The California Supreme Court Holds That Losing Bidder On Public Works Contract Cannot Hold Successful Competitor Liable For Interference With Prospective Economic Advantage.

Category: Business & Facilities
Date: Apr 20, 2017 01:19 PM

During a three-year period, American Asphalt South, Inc. (“American Asphalt”) outbid either Roy Allan Slurry Seal, Inc. (“Allan Slurry”) or Doug Martin Contracting, Inc. (“Doug Martin”) on numerous public works contracts to apply a slurry seal coating to roadways throughout Los Angeles, San Bernardino, Riverside, Orange, and San Diego Counties.  A slurry seal is a mixture that protects and extends the life of roadways.  Together, these contracts totaled more $14 million.

Allan Slurry and Doug Martin jointly sued American Asphalt in Riverside County for intentional interference with prospective economic advantage.  They claimed that American Asphalt had only been able to submit the lowest bid on the Riverside contracts by paying its workers less than the statutorily required prevailing wage.  Under Labor Code sections 1770 and 1771, contractors on public works projects must pay the prevailing wage as determined by the Department of Industrial Relations.  Allan Slurry and Doug Martin argued that each contractor’s material costs were effectively the same and the only difference in their bids came from American Asphalt’s deflated labor costs. 

To prove intentional interference with prospective economic advantage, Allan Slurry and Doug Martin had to show an economic relationship with some third party that makes it reasonably probable that Allan Slurry and Doug Martin would have gained some future economic benefit.  American Asphalt argued that as losing bidders, Allan Slurry and Doug Martin could not sue the successful bidder because there was no existing relationship with which to interfere and no reasonable probability that any contract would have been awarded.

The trial court agreed with American Asphalt and dismissed the lawsuit.  Allan Slurry and Doug Martin appealed.  The Court of Appeal reversed the trial court’s decision.  The Court of Appeal held that a second-place bidder on a public works contract may sue for intentional interference with prospective economic advantage against the successful bidder if the successful bidder was only able to submit the lowest bid by illegally paying its workers less than the prevailing wage.

American Asphalt requested a review by California Supreme Court.  American Asphalt argued that merely submitting a bid to a public entity does not create an existing relationship but, rather, “a hope of one.”  According to American Asphalt, under these circumstances, there is no relationship with which to interfere and no reasonable probability that a benefit will be conferred by the awarding of a contract.

The California Supreme Court granted American Asphalt’s request for review.  In a unanimous decision, the Supreme Court overturned the Court of Appeal decision and reinstated the trial court’s ruling dismissing the lawsuit.  The Court discussed the unique nature of public works contracts and held that the bidding process cannot form the basis for a tortious interference claim. As the Court explained, “[p]ublic works contracts are a unique species of commercial dealings.  In the contracts at issue here, the public entities retained broad discretion to reject all bids.  The bids were sealed, and there were no post submission negotiations.  In awarding the contracts, the public entities could give no preference to any bidders based on past dealings and were required to accept the lowest responsible bid.  In these highly regulated circumstances, [Allan Slurry and Doug Martin] had at most a hope for an economic relationship and a desire for future benefit.” 

Based on these circumstances, the Court concluded that an intentional interference with prospective economic advantage claim does not extend to the bid process for public works contracts. 

 

Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc. (2017) ___ Cal.4th ___.

 

Note:

For several years, the law was uncertain as to whether an unsuccessful bidder on a public works contract could seek damages for tortious interference from a successful competitor who obtained the contract through violation of the prevailing wage law.  The Supreme Court’s unanimous decision makes clear that in the context of public works contracts, the bidding process cannot form the basis for a tortious interference claim.

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