Can A General Contractor Rely On A Subcontractor’s Bid On California Public Works Project?

Can A General Contractor Rely Ont
A Subcontractor’s Bid on California
Public Works Project?

A Recent Apellate Court Decision Addresses the Issues

By
William C Last, Jr.
Attorney At Law

On December 28, 2004, a California Appellate Court published an opinion, Diede Construction, Inc. v. Monterey Mechanical Company, that addresses the issue of whether or not a general contractor who was awarded the prime contract could rely on a subcontractor's mistaken bid on california public works project.

In the Diede case the subcontractor sought to withdraw its bid due to a $300,000 error. The subcontractor timely informed the general contractor of the error and informed that they should withdraw their bid. The general contractor refused to withdraw the bid and then entered into a contract with the owner. The general contractor ultimately sued the subcontractor seeking the difference between subcontractor's bid and the actual cost of that work. The issue before the appellate court was whether or not the general contractor could reasonably rely on the subcontractor's bid when they could have withdrawn their prime bid. The court held that the right to withdraw the bid in itself did not necessarily make the reliance unreasonable.

This article will discuss not only the subcontractor fair listing laws and the legal issues surrounding a subcontractor's liability for refusing to execute a subcontract agreement.

1 . WHAT ARE SUBCONTRACTOR FAIR LISTING LAWS?

Prior to the establishment of subcontractor fair listing laws, it was common for successful general contractor bidders to bid-shop or bid-peddle the subcontractors bid. The Legislature determined, however, that such practices were not in the best interest of the public and thus established the fair listing laws. Those laws are referred to as the Subletting and Subcontracting Fair Practices Act and can be found at Public Contract Code section 4100 et seq. (hereinafter The Act).

2. WHEN MUST A CONTRACTOR LIST ITS SUB-CONTRACTORS?

Under most circumstances, subcontractors must be listed in the bid. Public Contracts Code '4104 states that public project specifications or general bidding conditions must require persons making bids to set forth the names and locations of subcontractors which will perform work in excess of one-half of one percent of the total bid (or, in the case of streets, highways, or bridges, work in excess of one-half of one percent of the total bid or $10,000.00, whichever is greater). The bidding contractor must also set forth the portion of the work which will be done by each subcontractor. The prime contractor may list only one subcontractor for each portion as defined in the bid.

3. WHEN CAN A CONTRACTOR SUBSTITUTE A LISTED SUBCONTRACTOR?

Generally, once a subcontractor is listed the general contractor may not substitute another subcontractor for the same work. California Public Contracts Code '4107 provides that no prime contractor whose bid is accepted may substitute another subcontractor in place of the subcontractor listed in the original bid. However, there are exceptions. The awarding authority may, except as otherwise provided, consent to the substitution of another person as a subcontractor in any of the following situations:

(1) When the subcontractor listed in the bid, after having had a reasonable opportunity to do so, fails or refuses to execute a written contract for the scope of work specified in the subcontractor's bid and at the price specified in the subcontractor's bid, when that written contract, based upon the general terms, conditions, plans, and specifications for the project involved or the terms of that subcontractor's written bid, is presented to the subcontractor by the prime contractor. (Please note that the wording in this exception was modified last year by the legislature.)

(2) When the listed subcontractor becomes bankrupt or insolvent.

(3) When the listed subcontractor fails or refuses to perform his or her subcontract.

(4) When the listed subcontractor fails or refuses to meet the bond requirements of the prime contractor (provided such bond requirements are included in the prime contractor's bid solicitation materials;

(5) When the prime contractor demonstrates to the awarding authority that the name of the subcontractor was listed as the result of an inadvertent clerical error.

(6) When the listed subcontractor is not licensed pursuant to the Contractors' License Law.

(7) When the awarding authority, or its duly authorized officer, determines that the work performed by the listed subcontractor is substantially unsatisfactory and not in substantial accordance with the plans and specifications, or that the subcontractor is substantially delaying or disrupting the progress of the work.

(8) When the listed subcontractor is ineligible to work on a public works project pursuant to Section 1777.1 or 1777.7 of the Labor Code

(9) When the awarding authority determines that a listed subcontractor is not a responsible contractor.

Prior to approval of the prime contractor's request for the substitution, the awarding authority must give notice in writing to the listed subcontractor of the prime contractor's request to substitute and of the reasons for the request, by certified or registered mail to the subcontractor's last known address. The subcontractor has five working days within which to submit written objections to the substitution to the awarding authority. If the subcontractor objects, the awarding authority must give notice in writing within at least five working days to the listed subcontractor of a hearing by the awarding authority on the prime contractor's request for substitution.

