Mistake in Bid:
Unilateral Mistakes

In general, when a company enters into a contract with another commercial company or the Government, the transaction is deemed final and conclusive. When a contract is fully executed, each party has justified expectations and the law protects these expectations. In some rare, exceptional situations, however, it is possible for one of the parties to a contract to avoid this finality. If such an exceptional situation arises during contract formation, excluding routine changes after award, the contract may be avoided or reformed. One example of such an exceptional situation is a “mistake”. A mistake in this context “is a belief that is not in accord with the facts”1 The word “mistake” refers to an erroneous belief. A party's erroneous belief relates solely to the facts as they existed at the time the contract was executed. Consequently, a party's anticipation of certain results, or the judgment of a party to a contract, is not a mistake. “An erroneous belief as to the contents or effect of a writing that expresses the agreement is, however, a mistake.”2 The above legal definition is different than the common dictionary definition of a mistake. The dictionary defines a "mistake" as an error or fault; a misconception or misunderstanding3. A mistake using this dictionary definition has no legal consequences. A mistake can be either mutual or unilateral. A unilateral mistake can occur when and if “a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performance that is adverse to him [then] the contract is voidable by him if he does not bear the risk of the mistake”4. In layman's terms, if a party enters into a contract expecting the other party to perform a specification or comply with one or more terms of the contract, and this expectation is not realized because of a unilateral mistake made by one of the parties at the time the contract was formed, then it is possible, but not guaranteed, that the contract may be reformed. With respect to Government contracts, the United States Court of Appeals for the Federal Circuit has stated that a government contract can be reformed when the Contracting Officer had direct or indirect knowledge that a contractor's bid or proposal contained a clear clerical or mathematical error or misreading of the specifications5. The Federal Acquisition Regulations (the “FAR”) state that an agency, when it learns of a mistake in bid, is authorized to either (i) rescind a contract; or (ii) reform a contract only on the basis of clear and convincing evidence that a mistake in the bid was made, and if the mistake is made unilaterally by the contractor, the mistake is so obvious as to have charged the Contracting Officer (“CO”) with notice of the probability of the mistake6. The issue of unilateral mistake in bid was discussed in more detail by the United States Court of Federal Claims (the “Court”) in its opinion concerning Information International Associates, Inc. (“IIA”) v.The United States, No.04-1489C, October 31, 2006. The Air Force issued a request for proposal (“RFP”) to obtain “labor and supplies to man and manage libraries located at five (5) Air Force Bases.” In its Final Proposal Revision (“FPR”) IIA submitted a revised price that was a 4.5% overall decrease and a 24.92% decrease at one Air Force Base. More than four (4) years after award of the contract to IIA, the contractor notified the Contracting Officer of a mistake in the bid. IIA had discovered that one labor category at one Air Force base had been deleted from the FPR except for the first two months of the base year. IIA submitted a Request for Equitable Adjustment requesting reformation of the contract to increase the price. The CO denied the request citing the reasons stated in FAR Subsection 14.407. Thereafter, a certified claim was submitted by IIA and “deemed denied” by the agency. Consequently, IIA timely appealed the deemed denial to the Court. The Court listed the five (5) “elements of proof necessary to establish a unilateral mistake in the context of a government contract” discovered after award of the contact: “The contractor must show by clear and convincing evidence that: A mistake in fact occurred prior to contract award; The mistake was a clear–cut, clerical or mathematical error or a misreading of the specifications and not a judgmental error; Prior to award the Government knew, or should have known, that a mistake had been made and, therefore, should have requested bid verification; The Government did not request bid verification or its request for bid verification was inadequate; and Proof of the intended bid is established.” The Court reviewed the facts of the case against the five elements focusing primarily on item (3). IIA argued that the CO should have compared their initial and final proposals because such a comparison would have revealed the mistake. The government argued that the CO had neither “actual or constructive knowledge of the mistake”. The Court stated that the CO was not required to compare initial and final proposals. On the other hand, the CO should have bee alerted to a possible error in [IIA's] Air Force Base pricing as a result of “Abstract of Proposal/Quotations” to compare [the IIA and Awardee's] final monthly and yearly proposed prices for the five Air Force Bases.” The Court further stated that “price disparity alone is not enough to impute the CO with constructive notice of a possible error in [a] bid, if there are other factors that reasonably could explain the difference”. The Court went on to state, however, that “the size of the disparity between the IIA's bid and the next lowest bid, as evidenced by the Air Force Base abstract, and the absence of other factors negating an inference of error, should have alerted the CO to the mistake.” The Court decided that IIA “had established by clear and convincing evidence that the CO should have known of a possible error” in the IIA final proposal revision. Pursuant to the authority cited in the Hamilton case previously decided by the Court of Appeals for the Federal Circuit, the Court in this case reformed the contract and awarded $174,882 plus interest for 2 years to IIA. The moral of the story here is to check, and double check and triple check your proposals before they are submitted to the Government. You should go to extraordinary efforts to avoid mistakes in your bids or proposals, particularly with regard to prices, and be absolutely certain that you have a Basis of Estimate (“BOE”) and supporting documentation for your proposal. Do not assume that you can “fix” a mistake in your bid or proposal at anytime after award of the contract. The IIA case dragged on for more that 3½ years and they probably incurred substantial litigation expenses. Although IIA was successful in court, you should review your proposals so thoroughly that you do not need to go to Court to correct your mistakes. Save yourself the time and expense of claims and litigation to correct a unilateral mistake in a bid or proposal that should have been detected and corrected before it is submitted to the government. Tom Petruska, Owner Contract Unlimited Incorporated Do you need assistance with contracting issues? Footnotes: Restatement of the Law, Second, of Contracts § 151. id. American Heritage Dictionary 2nd College Edition, 1985 Restatement, Second, Contracts §153 U. S. v. Hamilton Enterprises, 711 F. 2d 1038 (1983). FAR 14.407-4 (6)) (See also FAR 15.508) The foregoing is not legal advice nor is it a legal opinion. Please contact your attorney for legal advice.