KEMPER CONST CO v. CITY OF LOS ANGELES

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District Court of Appeal, Second District, Division 2, California.

M. F. KEMPER CONST. CO. v. CITY OF LOS ANGELES et al.

CITY OF LOS ANGELES v. M. F. KEMPER CONST. CO. et al.

Civ. 17800.

Decided: December 08, 1950

Ray L. Chesebro, City Atty., Bourke Jones, Asst. City Atty., James A. Doherty, Deputy City Atty., all of Los Angeles, for appellant. Stephen Montcleone, John M. Martin and Frank L. Martin, all of Los Angeles, for respondents.

On July 28, 1948, the Board of Public Works of the City of Los Angeles published a notice inviting bids for the construction of a piping system for the ‘Hyperion Activated Sludge Plant.’ This notice provided, in accordance with the City Charter, (1) that each bid must be accompanied by a certified check or corporate surety bond for an amount not less than 10 per cent of the aggregate sum of the bid, ‘as a guarantee that the bidder will enter into the proposed contract if the same is awarded to him’; (2) that the board reserves the right to reject any and all bids which are to be opened August 25. Respondent learned on August 17 of this invitation and immediately commenced the preparation of its bid.

The actual computations were performed by Mr. M. F. Kemper and two of his assistants, Messrs. Johnson and Buchanan. Kemper calculated the cost of the excavations and electrical installations; Buchanan was assigned the underground construction; Johnson did the balance, consisting of structural and mechanical work. All three men had had considerable experience in the construction business. The three worked feverishly the following week, Johnson putting in 16 hours per day during this period as he had the greatest portion of the work. On the last day before the bid was due, the men worked until 2 a. m. completing their task and all were exhausted by their exacting labors. Their final effort required the addition and transposition of the figures arrived at by each man (for his portion of the estimate on the construction) to a ‘final accumulation sheet’ prepared by Kemper from which the total amount of the bid to be submitted was taken. One of Johnson's estimates in the amount of $301,769 for mechanical work involved in a gas system was inadvertently omitted from this sheet. Buchanan's estimate of $46,713 for underground work on this system had been entered correctly but the parties overlooked the fact that this latter figure was to have been added to that of Johnson to arrive at the proper computation for that particular item on the final accumulation sheet. The only explanation given for the error was the fact that the men were tired, groggy and completely exhausted at the time. Kemper and Buchanan arose at 5 a. m. on August 25, proceeded to their office and checked over the final tabulation, but did not go into their prior individual worksheets. The necessary bond in the amount of $80,000 was arranged for at 8 a. m. At 10 o'clock the bids were opened and declared at the board's office. Respondents' bid was $780,305. Bids of the other contractors were in the sums of $1,049,592; $1,183,000 and $1,278,895.

Suspecting that his bid contained an error, Kemper immediately summoned his assistants to review their computations. The three men worked over their figures during the afternoon and discovered the mistake at 5 p. m. A member of appellant board was immediately notified, and on August 27 respondents delivered a letter to the board withdrawing its bid. On the same day the city engineer made his report to the Board of Public Works recommending that the contract be awarded to Kemper and noting that respondents' bid was 12.6 per cent below the city engineer's own estimate. On September 3 a hearing was had before the board at which Kemper and his assistants appeared to explain what had happened. However, on September 8 the board by resolution accepted respondents' bid and awarded the contract accordingly. Respondents having refused to execute a formal written agreement, the project was thereafter awarded to the next lowest bidder. The board adopted also a resolution demanding payment on the $80,000 bond and directing the City Attorney to institute proceedings for damages.

The trial court found in accordance with the foregoing facts and that the respondents had not been negligent in the preparation of their bid, but that it had been submitted as the result of ‘an excusable and honest mistake to such a material and fundamental character that the minds of the parties hereto have not, in fact, met.’

Thus the broad question for decision is whether the trial court erred in permitting respondents to rescind their bid.

The requirements for the intervention of a court of equity to grant relief by way of rescission for a unilateral mistake are as follows: (1) the mistake must relate to a material feature of the contract; (2) it must be of such grave consequence that enforcement of the contract as made would be unconscionable; (3) it must have occurred notwithstanding the exercise of ordinary diligence by the party making the mistake; (4) the complainant must be able to effect a rescission of the offer without serious prejudice to his offeree. (Pomeroy's Equity Jurisprudence, Fifth Edition, section 870a.)

