Nearly 60 years ago, the esteemed Justice Traynor of the California Supreme Court authored an opinion in a seminal case applying the doctrine of promissory estoppel to the competitive bidding process. Drennan v. Star Paving Company, (1958) 51 Cal.2d 409. At the time this case was decided, the competitive bidding process was far simpler than it is today. Most subcontract bids were communicated by telephone, and consisted of a bid price for a corresponding scope of work without any additional terms and conditions. In Drennan, the court determined that a subcontractor’s bid constituted a promise to perform, and the subcontractor had reason to expect that if the bid proved to be the lowest it would be relied upon by the general contractor. Thus, if a subcontractor subsequently decided not to honor its bid, the general contractor could assert a claim, based on the theory of promissory estoppel, for the additional costs incurred in obtaining a replacement subcontractor.
In Drennan, the subcontractor discovered a mistake in its bid, and refused to do the work for the bid price. In determining that the general contractor had the right to recover the damages caused by the subcontractor’s refusal to perform, the court stated “it is only fair that plaintiff should have at least an opportunity to accept defendant’s bid after the general contract has been awarded to him.” 51 Cal.2d at p. 415.
Two other cases were decided soon thereafter involving similar facts. Saliba-Kringlen Corp. v. Allen Engineering Co. (1971) 15 Cal.App.3d 95; H.W. Stanfield Construction Corp. v. Robert McMullen & Son, Inc. (1971) 14 Cal.App.3d 848. In Saliba-Kringlen, a subcontractor discovered an error in its bid, and attempted to withdraw it at the last minute prior to bid opening. In Stanfield, the subcontractor overlooked a scope of work that was included in the specifications, and refused to sign the subcontract tendered by the general contractor. In each instance, the general contractor prevailed, and was allowed to recover its damages from the subcontractor.
All of these cases, including Drennan, involved the transmittal of a telephone bid which consisted of a price only for a designated scope of work with no terms and conditions. In Saliba-Kringlen, the court observed that “the customary bid is made, as it was here, by a brief telephone call in which only the price is stated.” 15 Cal.App.3d at p. 109.
However, after the issuance of these decisions, the competitive bidding marketplace began to change. The fax machine was invented, which caused many subcontractors to transmit their bids by fax instead of by telephone. In addition, subcontractors began transmitting a detailed list of terms and conditions with their bids. Nowadays, with the advent of the internet, many subcontractors transmit their bids electronically via e-mail.
These changes in the competitive bidding process have presented general contractors with several new challenges. What obligation does the general contractor have to consider or accept all the terms of a subcontractor’s bid? What latitude does a general contractor have to negotiate modifications to a subcontractor’s terms and conditions after bid day?
Unfortunately, the case law in this area has not kept pace with the changes in the competitive bidding process. Only one other case has been decided involving facts similar to Drennan, where a subcontractor would not honor its bid due to a $300,000 mistake. Diede Construction, Inc. v. Monterey Mechanical Co. (2005) 125 Cal.App. 4th 380. Once again, the court found in favor of the general contractor, but remanded the case to the trial court for a determination whether the general contractor “reasonably relied” on the subcontractor’s bid proposal, a question of fact for the trial court to decide. Since all of these cases arose from subcontractor bid errors, they do not address the issue whether a general contractor may select a subcontractor based on its bid price and scope of work without giving due consideration to the other terms and conditions submitted by the subcontractor with its bid.
All that has changed, however, with the Court of Appeal’s decision in Flintco Pacific, Inc. v. TEC Management Consultants, Inc. (2016) 1 Cal.App. 5th 727. In Flintco, a subcontractor, TEC Management Consultants, Inc. (“TEC”), submitted a bid to perform the glazing work for a new building at Diablo Valley College. TEC’s bid included numerous terms and conditions, including: (1) a request for a deposit of 35%, (2) a refusal to accept any liquidated damages, (3) a refusal to provide a payment or performance bond, and (4) a provision calling for a 3% escalation in the price if the bid was not accepted within 15 days. The general contractor, Flintco Pacific, Inc. (“Flintco”), had an established practice of disregarding the terms and conditions in the bids received from subcontractors, except for the scope of work, price, the length of time the bid would remain open and bonding. Thus, on bid day, even though Flintco chose to list TEC as the subcontractor for the glazing work, it disregarded the material terms of TEC’s bid, except for the bid price and scope of work.
