April 11, 2007
Bidding or quoting a fixed price to perform work on a construction project always presents risks, such as questions of scope, ambiguities in the specifications, or unanticipated site conditions. Rapid price escalation for materials, labor, and equipment only compound these risks. Historically, it is not unusual to find that each period of rapid price escalation spawns litigation between contractors and subcontractors or suppliers regarding whether the subcontractor or supplier is bound to honor its quoted price.
Typically, the party seeking to enforce the quotation attempts to rely on the doctrine of promissory estoppel. The doctrine of promissory estoppel is set forth in Section 90 of the Restatement (Second) of Contracts as follows:
A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee (or a third person) and which does induce such action or forbearance is binding if injustice can be avoided only by the enforcement of the promise. The remedy granted for breach may be limited as justice requires.
The leading case regarding the application of the doctrine of promissory estoppel to subcontractors’ bids is Drennan v. Star Paving, 333 P.2d 757 (Cal., 1958). Many other state courts apply this doctrine in the context of subcontractor or supplier bids. One notable exception is North Carolina where in Home Electric Co. v. Underdown Heating & Air Conditioning Co., 358 S.E. 2d 539 (N.C. App. 1987) the court simply rejected the application of the doctrine of promissory estoppel as being essentially one-sided.
In those states which enforce the doctrine, the party seeking to enforce the bid or quotation must show the following:
- A clear and definite offer by the subcontractor (supplier) to perform the work at a certain price;
- A reasonable expectation by the subcontractor (supplier) that the prime contractor will rely on the price in preparing the prime contractor’s bid;
- Actual reliance by the prime contractor on the subcontractor’s (supplier’s) bid; and
- Detriment to the general contractor as a result of reliance on the subcontractor’s (supplier’s) bid and the subsequent refusal to perform at that price.
2006 Application of These Principles No Definite Quotation
Two recent decisions by federal district courts indicate that contractors cannot always presume that a price quote given by a subcontractor for a contractor’s use in preparation of a bid for a project is enforceable or that it can readily apply the doctrine of promissory estoppel to recover its increased cost.
In Fletcher-Harlee Corp. v. Pote Concrete Contractors,Inc., 421 F. Supp. 2d 831 (D.N.J. 2006) a federal court determined that a subcontractor was not required to perform at the price it had previously quoted because the subcontractor’s quote did not convey an intention to be bound to its price by making a clear and definite offer to perform the work for that amount. Fletcher-Harlee (“F-H”), a prime contractor, solicited bids from concrete subcontractors for a portion of the project in preparation of its bid for the construction of wing additions and alterations at a college. F-H utilized a quotation from Pote Concrete in its bid and, upon receiving the award, sought to enforce Pote Concrete’s quotation.
The Pote Concrete bid, actually used by the F-H, listed the scope of work to be performed and based its quote on that list, specifically excluding work not covered by the scope of the bid. Pote Concrete’s quotation stated that it was “provided for informational purposes” and that “no reliance should be placed thereon.” It also stated that the subcontractor would “not be responsible or liable in any manner pending execution of a written agreement covering the work in question” and that “submission of this information should not be regarded as a firm offer.” During review of the project plans, Pote Concrete advised F-H that it could not perform the work for the price originally quoted because the cost of material had increased significantly. After seeking estimates for the concrete portion of the project for a second time, F-H sued the subcontractor for damages incurred due to the subcontractor’s failure to deliver at the originally-quoted price. The prime contractor claimed breach of contract and promissory estoppel.
F-H’s breach of contract claim failed because the subcontractor manifested no intention to be bound by its quote. The language of the subcontractor’s bid stated that it was not an offer, as it expressly stated “pending execution of a written agreement covering the work in question.” The promissory estoppel claim likewise failed. The court held that there was no clear and definite offer. The court also held that the language of the bid letter precluded the prime contractor from reasonably relying on the quote. The letter stated: “This is provided for informational purposes and no reliance should be placed thereon.” The court dismissed both claims against the subcontractor.
Prompt Action Consistent with Reliance on Quote
A decision from Kentucky, Rotondo Weirich Enterprises, Inc. v. Rock City Mechanical, Inc., 2006 WL 950188 (E.D. Ky) illustrates the need to promptly act to enter into a formal contract consistent with the quotation in order to benefit from the doctrine of promissory estoppel. In this case, Rock City Mechanical, Inc. (“Rock City”) responded to a request for pricing for certain HVAC and plumbing work from Rotondo Weirich Enterprises, Inc. (“RWE”), on a project to construct a medium-security prison facility. Rock City had contracted with the general contractor for HVAC and plumbing outside the cell chases. RWE had contracted with the same general contractor for construction and installation of pre-cast concrete prison cells, including the HVAC and plumbing work inside the cell chases.
RWE requested that Rock City submit pricing for the HVAC and plumbing work inside the cell chases. Rock City responded with an offer to design and to install the inside HVAC and plumbing work for either $156,000 or $165,000. RWE used Rock City’s bid, but never formally communicated any acceptance of that offer to Rock City. Rather, RWE went about preparing its own detailed design drawings of the HVAC and plumbing work inside the cell chases. RWE submitted these design drawings to the general contractor and to Rock City, which needed them to coordinate the cell chase HVAC and plumbing with the same systems outside the cell chases. The drawings differed significantly from the designs upon which Rock City had based its original bid. Using these new design drawings, Rock City sent RWE a second price proposal of $395,000 for the inside work. Thereafter, RWE sued Rock City for damages, claiming breach of contract and promissory estoppel.
RWE’s breach of contract claim was dismissed because RWE never accepted Rock City’s original offer. The court noted that RWE’s use of the price quoted by Rock City in its own bid for a subcontract from the general contractor is not an acceptance that creates a contractual relationship. RWE had entered into a written contract with the general contractor, but did not enter into a written agreement with Rock City.
RWE’s promissory estoppel claim was similarly rejected. While the court noted that, in Kentucky (as in many other, but not all, states) incorporation of a subcontractor’s bid to the owner constitutes reliance that binds the subcontractor, it also noted that there must also be “an unequivocal communication of acceptance to the subcontractor, soon after the awarding of the contract” and “a timely request to enter into a formal contract.” RWE did neither. The doctrine of promissory estoppel is intended to prevent the subcontractor from revoking its offer before the prime contractor has the opportunity to accept. It does not allow a subcontractor’s bid to remain open indefinitely for the prime contractor’s acceptance. Here, RWE offered Rock City a proposed subcontract at the initial price quoted by Rock City approximately nine months after RWE had been awarded its contract and after RWE itself had changed the design upon which Rock City based its initial bid.
Comment: Alternative to Relying Upon Promissory Estoppel
Prime contractors can avoid the problem of changing prices from subcontractors by entering a conditional contract with the subcontractor upon deciding to incorporate the subcontractor’s price into its bid, conditioned upon the prime contractor’s bid being accepted by the owner. By so doing, a prime contractor can be assured that the prices it relied upon to develop its own bid will remain in place during performance of the prime contract, as the subcontractor will be bound to its agreement. A prime contractor can thus avoid having to make up the shortfall between an original price quote and a later, higher price.
Mr. Tabeling would like to acknowledge the assistance of Thomas J. Kelleher, Jr., also with Smith, Currie & Hancock LLP, in the preparation of this article.
Douglas L. Tabeling
(404)582-8058
[email protected]
Member of the State Bar of Georgia