Alaska International Construction, Inc. v. Earth Movers of Fairbanks, Inc. , 697 P.2d 626 ( 1985 )

OPINION

MATTHEWS, Justice.

This is an appeal from a decision of the superior court regarding the acceptance of bids for a road construction project. The court held that the Alaska Department of Transportation and Public Facilities (hereafter “the agency” or DOT/PF) had improperly awarded the project to Alaska International Construction, Inc. (hereafter AIC) rather than Earth Movers of Fairbanks, Inc. (hereafter Earth Movers).

I.

The facts in this appeal are not in dispute. On March 20, 1984, the agency opened bids on a grading and drainage road project near Nome. Earth Movers submitted the apparent low bid of $3,396,-998.80. AIC, the apparent second low bidder, submitted a total bid of $3,476,680.63. However, a discrepancy was noted in AIC’s bid; the numerical price quoted for the “mobilization item” was $90,491.00, while the price for this item as written out was “Nine Thousand Four Hundred Ninety-One Dollars.”

At this point, the contracting officer followed the agency’s procedure as provided in § 102-1.06 of the Alaska Department of Transportation and Public Facilities Standard Specifications for Highway Construction.¹ That section provides in relevant part that, “[i]n ease of a descrepancy [sic.] between the prices written in words and those written in figures, the prices written in words shall govern.” Relying on this regulation, the contracting officer recomputed AIC’s bid by reducing the figure for mobilization from $90,491.00 to $9,491.00. AIC was not asked for clarification. As a result, AIC’s total bid became $3,395,-680.63, $1,300 less than Earth Movers’s bid.²

After the agency had notified all bidders that it intended to award the contract to AIC, Earth Movers protested the agency’s decision based on the agency’s Standard Specifications for Highway Construction § 102-1.07(2) which states that irregular bid proposals shall be rejected if the irregularity may tend to make the proposal incomplete, indefinite, or ambiguous as to its meaning.³ The agency denied Earth Movers’s protest and reiterated its intent to award the contract to AIC based on § 102-1.06.⁴

Earth Movers then sought judicial review of the contract award by seeking a temporary restraining order and preliminary injunction. The superior court issued a preliminary injunction on April 2, 1984, which enjoined the agency from awarding the contract to anyone other than Earth Movers. The court subsequently made the preliminary injunction permanent, finding that AIC’s mistake was “a material variance that gave the bidder a substantial advantage over other bidders, thereby restricting or stifling competition....” We agreed to review AIC’s appeal to this court on an expedited basis, and have consolidated the agency’s appeal with it. On May 23, 1984, we entered an order reversing the judgment of the superior court and remanding the case with directions to dismiss the complaint. This opinion explains the reasons for our decision.

Two issues are presented. The first is whether the agency should have rejected AIC’s bid because of its mistake. This involves consideration of whether AIC was entitled to withdraw its bid because of the mistake. If AIC could have withdrawn, then it could have chosen whether or not to perform, an option which would have given it a competitive advantage over the other bidders. If this was the case, then the DOT/PF should have rejected AIC’s bid. See King v. Alaska State Housing Auth., 512 P.2d 887 (Alaska 1973); Chris Berg, Inc. v. State Dept. of Transp., 680 P.2d 93, 94 (Alaska 1984). The second issue is whether the agency erred by applying its policy favoring words over numerals when it could have determined that the numeral expressed was the intended amount.

II. STANDARD OF REVIEW

In reviewing an agency’s acceptance or rejection of bids for public projects, this court has applied an abuse of discretion standard of review. See Chris Berg, Inc. v. State Dept, of Transp., 680 P.2d 93, 94 (Alaska 1984); State v. Bowers Office Products, Inc., 621 P.2d 11, 13 (Alaska 1980); Kelly v. Zamarello, 486 P.2d 906, 917-18 (Alaska 1971).⁵ In this case, the superior court did not specify the standard of review which it applied, but it is clear from the record that it gave the agency’s findings little, if any, deference. Thus, the superior court apparently substituted its judgment for that of the DOT/PF.

Earth Movers contends that the trial court correctly substituted its judgment because the DOT/PF exercised no discretion, but merely mechanically applied Specification § 102-1.06 to AIC’s bid. Further, Earth Movers points out that the agency’s letter of April 18, 1984, which explained why AIC’s mistake did not give it the right to withdraw, was written sixteen days after the court had enjoined awarding the contract to AIC.

