During the 2012 legislative session, the Maryland General Assembly passed HB1370 which was signed into law by the Governor on May 2, 2012 and became Chapter Law 201. HB1370 includes many different changes to the minority business laws affecting state procurement. One such change requires that all contracts containing Minority Business Enterprise (MBE) participation goals shall contain a liquidated damages provision that applies in the event that the contractor fails to comply in good faith with the provisions of this subtitle or the pertinent terms of the applicable contract. MD Code Ann., State Fin. & Proc., § 14-303(b)(5). Accordingly, the Code of Maryland Regulations (COMAR) was amended to include a line at 21.11.03.10 (E) that states: All contracts containing certified MBE participation goals shall contain a liquidated damages provision that applies if the contractor fails to comply in good faith with the provisions of State MBE laws or the pertinent terms of the procurement contract. COMAR 21.11.03.10.
The Governor’s office of Minority Affairs (GOMA) published recommended liquidated language provisions that appear to have been universally adopted by all procuring state agencies. The recommended language includes: 1) a per-day penalty in an amount determined by the agency for failing to provide reports in full compliance with COMAR; 2) a per-subcontract penalty for every subcontract that does not require subcontractors to submit payment reports per COMAR; 3) a penalty for terminating, canceling, or changing the scope of work or value of a contract with an MBE subcontractor and/or amending the MBE participation schedule in an amount that equals the difference between the dollar value of the MBE participation commitment on the MBE participation schedule for that specific MBE firm and the dollar value of the work performed by that MBE firm for the contract; and 4) a penalty for failure to meet the Contractor’s total MBE participation goal and subgoal commitments in an amount equal to the difference between the dollar value of the total MBE participation commitment on the MBE participation schedule and the MBE participation actually achieved.
In the past month, these provisions have also made their way into procurement contracts already in process with county agencies (i.e. school districts) with the caveat that the State is mandating the Counties to include the provisions in new contracts and to amend existing contracts to include them.
The State has attempted to validate this new law and required contract language by including the following in the suggested contract language: The State and the Contractor acknowledge and agree that the State will incur damages, including but not limited to loss of goodwill, detrimental impact on economic development, and diversion of internal staff resources, if the Contractor does not comply with the provisions of the Minority Business Enterprise Program and pertinent contract provisions in one or more of the ways set forth below.
There are many different factors affecting the enforceability of such provisions in contracts in the State of Maryland. The language put forth by GOMA may not comport with much of the long-standing precedent regarding liquidated damages provisions in contracts. However, in the almost two months since the law went into effect, it does not appear that this new law has been challenged. It will be interesting to see if the State and the Counties will be held to the same standards as private business when the Courts inevitably rule on the enforceability of this new requirement.
Miles & Stockbridge, PC
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