In California, general contractors can “reasonably rely” on subcontractors’ bids when submitting their own bids to the owner. In , Case No. B258353 (July 19, 2016), the California Court of Appeal addressed what constitutes “reasonable” reliance, holding that it was unreasonable for a general contractor to rely on a subcontractor bid based on price alone, while ignoring other, material conditions of the offer.
In Flintco, Flintco Pacific, Inc. (“Flintco”), a general contractor, received a bid from TEC Management Consultants (“TEC”) to perform subcontract work on a community college building project. In addition to the bid price of $1,272,960, TEC’s bid included the following conditions: (1) a 35% up-front deposit; (2) the right to withdraw its bid if not accepted within 15 days; and (3) a minimum 3% price escalation, per quarter, after the 15-day acceptance period. Flintco used TEC’s bid price in compiling its own bid and was awarded the contract in July 2011.
Over the next several months, Flintco and TEC negotiated the terms of TEC’s subcontract, but the parties were unable to agree on: (1)TEC’s 35% up-front deposit; (2) Flintco’s requirement that TEC provide a bond; and (3) TEC’s refusal to accept Flintco’s liquidated damages clause. On September 12, 2011, TEC withdrew its bid. Flintco found a new subcontractor to do the work and then filed suit against TEC, under a theory of promissory estoppel, for $327,050 – the difference between TEC’s bid price and the replacement subcontractor’s price.
At trial, Flintco claimed that it had reasonably relied on TEC’s bid price because, on bid day, it is common practice for a contractor to disregard the terms and conditions of a subcontractor’s bid except for “work, price, length of time the bid would remain open, and bonding.” Therefore, the fact that Flintco relied on TEC’s bid, in spite of significant issues with other terms and conditions of the offer, did not render its reliance “unreasonable.”
Ultimately, the Court disagreed, holding that Flintco had not satisfied all the elements of promissory estoppel, which requires a showing that there was: (1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise is made; (3) the reliance must be both reasonable and foreseeable; and (4) the party asserting the estoppel must be injured by his reliance. The Court found that TEC’s terms and conditions were “material to its bid price” and that, as a result, Flintco’s “reliance on the bid price alone was not reasonable.” Notably, the Court also found unpersuasive Flintco’s argument that the custom and practice in the construction industry, on bid day, is to rely solely on price while ignoring other terms and conditions of the bid. The “reasonableness” of relying on bid price alone is a fact-specific inquiry and, in this case, both the significance and conspicuousness of the non-price terms and conditions were the deciding factor.
Based on the Court’s decision in Flintco, contractors should be aware that they cannot always rely on a subcontractor’s bid based on price alone. The material terms and conditions of the bid should also be reviewed, whenever possible; otherwise, the contractor may unknowingly assume the risk of the subcontractor’s post-award withdrawal if there is no agreement on those terms and conditions.