Failure to Provide all Necessary Minority and Woman-Owned Business Enterprise Subcontracts Within Reasonable Time After Subcontract Award is Material Breach of Contact

Jay Dee/Mole Joint Venture v. Mayor and City Council of Baltimore, 725 F. Supp. 2d 513 (D. Md. 2010)

In an interesting decision issued by the United States District Court for the District of Maryland, the Court held that a prime contractor was in material breach of its contact with the City of Baltimore for not entering into promised subcontracts with Minority and Women-Owned Disadvantaged Businesses.

Under Maryland law, state and local public contracts typically require participation by minority, social, economic and woman-owned disadvantaged businesses (collectively “DBs”).  Such participation is usually accomplished by subcontracts, which are typically entered into post prime contract award.  To qualify as a bidder/offeror, however, the prime contractor must make certain certifications and representations as to how the DB participation requirements are to be met.

In this case, the prime contractor, Jay Dee/Mole Joint Venture (“JV”), submitted a bid package including certifications that it would satisfy the various DB participation requirements.  The JV also provided Statements of Intent signed by both the prime and various subcontractors in which they “agree[d] to enter into a contract for the work/service indicated above for the dollar amount or percentage indicated….”  Thereafter, the JV was awarded the prime contract and it immediately moved to finalize the subcontracts with various DBs.  Unfortunately, the JV and certain DBs disputed the scope of work to be performed under particular subcontracts, and the relevant DBs refused to sign subcontracts.  Frustrated by the lack of movement by some of the DBs, the JV sought to substitute replacement DBs.  That substitution request was rejected two days later by the Agency, stating that a DB’s refusal to sign a subcontract was not adequate justification for granting a substitution.  The Agency noted that such substitutions are only approved in limited circumstances such as where the subcontractor becomes unavailable to perform the work or “unreasonably refuses to execute, or if the City changes the scope of work required.”  Id. at 520.  No such circumstances were found to exist in the present case.  As a result of this, and after further delays, the Agency annulled the prime contract award due to the JV’s failure to finalize the relevant DB subcontracts within 30 days of award (and even though the JV had begun performing some of its work).

In response to the JV’s suit for breach of contract, wrongful termination, quantum meruit and unjust enrichment, the City counterclaimed for breach of contract, liquidated damages and promissory estoppel (now called “Detrimental Reliance” under Maryland case law).

On cross-motions for summary judgment, the Court ruled in favor of the Agency, finding that a contract existed and that the Contractor materially breached the contract by failing to execute subcontracts with certain DBs within a reasonable time.  Id. at 531.  Therefore, the JV could not recover for work performed after bid was accepted but prior to termination (due to the JV’s materially breaching the contract, thereby precluding recovery under the doctrine of “first breach”).
 The Court found in the case of one DB, that the DB’s pre-bid proposal was strictly for labor on a time and materials basis, but that the post-award subcontract scope of work proposed by the JV also included the provision of equipment and materials, representing 90% of the pre-bid DB proposal price.  This was a material difference between what was contemplated by the DB in the statement of intent and what the JV expected post-award.  As a result, the Court found that the JV did not reach a meaningful agreement with the DB prior to submitting its bid or, at worst, the JV tried to “strong-arm [the DB] into accepting new subcontract terms after [the JV] possessed leverage of having secured the contract award.” Id. at 527.

It bears noting that the Court took issue with the City’s refusal to permit substitution of subcontractors, particularly after an only 2 day investigation.  The Court concluded, however, that the City did not (under the regulatory scheme in place) abuse its discretion, and as such, its actions were acceptable.

The Court also granted the Agency’s counterclaim but awarded only nominal damages of $1.00, finding that the Agency had failed to prove, “nor really attempted to prove, that it suffered damages as a result of this breach” on the straight breach counterclaim count.  As for the bid bond/liquidated damages counterclaim, the Court ruled that the JV had complied with the terms of the bid bond and by providing a performance bond, the bid bond no longer was in place and was in effect substituted by the performance bond.  As such, the Court refused to grant judgment against the bid bond.

Lastly, as to the Agency’s promissory estoppel argument, the Court ruled that because an express contract existed, that precludes recovery under a theory of promissory estoppel.

In the end, neither party really won, as the JV was found to have breached the contract and was therefore precluded from recovery, but the City, too, was not allowed recovery beyond the sum of $1.00.