When California general contractors submit bids to an owner, can they force their subcontractors to honor their bids? Can they recover damages if the subcontractor later refuses to do so?
While the general rule in California is that a general contractor who reasonably relies on a subcontractor’s bid may recover damages when the subcontractor reneges, the Court of Appeal for the Second Appellate District recently held that there is a substantial and important exception to the general rule.
In Flintco Pacific, Inc. v. TEC Management Consultants, Inc. (LASC No. YC067984), the Court of Appeal held that where a general contractor requires a subcontractor to enter into a “standard-form subcontract” which materially differs from the subcontractor’s bid, the general contractor has rejected the subcontractor’s bid and has instead issued a counteroffer. The subcontractor is thereafter free to walk, or accept the new terms. If the subcontractor walks, the general contractor may not seek to enforce the terms of the subcontract or seek reliance damages.
In Flintco, TEC Management Consultants submitted a bid to Flintco to perform the glazing work on a project Flintco was bidding on. Flintco used TEC’s bid in compiling its own bid to the owner. Flintco was awarded the job, and sent TEC a “letter of intent” and a standard-form subcontract. Both the letter of intent and proposed subcontract differed materially from TEC’s bid. TEC refused to enter into the proposed subcontract.
Flintco subsequently signed a subcontract with a replacement subcontractor, and sued TEC on a theory of promissory estoppel. Flintco sought $327,050 which was the difference between TEC’s bid and the amount Flintco paid the replacement subcontractor. The trial court rejected Flintco’s claims, finding that Flintco’s letter of intent and standard-form subcontract amounted to a “counter-offer” to TEC’s bid. Because Flintco had countered, and not accepted TEC’s bid, TEC was free to walk away from its initial bid.
The Court of Appeal upheld the trial court’s ruling. The Court acknowledged the general rule in California that “a general contractor may recover damages incurred as a result of its reliance on a subcontractor’s mistaken bid under a theory of promissory estoppel.” The Court also found that “whether a general contractor is entitled to rely upon the bid of a proposed subcontractor must be decided on the basis of the facts involved in the particular case before the court.”
Here, the Court found Flintco could have obligated TEC to honor its bid, but only if it incorporated all of its terms and conditions in the subsequent contract between the parties. The Court writes: “‘a general contractor is not free to reopen bargaining with the subcontractor and at the same time claim a continuing right to accept the original offer.’ Flintco’s . . . standard-form subcontract, which as the trial court found, varied materially from the terms of TEC’s bid, constituted a rejection of TEC’s bid and a counteroffer, and terminated Flintco’s power to accept TEC’s original bid.” In other words, Flintco could not hold TEC to its bid price while rejecting the other terms of TEC’s bid.
The Flintco decision is an important reminder that the contract negotiation process between a general contractor and its subcontractors is a two way street. Here, Flintco tried to hold TEC to its bid price while refusing to honor other material terms of TEC’s bid. By doing so, it effectively freed TEC to walk away from its original bid. Although Flintco relied on TEC’s price in negotiating with the project owner, the reliance was not justified because of Flintco’s refusal to agree to all of the bid’s material terms.
General Contractors can avoid the predicament faced by Flintco by including a copy of their standard form agreement with their invitations to bid. The invitation to bid will state that all bids must incorporate the terms and conditions of the standard form agreements. The invitations to bid should also indicate that by submitting a bid, the subcontractor agrees to be bound by the General Contractor’s standard form agreement if the bid is selected.
By requiring prospective subcontractors to agree to be bound by the provisions of the standard form agreement, the General Contractor can compare competing subcontractor bids on an “apples to apples” basis, while also ensuring that it has a level of confidence that it can rely on the subcontractor bids in preparing its own submittal to the owner.
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