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By Aaron R. Gruber and Paul W. Berning
The
general rule is that subcontractors providing bids to a
general contractor must perform the work contemplated by
their bids for the price quoted if the general contractor
is chosen to perform the work. This rule is grounded in
the doctrine of promissory estoppel and is followed in most
jurisdictions.
One
of the most widely cited cases on the issue is Drennan
v. Star Paving Co., 51 Cal.2d 409 (1958). Drennan
held that a subcontractor, which provided a bid by telephone,
had to compensate a general contractor that relied on the
bid for the additional cost of a replacement subcontractor
after the original subcontractor refused to perform, claiming
its bid contained a mistake. That is, the general contractor,
which in good faith detrimentally relied on the price quote
from the subcontractor by contractually binding itself to
an owner, could rely on the sub's price, even before they
signed a subcontract. Typical damages for failure to honor
a bid are the difference between the original bid price
and the cost of a replacement contractor.
Four
recent cases, however, show that this rule is not ironclad,
especially when pricing or other essential terms are left
open at the time of bidding or if the bid is not timely
accepted.
In
two of the cases, subcontractors were excused from their
bids when general contractors sought to include schedule
requirements in the subcontracts. Rouse Construction
Co. v. Interstate Steel Corp., 2002 WL 54182 (Tenn.
Ct. App. 2002); Lichtenberg Construction & Development,
Inc. v. Paul W. Wilson, Inc., 2001 WL 1141236 (Ohio
Ct. App. 2001). In the third, the general contractor failed
to accept a bid within the 30-day time limit set out in
the bid. Pickus Construction and Equipment v. American
Overhead Door, 326 Ill.App.3d 518, 761 N.E.2d 356 (2002).
In the fourth case, a subcontractor's insertion of disclaimer
language regarding pricing in its bid proposal prevented
the general contractor from enforcing the bid even though
the subcontractor knew the general contractor would use
the bid in making its own proposal to the owner. National
Environmental Service Co. v. Ronan Engineering Co, 256
F3d 995 (10th Cir. 2001).
No Meeting of Minds on Schedule
In
Rouse Construction, the Tennessee Court of Appeals
held that a general contractor could not enforce a subcontractor's
bid when the bid did not address the project's schedule.
The subcontractor provided a bid for the fabrication and
erection of steel for a church, and the general contractor
relied on it. The bid did not include or commit to a schedule.
After the general contractor was awarded the project, it
began discussing scheduling with the subcontractor. It also
presented for the first time a form of contract that would
have exposed the subcontractor to liability for liquidated
damages in an unspecified amount. The subcontractor proposed
alternate schedules. After partial performance and unsuccessful
negotiations lasting more than four months, the subcontractor
declined to proceed further. The general contractor sued
the subcontractor to enforce its bid.
The
court held that scheduling was an essential term of the
contract and that there was no meeting of the minds by the
contractor and subcontractor on scheduling and liquidated
damages so as to impose contractual or implied contractual
liability. Indefiniteness as to an essential term can prevent
formation of an enforceable contract, the court wrote. It
noted that the form of contract proposed by the general
contractor made time of the essence but also referred to
"an agreed upon construction schedule." It found
that partial performance in anticipation of a contract did
not evidence a meeting of the minds. The court also held
that the subcontractor could recover in quantum meruit for
services and materials it provided to the project before
negotiations broke down and it stopped work.
Strict Schedule Not Reasonably Expected by Sub
In
Lichtenberg Construction, the court held that a general
contractor could not enforce a masonry subcontractor's bid
upon which it had relied when the bid was provided without
knowledge of the contractor's schedule requirements. A "time-is-of-the-essence"
clause in the proposed subcontract required the sub to complete
the masonry work under "a strict time schedule"
to allow for overall project completion by a specified date.
The Ohio Court of Appeals set out the conditions for enforcing
a bid:
[A]
subcontractor is bound to its bid to a general contractor
if the general contractor relied on that bid, was awarded
a general contract, and notified the subcontractor within
a reasonable time that the subcontractor's bid was accepted.
But if the general contractor then proposes a subcontract
with terms that the subcontractor should not reasonably
have expected when the subcontractor made the bid, then
the subcontractor will not be obligated to honor the bid.
The
court noted that the strict time schedule was not included
in the specifications the subcontractor reviewed before
bidding. Thus, the court concluded, the subcontractor had
no reason to expect that an inflexible time schedule would
be included in the subcontract. If the time schedule for
performance of the work had been included in the bid specifications,
the court wrote, then the subcontractor would have been
obligated to honor its bid.
