This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its March 2014 decision in Tilcon New York, Inc. v. Morris County Cooperative, the Superior Court of New Jersey dismissed a lawsuit filed by a supplier who was seeking price adjustments under a group purchasing contract due to changing market conditions. The case dealt with a local co-operative pricing agreement for asphalt paving materials and services. As the Court summarized, when the market cost of asphalt surged during the term of the contract, the Morris County Cooperative Pricing Council (referred to as MCCPC) group purchasing members flooded the contractor with additional orders:
During the contract period, dramatic and unforeseen increases in the price of asphalt cement from around $350 a ton in December 2007 to as high as $822.50 in August 2008 significantly increased plaintiffs’ cost of performance. The fair market price of asphalt concrete in October 2008 rose to roughly fifty percent over plaintiffs’ bid. While these price shocks reverberated, MCCPC members placed, and plaintiffs filled, orders that in total, significantly exceeded MCCPC’s pre-contract estimates of purchases. MCCPC did not disclose that its estimates were based on the projections of a small group of its members.
The contractor relied on the equitable doctrines of mistake and frustration, and the covenants of good faith and fair dealing to claim that it was entitled to a retroactive increase in the prices of the materials it delivered to the co-operative purchasing members. It argued that the defendants had “acted in bad faith by failing to disclose the basis of their estimates”, and ordering quantities of materials “unreasonably disproportionate” to estimates.
The Court dismissed the contractor’s mistake argument, finding that the contractor had assumed the risk of changes in market conditions in its agreement with the purchasing co-operative:
Even if there were a mutual mistake about the future price of oil and asphalt cement, plaintiffs’ mutual mistake claim must fail because the risk of price shifts was allocated to plaintiffs. The parties were aware when they entered the contract that their knowledge about future price movements was limited, but they proceeded nonetheless. The risk of market fluctuations are borne by the bidder, who “assumes the risk of an increase in costs.” Edward D. Lord, Inc. v. Mun. Utils. Auth., 133 N.J. Super. 503, 506 (App. Div. 1975).
The Court also dismissed the contractor’s arguments under the “frustration” and “impracticability” doctrines, stating that “a mere increase in the price of raw materials is not sufficient” to allow relief to the contractor for changing market conditions under these contracting principles unless the changes are “well beyond the normal range,” since “it is this sort of risk that a fixed-price contract is intended to cover.” As the Court ruled:
Simply put, the rise in the price of asphalt cement did not frustrate the purpose of the contract, which was to sell asphalt products and services to MCCPC-member buyers at a fixed price during a specific time period. Although plaintiffs suffered a financial loss, that does not suffice as frustration of purpose. “It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss.”
In referring to established legal precedents, the Court stated that the “substantial weight of authority supports the principle that the mere increase in the cost of a party’s performance does not afford the defense of frustration of purpose or commercial impracticability.”
The Court also considered whether the contractor should be entitled to relief based on the argument that the amount ordered was “unreasonably disproportionate” to the anticipated volumes disclosed during the tendering process. While the Court did “recognize that MCCPC’s pre-bid estimates were at best ambiguously described, and at worst, misleadingly described” and that MCCPC’s group purchasing arrangement failed “to comply with regulations governing the bidding and specification of a contract by a cooperative pricing system,” it ultimately found that the “evident regulatory violations provide no basis for relief” to the contractor since the “implied covenant of good faith and fair dealing cannot override an express term in a contract.”
Stated simply, the Court found that the contractor had agreed to the arrangement, even if it breached group purchasing regulations, and was therefore contractually required to abide by it. In support of this conclusion, the Court relied on the fact that during the proceedings the contractor “uncovered no supporting evidence of opportunistic purchases” by the purchasing group members:
While the aggregate purchases from Tilcon…substantially exceeded the contract estimates, all the member-defendants that purchased from Tilcon established that their purchases were generally consistent with, and deviated little, from pre-bid estimates provided to MCCPC, or post-contract estimates provided to Tilcon, or were consistent with documented capital planning if no estimates were provided.
Finally, the Court supported its rejection of the contractor’s claims by finding that at the time of contract performance it had proceeded to fill out the orders at the previously agreed upon price. As the Court stated, “even if defendants’ orders were unreasonably disproportionate, plaintiffs waived their rights by delivering excess quantities without protest.” In other words, the contractor’s failure to object at the time undermined its ability to seek relief from its bid price at a later time. The Court therefore upheld a lower court’s previous summary dismissal of the contractor’s lawsuit.
As this case illustrates, the disclosure of anticipated volumes under group purchasing arrangements, and under tendered contracts more generally, can have a significant impact on bid prices and on a contractor’s willingness to honor that pricing. In this instance, the contractor was denied relief by the Court after market conditions caused its costs to increase when anticipated orders under the contract surged. However, even if the group purchasing members were not ultimately required to pay the higher pricing sought by the contractor, the arrangement resulted in protracted legal proceedings that could have been avoided had the parties established clearer volume estimates and reasonable price adjustment mechanisms at the outset of their arrangement.
