California Appellate Court Restricts General Contractors’ Ability to Rely on Subcontractor Bid Price
Under long-standing California law, general contractors who rely on a subcontractor’s bid can generally recover damages from the subcontractor under a promissory estoppel theory if it fails to honor its bid and enter into a contract. However, a recent decision has imposed new limitations on this rule. In Flintco Pacific, Inc. v. TEC Management Consultants, Inc., the Second District Court of Appeal held that a general contractor’s reliance on a subcontractor’s bid price was not reasonable and could not be enforced when the general contractor had ignored other relevant terms and conditions in the bid. General contractors would be well advised to consider this decision and the facts on which it is based when evaluating subcontractors’ bids, so that they do not suffer the same fate.
Flintco Pacific, Inc. (“Flintco”) was the general contractor on a public work of improvement involving the construction of a new building at Diablo Valley College in Pleasant Hill, California. TEC Management Consultants, Inc.’s (“TEC”) submitted a bid of $1,272,090 to Fintco for the glazing scope of work, and Flintco used that bid price in compiling its own bid to the owner. TEC’s bid also contained a number of other terms and conditions. Immediately below the bid price, TEC’s bid stated as follows: “A DEPOSIT OF 35% IS REQUIRED FOR THIS WORK.” TEC’s bid also provided that it could be withdrawn if not accepted within 15 days and, if not withdrawn, that the proposed price was subject to escalation by a minimum of 3% per quarter after the 15-day acceptance period.
TEC was the lowest bidder for the glazing scope of work. After the award of the prime contract, Flintco issued a letter of intent to enter into a subcontract with TEC, which stated that the award of a subcontract was contingent upon, among other things, TEC’s acceptance of liquidated damages and retention provisions and the parties’ agreement on a complete scope of work. Flintco then forwarded to TEC its standard-form subcontract. After receiving the subcontract, TEC objected to several terms, including: (1) TEC would not agree to liquidated damages or provide a bond, as required by Flintco’s standard-form subcontract; (2) Flintco’s standard-form subcontract did not incorporate the 35% deposit requirement set forth in TEC’s bid; and (3) Flintco’s standard-form subcontract did not reflect a 3% escalation of the bid price, which TEC’s bid required since Flintco did not accept it within 15 days. TEC withdrew its bid after negotiations on these and other terms stalled.
Ultimately, Flintco found a new glazing subcontractor who performed the work, but at a higher price, and sued TEC for damages under a theory of promissory estoppel. At the trial, the Superior Court heard testimony that subcontractor bids are usually submitted up to the bid deadline, and that bid day is “usually chaotic” because of the sheer volume of paperwork that a general contractor must contend with in compiling its own bid. Conflicts between bid conditions and contracts are usually resolved, and specific terms and conditions are negotiated, only after the prime contract is awarded. Although subcontractors often include terms and conditions in their bids that conflict with Flintco’s standard-form subcontract, Flintco disregarded most of these conflicting terms in compiling its own bid, except those that relate to scope of work, price, length of time the bid will remain open, and bonding.
The Superior Court found in favor of TEC after a bench trial, ruling that Flintco’s reliance on TEC’s bid price alone was unreasonable because Flintco had disregarded other material conditions that related directly to TEC’s bid price. Flintco appealed.
On appeal, Flintco argued that the Superior Court should not have found its reliance on TEC’s bid price to be unreasonable in light of the testimony received at trial and based on custom and practice in the industry. Flintco argued that it had no indication TEC would withdraw its bid until after the award of the prime contract. Flintco also pointed to the testimony of TEC’s Chief Executive Officer that TEC submitted its bid with the intent that it would be used by Flintco in compiling its own bid, and that it was reasonable for Flintco to rely on TEC’s bid as long as it was “complete and close to the low number.” Further, Flintco argued that it was reasonable for it to disregard conflicting terms in TEC’s bid and rely on TEC’s bid price alone in compiling its own bid to the owner, relying on cases noting that it is customary for general contractors to enter into subcontracts that embrace far more than the subcontractor’s bid price.
The Court of Appeal rejected TEC’s arguments and found that the Superior Court had not erred in finding Flintco’s reliance to be unreasonable. The appellate court found that the following facts supported the trial court’s finding that Flintco ignored bid terms that were material to TEC’s bid price and which, if omitted, would have “considerably” increased that bid price: (1) the location and typeface of the 35% deposit requirement in TEC’s bid; (2) the fact that the 35% deposit was necessary for TEC to lock in a price with suppliers; (3) exclusions in TEC’s bid for liquidated damages and bonds; and (4) the price escalation clause in TEC’s bid. Accordingly, the appellate court upheld the trial court’s decision that Flintco’s reliance on the bid price alone was not reasonable.
It is important to recognize that the Second District’s decision depended heavily on the specific facts involved in this case, a consideration noted numerous times in the court’s opinion. The court’s decision was also largely preordained in light of the “substantial evidence” standard of appellate review, under which an appellate court cannot disturb factual findings as long as there was any substantial evidence to support them. In reaching its decision, the appellate court observed that there was “some evidence of reasonableness” in the record, but that it was bound by the trial court’s findings because they were supported by substantial evidence.
These observations indicate that the appellate court may also have upheld a verdict in favor of Flintco, if the Superior Court had been persuaded that Flintco’s reliance was reasonable. In other words, because there was conflicting evidence on the issue of whether Flintco’s reliance was reasonable, the appellate court was unlikely to disturb the Superior Court’s finding no matter what the result was. For example, if TEC had buried its deposit requirement in fine print, rather than placing it in capitalized, underscored typeface directly under the bid price, the trial court and appellate court might have reached the opposite conclusion in this case.
Even so, the Second District’s decision in this case is a cautionary tale for general contractors bidding on public works of improvement. Due to its fact-intensive nature and concomitantly daunting standards of appellate review, litigation arising from reliance on subcontractor bids is expensive and its outcome is never certain. General contractors are already pressed for time on bid day, but the Flintco Pacific decision demonstrates that general contractors should never ignore qualifications of a subcontractor’s bid or assume that they will be successfully negotiated after the prime contract has already been awarded. Instead, general contractors should carefully review subcontractor bids for terms that qualify the subcontractor’s bid price in any way, and either reject such bids at the outset or negotiate acceptable terms with the subcontractor prior to relying on its bid price. Although inconvenient to general contractors in light of the chaos typical of bid day, these types of cautionary measures could mitigate or deter costly litigation resulting from withdrawn bids.