By Michael C. Loulakis and Lauren P. McLaughlin
Public owners have long been reluctant to provide bidding contractors with certain project information such as historical geotechnical reports and as-built drawings. Why? They typically think the information is old and unreliable or that it is unimportant. Or they fear the bidders will claim they were misled by the information and then successfully pursue a claim.
Those reasons may sound good in theory, but they are poor in reality. The problem is the “superior knowledge” doctrine. This doctrine has been part of public-sector contracting for decades and essentially gives a contractor the right to recover against an owner when the owner fails to turn over relevant information to the contractor. This month’s case, Marine Industrial Construction LLC v. United States, considers several superior knowledge claims raised by a contractor as it tried to defend against a default termination by the U.S. Army Corps of Engineers.
The project involved a hydraulic dredging procurement contract issued by the Corps for a waterway in Washington state in 2014. The Corps typically procured dredging services for this waterway every two to three years, and the procurements were all very similar. However, in this situation, the Corps made some major changes, including using a performance-based specification versus a design-based specification. In doing so, it also removed certain information, disclaimers, and warnings, such as those for sunken boats, fishnets, steel trolling wire, and machinery — all of which were likely to cause frequent downtime.
It also left out precipitation information for the area and warnings that fast currents resulting from precipitation would likely carry large logs and trees that could damage equipment. The Corps also added a boat basin to the scope of work, and the basin was located on a portion of the waterway that had not been dredged in full since 1982.
Marine Industrial was the lowest bidder. It had more than 60 years of dredging experience and an excellent contract-performance rating on numerous government dredging contracts. Marine Industrial’s price was 31% below the next-lowest bidder, and the Corps asked it to verify that its bid was valid. The bidder did so, and it was awarded the contract.
The project was almost immediately beset by problems and delays. There were several storms that disrupted the work as well as delays related to equipment problems and floating logs that damaged Marine Industrial’s discharge pipes. Marine Industrial also experienced delays in the boat basin portion of the work caused by, among other things, debris that clogged its dredging equipment and allegedly unexpected clay in the basin that it had difficulty dredging.
Within four months of Marine Industrial starting the project, the Corps issued a cure notice and ultimately terminated the contract for default 156 days into the project. By this time, Marine Industrial had dredged about 16% of the total yardage required under the contract.
Marine Industrial sued the Corps in the U.S. Court of Federal Claims for having wrongfully terminated the contract, alleging that the delays it encountered were excusable. It sought almost $650,000 in additional costs caused by, among other things, the Corps’ failure to disclose its superior knowledge and the existence of differing site conditions. The Corps responded by seeking more than $1 million for additional costs for procuring a replacement contractor and raised various defenses to the default termination.
Each party filed summary judgment motions on several aspects of the dispute, including the superior knowledge claims, and the court issued a 50-page opinion. The court started its analysis by citing the standard for determining a breach of contract under the superior knowledge doctrine. It stated:
(Marine Industrial) must produce specific evidence that it: (1) undertook to perform without vital knowledge of a fact that affects performance costs or duration; (2) the government was aware (Marine Industrial) had no knowledge of and had no reason to obtain such information; (3) any contract specification supplied misled (Marine Industrial) or did not put it on notice to inquire; and (4) the government failed to provide the relevant information.
The court found that Marine Industrial met its burden on one of its major claims, that the Corps failed to disclose its superior knowledge that a 12 in. discharge pipe was required to complete the project.
Marine Industrial pointed to the fact that four of the five solicitations preceding 2014 required a minimum 12 in. diameter discharge pipe. And in fact, when the Corps resolicited for this project, it reinserted the 12 in. minimum discharge pipe size. Marine Industrial argued that the Corps withheld the pipe size information to increase competition on the solicitation, and that led Marine Industrial to believe that its pumps, with their 10 in. diameter discharge pipes, would be sufficient to move the described materials.