The agency’s determination clearly required an understanding of the type of business involved. DOT/PF employed this expertise when it determined that AIC’s mistake did not give it the right to withdraw its bid. The fact that the determination was not actually written until after the award of the contract may raise questions as to whether the determination is merely a post hoc rationalization. But this possibility at most means that the court should subject the findings to more critical scrutiny. The superior court was not free to disregard the agency’s finding, but was required to state why it was an unreasonable one.

III. DID THE AGENCY ABUSE ITS DISCRETION BY DETERMINING THAT AIC’S BID COULD NOT BE WITHDRAWN BECAUSE OF ITS MISTAKE?

The crucial issue in this case is whether the DOT/PF had a reasonable basis for concluding that AIC could not withdraw its

bid. As noted above, if AIC could have withdrawn, it would have been in a more advantageous situation than other bidders, and the DOT/PF then would have been obliged to reject AIC’s bid.

The prevailing view, and the one which we adopt, is that a contract bidder may withdraw its bid because of a clerical mistake if (1) the mistake is of such consequence as to render enforcement unconscionable; (2) the mistake is material; (3) the mistake occurred despite ordinary care by the bidder; and (4) it is possible to place the other party in the status quo. In addition, the bidder must act promptly in order to be entitled to obtain rescission. See, e.g., City of Devils Lake v. St. Paul Fire & Marine Insurance Co., 497 F.Supp. 595, 597 (D.N.D.1980); M.J. McGough Co. v. Jane Lamb Memorial Hospital, 302 F.Supp. 482, 485 (S.D.Iowa 1969); M.F. Kemper Const. Co. v. City of Los Angeles, 37 Cal.2d 696, 235 P.2d 7, 10 (1951); Boise Junior College District v. Mattefs Const. Co., 92 Idaho 757, 450 P.2d 604, 605 (1969); State v. State Const. Co., 203 Or. 414, 280 P.2d 370, 380 (1955); Puget Sound Painters, Inc. v. State, 45 Wash.2d 819, 278 P.2d 302, 304 (1954). See generally 10 E. McQuillin, The Law of Municipal Corporations § 29.67, at 383 (3d ed. 1981); Annot., 2 A.L.R.4th 991 (1980).

Here, the most appropriate subject of inquiry is whether requiring AIC to perform according to the terms of its mistaken bid would be unconscionable, for if so, then the mistake necessarily would be material.⁶ In a letter dated April 18, 1984 the agency stated that AIC’s mistake was not material, and by implication, that requiring performance would not be unconscionable. Thus, it concluded that AIC would not have been permitted to withdraw its bid and recover its bond.⁷

The agency’s letter relies on the fact that the difference between the mobilization bid price in words and figures was less than two and one-half percent of AIC’s total bid for the project and that AIC would likely not be able to control its costs within such a small margin. In other words, the agency determined that even an $81,000 variation was not material in view of the large size of the project. The letter also relies on the fact that AIC’s total bid was only slightly lower than the next bid.

This holding is in concert with decisions from other jurisdictions. Generally, in those cases which have found that a unilateral mistake will lead to an unconscionable result, the bid error has been considerably larger than two and one-half percent of the total bid.⁸ The size of the bid error is not necessarily the determining fact of unconscionability. The Restatement (Second) of Contracts also contemplates that an erring bidder, in order to establish facts necessary for unconsciona-bility, must prove that he would lose a substantial amount of money.⁹ Further, the fact that the mistaken bid is not greatly disproportionate to other bids is relevant to the unconscionability question.¹⁰

All of these factors indicate that the agency was correct in making its determination. The mistake made was a small one compared to the size of the project and within the expectable variation of the contractor’s costs. The mistake would not cause the bidder to lose money. The mistaken bid differs only slightly from one that was not mistaken. In view of these facts we conclude that there was a reasonable basis for the agency’s determination that it would not have been unconscionable to force AIC to perform.¹¹

IV. DID THE AGENCY ABUSE ITS DISCRETION BY APPLYING ITS REGULATION FAVORING WORDS OVER NUMERALS?

Earth Movers argues that this court’s decision in Chris Berg, as well as decisions from other jurisdictions, establish that the agency abused its discretion by following its regulation favoring words over numerals when AIC’s intended bid as to the mobilization item was apparent from the bid documents. We assume for purposes of this discussion that Earth Movers is correct in its assertion that AIC’s intent could be determined without resort to extrinsic evidence.¹²

This court held in Chris Berg that the State Department of Transportation abused its discretion by not interpreting a bid according to the bid’s obvious intent discoverable from the face of the bid. Earth Movers essentially argues that AIC’s bid should have also been interpreted by its intent. We conclude that this argument should be rejected.