There is no question but that the first requirement is satisfied from a perusal of the facts. Notwithstanding appellant's plausible argument that the mistake here is merely collateral, how can it be said that a bid some 28 per cent below that intended to be submitted is not a mistake as to a material matter? This is much more than a mere inadequacy of consideration as characterized by appellant. For the city to enforce the offer would be grossly oppressive. Knowing that respondents by mistake made a bid far below that intended and at a figure for which performance would result in a substantial loss it still seeks to force the bidder to carry out the agreement. Not only was appellant informed of the error immediately, but the very fact that respondents' bid was far below those of the other bidding contractors emphasizes the unfairness of the city's contention. The emphasis is multiplied when it is remembered that the city engineer's own estimate (prepared at a time when material and labor cost were much less) exceeded respondents' bid by a substantial amount. Under such circumstances it would be inequitable to permit appellant to accept such an offer. No reasonable person would have thought that Kemper intended to work for the sum named in his bid. ‘The offeree will not be permitted to snap up an offer that is too good to be true.’ It is therefore not enforceable. Williston Contracts, [Rev.Ed.] Vol. 1, sec. 94; Geremia v. Boyarsky, 107 Conn. 387, 140 A. 749. Where an offeree has reason to suspect that a mistake has been made in the offer, his acceptance thereof is in bad faith, and the agreement will not be enforced. Germain Fruit Company v. Western Union Telegraph Company, 137 Cal. 598, 600, 602, 70 P. 658, 59 L.R.A. 575.

In regard to the third requirement that the offeror must not have been guilty of negligence or of conduct reflecting less than the use of ordinary diligence, the trial court has specifically found that an honest mistake was made, not as the result of any failure of plaintiff or its agents to exercise due care and caution in the preparation of the bid, and without any negligence or carelessness on their part. No bad faith obtained in respondents' behavior. The oversight of its agents was such as may occur in the best regulated and most ethical institution. The negligence which will bar one from relief is the ‘neglect of a legal duty’ Civ.Code, § 1577 or a failure to exercise at least the degree of diligence ‘which may be fairly expected from a reasonable person’. Roller v. California Pacific Title Insurance Company, 92 Cal.App.2d 149, 153, 206 P.2d 694, 697; see also Grymes v. Sanders, 93 U.S. 55, 63, 23 L.Ed. 798; Los Angeles & Redondo etc. Company v. New Liverpool Salt Company, 150 Cal. 21, 27, 87 P. 1029; Fraters Glass & Paint Company v. Southwestern Construction Company, 107 Cal.App. 1, 5, 290 P. 45. No neglect of legal duty is to be found in the conduct of respondents' agents, but only an accident not intended or anticipated. Appellant vigorously asserts that the evidence does not show that respondents have met the standard prescribed by section 1577 of the Civil Code. In view of all the circumstances—the complexity of the work, the limited time within which the calculations had to be completed, the exhausted condition of the men—there was not such an error but that it might have been made by men of rare prudence and caution. In the final analysis the question of the culpability of respondents' conduct is one primarily for the trier of fact and if there is any substantial evidence to support the findings, the judgment must not be reversed. On a set of facts practically identifcal with those here involved it was determined by a New Jersey Court that the plaintiff-bidder had exercised a reasonable degree of care and had acted as a reasonably prudent person. Conduit & Foundation Corporation v. Atlantic City, 2 N.J.Super. 433, 64 A.2d 382, 385.

Contrary to appellant's contention, the city can be readily placed in statu quo. Thus, there is no ground to deny rescission for this reason. Appellant contends that the city has altered its position as a result of the Kemper bid and cannot be restored to substantially the same status it occupied prior to the receipt of respondents' bid. It argues that damage has resulted to it by virtue of the delay in starting construction in that the people of Los Angeles have been deprived of the use of their new sewage disposal plant making it necessary to close to bathers certain sections of beach adjacent to the sewer outlet for a longer period of time. The obvious answer to this contention is that appellant could have avoided such delay by promptly permitting a withdrawal of respondents' bid and by awarding the contract to one of the other construction companies rather than by attempting to force respondents into the contract under threat of forfeiture of their bond and the collection of $269,000 in damages.

The trial court found that the city has suffered no prejudice and that no damage resulted by reason of respondents' refusal to execute the contract with the city. Any technical damage now sought to be shown through delay arose only from appellant's own making.