The Corps countered this argument by stating that there was no evidence that the Corps believed that a smaller-diameter pipe would not be sufficient. The Corps acknowledged that it eliminated the minimum pipe size requirement in an effort to create a performance specification-based solicitation, in which it would not dictate means and methods. However, it contended that Marine Industrial could have completed the project using its 10 in. pipe, although it would have taken more time.
The court concluded that Marine Industrial had met each of the four superior knowledge standards. Marine Industrial was unaware of the 12 in. minimum pipe size requirement from past solicitations because the Corps had removed that requirement in its 2014 solicitation. The Corps also removed the provision notifying bidders of the availability of prior dredging records, which would have presumably included the past solicitations with the minimum pipe size requirement. Marine Industrial “had no way to learn of this fact, even if it wanted to,” the court stated. The court was particularly influenced by the Corps having reinstated the 12 in. minimum pipe size requirement in the reprocurement offer.
The court noted that because the government is required to only specify restrictive conditions “to the extent necessary” to complete the job and “assuming the government abided by the law in the years before and after 2014,” the inclusion of a minimum 12 in. pipe size “necessarily implies this is the least restrictive means to complete the contract.” It rejected the Corps’ argument that a smaller pipe size could be sufficient to complete the project, stating that even if a narrower pipe size may have been sufficient under certain circumstances, it did not change the fact the government made pipe size vital to the contract and then failed to disclose it.
The court stated:
Once the government sets a minimum requirement for a solicitation, it is not required to maintain that minimum requirement for every subsequent solicitation. Where, however, the government establishes a minimum requirement that it uses for several years — one it identifies multiple times as minimally “sufficient” — and then fails to inform bidders that it has removed the minimum requirement, the government impermissibly withholds vital knowledge.
The court found that the minimum pipe size affected the performance costs and duration of the contract, as evidenced by the significant delays and costs caused by clogs in Marine Industrial’s 10 in. pipe.
The decision pointed out that although the difference between a 12 in. pipe and a 10 in. pipe may appear minor, a 10 in. pipe has a 31% smaller cross-sectional area than a 12 in. pipe. “This change affects the fluid velocity and pressure drop which, in turn, affects dredging performance,” the court stated. “A smaller pipe would also increase the likelihood of delays due to clogs than would otherwise occur with a larger pipe.”
The court summarily considered the other elements of the superior knowledge doctrine, finding that the Corps was aware that Marine Industrial had no knowledge of the 12 in. minimum pipe size on other projects and the failure of the Corps to indicate that pipe size would be important to completing the project — and the absence of prior dredging records — would not lead Marine Industrial to inquire about such a pipe size. It stated:
The government’s silence as to pipe size could mislead bidders to surmise a pipe size much smaller than 12 (in.) would be adequate, without knowing the government for years described 12 (in.) as the minimally ‘sufficient’ size.
This case is not a garden-variety superior knowledge case, in which the information at issue is in a standalone document of some sort, like a set of as-builts. The Corps likely did not think about whether it should have disclosed the 12 in. minimum pipe size to comply with the superior knowledge doctrine.
How will this play out in future projects? The case is certainly a strong reminder that when one is changing longstanding specifications, one needs to consider whether the deleted or altered information could be material to the bidding contractors.
Interestingly, Marine Industrial won one other superior knowledge claim, related to debris in the boat basin, but lost two others, dealing with the excess floating logs and the basin clay. The court was heavily influenced by whether Marine Industrial did its job in investigating the site, as required by the contract documents, and based its decisions accordingly. Bidders should also remember that to win on a superior knowledge claim, the information you complain about cannot be reasonably discoverable from completing pre-bid investigations.
Michael C. Loulakis ([email protected] cp-strategies.com) is the president and CEO of Capital Project Strategies LLC in Reston, Virginia. Lauren P. McLaughlin ([email protected]) is a partner of Smith, Currie & Hancock LLP in Tysons, Virginia.
This article first appeared in the May/June 2022 issue of Civil Engineering as “Why Withhold Information from Bidders?”