First, Chris Berg involved a situation where the agency treated the bidder’s mistake in conflict with its statutory objective under AS 35.15.050 of awarding contracts to the “lowest responsible bidder.” Chris Berg, 680 P.2d at 94. In the present case, the agency has exercised its discretion in a manner which furthers that objective. Assuming that enforcement would not be unconscionable, public policy favors holding a contractor to its bid, even if that bid is apparently mistaken.

Second, the agency in the present case, unlike the situation in Chris Berg, acted pursuant to a well-defined policy. This court noted in Bowers Office Products, 621 P.2d at 13, that “public policy requires carefully drawn public competitive bidding standards and strict compliance with those standards.”

Third, the court based its holding in Chris Berg on its finding that the agency could not reject a bid as nonresponsive because it contained a minor technical defect or irregularity. Although the mistake in AIC’s bid is more substantial, the agency determined that it was not of a nature requiring rejection of the bid.

Earth Movers cites several Federal Comptroller General opinions.¹³ The most supportive language for Earth Movers is found in B-158962, 45 Comp.Gen. . 682 (1966). That case also involved a bidding provision stating that prices written in words shall govern in the event of variations between words and numerals. The case states:

It would be patently absurd and inconsistent with the bid itself to view the matter as in the nature of a bid ambiguity. We believe that the invitation provision quoted above has reference to ambiguities in bids and provides a means whereby they must be resolved. But we do not believe that the provision should be construed so as to preclude the correction of apparent clerical errors. It is not necessary to go beyond the bid itself to ascertain the intended bid of Draw; that is, the written words were patently in error and the written figures constituted the bid intended.... To hold otherwise would be grossly arbitrary and wholly inconsistent with the bid itself.

Id. at 684-85. However, the mistake in the above case involved a 1,000 fold variance between the bid price in words as compared to numbers, which would have changed the bid from $45,000.00 to $45,000,000.00. Clearly such an error was substantial. Un-conscionability was not a factor since the mistake overstated the bid rather than understating it and would have taken the bidder out of the running for the contract. The federal rule as expressed in IB J. McBride and T. Touhey, Government Contracts § 12.40[2], at 12-69 (1983), is that a contracting officer cannot change the bidder’s price in the total column when an obvious error in computation is present, even though the invitation expressly permits him to do so, if such change would be substantial. Since the agency in the present case ruled that the error was not so substantial as to justify rescission, its decision seems consistent with this expression of the federal rule.

Earth Movers also alleges that under federal law a mistaken bid cannot be corrected when the correction would displace an otherwise low bidder and the existence of the mistake and the bid actually intended are not clearly ascertainable from the bid documents themselves. It contends that the agency’s application of its rules to AIC’s bid amounted to a correction of the bid to a lower amount.¹⁴ However, DOT/PF did not correct a mistake in order to make the bid consistent with the intent of the bidder. Rather, it applied its words over numerals clause to arrive at the total figure for AIC’s bid.

Earth Movers cites a Maryland State Board of Contract Appeals case, In the Matter of Appeal of Richard Klein, Inc., MSBCA 1116 (Feb. 23, 1983), in which the Board rejected application of a words over numerals clause. The Board stated as follows:

However, while G.P.-3.01 [words over numerals] properly may be utilized to resolve certain discrepancies in bids, it cannot be applied with blinders. When G.P.-3.01 produces an inequitable result and the bidder alleges error, the procurement officer cannot ignore the mistake and enforce an unconscionable result. He must permit the bidder to correct or withdraw if warranted....

(Emphasis added). Again, this case simply restates the issue discussed above: whether the agency abused its discretion in deciding that AIC’s mistake was not material and in deciding that requiring performance would not be unconscionable.

Earth Movers also argues that the Standard Specification 102-1.06¹⁵ applies only to unit prices and that AIC’s mistake related not to a unit price, but a lump sum price. The State responds by contending (1) that the last sentence of the specification is not limited to unit prices, (2) that in any case the term unit price as used in the specifications includes lump sum prices, and (3) that the State has uniformly so construed the specifications. We conclude that both readings of the specification are reasonably possible and that appropriate deference to the agency requires that its interpretation be given effect. In Rose v. CFEC, 647 P.2d 154, 161 (Alaska 1982), we stated:

[W]here an agency interprets its own regulation, as in the present case,, a deferential standard of review properly recognizes that the agency is best able to discern its intent in promulgating the regulation at issue. K. Davis, Administrative Law Treatise § 7.22, at 105.08 (2d ed. 1979).

