This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its May 2000 decision in International Bridge Corporation v. Yap State, the Micronesia Supreme Court Trial Division upheld a contract award after finding that the complainant’s low bid was properly rejected as non-compliant for lack of required experience. The case dealt with a tendering process for the construction of a sports complex. After losing that competition, the complainant challenged the outcome, claiming that the government improperly negotiated price reductions on the winning bidder’s $5.9 million bid after unfairly rejecting its own $5.4 million low bid without notice.
However, the Court dismissed the challenge, finding that it was appropriate for the government to negotiate scope and price reductions with the second-lowest bidder after properly rejecting the complainant’s low bid as non-compliant. While the Court noted that the government failed to formally notify the low bidder of its non-compliance, it found that there was no obligation to do so prior to proceeding with the next-ranked bidder. The Court also found that the government failed to formally identify the second-lowest bidder as the lowest responsive bidder prior to initiating negotiations, as strictly required by the applicable process rules. However, the Court determined this procedural irregularity to be a non-substantial breach of the complainant’s rights and therefore rejected the challenge:
IBC urges that Public Works ran afoul of the statutory procedure set out in 9 Y.S.C. 528 because the statute allows negotiations only with the lowest responsible bidder after that bidder has been determined. The court agrees. At the same time, the stated reason for conducting negotiations with Black was the incompleteness of IBC’s proposal, the basis upon which IBC’s bid was rejected in the March 15, 2000, letter. The court by this order, as set out further below, determines that three of the bases for that rejection as stated in the March 15, 2000, letter were legally sufficient. The determination that IBC’s bid was incomplete, made prior to the lieutenant governor’s statement, was a rejection of IBC’s bid. Section 528 of title 9 contains no notice requirement, and notice to IBC that its bid had been rejected was not required under the statute before Public Works began negotiations with Black.
Section 165 of title 10 provides that “[t]he court may reverse or modify the decision of the agency, or remand the case for further proceedings if substantial rights of the petitioner have been prejudiced because the decision of the agency is: … (c) made upon unlawful procedure” (emphasis added). While the better procedure under 9 Y.S.C. 528 would have been for Public Works to formally select Black as the lowest responsible bidder before beginning negotiations with it to reduce the scope of work, and consequent price, the essential point is that Public Works had legally sufficient reasons for rejecting IBC’s bid when it did so.[2] As a result, no “substantial right” of IBC was violated by Public Works’ failure to strictly conform to the statutory procedure set out in 9 Y.S.C. 528.
While the complaint was ultimately rejected, the Court’s decision remains a useful reminder of the importance of procedural compliance in a negotiation and award process since procedural irregularities can subject a contract award to legal challenge. Accordingly, those irregularities, if deemed sufficiently substantial by a court, can undermine the legal validity of any resulting contract award.