4. WHAT STATUTORY LIABILITY DOES A GENERAL CONTRACTOR HAVE FOR IMPROPERLY SUBSTITUTING A LISTED SUB-CONTRACTOR?

Public Contracts Code '4105 states that listing other contractors who will in turn sublet portions constituting the majority of the prime contract work is a violation of Public Contracts Code '4104 and subjects the prime contractor to penalties set forth the Act. Public Contracts Code '4106 states that if a prime contractor fails to specify a subcontractor when so required, the prime contractor agrees that he or she is fully qualified to perform that portion himself or herself and will in fact perform that portion of the work. The issue that can arise is whether the general contractor has the appropriate license to perform that work.

If after the award of a contract, the prime contractor subcontracts, except as otherwise provided for in the Act, any such portion of the work, the prime contractor shall be subject to the penalties. The penalties are set forth in Public Contracts Code '4110 which states: AA prime contractor violating any of the provisions of this chapter violates his or her contract and the awarding authority may exercise the option, in its own discretion, of (1) canceling his or her contract or (2) assessing the prime contractor a penalty in an amount of not more than 10 percent of the amount of the subcontract involved, and this penalty shall be deposited in the fund out of which the prime contract is awarded. In any proceedings under this section the prime contractor shall be entitled to a public hearing and to five days notice of the time and place thereof. A violation of the Act may also subject a prime contractor to a disciplinary action by Contractor's State License Board.

5. WHAT HAPPENS WHEN THERE IS A WITHDRAWAL OF A BID BY A SUB-CONTRACTOR?

The Diede court restated the general rule concerning the legal restrictions on a listed subcontractor's refusal to sign a subcontract. In essence, if a listed subcontractor refuses to sign a contract, the general contractor can file a lawsuit against that subcontractor that seeks the difference between the bid amount and the actual cost of such work. Such an action is based on the doctrine of promissory estoppel. Generally, that doctrine is based on the concept that if someone makes a promise which reasonably induces the other party to take a certain action, such a promise should be binding to avoid an injustice. Earlier reported cases held that the doctrine is available to a general contractor, as applied against a proposed subcontractor who makes a bid on a public works project and with it an implied subsidiary promise to keep the bid open for a reasonable time after the awarding of the general contract. The Diede court made it clear that as between the subcontractor who made the bid and the general contractor who reasonably relied on it, the loss resulting from the mistake should fall on the party who caused it.

The subcontractor, however, has defenses to such a lawsuit. The defenses include: (1) The general contractor should not have relied on the bid because it was so low in comparison to the other bidders; (2) The general contractor shopped the bid and did not rely on it; and (3 ) The subcontractor refused to sign the contract because the general contractor's contract contained unfair and unreasonable language.

As to the Diede case, the subcontractor argued that once the general contractor learned of the error it should have withdrawn the bid from the public entity pursuant to the statutes that allow for a general contractor to withdraw its bid due to a clerical error. The Diede court rejected that argument. The Diede court held that a general contractor is not required to attempt to withdraw its bid due to a subcontractor's clerical error and that the failure to do so negated reasonable reliance on that subcontractor's bid. The Diede court did remand the case to the trial court so that it could make a determination if there was reasonable reliance based on the other facts surrounding the case.

CLOSING COMMENTS

If you are a prime contractor bidding on a public works project you should review the subcontractor's bid to determine if there are exceptions or special subcontract terms in the bid. A general contractor should also review all the subcontractors bids to ascertain if they are reasonable in light of the other competitive subcontractor bids for the same scope of work If the bid appears to be too low you should so notify that subcontractor and confirm the bid amount before listing that subcontractor. If the listed subcontractor later claims that its bid was too low, the fact that you notified them and re-confirmed the bid will offset any argument that you should not have reasonably relied on the bid.

If you are subcontractor whose bid is listed you should familiarize yourself with your obligations to enter into a subcontract. You should also submit your bid along with any exceptions and/or contractual language requirements by facsimile prior to the bid opening. Timely written bid exceptions and/or contractual language requirements may be the basis for a limitations on the scope of the work in the subcontract and elimination of unfavorable contract clauses.

This article,2005, was written by William C. Last, Jr. of Last & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over twenty-five years. Mr. Last also holds a California A&B contractors license. If you have any questions Mr. Last can be contacted at 415-764-1990 or 650-425-7679. He has other articles on his web site: lhfconstructlaw.com. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.