by Lauren P. McLaughlin, Esq., BrigliaMcLaughlin, PLLC
Bid day deals are often fraught with risk for all parties in the privity chain. One example of this plays out when a general contractor submits a proposal for a project, wins the award of a prime contract, and then later discovers that one of the subcontractors upon whom the GC relied—reneges on its bid price and refuses to enter into a subcontract.
In some states, contractors are able to prevail against the subcontractor who backed out, even though no contract existed between the two. Consider the recent case of Weitz Co., LLC v. Hands, Inc., where the Supreme Court of Nebraska held that a general contractor can hold a subcontractor to its bid price under a theory of promissory estoppel. Under this doctrine, the general contractor is allowed to sue the subcontractor based on a “promise” (i.e., the bid) if the general contractor relied on the promise to its legal detriment.
The disputes in that case arose when Evangelical Lutheran Good Samaritan Society invited four prequalified general contractors to bid on the construction of a nursing facility. One of those prequalified contractors was Weitz Company, LLC. Fifteen minutes before bids were due, Weitz received bids for the mechanical scope of work from the defendant, Hands, Inc. d/b/a/ H&S Plumbing and Heating, for $2,430,600, with alternate duct and radiant heating work, at $39,108 and $52,500, respectively. Weitz used H&S’s numbers for the HVAC scope and was awarded the project for $9.2 million. After the award, H&S conveyed that its bid contained mistakes in the magnitude of $430,000.
Ultimately, the parties were unable to come to an agreement for increased compensation, and Weitz completed the project using different subcontractors costing almost $300,000 more than H&S’s bid with options. Weitz then sued H&S for breach of contract and promissory estoppel, seeking to recover that amount. After a bench trial, the court concluded that although no contract was formed, Weitz was entitled to enforce the bid and recover the $300,000 in damages under its claim for promissory estoppel.
On appeal, the Nebraska Supreme Court affirmed. Reciting the elements of a claim of promissory estoppel, the court held that a plaintiff is entitled to damages if it can show: (1) a promise that the promisor should have reasonably expected to induce the plaintiff’s action or forbearance; (2) the promise did in fact induce the plaintiff’s conduct; and (3) injustice can only be avoided by enforcing the promise. The court began its legal analysis by addressing whether H&S’s bid was a promise upon which reliance was foreseeable. In other words, should H&S have known that Weitz was going to use its bid price?
The answer was undoubtedly yes. The court determined that in the construction industry, most subcontractors know and understand that by submitting a price, contractors are going to rely on those numbers and submit them to owners in the hopes of getting an award. Moreover, H&S’s submission of its bid 15 minutes prior to the bid deadline meant that the H&S should have known that Weitz had little time to review or otherwise “kick the tires” on the numbers. Having satisfied itself that Weitz’s reliance on the promise was foreseeable, the court next considered whether Weitz’s reliance was also reasonable.
The court was persuaded by the business relationship and commercial history Weitz and H&S had together. Weitz had worked with H&S 10 or 15 times before without incident and without H&S retracting its bid. The court noted, “[h]ow could competitive bidding function at all if general contractors did not rely on subcontractors’ bids?”
H&S made four primary arguments in an attempt to show Weitz’s reliance was not reasonable. First, it argued that the bidding documents themselves precluded reliance, since the owner had a right to veto subcontractors. In addition, H&S argued that Weitz did not require subcontractors to “keep their bids open” for a specified period of time. The court correctly noted that contractors are not required to affirmatively state, notify, or remind those submitting bids that their bids cannot be revoked. Third, H&S asserted that because Weitz could have withdrawn its own bid at any time with no consequences, its reliance on H&S’s mistaken bid was not reasonable. Even though the IFB did not require the contractor to post a bid bond, or otherwise subject it to real penalties, the court was persuaded that if Weitz withdrew its own bid, its business reputation would have suffered greatly with its clients and prospective clients. The court concluded that Weitz should not have to back out of a deal “because of a squabble with its HVAC contractor.”
Lastly, H&S argued that Weitz’s reliance was not reasonable because H&S had submitted an exceptionally low bid, fraught with mistakes. Weitz, however, presented evidence that its own internal HVAC estimate was lower that what H&S proposed. Because there was testimony that the market was weak and subcontractors were submitting very aggressive bids, the court deemed Weitz’s reliance reasonable.
