Contractor’s Failure to Comply With Municipality’s Bid Requirements Leads to Null Contract And $6 Million in Losses A divided panel of the Court

Contractor’s Failure to Comply With Municipality’s Bid Requirements Leads to Null Contract And $6 Million in Losses A divided panel of the Court

Appeals of Puerto Rico affirmed a lower court’s declaration that a contract between the Municipality of Aguada

and W Construction, LLC is null. As a result, the contractor will probably be unable to collect over $6,000,000 worth of services rendered to the municipality.

The disagreements between the majority and dissenting opinions are noteworthy, especially since they could not even agree on whether the municipality issued an invitation to bid or an RFP (it seems that the parties submitted an incomplete record of the procurement process).

For the majority, W Construction did not have at least two years of relevant experience (as required in the invitation to bid) since W Construction was organized in August of 2017, and the contract was executed in December of 2018. This fact alone was sufficient to invalidate ab initio any award as well as any contract that resulted from the same.

The dissenting judge saw it differently. For Judge Sánchez Ramos, noncompliance with bid requirements does not necessarily imply noncompliance with the law. Any alleged failure to comply with the bid requirements had to be addressed through a timely bid protest.

Otherwise, any contract could be collaterally attacked after an award is final based on matters which have nothing to do with the intrinsic validity of the contract.

Regardless, the dissenting opinion understood that the W Construction complied with the experience requirement. According to Judge Sánchez Ramos, under AEE v. Maxon, 163 DPR 434 (2004), the municipality was not only allowed to, but should have considered the experience of the individuals that comprise the entity that is under evaluation.

After all, entities can only act through the individuals that comprise them.

The majority retorted that Maxon only applies to contracts involving highly technical and sophisticated services, which was not the case here. Additionally, for the majority, it would be unfair to the other competitors as well as detrimental to the municipality to consider the experience of an entity’s members when this consideration was not disclosed in the invitation to bid.

The majority did not discuss another factor that led to the trial court’s decision: that the contract was amended to increase the maximum payment amount from $4,000,000 to $7,000,000 without issuing a new invitation to bid, as required under Act No. 81-1991 (repealed) for amendments increasing a municipality’s contract ceiling by more than thirty percent.

For the dissenting opinion, the trial court also erred in this regard, as the amendment qualified under the exception provided in said act for duly documented exceptional circumstances.

The majority and dissenting opinions also disagreed on the fairness of the result. For the majority, W Construction’s owner was a contractor with many years of experience doing business with the government and municipalities. As such, he should have been familiar with the contracting process and the fact that he assumes the economic risk for any irregularity that invalidates the government action in his favor.

On the other hand, the dissenting opinion lamented the fact that the end result would be that a private party which undisputedly provided valuable and necessary emergency services to the municipality would have to bear a loss of millions of dollars when no illegality occurred.

This case merits a reflection on whether the result advocated by the majority actually serves the public interest. While in the short term the municipality may benefit from not having to pay for services that it receives, the resulting uncertainty for government contractors could ultimately harm the public interest through less competition (if some contractors decide that the risks posed by decisions like the present are not worth it) and/or increased prices (if other contractors require additional compensation to assume the additional risk that the decision implies).

It will be interesting to see if the contractor seeks review by the P.R. Supreme Court, especially considering the recent ruling in Ortiz Zayas v. ELA.

Although, in my view, the Court would probably distinguish Ortiz Zayas from the present case in that the contractor voluntarily provided the services and/or should have been aware of the irregularities that invalidated the contract (to the extent that the Court agrees that the contract is null), a clarification on this matter would be useful.