Request By:
Mr. Walter Spooner
Chief Internal Auditor
Executive Department for
Finance and Administration
Capital Annex
Frankfort, Kentucky 40601
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
You request our opinion as to the legality of a lease-purchase agreement between the Commonwealth of Kentucky and the Addressograph-Multigraph Corporation [referred to as AM], as specifically relates to certain offset printing equipment, offset and dark room supplies furnished by Didde-Glaser Corporation, the Didde-Glaser equipment being priced at $150,090.
For the purpose of clarity in recounting the significant factual and contractual background, we shall break this down into three major events.
THE PRICE CONTRACT OF 1977
On May 25, 1977, an Invitation to Bid was furnished to various suppliers of printing equipment and supplies. The Finance Department has been operating a printing division for the benefit of state agencies, in addition to the procurement of printing from other sources. The Invitation to Bid was for equipment to be used by the state's printing organization. As a result of the invitation, a price contract, No. PCT Ky-117-678, was established with AM on their equipment. The intent was that selected purchases by the state would be based upon the price sheets and catalogues, involving AM equipment submitted by the successful bidder.
Under price contracts, the Commonwealth establishes a source of supply at a definite price without a guarantee of a specific quantity. Such a contract normally envisions that the purchase of selected and available items at the price agreed on will be paid upon purchase.
THE LEASE-PURCHASE AGREEMENT OF 1978
On June 29, 1978, contract number CT-061674 was issued by the Finance Department to AM, without bidding. The lease-purchase contract was based upon the original price contract, PCT Ky-117-678, mentioned above. The contract converted the original price contract into a lease-purchase contract. It embraced certain of the originally priced items of AM equipment, with the rental-purchase payments to be strung out over three years, but at the price shown in the original price contract.
CHANGE ORDER NO. 1953, RELATING TO THE WEB-COM PRESS OF DIDDE-GLASER
The Change Order No. 1953, dated March 16, 1979, was injected into the lease-purchase contract, CT-061674. The price of the Didde-Glaser Web-Com offset printing press and allied equipment and supplies, amounts to $150,090. The Corporation, Didde-Glaser, actually has no completely formalized and direct contract with the Commonwealth. It does have a direct contract with AM, which provides that AM Leasing will make full payment to Didde-Glaser for the latter's equipment at agreed upon prices, totaling $150,090, only after AM receives direction from the Commonwealth of Kentucky that the equipment has been received, installed, and has been accepted by the state. At present, the Didde-Glaser equipment is still in the crates and has not been used or accepted by the state.
Under the policy of the Finance Department, a change order is not to be used to initiate major changes which are outside the scope of the contract, or to effect a new buy which normally would be done by competitive bids.
OPINION OF ATTORNEY GENERAL
It is our opinion that the lease-purchase agreement was not validly executed. The Department of Finance has no authority to enter into a lease extending beyond the end of the legislative biennium in which the lease is executed.
Turnpike Authority of Kentucky v. Wall, Ky., 336 S.W.2d 551 (1960).
In addition, the conversion of the original price contract into a lease-purchase agreement in 1978, without bidding, was not contemplated in the original 1977 Invitation to Bid. Thus a material and substantive change was made in the original price contract, such that it became another and distinct contract. Competitive bidding statutes are for the benefit of the public, i.e., the taxpayers. As stated in 72 C.J.S., Supp., Public Contracts, Sec. 8, p. 182, "The purpose of this requirement is to protect the taxpaying public against the wasting of public funds and to prevent abuses such as fraud, favoritism, improvidence and extravagance." But to insure the primary benefits of bidding to the public, the secondary consideration in terms of the equitable treatment of bidders is necessary. It is vital that all bidders be given an opportunity to bid on precisely the some thing. Thus the plans and specifications cannot be legally changed after the bids are advertised without a new advertisement giving all bidders a chance to bid on the new situation. See ibid., Sec. 10, p. 186. In
R.G. Wilmott Coal Co. v. State Purchasing Commission, 246 Ky. 115, 54 S.W.2d 634 (1932) 635, the court wrote that "A study of this statute discloses that its underlying purpose is to encourage competitive bidding to the end that supplies for departments and institutions of the government may be secured at the most favorable prices."
The bidding process involves three important considerations: (1) An offering to the public; (2) An opportunity for competition; and (3) A basis for an exact comparison of bids. 43 Am.Jur., Public Works and Contracts, Sec. 23, p. 765.
Here the original price contract was converted into a lease-purchase agreement without bidding. Thus the original bidders were not given an opportunity to bid on the new conditions. Even if AM had a general service administration price agreement with the United States or one of its agencies, the Department of Finance chose to let the price contract out on bids, and AM chose to respond to the Invitation to Bid. Where a vendor holds a G.S.A. Price Agreement, the Department could negotiate without bidding. KRS 45.360(2). But that is now academic. The Model Procurement Code does not apply to this problem, since it became effective January 1, 1979.
It is further our opinion that the injecting or piggybacking the subject Didde-Glaser equipment into and onto the so called lease-purchase agreement was illegal, since the lease-purchase agreement is illegal. Even if the lease-purchase agreement were legal [which we seriously doubt for the above reasons], the Didde-Glaser equipment is not based upon the original price contract. The only price established for their equipment was through Change Order No. 1953 of March 16, 1979. Thus Didde-Glaser was indeed a total stranger to the original price contract and subsequent lease-purchase agreement.
There is some suggestion that the Didde-Glaser equipment, in terms of its size and capabilities, might technically be deemed to be a single source item [where an item is available from only one source, bidding is not required. See KRS 45.360(1)(g)]. However, the Commonwealth is not dealing with Didde-Glaser. Thus the "one source" aspect is academic.
Under these factual circumstances, the state has not executed a binding contract with Didde-Glaser in terms of the contract claims law. See the old KRS 44.260 et seq., [amended and reenacted. See KRS 45A.240 et seq.]. Cf.
Fidelity & Cas. Co. v. Commonwealth ex rel. Christen, Ky., 445 S.W.2d 113 (1969), observing in effect that the state must live up to its authorized contractual obligations.
In summary, it is our opinion that the Commonwealth of Kentucky is not legally committed to the lease-purchase of the Web-Com printing press of Didde-Glaser.