After the award of the prime contract, Flintco sent a letter of intent to TEC concerning the award of a subcontract for the glazing work, but made no mention of the terms and conditions in TEC’s bid. Shortly thereafter, Flintco’s Project Manager sent TEC a copy of Flintco’s standard form subcontract, which contained several provisions that differed materially from TEC’s bid. After several telephone conversations between TEC and Flintco, in which TEC pointed out the inconsistencies between its bid terms and Flintco’s subcontract agreement, Flintco sent TEC a new subcontract. However, this subcontract also failed to acknowledge any of the conditions set forth in TEC’s bid. Curiously enough, Flintco’s Project Manager admitted that he never reviewed the terms and conditions in TEC’s bid while preparing Flintco’s subcontract agreement.
Flintco followed up the transmittal of this subcontract with an e-mail to TEC demanding that TEC sign Flintco’s subcontract as issued to TEC. TEC refused to do so, and informed Flintco that TEC was withdrawing its bid. Flintco then found a new subcontractor to perform the glazing work, and sued TEC for the difference in price under the theory of promissory estoppel.
The court began its analysis by reciting the elements of a promissory estoppel claim, which are: (1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3) the reliance must be both reasonable and foreseeable; (4) the party asserting the estoppel must be injured by his reliance. Of these four factors, the issue before the court was whether Flintco could demonstrate that it reasonably relied on TEC’s bid.
There were two factors that weighed heavily against Flintco. The first involved Flintco’s apparent disregard of the terms of TEC’s bid, except for price and scope of work. Flintco’s disregard of TEC’s bid terms began on bid day and continued through the time when Flintco sent a subcontract to TEC. The second factor concerned Flintco’s “take-it or-leave it” attitude, characterized by the court as “hardball tactics.” There was no indication that Flintco ever made an effort to negotiate with TEC to reach an accommodation that would be acceptable to both parties. Instead, Flintco insisted that TEC sign the subcontract agreement prepared by Flintco’s Project Manager without any revisions.
Flintco responded by arguing that it is impossible to consider the detailed terms and conditions included with the multitude of subcontract bids it receives on bid day due to the sheer volume of paperwork. Flintco also pointed out that of the 40 subcontracts awarded on this project, Flintco was able to reach an agreement with every subcontractor other than TEC. During the trial, Flintco’s Vice President referred to TEC as a “walk away” subcontractor.
The court’s decision in this case turned, in large part, on the dictum in the Drennan case. While acknowledging that the general contractor in that case had successfully met all the elements of promissory estoppel, Justice Traynor was careful to point out the limits of this doctrine. In particular, the court observed that when a general contractor uses a subcontractor’s offer in computing its own bid, the general contractor bound himself to perform in reliance on the terms of the subcontractor’s bid. “It bears noting that a general contractor is not free to delay acceptance after he has been awarded the general contract in the hope of getting a better price. Nor can he reopen bargaining with the subcontractor and at the same time claim a continuing right to accept the original offer.” Drennan, supra, 51 Cal. 2d at p. 415. (Emphasis added)
The application of this language from Drennan led the court to conclude that Flintco had not reasonably relied on TEC’s bid, and was not entitled to any recovery on its promissory estoppel claim. In particular, the court found that Flintco’s letter of intent, along with its standard form subcontract, which varied materially from the terms of TEC’s bid, constituted a rejection of TEC’s bid and a counteroffer, which terminated Flintco’s right to accept TEC’s original bid.
The potential repercussions of this decision are substantial. Subcontractors, on the one hand, will likely say that this case merely levels the playing field between general contractors and subcontractors on bid day. However, the impact to general contractors is much more serious. Every time a general contractor sends a “boilerplate” subcontract agreement to a subcontractor without incorporating the material terms of a subcontractor’s bid, it runs the risk of having the subcontractor withdraw its bid. At the very least, general contractors will need to be more vigilant in their review of subcontractor bids to ensure they can offer a subcontract which incorporates the material terms of such bids. Otherwise, they may find themselves in the same position as Flintco, whereby the subcontractor has the right to withdraw its bid.
Jack W. Fleming is a partner in the Orange County office of Musick, Peeler & Garrett LLP, where he serves as Chairman of the firm’s construction law practice. He specializes in construction and real estate litigation. His full bio and contact information can be found at http://www.musickpeeler.com/professional/Jack_Fleming