RAM ENGINEERING v. UNIVERSITY OF LOUISVILLE
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RENDERED:
JANUARY 12, 2001; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
1999-CA-002698-MR
RAM ENGINEERING
& CONSTRUCTION, INC.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM GRAHAM, JUDGE
ACTION NO. 97-CI-01452
v.
UNIVERSITY OF LOUISVILLE
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
CHIEF JUDGE, GUDGEL; BARBER, AND COMBS, JUDGES.
BARBER, JUDGE:
Appellant RAM Engineering (RAM) was awarded a bid
by the University of Louisville to build a portion of the
University’s new football stadium. This award was made on
September 23, 1996 following private negotiations between the
University and the three low bidders for the construction
project.
The three low bidders included RAM and MAC
Construction.
Appellee University of Louisville (University)
issued a “Notice to Proceed” to RAM on September 26, 1996.
After
the Notice to Proceed was sent to RAM, one of the other firms
involved in the bidding process, MAC Construction, filed a
protest with the University on September 26, 1996.
was denied by the University.
This protest
MAC Construction then filed a
civil suit against the University of Louisville challenging the
award to RAM on September 30, 1996.
this action.
RAM was not made a party to
At the hearing on injunctive relief in that action,
the trial court announced that it would issue a temporary
restraining order (“TRO”), preventing RAM from proceeding with
construction.
The terms of the temporary restraining order
prohibited the University from issuing a notice to proceed to
RAM, and from allowing any work to commence or continue under the
award of the bid to RAM.
The trial court indicated that it would
issue the TRO on September 30, 1996.
The TRO was never signed or
entered into the record. MAC and University of Louisville then
entered into an agreed order terminating the MAC litigation and
declaring the contract with RAM on October 2, 1996.
RAM was not
notified of MAC’s suit, or given the opportunity to argue that
the award of the bid was fair and should not be voided.
In accordance with the Notice to Proceed and prior to
being notified of the nullification of the original bid, RAM
procured a Surety Payment and Performance Bond, Insurance
Certificates and other information required by the University.
These documents were submitted to the University on October 2,
1996 along with a letter from counsel for RAM indicating that RAM
intended to proceed with construction pursuant to the Notice to
Proceed.
Following entry of the Agreed Order in the MAC
litigation, the University rebid the project.
RAM was again the
low bidder, and was awarded the contract for a sum substantially
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less than that accepted in its original bid.
with the University on October 7, 1996.
RAM filed a protest
The University denied
the protest, and stated that no contract existed between the
parties following the initial bid.
RAM argues that the original award of the bid and
issuance of the notice to proceed constituted a valid and binding
contract, which should not have been canceled by the University,
and alleges that it is due the sum of $599,425.00, which is the
difference between the two contract amounts.
RAM asserts that
the voiding of a contract, following an award and a notice to
proceed, violates public policy, and should not be permitted by
the courts.
RAM filed a civil action requesting money damages for
the breach of the original contract.
The circuit court held that
there was a valid contract between RAM and the University based
on the acceptance of RAM’s original bid.
The University’s bid
procedure was in accordance with the provisions of the Kentucky
Model Procurement Code, codified at KRS Chapter 45A.
RAM claims
that an award to a successful bidder constitutes a binding
contract.
KRS 45A.030(5) defines “contract” as being:
[A]ll types of state agreements, including
grants and orders, for the purchase or
disposal of supplies, service, construction
or any other item. It shall include awards,
contracts of a fixed price, cost, cost-plusa-fixed-fee, or incentive type,contracts
providing for the issuance of job or task
orders; leases; letter contracts, purchase
orders; and insurance contracts . . . .
Id.
RAM asserted that the state’s acceptance of a competitive
bid formed a binding contract.
Wallace v. City of Louisa, Ky.,
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273 S.W. 720 (1920).
A Notice to Proceed is evidence that there
has been acceptance of a bid.
Paducah Junior College v.
Secretary of Health, Educ. & Welfare, 255 F. Supp. 147 (E.D. Ky.
1966).
RAM asserts that KRS 45A.030 includes a bid award such
as it received from University of Louisville as a binding
contract.
In Commonwealth Dept. of Educ. V. Gravitt, Ky. App.,
673 S.W.2d 428 (1984), the Court found that a receipt form signed
by the state which authorized a project constituted a binding
contract.
Id. at 430.
We agree with the trial court’s
determination that a contract existed between RAM and University
of Louisville following the University’s acceptance of the
initial bid, and issuance of the Notice to Proceed.
The University argued that KRS 45A.245 requires a
lawfully authorized written contract to bind the Commonwealth
before an action may be brought against the state.
