MEMORANDUM
FROM:
Sid Hemsley, Senior Law Consultant
DATE:
March 30, 2006
RE:
Gratuitous Payment for Increased Price of Gasoline Under Garbage Collection
Contract
The City Recorder has what appears to be two questions:
1. Can the City hold the person who has the contract to collect the city’s garbage to the
price contained in the contract, notwithstanding the fact that the price of gasoline has increased
during the life of the contract?
2. Can the City gratuitously give the contractor more money under the contract to
compensate him for the increased price of gasoline?
Let me say here that it appears to me that I do not have the contract in question. I have a
couple of pages that appear to reflect some of the terms of the contract, but not the contract itself.
For that reason, I am shooting in the dark on the questions, but I can generally give you the law
regarding additional compensation under contracts.
The answer to question 1 is that the person who holds the contract with the city to collect
its garbage can be held to the price contained in the contract. Sometimes contractors have
grounds to argue that they are entitled to additional compensation under a contract due to
unforseen circumstances that could not be contemplated when the contract was signed, or for
extra work they have done under the contract. [See 88 A.L.R.1223.] However, at least since the
Iraq War began, it has been predictable that the price of gasoline would change, and probably
change upward. I cannot envision the courts being sympathetic with contractors in this situation,
who should have anticipated the potentially escalating price of gasoline into account when they
submitted their bids. It may be that if the price of gasoline had increased to, say, $10 a gallon,
the answer might be different. Whatever the case there, no extra work of any kind is involved in
the claim for the extra compensation.
1
The answer to question 2 is more difficult. There are surprisingly few cases on the
question of whether a government can give a contractor what amounts to a gratuity that
compensates him for the increased prices he pays in performing a contract. Most of those cases
involve states that have constitutional provisions that prohibit additional compensation for the
services of contractors. The Tennessee Constitution does not contain such a provision, but even
in some of those cases, it is said that even under the common law a government cannot pay a
contractor additional compensation for the performance of his contract where there is no
additional consideration for the change in the contract. For example, in Dockett v. Old Forge
Borough, 240 Pa. 98 (1913), the Court said that the payment to a contractor of additional
compensation to reflect unforseen expenses in constructing a sewer due to a wage increase the
contractor’s workers won through a strike, was illegal, and could be recovered in a taxpayer’s
suit. The city got nothing for the additional compensation it paid to the contractor. Likewise, in
Martin, Ginter & Power v. Liberty County Board of Education, 44 S.E.2d 462 (Ga. App. 1947), a
Georgia school board awarded a contract for the construction of a school at a certain fixed price.
The contractor entered into the contract knowing that the beginning of the project relied on the
availability of federal funds. By the time the funds were available and the contractor had started
the school, WWII had begun, and prices for materials, labor, etc., had increased. The school
board passed a resolution agreeing to pay an additional price of 10% for the school.
The Court said with respect to the resolution increasing the payment to the contractor for
the school:
Even though the plaintiffs were not responsible for the increase in
the costs of building materials and labor during the delay, and were
not responsible for the delay, they took the contract knowing that
they could not begin the work until the government made the funds
available and they were authorized by the defendant to proceed.
They took the risk of rising prices during the interim between the
acceptance of the contract and the beginning of the construction
thereunder. It would seem also that the resolution of the defendant
to add 10% to the contract price was without consideration as to it
because the plaintiffs were already bound to do the work for the
original contract price. [At 463]
Other cases in this area have been more generous to contractors, but as pointed out in the
answer to Question 1, they have been more generous when the contractor has had to do extra
work to perform the contract, or conditions that neither party to the contract anticipated at the
inception of the contract have occurred that increase the contractor’s price.
But there seems to me a more compelling reason why it is not likely that the city can give
the contractor a gratuity: it defeats the purpose of Tennessee’s competitive purchasing laws.
2
What does the term “competitive bidding” in the Municipal Purchasing Law mean? The
Tennessee Supreme Court in State ex rel. Wright v. Leech, 622 S.W.2d 807 (Tenn. 1981),
answered that question:
1. “The request for bids must not unduly restrict competition. All persons or
corporations having the ability to furnish the supplies or materials needed, to perform the work to
be done, should be allowed to compete freely without any unreasonable restrictions.”
2. “It is essential that bidders, so far as possible, be put on terms of perfect equality so
that they may bid on substantially the same proposition and on the same terms.”
3. “In order to attain competitive bidding in its true sense, proposals for bids must be
invited under fair circumstances which afford a fair and reasonable opportunity for
competition.” [Emphasis is mine.]
4. Among other things, the advertisement for bids should include “[s]pecifications of the
supplies or equipment to be purchased and the quantity thereof.”
Those standards are not optional, continued the Court, they must be followed.
The obvious fundamental principles of Leech are that all bidders must be put on a level
playing field, and that the bidding process actually be competitive. In fact, it is further said in
Metropolitan Air Research Testing Authority, Inc. v. Metro. Government of Nashville &
Davidson County, 842 S.W.2d 611 (Tenn. Ct. App. 1992), that:
One of the purposes of competitive bidding is to provide bidders
with a fair opportunity to compete for public contracts. State ex rel.
Leech v. Wright [citation omitted]. Thus, the courts have
recognized that the statutes and ordinance requiring competitive
bidding impose upon the government an implied obligation to
consider all bids honestly and fairly. [Citations omitted.] [At 616]
[Emphasis is mine.]
If a government awards gratuities to contractors who, during the life of the contract ask
for additional money under the contract because the cost of performing the contract has increased
due to changing conditions of which all the parties were aware, or should have been aware, the
competitive bid laws are at least partially defeated; the generosity of the government will relieve
the contractor of the consequences of his failureBfor whatever reasonBto take account in his bid
of those conditions.
3