LAW: THE CONTRACTOR'S SIDE: Breaking the terms

Contractor’s tampering not favorable in court

Blog Entry January 15, 2014

Larry Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction.

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In the world of construction contracting, it is well known that on bid day prime contractors hastily receive pricing from prospective subcontractors and suppliers.

It is accepted practice for prime contractors to utilize the lowest prices they receive as the basis of the final bid they submit to project owners. Ignoring the disfavored practice of bid shopping and special bid-listing statutes, which are topics for another day, prime contractors generally rely upon bids they receive from subcontractors and suppliers. But, since no formal contract exists at the time of bid, primes are at the mercy of subcontractors and suppliers to honor their quotes once it comes time to begin work.  

In previous articles, I have discussed the doctrine of promissory estoppel, which essentially makes these quotes enforceable promises under certain circumstances. The Restatement (Second) of Contracts defines promissory estoppel as “[a] promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”  

In simple terms, promissory estoppel provides a prime contractor with a remedy to seek damages against a subcontractor or supplier who submits a quote on bid day expecting that the prime is likely to use the price if it is low and the prime, in fact, reasonably relies upon the price by using it. As a recent case in Ohio illustrates, however, the prime contractor must pay close attention to the fine print of all subcontractor quotes it receives on bid day if its reliance will be deemed reasonable.

Complete General Constr. Co. v. Kard Welding, Inc., 911 N.E.2d 959 (Oh. App. 2009) involved a prime contractor bidding on an Ohio Department of Transportation (ODOT) interchange project. While preparing its bid, the prime accepted prices from structural steel suppliers. One such quote, which turned out to be the lowest and thus the one the prime used in its bid to ODOT, included a statement indicating that the supplier would create and submit shop drawings, but that the prime would have to hire an engineer to review and stamp them. The quote also included a set of the supplier’s standard terms and conditions along with a provision stating that acceptance of any order from the prime would be conditioned upon the prime’s acceptance of the terms of the quotation.  

Just prior to submitting its bid to ODOT, the prime telephoned the supplier to confirm that it could supply the steel for the price it quoted, and upon receiving the supplier’s assurance, the prime deducted $89,390 from its bid to the owner, which turned out to be the low bid.  

A few weeks later, and following its standard practice, the prime contacted the supplier to notify it that it intended to use the supplier on the project, and it faxed over to the supplier a copy of the prime’s own standard purchase order terms and conditions. The prime informed the supplier that it would have to use the prime’s terms and conditions rather than the supplier’s.  

Over the next several weeks, the supplier and prime attempted to negotiate terms and, in particular, the provision under which the supplier expected the prime to hire an engineer to stamp shop drawings. Upon reaching an apparent stalemate, the supplier provided a revised (and increased) price to the prime and indicated that it would hire its own engineer. The prime rejected the offer and decided to hire another entity to perform the work, and it sued the supplier for the additional costs of doing so. The trial court dismissed the prime contractor’s lawsuit and it appealed.  

The appeals court ruled that as the prime actually relied upon the supplier’s original quote and the supplier should have expected the same, the supplier could not revoke the quote until the prime had an adequate opportunity to accept it. However, in this case, the supplier was not bound to perform because rather than simply accepting the offer, the prime attempted to change the terms the supplier made clear in the original offer. Thus, while prime contractors in most states are generally protected from subcontractors and suppliers who attempt to renege on their quotations, primes must take the time to read and understand all terms in quotations they receive before relying upon them. R&B

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