For the reasons stated, the judgment of the superior court has been reversed.

1 . This policy was also expressed in the bid instructions.

2 . AIC in fact intended the higher amount, $90,-491.00, rather than $9,491.00.

3 . This specification provides:

102-1.07 Irregular Proposals. Proposals will be considered irregular and shall be rejected for the following reasons:

2. If there are unauthorized additions, conditional or alternative bids, or irregularities of any kind which may tend to make the proposal incomplete, indefinite, or ambiguous as to its meaning.

4 . The agency apparently concluded that § 102-1.07(2) did not apply because 102-1.06 operated to cure any irregularity.

5 . This standard is appropriate where a question of law implicates the agency's expertise as to complex matters or involves the formulation of fundamental policy. Rose v. Commercial Fisheries Entry Comm’n., 647 P.2d 154, 161 (Alaska 1982). Once the interpretation of a regulation is clear, the application of the law to the particular factual circumstances of a given case is a matter committed to the agency’s sound discretion. Id.; Bowers Office Products, 621 P.2d at 13.

6 . Several courts have used the concept of un-conscionability to cover elements of materiality as well. See State v. Union Constr. Co., 9 Utah 2d 107, 339 P.2d 421 (1959) (court, without referring to materiality, states that mistake must be such that bidder would suffer substantial detriment by forfeiture); Donaldson v. Abraham, 68 Wash. 208, 122 P. 1003 (1912). Because of our determination on the subject of unconscionability, we need not discuss the rest of the factors which must be present in order to withdraw a mistaken bid.

7 . The letter stated in relevant part:

3. The difference between the mobilization bid price in words and figures was $81,000, less than 2 ½% of AIC’s total amount bid for the project. Although this amount will be deductible from AIC’s potential margin for profit, it does not have the potential to be financially disastrous for AIC or to impinge on the ability of AIC to complete the project as a whole. Further it is unlikely that AIC could control its costs on the project to within a margin of plus or minus 2½%.

4. The State’s experience shows that bids for mobilization characteristically vary widely between bidding contractors on specific projects. The fact that AIC’s bid was significantly lower than that of other bidders could not in itself be considered material, especially since the resultant total amount bid was only slightly lower than the next low bid.

8 . See, e.g., Peerless Casualty Co. v. Housing Auth. of Hazelhurst, 228 F.2d 376 (5th Cir.1955) (Applying Georgia law) (7.3%); Dick Corp. v. Associate Electric Co-op, Inc., 475 F.Supp. 15 (W.D. Mo.1979) (6.8% bid error—$1,000,000); State ex rel. Arkansas Hwy Comm'n v. Ottinger, 232 Ark. 35, 334 S.W.2d 694 (1960) (22%); Boise Junior College Dist. v. Mattefs Constr. Co., 92 Idaho 757, 450 P.2d 604 (1969) (14%); Wil-Fred’s, Inc. v. Metropolitan Sanitary Dist., 57 Ill.App.3d 16, 14 Ill.Dec. 667, 372 N.E.2d 946 (1978) (17%); People ex rel. Dept. of Public Works & Bldgs v. South East Nat. Bank, 131 Ill.App.2d 238, 266 N.E.2d 778 (Ill.App.1971) (10%); Santucci Constr. Co. v. County of Cook, 21 Ill.App.3d 527, 315 N.E.2d 565, 569 (1974) (Mistake of over 40%); Baltimore County v. John K. Ruff, Inc., 281 Md. 62, 375 A.2d 237 (1977) (7.6%); City of Baltimore v. DeLuca-Davis Constr. Co., 210 Md. 518, 124 A.2d 557 (1956) (33%); Union & People’s National Bank v. Anderson-Campbell Co., 256 Mich. 674, 240 N.W. 19 (1931) (6.2%); Mississippi State Bldg. Comm’n v. Becknell Constr., Inc., 329 So.2d 57 (Miss.1976) (4.7%); School District of Scottsbluff v. Olson Constr. Co., 153 Neb. 451, 45 N.W.2d 164 (1950) (13.3%); Kenneth Curran, Inc. v. State, 106 N.H. 558, 215 A.2d 702 (N.H. 1965) (97.8%); Cataldo Constr. Co. v. County of Essex, 110 N.J.Super. 414, 265 A.2d 842 (N.J.Sup.1970) (41%); Conduit & Foundation Corp. v. Atlantic City, 2 N.J.Super. 433, 64 A.2d 382 (1949) (35%); State Highway Comm’n v. State Constr. Co., 203 Or. 414, 280 P.2d 370 (1955) (20%); Rushlight Automatic Sprinkler Co. v. Portland, 189 Or. 194, 219 P.2d 732 (1950) (23%); Jordan v. Beaumont, 337 S.W.2d 115 (Tex.Civ.App.1960) (16%); Puget Sound Painters, Inc. v. State, 45 Wash.2d 819, 278 P.2d 302, 302-03 (1954) (probably 100% error); Town of La Conner v. American Constr. Co., 21 Wash.App. 336, 585 P.2d 162. (Wash.App.1978) (37%). But see City of Devil’s Lake v. St. Paul Fire & Marine Ins. Co., 497 F.Supp. 595 (D.N.D.1980) (4½%—but bidder would lose substantial amount of money); Smith & Lowe Constr. Co. v. Herrera, 79 N.M. 239, 442 P.2d 197 (N.M.1968) (3½% error).

