Every invitation for bids that promises to award the contract to the lowest responsible bidder qualifies that promise with a sentence like this: “The agency reserves the right to reject any or all bids.” As a general rule, the agency has the discretion to reject all of the bids. However, that discretion cannot be abused. 

As Massman Construction Co. v. U.S. (1945) 102 Ct.Cl. 699, 718, 60 F.Supp. 635, cert. den. 325 U.S. 866, 89 L.Ed 1985, 65 S.Ct 1403, explained almost 75 years ago: “To have a set of bids discarded after they are opened and each bidder has learned his competitor’s price is a serious matter, and it should not be permitted except for cogent reasons.”

No tribunal has more experience in evaluating and resolving bid disputes on public contracts than the U.S. Comptroller General; the office has been performing that function since 1921 (Ameron, Inc. v. U.S. Army Corps of Engineers (3d Cir, 1986) 787 F2d 875, 878).

In 52 Comp. Gen. 285 (B-176647, Nov. 21, 1972), even though some bids offered typewriters that satisfied the Government’s needs within the budget for the contract, all bids were rejected because of questions about requirements in the invitation for bids

[IFB]. One bidder protested. Meanwhile, on the rebid, the same companies and equipment were bid, but at lower prices.

Rebidding Held as Illegal

The Comptroller General held that the rebidding was illegal and the contract should have been awarded on the first round of bidding, stating: “The mere utilization in the IFB of inadequate, ambiguous or otherwise deficient specifications is not, itself, a ‘compelling reason’ to cancel an IFB and readvertise. The rejection of all bids after they have been opened tends to discourage competition because it results in making all bids public without award, which is contrary to the interests of the low bidder, and because rejection of all bids means that bidders have expended manpower and money in preparation of their bids without the possibility of acceptance. [citation] Moreover, as a general proposition, it is our view that cancellation, after bids are opened, is inappropriate when an award under a solicitation would serve the actual needs of the Government.”

See also 55 Comp. Gen. 231, 237-38 (1975), which holds: “It is also pertinent to note that in determining whether a cogent and compelling reason exists to cancel an IFB, consideration of at least two basic factors is involved – whether the best interests of the Government would be served and whether bidders would be treated in an unfair and unequal manner. The fact that the terms of an IFB are deficient in some way does not necessarily justify cancellation after bids have been opened and bidders’ prices exposed. For instance, even where the agency believed the IFB’s purchase description to be materially deficient, our Office found no cogent and compelling reason to support the cancellation where bidders had offered to meet the Government’s actual requirements and the cancellation was believed to damage the integrity of the competitive bidding system.”

See also 41 Comp. Gen. 536, 539-40 (1962), which holds: “[I]t must be recognized that, contrary to the purposes for which the public procurement statutes were enacted, the rejection of all bids–without abandonment of the proposed procurement–is a serious matter and tends to discourage competition … [I]t results in making all bids public without award, which is contrary to the interests of the low bidder … [The] rejection of all bids means that the bidders have expended manpower and money on the preparation of their bids without any possibility of acceptance. Therefore, the authority to reject all bids must be exercised with care and only upon a bona fide determination that the public interest would thereby be served.”

Rejection of All Bids Tested

The same test for rejection of all bids has been included in both the American Bar Association 2000 Model Procurement Code for State and Local Governments, commentary to § 3-301, and the American Bar Association 2007 Model Code for Public Infrastructure Procurement, commentary to § 3-201. Both commentaries state: “It is contemplated that the authority [to reject all bids and readvertise] granted by this Section should only be exercised for cogent and compelling reasons . . .”