What is noteworthy was how the court interpreted what was “fair.” H&S argued that it was not fair to enforce a bid with mistakes in it, and that was especially true where it alleged Weitz “engaged in … bid shopping.” But the court determined there was no evidence of bid shopping and 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.”
Nebraska is not alone in holding that subcontractors can be held liable for backing out of bids. Courts in Georgia, Louisiana, Nevada, Minnesota and Pennsylvania have also had occasion to address the issue in favor of general contractors. As a general rule and take away, a subcontractor can be held to its bid to a general contractor if the bid is unequivocal and reasonably relied-upon.
But proving promissory estoppel is very fact intensive, and very difficult to prove. Two states, Virginia and North Carolina have rejected promissory estoppel as a basis to enforce a subcontractor’s bid. There are times when a subcontractor is not held liable for backing out of its bid. Consider another recent case which highlights the “classic trilogy” of a general contractor and subcontractor relationship gone wrong: a bid, ensuing negotiations, and disengagement.
In CG Schmidt Inc. v. Permasteelisa North America, the general contractor filed a breach of contract and promissory estoppel suit against an international conglomerate of subcontractors participating in design-build projects for unitized curtainwalls.
The parties were going after a $52 million award of a mixed-use, 18-story office building in Milwaukee, Wisc. The curtainwall was slated to be the largest subcontract for the development. In 2013, PNA submitted a $12 million bid to furnish, fabricate and install a custom curtainwall. CGS had not yet entered into the prime contract and GMP amendment with the owner, and as such, did not yet enter into a formal subcontract with PNA.
CGS and PNA began value engineering negotiations to reduce the cost of PNA’s proposal. Although the parties began reviewing and exchanging a draft subcontract, they held off on formalizing while the prime contract continued negotiations. The parties continued to exchange draft subcontracts through 2013 and into 2014. In May 2014, CGS issued a signed letter of intent to PNA for approximately $7.7 million (the result of the parties’ VE solutions). CGS then entered into the GMP Amendment with the owner. PNA emailed sample glass options to CGS and provided an Updated Bid Proposal of $8.4 million.
When PNA received a copy of the prime contract, they had serious reservations regarding the open-ended nature of the liquidated damages and delay damages. Now eager to get a contract executed, CGS sent two proposed subcontracts for PNA to sign in June 2014. PNA then advised CGS it was “disengaging” from the curtainwall project due to civil unrest in Thailand limiting production availability. The parties had not signed a contract. CGS was forced to hire another curtainwall contractor and directed acceleration. CGS sued PNA in federal court alleging both promissory estoppel and breach of contract.
PNA argued that the parties intended to sign a subcontract and that, unless and until a subcontract was signed, neither party owed a binding obligation to the other. On the other hand, CGS argued that a binding contract could be formed, even in the absence of a signed, written agreement. CGS alleged that over the course of their 14-month interaction, four different “contracts” could be enforced based on the terms of: (1) the PNA bid; (2) the LOI; (3) PNA’s Updated Bid Proposal; and (4) the proposed subcontracts.
The court ruled in favor of PNA and concluded that the parties never manifested an intent to be bound to any of the bids, LOIs, or proposed subcontracts that the parties exchanged from April 2013 through June 2014. Instead, the documents all pointed to the unmistakable conclusion that CGS and PNA fully intended to be bound by a subcontract, which was never executed.
The case underscores that general contractors are experienced actors (i.e. “big boys”) in the commercial construction industry and will be viewed as such. As the court noted, here “… the ‘losses are best left where they have fallen.’” To that end, sophisticated parties are not likely to succeed where they rely on a series of transactions that failed to yield a satisfactory agreement.
Lauren McLaughlin is a founding partner of BrigliaMcLaughlin, PLLC, a law firm devoted exclusively to construction industry and surety clients. For the past 16 years, she has represented owners, developers, contractors, subcontractors, sureties and design professionals in all aspects of public and private construction projects. With that perspective, she counsels clients on project risk management and litigation avoidance. Having represented all parties in the privity chain, McLaughlin is intimately familiar with the unique leverage perspectives of the owner, contractor, and subcontractor. She understands the business aspects confronting construction companies from employment and compliance issues to bid day deals, from change order negotiation to electronic project management systems. She has worked extensively with performance bond sureties, mechanical contracting firms, glass and glazing contractors, and in support of excavation contractors. McLaughlin’s construction clients routinely involve her at all phases of the project, from conception and value engineering through final completion. She can be reached at (703) 506-1990 or lmclaughlin@briglialaw.com.
