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Bid
Bonds – Liquidated Damages or Penalty?
Jack W. Plowman*
Pennsylvania law is well-established that if a contractor, having
given a bid bond in the amount specified in the invitation for bids,
fails to enter into the contract, the full amount of the bond will be
forfeited as liquidated damages for such refusal. Bellefonte
Borough Authority v. Gateway Equipment & Supply Co., 442 Pa.
492, 277 A.2d 347 (1971). This being so even if the next low bid is
only a nominal amount higher.
But Pennsylvania law also has rather stringent requirements that are
to be met in order for liquidated damages to be upheld as such, rather
than being an unenforceable penalty. I know of no Pennsylvania cases
that apply the liquidated damages criteria to bid bonds.
The leading Pennsylvania case on liquidated damages in construction
contracts is Hanranan v. Audubon Builders, 614 A.2d 748 (Pa.
Super. 1992). In that case the Court held:
“…we must consider the relation which the sum stipulated bears to the
extent of the injury,…the ease or difficulty of measuring a breach in
damages, and such other matters as are legally or necessarily inherent
in the transactions.” 614 A.2d at 750.”
One widely accepted authority provides that a bond is unenforceable to
the extent that the amount exceeds the loss. Restatement, 2d,
Contracts §356.
What to do? The issue has not yet confronted Pennsylvania’s Supreme
Court. The forfeiture of the whole bid bond amount should be resisted
where the loss to the owner is slight, in comparison to the bid bond
amount
The Procurement Code, §902, expressly authorizes the requirement of a
bid bond, but does not address the damages to be imposed, i.e., actual
or liquidated. Some bid bond forms provide that the amount to be paid
in the event of default is limited to the difference between the low,
bonded bid, and the next low bid. So long as the Bellefonte case is
good in Pennsylvania where the invitation for bids specifies that the
amount of the bid bond is to be a certain percentage of the bid (10%
is not uncommon), it is doubtful whether a bid bond that by its terms
allows a recovery only of the difference between the low and next low
bid is in compliance with the invitation for bids, and such bids
should be rejected for non-compliance with the invitation.
*Of counsel, Bentz Law Firm, P.C.; fellow, American
College of Trial Lawyers; member, American Bar Association Forum on
the Construction Industry; member, American Bar Association Fidelity
and Surety Committee; Member, National Bond Claims Association;
Adjunct Professor, Emeritus, Duquesne University School of Law,
Author, Pennsylvania Mechanics’ Liens (Professional Education Systems,
1989); Author, with K.W. Lee, Construction Contracting for Public
Entities in Pennsylvania (Lorman Education Services, 2002). |
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