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After Sixty Years, Subcontractors are Back in the Driver’s Seat in Bidding on California Construction Projects
In virtually every complex construction project, the general contractor will submit a competitive bid for the work, and in doing so will rely on underlying bids from prospective subcontractors in particular trades. One of the enduring legal issues in this scenario is the justifiable reliance that a bidding general contractor places in a subcontractor’s bid. If the general uses the sub’s bid, does that automatically lock in the price stated by the subcontractor? What about the other items that may be buried within the subcontractor’s bid? A recent decision from the court of appeal sheds much needed light on these issues.
The Drennan Case
For almost the last sixty years, the standard for bidding on California construction projects has been governed by the landmark case of Drennan v. Star Paving (1958) 51 Cal.2d 409. The Drennan case generally states that the contractor bidding to perform work for a project owner is entitled to rely on the bids of subcontractors in formulating its own bid to do the work.
Under the equitable legal doctrine of promissory estoppel, which serves as the foundation of the Drennan rule, even though there was no formal contract between the contractor and subcontractor at the time of bid, the contractor is entitled to enforce the subcontractor’s bid because of reliance upon it during the bidding process, and specifically because the general contractor relied on the sub’s bid when preparing its own bid to submit to the project owner.
For bidding purposes, promissory estoppel serves as an equitable foundation to form a binding relationship between the general and the sub. In the six decades since Drennan, courts have allowed promissory estoppel to act as a substitute for the contract in public bidding because, in equity, when a contractor “reasonably” relies on a subcontractor’s bid in formulating its own bid, it would be unjust to allow the subcontractor to withdraw a bid on which the contractor had relied in submitting its own successful bid.
Reality Check: The Frenzy of “Bid Day”
While the above standard is in general quite reasonable, over the years the law has drifted away from the core principles that underlie the Drennan decision. A look into the flurry of activity in a general contractor’s office when people are under the gun to submit a bid by the deadline illustrates the problem: On a typical “bid day,” a direct contractor might receive hundreds of bids from subcontractors, each presenting a price to perform its own specialized scope of work for the project. The contractor then typically selects the lowest responsive bid for each trade and includes sums for its own costs and profits and on that basis submits a single bid to the owner to perform the entire project, including all trades, often within minutes before the deadline. Usually, the contractor has no time or inclination to look any deeper into a subcontractor’s bid than the dollar figure presented by the subcontractor. A problem arises when subcontractor bids include terms other than price. Contractors have become quite accustomed to ignoring these other terms and focusing solely on the price. Contractors have done so with assurance that the strength of the Drennan case and the promissory estoppel doctrine will ultimately enable them to enforce the subcontractor’s bid price, often regardless of other terms presented in the bid.
Contractor Has the Hammer
The tendency of the general contractor to ignore non-price terms in subcontractor bids has been reinforced by post-Drennan legislative enactments and court decisions. Witness Public Contract Code 4107: Enacted in 1986, section 4107 authorizes a contractor to replace a listed subcontractor on a public works project when the subcontractor “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.” See Cal. Pub. Contract Code § 4107(a)(1). Note that only “scope” and “price” are specified by the statute as the governing standard in determining when a contractor can be replaced. When a subcontractor refuses to sign the contract, the contractor then simply hires another subcontractor, almost certainly at a higher price, and relying on the doctrine of promissory estoppel and the Drennan case, successfully sues the subcontractor who would not sign the contract for the difference in price between the subcontractor’s bid and the replacement subcontractor’s bid.
