit, it cannot prove that [it] is an intended
third-party beneficiary of the agreement. Thus, even
assuming that the Utility Commission agreed to follow
the Kentucky Model Procurement Code for the Project
via the grant assistance agreement, and even further
assuming that the Utility Commission breached the
agreement by violating the code, Laurel Construction still
has no claim because it has no standing to bring suit
under the KMPC.
Accordingly, we agree with the trial court that Laurel Construction failed to
demonstrate that the Commission’s acts were governed by the KMPC and, thus,
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the trial court properly granted the Commission’s motion for summary judgment
on such claim.
Nor do we find any merit in Laurel Construction’s claim that
notwithstanding the applicability of the KMPC, the Commission’s acts relevant to
bidding the water tank project violated Kentucky Constitution’s Section 2, which
provides, “Absolute and arbitrary power over the lives, liberty and property of
freemen exists nowhere in a republic, not even in the largest majority.” Laurel
Construction bases this arbitrariness argument on the discretionary language
contained in the bid contract, as well as the fact that its bid was rejected despite
being the lowest submitted. It is significant, however, that Laurel Construction has
not raised any specific claim of fraud, collusion or dishonesty on the Commission’s
part.
The bid advertisement and contract gave the Commission the right to
reject any bid. (“RIGHT TO REJECT: Owner reserves the right to reject any and
all bids and to waive all informalities and/or technicalities should it be in the best
interest of the Owner.”). Further, the Commission reserved a great deal of
discretion in selecting the bid. (“METHOD OF AWARD: The Contracts will be
awarded by the Owner to the low responsive, responsible, best and qualified
bidder.”). Clearly, Laurel Construction was aware from the outset that its bid
could be rejected even if it was the lowest submitted. Moreover, under the plain
language of the bid contract, the Commission had the right to look beyond the bid
price and consider factors such as maintenance and product life. The Commission
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thereafter concluded that although Laurel Construction was the low-responsive
bidder, it was not the best bidder. Kentucky law has long recognized that a low
bidder is not necessarily the best bidder:
That it is assumed when a governmental agency awards a
contract to one other than the lowest bidder, that the
award of contract is still to the best bidder, and the
burden is on one who challenges the bid to show not just
that the award was not, in fact, to the lowest and best
bidder, but that there was an abuse of discretion on the
agency's part amounting to fraud, arbitrariness or
capriciousness in awarding the contract.
Handy v. Warren County Fiscal Court, 570 S.W.2d 663, 664 (Ky. 1978)
(superseded by statute as stated in Pendleton Brothers Vending, Inc, 758 S.W.2d
24). “[M]unicipalities have wide discretion in the exercise of acceptance or
rejection, and where they reserve the right to reject, the courts will not disturb their
actions based on mere technicality, even if made unwisely or under mistake.”
Ohio River Conversions, Inc. v. City of Owensboro, 663 S.W.2d 759, 761 (Ky.
App. 1984)
Our review of the record reveals that the Commission’s decision to
reject Laurel Construction’s low bid was not arbitrary but rather was based upon
multiple considerations, including the recommendations of the Commission’s
manager and the consulting engineer. Larry Herald, General Manger of the
Commission, testified in his deposition that he recommended that the Commission
accept Kentucky Glass Lined Tank’s bid because in his experience the overall
costs of glass-lined tanks were significantly lower, resulting in savings over the
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long term. Herald explained that the Commission could clean and maintain glasslined tanks in-house, unlike paint-lined tanks which necessitated outside vendors.
Further, paint-lined tanks rust, requiring the costly and disruptive process of
draining the tank in order to scrape, clean and resurface the interior. In support of
Herald’s testimony, the Commission filed inspection and maintenance reports for
four of its other paint-lined water tanks. Further,
Joe Sisler, the project design
engineer,
corroborated Herald’s opinion as to the longer lifecycle and lower maintenance
costs associated with glass-lined tanks.
We find it significant that Laurel Construction and Kentucky Glass
Lined Tanks build two entirely different products. The Commission was not
presented with two bids for identical tanks and arbitrarily chose the higher bid.
The Commission was presented with bids for two different types of water tanks
and based upon several factors concluded that the higher bidder would, in fact,
provide the better product. We simply cannot conclude that such decision was
arbitrary and in violation of the Kentucky Constitution.
Finally, the trial court found that because Laurel Construction
premised its case on the Commission’s violation of the KMPC, Laurel
Construction was required to first exhaust its administrative remedies by filing a
protest under KRS 45A.285. The trial court concluded that “Pendleton establishes
[that] Laurel Construction’s failure to file a protest under KRS 45A.285 amounts to
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a failure to exhaust administrative remedies and bars this Court’s review of the
Utility Commission’s action.”
Although we agree with the trial court that the KMPC requires a
disappointed low bidder to file a protest under KRS 45A.285 in order to exhaust
administrative remedies, our conclusion that this case is not governed by the
KMPC necessarily renders this argument moot.
For the reasons set forth herein, we affirm the order of the Johnson
Circuit Court granting summary judgment in favor of the Paintsville Utility
Commission.
ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Scott M. Webster
London, Kentucky
Todd C. Myers
Lexington, Kentucky
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