Background: From time to time, procurement agencies enter into contracts that contain provisions permitting the parties to extend (or renew) the contracts past the initial term based on “mutual agreement” of the parties, or on terms to be negotiated at a later date (or both). In 1984, the Procurement Advisor issued a memorandum that instructed agencies that such provisions are not true contract options and are improper. That memorandum was accompanied by a memorandum of law distributed by the State Law Department to all general counsel, outlining the legal basis for the Procurement Advisor’s instructions. Because this issue recurs, it is appropriate to restate the principles set forth in those memoranda.
The Maryland Court of Appeals has specifically addressed this issue. The court held that when the procurement law requires competitive sealed bids (or proposals), provisions that permit “extension by mutual consent of the parties” or that “require negotiation and agreement” are “inoperable” and an evasion of competitive bidding requirements. The only type of option that the State may exercise in lieu of a new procurement – is one where “no negotiation [is] involved because the State alone holds the power to extend the contract” and the terms for the option period are set forth in the original bid (or proposal). City of Baltimore v. Bio-Gro Systems, 300 Md. 248, 477 A.2d 783 (1984), discussed in Survey of Developments in Maryland Law, 45 Md. L. Rev. 532, 587-88 (1986) and in Penpac, Inc. v. Morris County Municipal Utilities Authority, 690 A.2d 1094 (N.J. Super. 1997). (In the recent New Jersey case, the court confirmed this principle even when the government and the contractor agreed to prices lower than those contained in the original contract.)
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