Lost in the foregoing situation is the reason that the subcontractor refused to sign an agreement with the general contractor. One common reason is that the subcontractor’s bid contained terms which are important to the subcontractor but which were ignored by the contractor who looked no further than the subcontractor bid price. These terms often include early deposits so subcontractors can purchase expensive equipment or materials to be installed, necessary worksite conditions, insurance and bonding limits, change order procedures, and other terms the subcontractor has included in its bid to protect its interests. From the perspective of the bidding subcontractor these are important terms of the subcontractor’s offer. The subcontractor reasonably believes that if the contractor accepts the offer, it is obliged to accept the subcontractor’s entire offer and not just the price alone. From the perspective of the contractor, it is the fact that the subcontractor would not sign the contract which contains customary and expected provisions that is paramount. The Drennan case and its progeny, supported by statutes such as Public Contract Code section 4017 and the promissory estoppel doctrine, have always given the contractor the upper hand in the equation.
Flintco Pacific Changes the Analysis
It was against this backdrop that the court of appeal decided Flintco Pacific, Inc. v. TEC Management Consultants, Inc., 1 Cal.5th 527 (2016). Flintco Pacific presents a significant clarification, if not an erosion, of the Drennan doctrine. In Flintco, a subcontractor (TEC) submitted a bid to perform glazing (window) work on a community college for the sum of $1,272,090.00. Within the bid there was a requirement that the general contractor (Flintco Pacific) pay a 35% deposit ($445,231.50) as security so that TEC could lock in the prices with suppliers of the materials to be installed. Also included were terms that the bid could be withdrawn if not accepted within 15 days and that if not accepted or withdrawn that the price was subject to a minimum 3% escalation per quarter if the bid was held open after the 15 days.
Flintco Pacific accepted the bid and informed TEC by letter that it was the lowest bidder and would be awarded the contract and also informed TEC that “the contract award is contingent upon the following terms and conditions,” including (1) that TEC accept liquidated damages and retention provisions, (2) agree on a complete scope of work, and (3) provide a bond. Flintco Pacific then sent TEC a contract including these terms and additional terms. The contract did not include the provision from the TEC bid that a 35% deposit would be paid. Negotiations ensued but no agreement was reached on key issues, including the provision that TEC would provide a bond or that Flintco Pacific would pay the 35% deposit. TEC then exercised its stated option after 15 days to withdraw its bid. Flintco Pacific then hired another subcontractor to perform the work at a higher price and sued TEC on the doctrine of promissory estoppel, citing the Drennan case, for the $327,050.00 difference between the bid of TEC and the higher bid of the replacement subcontractor.
Reasonable Reliance to the Rescue
One of the bedrock requirements to establish promissory estoppel is that Flintco Pacific “reasonably rely” on the bid in formulating its own bid. The court of appeal specifically noted that Flintco Pacific’s management readily acknowledged that it considered only TEC’s bid price in deciding to list TEC as its glazing subcontractor. This, the court concluded, was unreasonable. It was also not reasonable for Flintco Pacific to ignore the 35% deposit requirement and other materials terms of the bid.
For these reasons, Flintco Pacific was unable to invoke the doctrine of promissory estoppel. By sending TEC its contract which contained terms differing from the bid terms, Flintco Pacific was in reality issuing a counteroffer which TEC was free to reject. TEC did just that when it rescinded its earlier offer to subcontract on the job. Flintco Pacific’s lawsuit against TEC for the $327,050 difference in price between the TEC bid and the replacement subcontractor bid was therefore unsuccessful at trial and on appeal.
The Flintco Pacific case presents an erosion of the Drennan case and inserts an important gloss on the promissory estoppel doctrine, particularly for construction bidding in California. Subcontractors have new hope that important conditions within their bid documents cannot be ignored at the whim of general contractors. And general contractors are now fully forewarned that they have the responsibility to closely examine subcontractor bids for terms that they may not agree with—and when they encounter those conditions, they should reject those sub-bids, or negotiate as to them before incorporating the sub’s bid in their proposal to the project owner. If they simply incorporate the sub’s bid wholesale into their proposal to win the project, they may be stuck with it–all of it, including terms that they don’t like.
As a result of the Flintco Pacific decision, bid days will now be more hectic than ever before.
Article by William L. Porter, Esq. in 2015. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com