Reliance On A Subcontractor’s Bid on California Public Works Project that has material contract terms that are different than those in the Contractors Subcontractor?

A recent case holds that the contractor cannot rely on the bid.

By
William C Last, Jr.
Attorney At Law

 

On July 19, 2016, a California Appellate Court published an opinion, FLINTCO PACIFIC, INC. vs TEC MANAGEMENT CONSULTANTS, INC, that changes the landscape as to when a general contractor can reasonably rely on a subcontractor's public works bid. The issue in the case concerned when the general contractor could reasonably rely on the subcontractor's bid on California public works project.

The general rule that many general contractors have followed is if a listed subcontractor refuses to sign a contract, the general contractor can file a promissory estoppel lawsuit against that subcontractor that seeks the difference between the bid amount and the actual cost of such work. 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 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.

In the Flintco case the subcontractor, TEC, submitted a bid to Flintco to perform subcontract work on the project for $1,272,960. Immediately below the bid price read: "A DEPOSIT OF 35 % IS REQUIRED FOR THIS WORK." The deposit was for security and to enable TEC to lock in a price with its suppliers. Other conditions of TEC's bid were that the bid could be withdrawn if not accepted within 15 days and that the proposed price was "subject to a minimum 3% escalation, per quarter, after 15 days acceptance period."

After Flintco was awarded the bid by the public agency it sent a subcontract to TEC that did not include the additional terms that were included in the TEC bid. When the parties couldn't reach an agreement on the subcontract, Flintco entered into a subcontract with another subcontractor for over $300,000 more than the TEC bid. Flintco then sued TEC for that the additional cost.

Flintco relied on case law for the proposition, based on custom and practice in the business of lump-sum contracting, that conditions in a bid are irrelevant and so Flintco reasonably relied on the bid price only. Flintco relied on an earlier appellate decision that held that "the customary practice in the construction industry is for the general contractor who is awarded a contract to enter into a written contract with the subcontractor, which written contract embraces far more than the price which the subcontractor has bid by telephone. The additional matters would include such things as whether the subcontractor would furnish a bond, who would provide for insurance, how payments would be made and many other matters. Although the provisions other than price are not identical in all subcontracts generally . . . price is the principal item as is evident from the fact (as shown by the evidence) that seldom does a general contractor fail to reach an agreement with the subcontractor whose bid is low."

The Flintco court found, however, that "TEC's bid contained conditions that were material to its bid price, and which if omitted, would have considerably increased the price. The court found therefore that Flintco's reliance on the bid price alone was not reasonable. The court decision, in part, was based on the fact that the bid contained a "35 percent deposit requirement was underscored and written in all capital letters directly beneath the bid price and was necessary to lock in TEC's suppliers' costs; TEC would not accept any liability for liquidated damages; TEC's bid contained an exclusion for bonds; and contained a 3 percent per quarter escalation in price if the bid were not accepted by Flintco within the 15-day period the bid was open". It should be noted that during the trial Flintco's employee testified that it reviewed bids prior to listing the subcontractor "for bonding, length of time the bid would remain open, and "red flags" to avoid problems during negotiations that could cause it to lose the subcontractor. "

The Court also cited another appellate court decision for the proposition that "[w]hether a general contractor is entitled to rely upon the bid of a proposed subcontractor must be decided on the basis of the facts involved in the particular case before the court." Another interesting part of the Flintco court decision is the section that states: "When a general contractor uses a subcontractor's "offer in computing his own bid, he bound himself to perform in reliance on defendant's terms." Hence, "a general contractor is not free to . . . . reopen bargaining with the subcontractor and at the same time claim a continuing right to accept the original offer."

It should also be noted that if the general contractor is relying on a suppliers quote the outcome is generally dictated by the Commercial Code. While the doctrine of promissory estoppel can be applied if a supplier backs out of a quote, the Commercial Code may be applicable. If the quote is oral, it becomes irrevocable on written confirmation by the contractor until the earlier of (Com C §2205): (a) 10 days after the award of the prime contract; or (b) 90 days after the date of the supplier's. However, the suppliers quote does not become irrevocable if the prime contractor's written confirmation within 48 hours was required (i.e., supplier made an oral offer for $2500 or more) but not given. Com C §2205(b). Finally, under the Commercial Code a supplier will be bound if it attempts to withdraw after the bid deadline if the prime contractor's bid (1) is the low bid (or becomes the low bid after lower bids are rejected) and (2) incorporates the withdrawing supplier's bid. Com C §2205.

This article, ©2016, was written by William C. Last, Jr. of Last & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over eighteen 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 650-696-8350. 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.