I haven’t discussed public construction projects much recently, particularly in the context of procurement in Virginia. If you are a commercial contractor in Virginia and have sought to perform work for the state or one of its subdivisions, you are likely familiar with the Virginia Public Procurement Act (VPPA). This Act controls the means and methods for procurement of goods and services by the various state and local entities in Virginia. Among these services is construction.
A recent case out of the Western District of Virginia highlights the importance of understanding the VPPA by both contractors and the public bodies that hire them. In H.S. Martin Construction Corp. v. Lee County School Board the Court considered a claim for breach of contract against both the Lee County School Board and it’s self insurance pool.
The basic facts are these. Two Lee County, Virginia schools were damaged by weather and needed repairs. The School Board, without following the competitive bidding process outlined in the VPPA, and through its insurance pool, hired H. S. Martin to perform the work. Furthermore, the board, through its insurance pool, paid a majority of the payment applications for the work performed, to the tune of close to $1,000,000.00, upon the prior authorization of the School Board. However, even after these payments were made, H. S. Martin still had outstanding bills totaling approximately $585,000.00. When neither the Board or its self insurance pool paid these final balances, the inevitable suit for breach of contract against the Board and bad faith breach of contract against the self insurance pool under a third party beneficiary theory.
The Court, applying Virginia law, determined that despite the prior course of conduct and the clear direction and intention of the Board to hire and pay H. S. Martin for its work (at least at the time it hired H. S. Martin), H. S. Martin could not collect on the final balances. The Court reasoned that the contract between the Board and H. S. Martin was void ab initio because of the non-compliance with the VPPA. In ruling this way the Court stated:
When a school board attempts to enter into a contract without complying with the VPPA, the school board seeks to exercise powers beyond those granted to it by the General Assembly, and the resulting contract is therefore ultra vires.
The Court therefore dismissed the claims against the Board and using an extension of the same reasoning, against the insurance pool. The Court held that because the underlying contract was void, that any claim for bad faith non-payment pursuant to that contract was void as well. The Court then determined that H. S. Martin was never made a third party beneficiary of the insurance policy. In sum, H. S. Martin did not have a contractual right to payment because the school board failed to follow the VPPA and could use this non-compliance as a shield against payment.
The takeaway? As a construction contractor in Virginia, be sure to double check that the public body asking you to perform work both understands and follows the procurement rules. In the H. S. Martin case, all of the hallmarks of a good contract and a good claim were there, however, the failure of the public body to follow its own rules blew the claim out of the water. Of course a good understanding of the VPPA procurement rules and the counsel of an experienced construction lawyer are key as well.
What are your thoughts on this opinion? Does this reading lead to potential abuse of the procurement process by public bodies? I’d love to hear your thoughts.
As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.
Hi, Chris. You’ve got me thinking twice in one week… so here’s my reaction.
I will go out on a limb and assume (often a dangerous thing to do) that your readers believe the proper application of laws ‘should’ result in equitable resolutions of disputes. They also know, pragmatically, that in our courts equity is not always achieved. The case in point, in my opinion, is a classic case of inequity – in which technicalities prevail and justice is lost.
Making the situation worse is that this dispute is an asymmetrical contest between a private party and a government entity that has, truly, nothing to lose (because at the end of the day it is taxpayer dollars that are being used to pay for the infrastructure or the legal bills to fight the claim). The private contractor, however, is disadvantaged by having financed the work in place, plus paying to litigate the dispute. Depending on the contractor’s financial viability it may be put out of business altogether simply because it relied, reasonably, on the government’s promise to pay undisputed invoices.
Without beating details to death, the simple version is: a) the contractor is not the administrator or overseer of the government agency, nor is it expected to act in that capacity; b) the contractor would not have had the ability to force the government agency to follow its own rules, even if a flaw was known; c) it is possible that even the government agency itself did not realize it was not following the statute, else why would it proceed as it did; d) the agency, when it executed the construction contract was either negligent by not knowing the rules, or was acting fraudulently by inducing the contractor to perform under a contract it was not authorized to issue; e) the custom and practice of both parties during the course of the work was clear, the contractor acted in good faith, and the agency breached via non-payment; f) there appears to be no allegation that the work was defective.
You do not note, in your write-up if there was any claim made that the contractor charged the work at an exorbitant rate. That would seem doubtful since the contractor was part of the known insurance-approved builder pool. Thus it does not appear there was any element of wrongful conduct by the contractor (which took on a project under a contract offered by the agency). You don’t mention if there was a counter-claim by the agency that the contractor knew the contracting process was flawed, or that it in any way induced the agency to offer the contract in an unlawful manner.
In overview, the contractor became the victim of an agency that did not act lawfully – yet the agency was held innocent based on a technical point granting it ‘immunity’ for its own improper actions/inactions.
I do not profess to know the statutes or case law in your neck of the woods. Where I come from, the court looks beyond the contract to examine both the mutual intent of the parties and the custom and conduct of both parties. The result of this court’s decision was to punish a good actor (perhaps fatally in a business sense) while rewarding a bad actor (which receives a windfall that it would not be entitled to if it had bid the project competitively).
As a layperson with little knowledge of Virginia law/precedent, and looking at this from an equity or justice perspective, I would anticipate an appeal.
Thanks Howard as always, for your comments. I will of course keep an eye out for any appeal.