Ignore at your own risk

Jan. 3, 2017

Question of promissory estoppel suggests contractors follow their guts

In previous issues, I have addressed the promissory estoppel doctrine and how it may be used by a prime contractor in some states to recover the cost of hiring a higher-priced subcontractor from the low-bid subcontractor who refuses to honor its quote. As a case in Pennsylvania illustrates, it is not enough that the prime merely used a subcontractor’s quote in its price to the owner in order for the prime to recover.

In Neshaminy Constructors, Inc. v. Concrete Bldg. Sys, Inc., 2007 WL 2728870 (E.D. Pa. 2007), a contractor bidding on a multi-story parking garage project accepted subcontractor quotes on bid day in March 2006. One bidder, CBS, forwarded to the prime a written proposal, which was conditioned on, among other things, award of a subcontract within five weeks; starting production of the precast members in June 2006; and erection on-site during November/December 2006.

Immediately after receiving CBS’s proposal, the prime telephoned CBS to confirm the quote of $5.4 million because it was $1 million lower than the next highest price received. CBS confirmed the price and the prime inserted it into the bid estimate. Soon thereafter, but before the prime submitted its bid to the owner, CBS telephoned the prime and increased its price by $200,000 to $5.6 million to take into account a requirement in the specifications governing minimum crane sizes, which it had initially overlooked. The prime acknowledged the increase, but elected to increase the number in its bid by only $100,000 to $5.5 million.

As it turned out, the prime’s bid to the owner was the only bid received. Consequently, the owner consumed nearly all of the 90-day period during which bids were to remain open to perform due diligence required by law before awarding the project. This was a problem for the prime because of CBS’s stated deadlines for receiving a subcontract and beginning fabrication.

In the interim, and before the five-week period expired, the prime asked CBS to break out from its quote the price for the precast shop drawings, and stated that it was considering authorizing CBS to proceed with the shop drawings pending the owner’s decision to award the prime contract. Several days later, CBS notified the prime that it had received another job that would occupy its production capacity in June 2006 and that it would be unable fabricate materials for the project until January 2007.

The following day, the prime forwarded to CBS a letter of intent reflecting CBS’s original price of $5.4 million, not its revised price of $5.6 million. The prime retained the right to modify the production schedule from the June 2006 date contained in CBS’s proposal and to order only the shop drawings, but cancel the remainder of the subcontract if the owner did not award it the project. CBS refused to sign the letter and subsequently refused to enter into a subcontract when the owner eventually awarded the project to the prime.

The prime sued CBS and alleged that the parties had entered into a contract by virtue of their conduct, or, in the alternative, that because it relied upon CBS’s quote to its detriment, CBS is liable under the doctrine of promissory estoppel for costs incurred subcontracting with another precast supplier.

The court sided with CBS and held that neither the use of CBS’s price in the prime’s bid to the owner nor the prime’s notice to CBS that it had submitted the lowest price for the precast work constituted “acceptance” of CBS’s offer. Thus, no contract was ever formed between the parties. Also, when the prime proposed in the letter of intent terms differing materially from CBS’s proposal (i.e., price, schedule and scope) the prime actually rejected CBS’s offer and made a counter-offer, which CBS never accepted. As to promissory estoppel, the court held that the prime never relied upon CBS’s proposal because it used a lower number than CBS’s in its bid to the owner and thus obviously intended to negotiate with CBS at a later date to lower its price.

The prime in this case should have smelled trouble when CBS’s bid came in $1 million lower than the next lowest bid and contained very little flexibility from a schedule standpoint. The prime also should not have ignored the subcontractor’s restrictive scheduling constraints.

About The Author: Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected].

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