As a follow-up to last month’s column on “Pay-If-Paid” provisions, I would like to focus for one additional month on subcontracting and address an issue with which I am frequently faced—the extent to which subcontractor quotes can be relied upon on bid day and beyond. This is a topic crucial to all participants in the contracting chain. Although I will refer to subcontractor quotes throughout, the principles apply equally to material vendor quotes.
Holding them to it
What about that 1% of the time when, for whatever reason, the subcontractor is unable or refuses to honor its price and the prime is left to hire another subcontractor at a higher price? In most, but not all, states and courts have adopted the doctrine of promissory estoppel, which can be used by a prime contractor to hold a subcontractor to a quote given in anticipation of a prime contractor’s bid to an owner. The circumstances under which a quote is given and the actions of the contractor before and after the bid are important in determining whether promissory estoppel applies.
No contract is formed until the prime contractor actually accepts the offer, and, once accepted, the subcontractor is legally obligated to perform even though a formal written agreement has not yet been entered into. The mere use by a prime contractor of a subcontractor’s price in its bid to the owner is insufficient to constitute acceptance. In the meantime, absent an express promise not to revoke its offer, the subcontractor may withdraw its quote at any time before the prime accepts it, and the prime contractor is left to absorb the cost of having to resort to a higher quote. That is, unless the requirements for promissory estoppel are met and the state in which the offer was made recognizes the doctrine.
Breaking a promissory
Promissory estoppel is not a means to require an unwilling subcontractor to perform in accordance with its offer. Rather, it is an avenue for the prime to recover from the subcontractor the additional costs of procuring performance from another party. The only requirement for promissory estoppel is that the party making the offer must either have known or reasonably should have known that the offer might be relied upon by the prime contractor to its detriment. This is nearly always the case in both public and private contracting because everyone in the chain understands that contractors collect prices for use in assembling their bids to project owners, and once bids are given, the contractors are locked into their prices.
Subcontractors complain that the doctrine of promissory estoppel is unfair because it holds them to their quotes while the prime contractor is free to conduct bid shopping both before and after bids are given to the owner. As some courts have held that any of the following acts by the prime will defeat its promissory estoppel claim: (1) Pre-award or post-award bid shopping; (2) unreasonable delay by the prime in accepting the subcontractor’s offer after being awarded the project; and (3) insistence that the subcontractor accept unreasonable subcontract terms that alter the essence of the subcontractor’s quote.
Prime contractors, subcontractors and vendors must be aware of the laws in their states concerning promissory estoppel and the defenses that are available to defeat a promissory estoppel claim. Also, prime contractors and those providing quotes should consider including terms that address how quotes may, if at all, be withdrawn.
