Lanak & Hanna
By Colin K. McCarthy, Principal, LEED AP BD+C
The chaos of bidding day on public works projects sometimes leads to disputes between the general contractor and the bidding subcontract when it comes time to sign the subcontract agreement and agree on final terms. In a recent Appellate Court decision, Flintco Pacific, Inc. v. TEC Management Consultants, Inc., a California court addressed the issue of when a general contractor is reasonable in relying on a subcontractor’s bid.
In that case, general contractor Flintco Pacific, Inc. (Flintco) sued subcontractor TEC Management Consultants, Inc. (TEC) for promissory estoppel. Flintco claimed it was reasonable in relying on TEC’s bid and sought to recover the amount between TEC’s bid and the amount it paid to the replacement subcontractor after TEC withdrew its bid prior to signing the subcontract. The trial court found in favor of TEC and held that Flintco was not reasonable in relying on TEC’s bid without considering the material conditions stated in TEC’s bid and the Appeals Court affirmed that ruling.
General contractor, Flintco submitted a bid and was awarded a project to construct a new building at Diablo Valley College in Pleasant Hills, California. Subcontractor TEC had submitted a written bid to Flintco to perform glazing work on the project, and as the lowest bidder, it had the winning bid. Flintco had incorporated TEC’s bid in its general contractor’s bid to the project owner.
The conditions in TEC’s bid required a deposit of 35% for the work, and allowed TEC to withdraw the bid if it was not accepted within 15 days. After the acceptance period, the proposed price was subject to a minimum 3% escalation, per quarter.
Flintco gave notice to TEC that it was the winning bidder in July, 2011, and also sent a letter of intent to TEC, indicating its intent to issue a Subcontract Agreement to TEC. The letter stated that the contract award is “contingent upon the following terms and conditions,” and included a requirement that TEC accept liquidated damages and retention provisions, as well as agree on a complete scope of work. Thereafter, Flintco sent TEC a standard-form subcontract with conflicting terms. The parties’ terms differed in that TEC would not provide a bond, whereas Flintco required a bond; TEC had not received a scope of work that complied with its contractor’s license; TEC would not agree to the liquidated damages clause; and Flintco’s version of the contract did not acknowledge TEC’s deposit requirement. In addition, the 15 day acceptance period had lapsed, triggering TEC’s escalation clause. The parties negotiated further, but did not come to an agreement.
In August, 2011 TEC notified Flintco that it would not pursue the contract for the project. As a result, Flintco had to find a new subcontractor, and pay a higher amount of over $300,000 for the subcontract. Thereafter, Flintco sued TEC for $327,050 alleging promissory estoppel. After trial, the trial court ruled in favor of TEC and found that Flintco did not satisfy every element of promissory estoppel, since its reliance on TEC’s bid price “only without regard for material conditions that related to TEC’s bid price was not reasonable.” The court held that in sending TEC the standard-form subcontract with terms conflicting with TEC’s bid, Flintco’s contract was a counter-offer that gave TEC the right to withdraw its bid. Flintco and TEC did not reach an agreement concerning the material terms, and the court held that Flintco’s unwillingness as well as its “hard ball tactics” caused TEC’s withdrawal. The Appeals Court affirmed.
Unlike cases where a general contractor is reasonable in relying on a subcontractor’s mistaken bid and where “the loss resulting from the mistake should fall on the party who caused it,” here, TEC’s bid was written and contained terms and conditions that were “underscored and material because they affected the price.” For example, TEC’s bid had deposit requirements and price escalation terms which were not in Flintco’s subcontract. Thus, Flintco was not free to “reopen bargaining with the subcontractor and at the same time claim a continuing right to accept he original offer.” The Appellate Court agreed that Flintco’s letter of intent, which was made expressly contingent upon certain terms and conditions, conflicted with TEC’s offer and varied materially from the terms in TEC’s bid. Therefore, Flintco’s letter constituted a rejection of TEC’s bid and was a counteroffer, terminating Flintco’s power to accept TEC’s original bid.
This case is a cautionary tale for both bidding subcontractors and general contractors, to ensure that both parties have agreement on the key terms of the subcontractor bid prior to submission of the bid to the public owner. Scope and price are important, but are not the only terms that must be consented to by both parties.
Colin K. McCarthy is a principal at Lanak & Hanna, P.C.