The
University claimed that any agreement between RAM and the
University was not lawful, and thus cannot be considered a
binding contract under All American Movers Inc. v. Commonwealth,
Ky. App., 552 S.W.2d 679 (1977).
The University also asserts
that the bid packages specified that the Agreement would be
binding upon the parties only upon the issuance of an Award of
Purchase Contract, which was never issued to RAM under the
initial bid.
The circuit court held that the Notice to Proceed
constituted a lawfully authorized written contract between RAM
and the University, pursuant to KRS 45A.245.
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The circuit court
stated that the Notice to Proceed “indicates RAM’s offer and that
the offer was accepted, conforming with the basic requirements of
contract formation.
Most importantly. . . it evidences the
parties’ intent to be bound and is manifestly contractual in form
and effect.”
The Invitation to Bid itself states that “[i]n
submitting this bid, it is expressly agreed that, upon proper
acceptance by the Department of Purchasing of any or all items
bid above, a contract shall thereby be created with respect to
the items accepted.”
Issuance of the Notice to Proceed
constitutes formation of a binding contract as it evidences the
intent of the parties.
See: Commonwealth v. Gravitt, Ky. App.,
673 S.W.2d 428 (1984). We affirm the circuit court’s finding that
a valid and binding contract existed between the University and
RAM based on the issuance of a Notice to Proceed.
The circuit court then held that the University could
revoke the contract with RAM, based on a substantial change in
circumstances.
The “General Conditions” of the Bid Package
contain a “Termination of Contract for Convenience of Owner”
provision, permitting termination of the contract by the
University “when it is determined by the contracting authority
that such termination will be in the best interest of the
University of Louisville.”
200 KAR Section 5:312(2) allows a
state university to terminate a contract for its convenience when
it is in the best interests of the university.
Following such a
termination for convenience, the contractor may make a claim for
compensation based upon “expenses paid or incurred in performance
of the contract from the date of award through the date of
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termination for convenience.”
The University has agreed to pay a
nominal sum to RAM for any expenses incurred between September
26, 1996 and October 2, 1996.
The federal termination for
convenience clause has recently been upheld as a valid
contractual term, absent a showing of bad faith or abuse of
discretion.
Kygoski Construction Co. v. United States, 94 F.3d
1537 (Fed. Cir. 1996).
The University argues that it was not required to show
a change in circumstances, but could cancel the contract based on
the general terms of the bid package at any time.
The circuit
court stated that: “[T]he substantial change standard is the most
sound for cases involving termination for convenience clauses.
This analysis prevents the government from simply invoking the
termination for convenience clause in order to shield it from the
results of its decisions.”
The revocation of a contract based on
the “substantial change in circumstances clause” requires a
showing that the “circumstances of the bargain or the
expectations of the parties” have changed significantly.
Torncello v. United States, 681 F.2d 756, 770 (Cl. Ct. 1982).
The University asserted that the “General Conditions”
in the Bid Package permitted the University to “terminate the
contract for its own convenience when it is determined by the
contracting authority that such termination will be in the best
interests” of the University.
The University cites to KRS
45A.210 and 200 KAR 5:312 as showing that it does not have to
satisfy the “substantial change in circumstances” test prior to
voiding or terminating a contract.
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The University argues that
Kentucky law requires statutes and regulations to be construed
according to their common usage.
135 S.W.2d 682 (1939).
Green v. Moore, 281 Ky. 305,
The University asserts that it is
entitled to terminate any contract at its convenience, without
making any additional showing of need.
The bid terms and
conditions, and the law governing such bids requires the
University to pay damages when a contract is canceled.
We hold
that the applicable laws and regulations require a showing that
termination is in the best interests of the University is
commensurate with a showing of changed circumstances.
For this
reason, we affirm the trial court’s requirement that the
University show a substantial change in circumstances prior to
terminating the contract.
RAM argues that the “termination for convenience”
clause can only be used where there is a substantial change in
circumstances shown.
See: Maxima Corp. v. United States, 847
F.2d 1549 (Fed. Cir. 1988) holding that a substantial change in
circumstances is required to prevent entities canceling contracts
on a whim.
The University argues that even if it were required
to show a substantial change in circumstances, the temporary
restraining order proposed by the trial court in the MAC
litigation in 1996 forbidding construction until the lawsuit was
over was sufficient to meet that standard.
Absent any Kentucky cases on point, the circuit court
determined that the “substantial change in circumstances”
standard should be applied in the present case.
Public policy
will best be served by requiring state entities to show a need
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for termination of a contract due to a change in circumstances,
rather than being permitted to terminate contracts for any
reason, or no reason at all.
