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Edward D. Lord Inc. v. Municipal Utilities Authority

Decided: April 2, 1974.


Gruccio, J.s.c.


[128 NJSuper Page 44] Edward D. Lord, Inc. (Lord) instituted this suit in contract against the Municipal Utilities Authority of the Township of Lower Cape May (M.U.A.) to recover the outstanding balance allegedly due from a contract for the construction of a sewerage treatment plant. Defendant has counterclaimed against plaintiff for the difference between the amount of a collusive subcontract and the real cost to plaintiff to obtain the electrical work. The State of New Jersey has intervened on behalf of defendant since state funds were used to finance the construction of the sewerage facilities. The United States Government has agreed to be bound by the decision of this court, since federal funds are involved. The litigants have stipulated to the material facts and to the amount of damages so that the issue of liability will be decided by this court sitting without a jury.

M.U.A. was created in 1965 for the purpose of managing the installation of a sanitary sewerage system for Lower Cape May County. M.U.A., after conducting feasibility studies, applying for state and federal grants and engaging the firm of Van Note-Harvey Associates as consulting engineers, authorized bidding by the lump sum procedure in order to select the general contractor for the construction of the sewerage treatment plant. Of the two bids submitted, M.U.A. accepted the lower bid tendered by plaintiff Lord. Lord was awarded the contract for the sewerage treatment project on July 7, 1969.

This controversy arose out of the fraudulent conduct of two electrical subcontractors, Audubon Electric and Martin Electric Company. Prior to the awarding of the contract the two bidding general contractors, Lord and Edward Ellis, Inc., had requested and received quotations on the electrical work from the two electrical subcontractors. Both of the general contractors incorporated these quotations in order to arrive at their final lump sum bid. However, unbeknownst to the general contractors, the electrical subcontractors had covertly agreed to set their quotations well in excess of the actual cost plus a reasonable profit. In addition, they agreed to cross their bids to the general contractors so that the fraudulent quotations would be reflected in the lump sum bids of both general contractors.

Subsequently, Lord awarded the electrical subcontract to Audubon Electric. However, before Audubon commenced any of the electrical work Lord discovered the covert agreement between Audubon and Martin. Lord immediately notified M.U.A. and cancelled the subcontract with Audubon. Lord requested new bids, and R. C. Smith of Woodbury, New Jersey, was awarded the electrical subcontract at a price which amounted to a $113,416 reduction from Audubon's fraudulent bid.

All work under the contract between Lord and M.U.A. has been completed and the M.U.A. has paid Lord the full contract price less the $113,416. Lord claims that this balance

is owing under the original contract and asserts that any fraudulent conduct by its subcontractors does not affect the enforceability of the contract price based upon a lump sum bid.

Lord's position is based upon the inherent risks and uncertainty of lump sum bidding. Basically, such a bid is wager because of the various unpredictable contingencies which the general contractor must weigh against the priority of submitting the lowest bid in order to obtain the contract at a reasonable profit. Plaintiff also asserts that the subcontractors' fraudulent quotations were not binding bids but merely an informal estimate which is used by the general contractor in arriving at its own bid. Defendant M.U.A. and the State of New Jersey, Department of Environmental Protection, maintain that the $113,416 is essentially a windfall profit which was not a part of the bargain but which occurred because of this fraudulent activity. Therefore, it is asserted that this portion of the contract should not be enforced because it violates public policy. Plaintiff is entitled to compensation for the work performed, along with a reasonable profit, but Lord should not benefit from the fraud of its subcontractors.

The litigants have also stipulated to the amount of damages. In the event that Lord prevails, plaintiff's recovery would be in the amount of $112,120.52, which represents the principal claim. If M.U.A. prevails, a judgment of $1,296 would be entered against plaintiff Lord, that amount representing an overpayment made by M.U.A. to plaintiff. In addition, the prevailing party will be responsible for any amount determined to be due Audubon in an action now pending before the bankruptcy court.

From the evidence present it is apparent that Lord and M.U.A. were both innocent of any malfeasance or knowledge of the fraud committed by the electrical subcontractors. Lord's conduct, evidenced by its discovery and immediate disclosure to all pertinent parties, exemplified the highest form of business integrity. Conversely, there is no indication

of any negligent or improper conduct on the part of M.U.A. Therefore, the issue before this court is who between these two innocent parties should suffer a loss perpetrated ...

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