Public-Private Partnerships (“P3”) are a popular project delivery method for many state and local agencies across the nation.  A key question that private parties interested in pursuing a P3 project should answer before diving in is whether the P3 procurement is subject to, and in compliance with, the public bidding laws.  Where a state’s statutes and regulations are not perfectly clear on whether public bidding laws apply, the question becomes whether the contract is a “public” or “private” contract.  As a matter of course, parties interested in participating in P3s should assume that the state’s competition requirements apply unless the state has enacted legislation expressly exempting a P3 project from such requirements.  In circumstances where agencies may be attempting to bypass competition requirements by utilizing a P3-type delivery method, courts have indicated their willingness to void contracts and possibly assess additional costs and damages.

When Are P3s Subject to Public Bidding Laws?

A common misperception is that P3 projects are not subject to the competition requirements applicable to public contracts.  State statutes and regulations sometimes address public bidding requirements for P3s directly by exempting P3 projects under that section.  In instances where state laws are unclear or silent on this issue, it is up to the courts to determine whether challenged P3 contract awards should have been solicited under the public bidding laws.  The general rule is that public bidding laws apply to “public” work.  Courts look at several different factors when considering whether a P3 project is “public” enough to require compliance with competitive bidding statutes. 

Sources of Funding for the P3

Public bidding laws usually apply to projects that use public funding.  However, because P3s often involve both public and private funding, it is more difficult to classify P3s.  Therefore, courts look at the sources of funding for the P3 project to determine whether the financing is sufficiently public to require public bidding.  If a P3 project is only partially funded by a public source, it is less likely that a court will find the project to be “public” in nature.

Purpose of the Contract

Courts also look at the essence or purpose of the contract in determining whether the public competition requirements should apply to a P3 contract.  This factor focuses on whether the definition of public work in the bidding statutes cover the majority of the type of work to be performed under the contract.

Existences of an Agency Relationship

Another factor courts consider is whether the private entity in the P3 project is acting simply as an agent of the public entity.  Where a private entity is found to have acted entirely on behalf of an agency, or is completely within the agency’s control, the competitive bidding laws will apply.

  1. Final Ownership of the Project

Lastly, courts also look at whether the public entity will be the owner of the project at completion or at some point in the future.  For example, courts have found projects to be “public” where ownership of a property would revert to the agency if the private entity failed to build on it.

When courts find a P3 contract to be so “public” that it should have been solicited in compliance with the public bidding laws, the underlying contract may be declared void.

The Risks Associated with Using P3s to Circumvent Public Bidding Statutes

State and local agencies sometimes set up complex, P3-type contractual arrangements in order to avoid having to comply with public bidding laws.  However, private entities interested in participating in a P3 project should beware of contracts with public entities that do not comply with public bidding requirements.

Because competing contractors have an incentive to challenge P3 projects obtained without fair competition, it is unlikely that agencies will be able to use P3s to avoid public bidding requirements without a statutory exemption.  If a court finds that a challenged contract violated public bidding law (using some or all of the factors noted above), the court may declare the contract void and may even hit the P3 participants with nominal damages, costs, or attorney’s fees.

A decision by the Indiana Supreme Court in Alva Electric et. al vs. Evansville-Vanderburgh School Corp. shows that costs and damages in addition to declaring the contract void could be assessed against the P3 participants. 7 N.E.3d 263 (Ind. 2014).  In that case, the Indiana Supreme Court found that a deal between a school district and a private foundation whereby the foundation would purchase and renovate an existing building using public funds, and then lease the building to the school district, did violate public bidding law and required competitive bidding.

In addition to finding that the project violated the public bidding law, the court also considered whether to award nominal damages, costs, and attorney’s fees for violating Indiana’s Antitrust Act.  The court determined that the competing contractors who brought the lawsuit failed to fully establish a violation of the antitrust statute.  While the competing contractors had showed a violation of the statute and injury to a person’s business or property proximately caused by the violation (the first and second elements), they did not show actual damages (the third element).  However, the court appeared to agree that such allegations could result in a successful showing of actual damages under the Antitrust Act if the competing contractors had provided an “estimate of what the project would have cost if bid publicly,” and some evidence “from which [the court could] infer that any one of them would have provided the ‘winning’ bid.”

Thus, competing contractors will likely be more motivated to challenge P3 projects that do not comply with public bidding laws with the possibility of damages, costs, and attorney’s fees in addition to contract rescission.  Private entities should be aware of these risks when considering whether to enter a P3 procurement that may not have complied with the applicable competitive bidding laws.

Conclusion

When statutes and regulations do not directly exempt a P3 project from public bidding requirements, it is up to the courts to determine whether the project is for a “public” work by weight factors such as the funding source, contract purpose, level of agency control, and ownership of the project.  If found to be sufficiently “public”, courts may declare a contract void and may even assess costs and damages against the P3 participants.  As a result, it is safer for a private party interested in a P3 project to assume that the public bidding laws do apply, rather than risk a court finding the project violated the competition requirements and assessing penalties.