In the present case, the circuit
court’s entry of the Agreed Order voided the contract with RAM,
and constituted a substantial change in circumstances permitting
termination. We affirm the trial court’s decision and find that
the University was required to show a substantial change in
circumstances prior to terminating its contract with RAM and that
the entry of the circuit court order constituted such a
substantial change in circumstances.
RAM filed a motion to alter, amend or vacate the entry
of summary judgment in favor of the University based on the fact
that the record shows that the TRO was drawn up by the circuit
court in the 1996 MAC litigation, but never formally entered or
filed.
The circuit court stated, following a hearing between the
University and MAC on September 30, 1996, that it would enter the
TRO.
The trial court granted the TRO on the record.
Bond was
posted by MAC in the sum of $10,000 in accordance with the TRO.
The Agreed Order entered between the University and MAC and
signed by the circuit court stated that the TRO had been entered.
The University argues that the failure to formally
enter the TRO was a mere clerical error, which could properly be
corrected by the circuit court.
The University cites Potter v.
Eli Lilly & Co., Ky., 926 S.W.2d 449 (1996), which permits a
trial court to correct clerical errors in the record.
The
Agreed Order terminating the MAC litigation specified that the
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bid had been awarded in an arbitrary and capricious manner, and
that the bid award would therefore be canceled.
RAM asserts that the TRO was invalid as it was never
properly filed, and therefore argues that the TRO cannot be
relied upon as a change in circumstances permitting termination
of the contract between the University and RAM.
The circuit
court, in reviewing RAM’s motion to alter, amend or vacate,
stated that whether or not the TRO was properly entered, the
entry of the Agreed Order constituted a substantial change in
circumstances sufficient to permit the University to cancel its
contract with RAM.
We agree.
RAM claims that the TRO was intended only to delay
performance of the contract during the pendency of the
litigation, rather than to terminate the contract between the
University and RAM.
RAM alleges that for this reason the TRO
does not constitute a substantial change in circumstances
sufficient to permit revocation or termination of the
construction contract.
The Bid Package contains a clause in
Article 24 which prohibits termination of the contract by RAM
where there is a court ordered delay of up to ninety days.
RAM
claims that this clause shows that a TRO of less than ninety days
duration should not constitute a substantial change in
circumstances sufficient to permit termination of the contract by
the University.
This clause, by its terms, relates to
termination of the contract by the contractor, not the
University, and is therefore inapplicable under the present
circumstances.
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The circuit court found that while the effect of the
TRO may have been to merely delay construction, the effect of the
Agreed Order was to terminate the contract.
We agree, and hold
that entry of the Agreed Order requiring rebidding of the package
constitutes a substantial change in circumstances justifying
termination of the contract with RAM.
RAM also claims that it was denied fundamental due
process as RAM was not a party to the lawsuit.
RAM argues that
the circuit court had no subject matter jurisdiction in the MAC
litigation as RAM was an indispensable party to the action, and
was not joined in the action.
Kentucky Unemployment Insurance
Commission v. Providian Insurance Group, Ky., 981 S.W.2d 138
(1998), holds that there is no subject matter jurisdiction where
indispensable parties are not made part of the action.
CR 19.01 defines an entity as an indispensable party as
one who shall be joined if:
(a) In his absence complete relied cannot be
accorded among those already parties; or (b)
he claims an interest relating to the subject
of the action and is so situated that
disposition of the action in his absence may
(i) as a practical matter impair or impede
his ability to protect that interest or (ii)
leave any of the persons already parties
subject to a substantial risk of incurring
double, multiple or otherwise inconsistent
obligations by reason of his claimed
interest.
While the MAC action did affect the contract between the
University and RAM, the circuit court’s decision was that the
bidding procedure had been unlawful or improper, and that as a
result, the contract must be declared void.
RAM was not a
necessary party to that action, as RAM had no involvement in the
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actions complained of as being improper or unlawful.
RAM’s
presence or absence had no effect on the findings of the parties,
and thus RAM was not an indispensable party.
RAM had no right or
ability to affect the outcome of the litigation, and no right to
a contract issued in violation of law.
Where a prospective
litigant has no right to the property which is the subject of the
action, then he cannot be considered an indispensable party.
Field v. Evans, Ky. App., 675 S.W.2d 3, 4 (1983).
We hold that RAM was not denied due process, and was
not an indispensable party to the MAC litigation.
For this
reason, the orders of the Franklin Circuit Court are affirmed.
ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Robert C. Ewald
Kenneth W. Brown
Louisville, KY
Barbara Reid Hartung
Holland N. McTyeire, V
Louisville, KY
Thomas H. Lyons
Office of Unviversity Counsel
University of Louisville
Louisville, KY
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