Both
the trial court and appellate court relied on testimony
of an expert witness called by the masonry subcontractor
to show that the scheduling requirement could not have been
reasonably expected. The expert witness, himself a masonry
subcontractor in the Cincinnati (Ohio) for 25 years, testified
that although a "time-is-of-the-essence" clause
was standard language in a subcontract, it "d [idn't]
carry much weight" because in practice the general
contractor and subcontractor negotiated the schedule in
good faith. The expert also testified that if a general
contractor was adamant that work be completed within a strictly
limited time and refused to negotiate, then the subcontractor
simply did not sign the contract. The expert testified that
if a general contractor knew in advance that a strict time
schedule was necessary for a project, it would send a letter
of intent to the subcontractor requesting that it reserve
a specific period of time in its schedule to work on the
project.
The
trial court determined that the standard of practice in
the Cincinnati area, where the case arose, was for the subcontractor
to offer a bid to the contractor, the contractor to accept
the bid and the parties to negotiate the schedule. Instead,
the contractor attempted to impose a strict, non-negotiable
schedule on the subcontractor. The court determined that
the subcontractor, when bidding, could not have reasonably
expected the general contractor to require a strict schedule
and, therefore, an enforceable agreement had not been reached
between the parties when the general contractor accepted
the subcontractor's bid.
Bid Not Accepted Within Time Limits
In
Pickus Construction, a subcontractor ultimately demanded
a price nearly twice its bid price for overhead doors. When
the general contractor sued to enforce the bid, the subcontractor
raised a number of defenses. The Appellate Court of Illinois
rejected all but one: The bid's qualification that it was
good for only 30 days because of potential price increases
by suppliers and that a signed purchase order had to be
tendered in that time. One was not so tendered.
To
prevail on its claim of promissory estoppel, the court held,
the general contractor had to prove: 1.) the defendant
made an unambiguous promise; 2.) the plaintiff relied
on the promise; 3.) the reliance was expected and
foreseeable to one in the defendant's position; and 4.)
the plaintiff's reliance on the promise was detrimental.
Because
of the 30-day time limit on the bid, the court held, any
reliance after the 30 days had run was not reasonable. It
noted testimony by the subcontractor that the time limit
was included because the sub's suppliers would hold their
price quotes for only 30 days.
The
court distinguished an earlier case cited by the general
contractor. There, after the bid opening, the general contractor
told the subcontractor that if it were awarded the contract,
it would award the subcontract to the sub. At trial, the
general contractor presented evidence establishing the existence
of a trade practice that the conversation amounted to a
contract award to the subcontractor. The court in Pickus
Construction held that no evidence of a trade practice
had been presented.
The
outcome was particularly harsh for the general contractor.
When the subcontractor submitted its bid, the general contractor
contacted the sub to say the bid appeared to be erroneous.
After reviewing its bid with the general contractor, the
sub insisted that the bid was correct and refused to withdraw
it from the plaintiff and other general contractors. The
plaintiff general contractor explained to the sub that it
would be at a competitive disadvantage if the sub did not
withdraw the bid and the general contractor used a higher
bid from another sub. Accordingly, the plaintiff general
contractor informed the sub it would use the sub's bid and,
if the plaintiff got the project, would make an award to
the sub. The sub insisted that it would honor its bid.
After
the general contractor was awarded the contract, the sub
revealed that its bid was not based on the brand of doors
set out in the owner's specifications but on purported "or
equal" doors. The owner's architect twice refused to
accept purported "or equal" doors proposed by
the sub, leading the sub to nearly double its price as a
condition of supplying the specified brand.
Price Quotation Was Heavily Qualified
In
National Environmental Services, a subcontractor
submitted a price quotation for equipment and installation
of a leak detection system for fuel tanks. It provided:
"The following quote is only a cursory view for budgetary
purposes and the final components and costs are subject
to change dependent on actual site conditions." Later,
the general contractor, in writing, requested a "firm"
price quote. The subcontractor then submitted a price quote
but with substantially the same disclaimer language as before.
An
employee of the general contractor testified that he paid
little attention to the disclaimer because he had requested
a "firm" price quote and because sufficient time
had passed for the subcontractor to give more than "cursory"
consideration to its pricing.
In
the end, the contractor had to use another subcontractor,
and the project was finished late and substantially over
budget. At trial, the subcontractor asserted that no contract
had been formed and that it had only engaged in prolonged
negotiations with the general contractor. The jury found
no contract was breached, and the Court of Appeals affirmed.
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