Although no California decision has directly ruled on the problem at bar, numerous authorities support a judgment of rescission under such facts as those presented by this appeal. In Moffett, H. & C. Company v. City of Rochester, 178 U.S. 373, 20 S.Ct. 957, 961, 44 L.Ed. 1108, a mistake was made by a near-sighted bidder in transcribing figures. By mistake he inserted in his bid one tenth the actual price he intended to charge for an item of work to be done under the contract and made another error in transcribing. With notice of the error, the city threatened to enforce a penal bond and thereby compel the bidder to carry out the contract created by its acceptance of the bid. Stressing the unconscionable advantage sought by the city, the court adjudged a rescission, declaring that under the city's theory a bidder would from the moment his proposal was opened be held in a grasp of steel with no remedy and no escape ‘while equity stands by with folded hands and sees him driven into bankruptcy.’ Conduit & Foundation Corporation v. Atlantic City, supra, is an exact parallel of the case at bar. Upon discovering when the bids were opened that his bid was $50,000 less than his company had concluded to make, the president of the plaintiff corporation promptly asked to be allowed to withdraw the offer, explaining (1) that the discrepancy was so great that he could not proceed with performance; (2) that he and his assistant had worked in preparing the offer continuously for about 48 hours and became so exhausted that in assembling the sheets containing the computations, the sheet showing the over-all cost had through inadvertence not been used in finally determining the costs and (3) that as a result an item of $50,250 had been omitted from the final estimate. Despite the prompt notification of the mistake, the city persevered in its effort to hold the bidder and to compel a forfeiture of its $5,000 deposit. Basing its action upon the same four requirements laid down by Professor Pomeroy, supra, the court granted rescission and emphasized the bidder's prompt notification and the unconscionable conduct of the defendant.

In Board of Regents v. Cole, 209 Ky. 761, 273 S.W. 508, anticipatory of the contract they desired to make, plaintiffs forwarded to prospective bidders plans and specifications for the intended construction sufficiently in advance of opening the bids to enable them to prepare their bids. Also, they specifically prescribed that (1) no claims would be allowed on account of mistakes or omissions in the bids and (2) failure of the successful bidder to execute the contract would be ground for forfeiture of the check accompanying the bid. Cole's bid was $31,000 below his nearest competitor. He was awarded the contract after the board had indicated a belief that he had made a mistake, and he had reaffirmed his willingness to stand on his offer. On returning to his home three hours later, he discovered a $22,000 error in his computations. On the trial of the action which followed his refusal to execute the contract it was discovered that in preparation of his proposal Cole had classified the items of construction, estimated the cost of each and totaled them on separate sheets of paper. In doing so he omitted the item of cut stone in the sum of $21,066 which would have been his loss had he undertaken the job for his bid. The court reasoned that the mistake was fundamental and that the value of the cut stone was a substantial part of the entire consideration. While he intended to submit a bid on which he stood to earn 8 per cent of the cost, he did not intend to do the work at a $5,000 loss. ‘There is no doubt’ said the court, ‘that appellee made an honest mistake and it does not appear that he was guilty of culpable negligence. It was such an error as any business man might make. It was discovered before any action was taken under the contract. No other rights had intervened * * * The only way in which appellant has been prejudiced is in the cost incidental to the second letting.’ (Citing Story's Equity Jurisprudence, sec. 1381.) The chancellor having determined that plaintiffs' actual damage was $200—the expense of readvertising for bids—the judgment was affirmed. See also Bromagin v. City of Bloomington, 234 Ill. 114, 84 N.E. 700; W. F. Martens v. City of Syracuse, 183 App.Div. 622, 171 N.Y.S. 87, 91; New York v. Dowd Lumber Company, 140 App.Div. 358, 125 N.Y.S. 394, 397; State of Connecticut v. McGraw Company, D.C., 41 F.Supp. 369, 374; Germia v. Boyarsky, 107 Conn. 387, 140 A. 749; City of New York v. Seely-Taylor Company, 149 App.Div. 98, 133 N.Y.S. 808; Id., 208 N.Y. 548, 101 N.E. 1098; Union & Peoples National Bank v. Anderson-Campbell Company, 256 Mich. 674, 240 N.W. 19, 80 A.L.R. 584; Barlow v. Jones, N.J., 87 A. 649; Harper v. City of Newburgh, 159 App.Div. 695, 145 N.Y.S. 59.

