MJ McGough Company v. Jane Lamb Memorial Hospital
1969 U.S. Dist. LEXIS 9864, 302 F. Supp. 482 (1969)
Rule of Law:
A contractor may rescind a bid containing a unilateral clerical mistake if the mistake is material and enforcement would be unconscionable, the mistake occurred despite ordinary care, prompt notification was given before acceptance, and the other party can be restored to status quo without suffering actual damage beyond the loss of the bargain.
Facts:
- On or about January 2, 1968, Jane Lamb Memorial Hospital (a nonprofit Iowa corporation) published an invitation for bids on a hospital improvement project.
- Shortly before 2:00 p.m. on February 16, 1968, M. J. McGough Company (a Minnesota corporation) submitted a bid for $1,957,000, along with a $100,000 bid bond from The Continental Insurance Company.
- At 2:00 p.m. on February 16, 1968, bids were opened, revealing M. J. McGough Company's bid as the lowest, approximately 10% lower than the next lowest bid from Knutson Construction Company.
- Around 2:45 p.m. on February 16, 1968, Mr. J. H. McGough, President of M. J. McGough Company, immediately suspected a serious mistake due to the low bid and instructed his representative to request withdrawal of the bid from Mr. Clark Depue III of the Hospital.
- After the bid opening, Mr. McGough discovered a $199,800 error in the bid: during frenzied activity, a $222,000 subcontractor bid from Artcraft Interiors, Inc. was verbally relayed and recorded as $22,200, which was then used in the final bid calculation.
- M. J. McGough Company sent a letter dated February 16, 1968, to Milton Holmgrain, the hospital administrator, explaining the error and offering to submit all records for verification.
- On February 22, 1968, without further communication with M. J. McGough Company, the Hospital's Board of Trustees passed a 'Resolution of Intent' to accept M. J. McGough Company's bid, conditional upon obtaining necessary governmental approvals.
- M. J. McGough Company subsequently refused to execute the contract and other necessary documents, leading the Hospital to award the contract to Knutson Construction Company, the next lowest bidder.
Procedural Posture:
- On April 11, 1968, M. J. McGough Company filed a complaint in the United States District Court for the Southern District of Iowa, seeking to have its bid declared rescinded and its surety, The Continental Insurance Company, released from liability on its bid bond.
- On April 11, 1968, Jane Lamb Memorial Hospital filed a separate complaint in the United States District Court for the Southern District of Iowa against M. J. McGough Company and The Continental Insurance Company, seeking damages.
- The two separate complaints were consolidated for trial by the United States District Court for the Southern District of Iowa.
- The matter was tried by the United States District Court without a jury on May 19, 1969, with the parties having stipulated to many of the facts.
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Issue:
Does a construction contractor have the right to rescind its bid and be released from bond liability due to a significant unilateral clerical error in calculation, where the hospital had prompt notice of the error before formal acceptance of the bid, and would suffer no actual damages beyond losing the benefit of the mistaken low bid?
Opinions:
Majority - Stephenson, Chief Judge
Yes, a construction contractor does have the right to rescind its bid and be released from bond liability when a significant unilateral clerical error is discovered and promptly reported before the bid's acceptance, and the other party suffers no actual damages beyond the loss of bargain. The court found that all prerequisites for equitable rescission of a contract due to unilateral mistake were met. First, enforcement of the bid with a $199,800 error (approximately 10% of the bid) would be unconscionable, particularly since Jane Lamb Memorial Hospital had actual knowledge of the mistake before acceptance. Second, the mistake related directly to the substance of the consideration. Third, the error was a simple clerical mistake made during a period of rushed activity, which the court distinguished from gross or willful negligence that would bar relief; thus, it occurred despite the exercise of ordinary care. Fourth, Jane Lamb Memorial Hospital suffered no actual damages from the withdrawal, only the loss of an advantageous bargain, which equitable considerations do not permit recovery for in this situation. The court also determined that M. J. McGough Company provided prompt notification of the mistake and intent to withdraw, as the mere opening of bids did not constitute acceptance, nor did the Hospital's conditional 'Resolution of Intent' effectively accept the bid prior to notification. Citing numerous precedents, the court affirmed that such equitable relief is standard, and provisions in bid documents prohibiting withdrawal for a set period or for negligence are not effective when equitable considerations dictate otherwise.
Analysis:
This case establishes a clear precedent for allowing equitable rescission of construction bids containing significant unilateral clerical errors. It reinforces that courts will prevent unconscionable enrichment where one party attempts to capitalize on another's obvious mistake, especially when prompt notice is given. The ruling provides an important safeguard for bidders against severe financial loss from honest, non-negligent errors, while also cautioning public entities that specific bid terms cannot override fundamental equitable principles. This case helps define the boundary between permissible reliance on a bid and impermissible exploitation of a known mistake, thereby influencing future bidding practices and contract dispute resolutions.