Although no California appellate case has dealt with this exact issue, other state courts have. In Petricca Construction Co. v. Commonwealth (1994) 37 Mass.App.Ct. 392, 640 NE2d 780, the issue was whether the state could “recapture the benefit of a lower bid that was properly rejected for noncompliance with the bidding procedure” by rejecting all bids and rebidding the project (640 NE2d at 782). Petricca’s bid was the 3d lowest; however, it was responsive and below the engineer’s estimate for the project. The two lowest bids were found to be defective. The state rejected all bids, giving three reasons: (1) avoid delay, (2) avoid litigation, (3) to try to obtain a lower price than Petricca’s in the rebidding. The court found that awarding to Petricca would not have caused delay and that litigation resulted anyway. Turning to the cost issue, the applicable statute permitted the state to “reject any and all bids, if it is in the public interest to do so.” The court construed this language (at 640 NE2d 783) as, among other things, requiring: “[A]n open and honest competition with all bidders on an equal footing. [citations] Absent such a restriction, an awarding authority would be free to rebid a contract until a preferred bidder submitted the lowest bid price, and thwart one of the important legislative goals. [citation] … While there is no Massachusetts case directly on the point, other courts have made clear that awarding authorities may not reject bids simply to obtain a lower price. [citations].”

In Caruci v Dulan (1964) 41 Misc.2d 859, 246 NYS2d 727, petitioners, the incumbent garbage collection services contractor, was the lowest responsible bidder for the new contract. The city of Utica, New York, rejected all bids to avoid litigation and hoping for a lower bid price. The court explained its function: “That the petitioners are the lowest dollar bidder is unquestioned. The matter for determination is whether or not respondents abused their discretion in failing to award them the contract.”

The court ordered the city to award the contract to petitioners, explaining, at 41 Misc.2d 864: “[T]o sanction readvertisement under the circumstances as they exist in this case, would be to authorize a pernicious practice, the long-range effect of which could only be detrimental to the best interests of the municipality. While the intention of the respondents to seek the lowest possible bid is commendable, continued readvertisement can only result in limiting the number of prospective contractors willing to expend the cost and energy necessary for submitting bids when they have no assurance of being awarded the contract even if they are the low bidder. Such a procedure also exposes the secret bid price to other potential bidders and may provide the means whereby a future municipal government can use this power of rejection to award contracts to persons of their choice. This practice has been condemned by the courts of this State [citation].”

On appeal, the N.Y. Supreme Court, Appellate Division, in Caruci v. Dulan (65) 24 A.D.2d 529, 261 N.Y.S.2d 677, the court concluded: “After the facts are found [on remand to the trial court] a determination can be made as to whether or not the action of the city was proper. ‘In exercising the power to reject any or all bids, and proceeding anew with the awarding of the contract, the officers [of a municipality] cannot act arbitrarily or capriciously but must observe good faith and accord to all bidders just consideration, thus avoiding favoritism, abuse of discretion or corruption. Although the courts generally will not disturb an honest exercise of discretion, it has been said that they will intervene to prevent the arbitrary rejection of a bid when its effect is to defeat the object to be obtained by competition.’ (10 McQuillin, Municipal Corporations [3d ed.], § 29.77 pp. 363-364.)”

In Ronald G. Hinson Electric, Inc. v. Union County Board of Education (N.C.App. 1997) 481 SE2d 326, the agency rejected all bids and rebid the project. The low bidder sued. The appellate court remanded to the trial court for a factual determination of whether the agency had abused its discretion by manipulating the bid process to favor a particular bidder.

Although there are no California appellate court decisions on this point, judicial review of the actions of a public agency to assure that the discretion to reject all bids has not been abused conforms to Public Contract Code objectives. For example, section 100 says that, among the purposes of the code, are:

“(b) To ensure full compliance with competitive bidding statutes as a means of protecting the public from misuse of public funds.

“(c) To provide all qualified bidders with a fair opportunity to enter the bidding process, thereby stimulating competition in a manner conducive to sound fiscal practices.”

Before any California public entity rejects all bids, it must demonstrate that there are cogent and compelling reasons for doing so, and that doing so does not impair the public interest by damaging the integrity of the competitive bidding system. Otherwise, that rejection probably amounts to an abuse of discretion.

By Bernard S. Kamine, ECA Legal Counsel Emeritus