9 . Compare Illustration 1 with Illustration 2 of Restatement (Second) of Contracts § 153 (1981).

10 . Cf. Kenneth E. Curran, Inc. v. State, 106 N.H. 558, 215 A.2d 702, 704 (1965); Rushlight Automatic Sprinkler Co. v. Portland, 189 Or. 194, 219 P.2d 732, 753 (1950); State Highway Comm'n v. State Constr. Co., 203 Or. 414, 280 P.2d 370, 381 (1955); Boise Junior College District v. Mattefs Constr. Co., 92 Idaho 757, 450 P.2d 604, 608 (1969).

11 . Earth Movers also argues that AIC's mistake was an "irregularity” that made its bid "indefinite or ambiguous to its meaning” which under Standard Specification § 102-1.07(2) requires rejection of the bid. This argument is without merit because the agency's application of the previous section 102-1.06, which gives preference to written figures over numeric figures, removed any ambiguity and left as the only question whether AIC’s mistake would force an unconscionable result.

12 . The other bids for mobilization ranged from slightly over $200,000.00 to almost $450,000.00. The agency’s own engineer’s estimate for this item was $300,000.00. On the other hand, by way of illustrating the often uncertain nature of determining intent solely from a document: (1) AIC was performing or about to perform another contract in the Nome area and might be expected to have lower mobilization costs than other contractors; (2) the difference between AIC’s mistaken bid and its intended bid was less than the difference between its intended bid and that of any other bidder; and (3) in allocating shared mobilization costs between two contracts good reasons might exist for dividing costs unequally.

13 . Earth Movers relies on AS 35.15.050 to invoke the Comptroller General Decisions. This statute provides in part:

The department shall make the award in compliance with applicable federal law and the regulations promulgated under it, with this title, and in compliance with AS 37.05, and the rules and regulations promulgated under it, where they are not in conflict with this title and federal law.

However, as indicated infra, federal decisions do not hold that an agency policy favoring written out figures may not be followed, assuming the mistake is not material.

Further, AS 35.15.050 does not mandate that federal bidding procedures be followed exactly. In this regard, it should be noted that, unlike federal procedures, it is the state agency’s stated policy not to inquire from the bidder what the bidder’s actual intent was.

14 . Earth Movers cites Comptroller General Decisions Nos. B-208114, B-208880, 30 CCF ¶70,-478 (Oct. 20, 1982), which state:

Correction of an alleged bid mistake was properly denied because the correction would have resulted in displacement of the low bidder and the intended bid was not ascertainable from the bid itself. In cases of bid corrections which would displace the low bidder, GAO is concerned with the degree to which the asserted correct bid is the only reasonable interpretation, ascertainable from the bid itself, of the claimed mistake. The contestor claimed that his unit price on one item was correct and that his extended total price was incorrectly higher than he intended. However, his total price was in line with both the other bids and the government’s estimate. The government reasonably concluded that his total price was correct and that he had simply misplaced a decimal point in his unit price.

15 . Standard Specification 102-1.06 provides in relevant part:

The bidder shall specify a unit price in words and figures, for each pay item for which a quantity is given and shall also show the products of the respective unit prices and quantities written in figures in the column provided for that purpose and the total amount of the proposal obtained by adding the amounts of the several items. All the words and figures shall be in ink or typed. In case of a descre-pancy [sic] between the prices written in words and those written in figures, the prices written in words shall govern.