Appellant places great stress upon the case of Steinmeyer v. Schoeppel, 226 Ill. 9, 80 N.E. 564, 10 L.R.A., N.S., 114, where equitable relief was denied to a bidder who had made a mistake in his computations, specifically in the addition of figures set down for various items of lumber. Contrary to the contention of Steinmeyer that he had made an error in addition, the court found that such error did not account for the difference of $421; that he was negligent in not having the figures exactly in line which fact could not have escaped the notice of a competent business man giving reasonable attention to his computations; that there was no proof reasonably tending to excuse the blunder. No notice of the mistake was given prior to the bid's having been accepted and the contractee had no knowledge of the error prior to the execution of the contract. There was no showing that the parties could be restored to statu quo, and the amount of loss caused by the mistake was trivial, whereas in the instant cause, the mistake was clearly established and it involved a loss to respondents of over $300,000.

Appellant contends also that the statement in the invitation and bid itself that ‘Bidders Will Not Be Released On Account of Errors' precludes relief to the bidder; that such provision warned everyone of the finality in bidding on a city contract; that bidders thereby assumed the risk of any such errors. It is not to be denied that where parties enter into a transaction contemplating the possibility of mistakes as to matters the existence of which they took the risk, rescission will not be permitted. (Rest.Restitution, sec. 11; Williston on Contracts, Rev.Ed. sec. 1543, p. 4332.) However, the finality about bidding for a government contract by no means justifies a governmental agency in taking an unconscionable advantage of its special status. The contracting agencies of the state or of its political subdivisions must be required to observe the traditional principles of equity and fair play in their relations to contractors which the latter must observe. State of Connecticut v. McGraw, D.C., 41 F.Supp. 369. A more reasonable interpretation of this warning is that the bidder must be prepared to stand by his own judgment in anticipating changes in wage scale, in estimating the number of man hours, in computing the quantities of materials, cost of machinery rental, price of fuel, water and transportation. If in these details he commits errors of judgment or is not diligent in ascertaining values and costs of things, the lowest bidder will be held to a compliance with the warning contained in the invitation for bids. But the severity of the law is emphatically mollified when the bidder through an honest mistake in the preparation of his bid names a sum for which he could not perform the contract without great loss.

Appellant zealously argues that sound public policy requires a reversal of the judgment. Its theory is that the interest of the public in the prompt completion of public improvements requires that there be a finality in such negotiations, that the public interest requires such a rigid procedure as a guaranty of official honesty and a protection against extravagance; that a contrary policy opens the door for unscruputlous, dishonest contractors to avoid their obligations when the bargain does not appear as profitable and ‘rosy’ as had been first supposed. While this argument has been recognized as meritorious where different factual situations were presented, Palo & Dodini v. City of Oakland, 79 Cal.App.2d 739, 180 P.2d 764; City of Baltimore v. Robinson Construction Company, 123 Md. 660, 91 A. 682, L.R.A.1915A, 225—both actions at law to recover forfeited deposits, still the principle of public policy cannot be employed to justify the infliction of a penalty in the sum of approximately $350,000 on an innocent party who has made an honest mistake. It is to be observed that in the Palo decision the court distinctly pointed out that no facts entitling the bidder to equitable relief had been shown. The Government Code, § 14352, provides that in the case of contracts on state public works a bidder may recover any amount forfeited on establishing to the satisfaction of the court that a mistake occurred not due to error in judgment, but in ‘filling out the bid’.

Finally, it may be urged that an affirmance of this judgment does violence to and approaches a contradiction of the modern objective theory of mutual assent in the formation of contracts. (See Williston on Contracts, Rev.Ed., sec. 1579.) Because it does contradict the objective theory the Restatement of Contracts, section 503, has rejected the doctrine of rescission for a unilateral mistake as have the courts of a number of jurisdictions. But in California by virtue of Civil Code sections 1577 and 1578 rescission for purely unilateral mistakes has been upheld where to enforce the contract would be inequitable. California Annotations to Restatement, Contracts, sec. 503; Palace Hardware Company v. Smith, 134 Cal. 381, 384, 66 P. 474; Los Angeles etc., Company v. New Liverpool Salt Company, 150 Cal. 21, 27, 87 P. 1029; Hardison v. Davis, 131 Cal. 635, 63 P. 1005; Moore v. Copp, 119 Cal. 429, 436, 51 P. 630. Under the circumstances disclosed by the record the basic principles of equity and fair dealing require that respondent be permitted to rescind his bid and that the bond be cancelled.

Judgment affirmed.

MOORE, Presiding Justice.

McCOMB and WILSON, JJ., concur.