Is General Contractor Reliance on Subcontractor’s Bid Appropriate?

Construction and Procurement Law News, Q4 2016

Firm Alert

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During the “chaotic conditions” of bid day, general contractors often call several subcontractors to obtain prices for certain scopes of work. General contractors must be able to enforce and rely upon the subcontractors’ bid price; otherwise, a general contractor could be responsible for significant price gaps if it is awarded the prime contract and the lowest subcontract bidder reneges on its price quote. The law recognizes this reality and industry custom through a legal concept called promissory estoppel, which allows the general contractor to rely upon and enforce the subcontractor’s bid.

General contractors have for decades used promissory estoppel to maintain the integrity of the bidding process. Generally, to prevail on a promissory estoppel claim, a general contractor must establish that (i) the subcontractor made a clear and unambiguous promise and (ii) the general contractor’s reliance upon that promise is reasonable and foreseeable.

Two recent cases illustrate the type of situations where courts may not enforce, and the general contractor cannot rely upon, the subcontractor’s bid. In the first case, Flintco Pacific, Inc. v. TEC Management Consultants, Inc., a decision by an intermediate California court, the subcontractor attached certain terms and conditions to its bid. In the second case, C.G. Schmidt v. Permasteelisa, a case by a federal appeals court, the general contractor engaged in negotiations with the subcontractor, thereby undercutting its ability to claim it relied upon the subcontractor’s bid.

In Flintco, the subcontractor submitted a proposal to the general contractor with its bid-price and a few material conditions, such as: “A DEPOSIT OF 35% IS REQUIRED FOR THIS WORK,” an exclusion for bonds, and withdrawal of the bid if not accepted within 15 days. About 45 days later, the general contractor notified the subcontractor that it was the winning bidder. Shortly thereafter, the general contractor sent its standard form subcontract to the subcontractor that was in direct conflict with many terms in the subcontractor’s proposal, including the bonding requirements, liquidated damages, the scope of work, and the subcontractor’s deposit requirement. The parties had a few discussions and negotiations regarding these terms. Ultimately, the subcontractor refused to enter into a subcontract and terminated its discussions with the general contractor. The general contractor sued the subcontractor to enforce its bid under the theory of promissory estoppel.

During litigation, the subcontractor admitted that it anticipated that the general contractor would use its price in its bid to the owner and the general contractor acted reasonably by relying upon its bid. In addition, the general contractor also argued that, as a matter of construction industry custom and practice, conditions in a bid are irrelevant. The Flintco Court, however, disagreed. According to the Court, “it was unreasonable for [the general contractor] to rely solely on the price in the bid while ignoring terms and conditions stated therein, which were material to the bid’s price itself. Custom and practice cannot alter that result.” Because these conflicting terms and conditions affected the price, the general contractor having sent a contract form that “varied materially” from the subcontractor’s proposal amounted to a rejection of the subcontractor’s bid and a counteroffer, which was never accepted by the subcontractor. There was therefore no enforceable contract between the parties.

The subcontractor in C.G. Schmidt submitted a bid price and, unlike the subcontractor in Flintco, accepted the general contractor’s initial standard form contract. However, over a year passed between the date that the subcontractor submitted its bid and the date that the general contractor entered into the prime contract with the owner. In the meantime, the subcontractor repeatedly requested to review the final prime contract before entering into a formal subcontract, and the parties continually refined and updated the subcontract terms, price, and schedule. Even after the general contractor entered into the prime contract, the parties continued to negotiate terms of the subcontract, including liquidated damages and other delay provisions. Eventually, negotiations broke down and the subcontractor refused to honor its original bid.

During the eventual litigation, the general contractor sought to enforce the subcontractor’s bid through promissory estoppel. The C.G. Schmidt Court, however, held that it was not reasonable for the general contractor to rely upon the subcontractor’s bid because it continually negotiated with the subcontractor both before and after the general contractor entered into the prime contract. The Court called this “bid chiseling,” which is a practice whereby a general contractor attempts to renegotiate the subcontractor’s bid. “When a general contractor reopens bidding with the subcontractor, promissory estoppel may be denied for a number of reasons, including that the general contractor did not ‘in fact rely on the subcontractor's bid, or failed to accept it within a reasonable time, or rejected it by a counter-offer...” “This limit to the application of promissory estoppel exists because of the inequity in allowing the general contractor to shop for lower bids or negotiate with the subcontractor while holding the subcontractor to its bid. Without such a rule, the general contractor, already in a position of power because it can select among subcontractor bids, would be given even more bargaining power over the subcontractor.” Accordingly, the C.G. Schmidt Court ruled in favor of the subcontractor and refused to require the subcontractor to honor its bid based upon promissory estoppel.

As illustrated by both cases, a general contractor can lose its ability to rely upon a subcontractor’s bid where it accepts a bid containing contrary material terms or attempts to negotiate with the subcontractor after the bid has already been submitted.

To be safe, the general contractor should not accept any bids that contain any contrary material terms or conditions. Or, even better, the general contractor should send its standard-form subcontract to the subcontractor and require the subcontractor to accept its standard-form as a condition of submitting the bid. In light of C.G. Schmidt, the general contractor should also, if possible, refrain from negotiating with the subcontractor after it receives the bid, or else it will risk losing the original bid price. Conditions upon bid and negotiations are sometimes unavoidable, but regardless, the general contractor should be aware of the consequences.