Law Articles
| Architects & Engineers |
| Construction Contracts |
| Procurement Law |
|
According to the United Nations' recent report on climate change, the construction industry has a key role in reducing global carbon emissions. The Intergovernmental Panel on Climate Change (IPCC) says that "Energy efficiency options for new and existing buildings could considerably reduce carbon emissions with net economic benefit ... By 2030, about 30% of the projected greenhouse gas emissions in the building sector can be avoided with net economic benefit." The ICPC wants the public sector to take the lead. Government purchasing could make demands for energy efficient products and technology. See 'Building' 11 May 2007, p13. |
| Promissory Estoppel |
|
|
|
| Written by Ron Craig | |
| Friday, 17 August 2007 | |
§ 2.14 Promissory estoppel prevents subcontractor from withdrawing bid. ‘Bid shopping’ and ‘bid chiselling’ defined.
Preload Technology Inc v AB&J Construction Company696 F 2d 1080 (1983). US Court of Appeals, Fifth Circuit.
SCENARIO
Preload Technology is a general contractor. In preparing bids it incorporated AB&J Construction’s subcontract bid in its tender to the council, which was the lowest bid. Preload was awarded the contract, and assured AB&J Construction that it would become subcontractor since its bid was lowest. Subsequently, AB&J Construction withdrew as preferred subcontractor, citing “changes in our workload and other developments”. In response Preload threatened AB&J Construction with legal action if they did not withdraw their refusal to perform. Preload then employed other subcontractors at an increased cost of $155,000. Preload then sued AB&J Construction for breach of contract and promissory estoppel to recover these damages. The trial judge held that the corporate structure of the Preload group was not relevant to the defence filed by AB&J Construction, whose real reason for non-performance was fear of losing money. Preload were awarded damages and costs against AB&J Construction, who appealed, denying liability.
QUESTION
Is the general contractor entitled to rely on the subcontractor’s bid, so that if the subcontractor fails to perform, the general contractor becomes entitled to damages? If so, under what theory is the general contractor entitled to recover?
RESPONSE
Yes, the subcontractor’s promise was enforced in Preload Technology Inc v AB&J Construction Company under the doctrine of promissory estoppel. This circumvents any need for consideration to make the promise binding. Exceptionally, the general contractor’s reasonable reliance on the subcontractor acts as a substitute for consideration.
Circuit Judge Garwood gave the judgment of the court:
“Texas cases have recognised the doctrine of promissory estoppel as set forth in s.90 of the Restatement (First) of Contracts: Wheeler v. WhiteTexas; Cooper Petroleum Co v. La Gloria Oil & Gas CoTexas. Section 90 states: 436 SW 2d 889 (1969) 398 SW 2d 93 (1965)
‘A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.’” 696 F 2d 1080 (1983) 1084.
In a similar case Montgomery Industries International Inc. v. Thomas Construction Co 620 F 2d 91 (1980). the Texan court had relied on Drennan v. Star Paving Co., Cal 2d 409, 333 P 2d 757, 760 (1958) holding the defaulting subcontractor liable to the head contractor under the doctrine of promissory estoppel. The court concluded:
“In Texas, a subcontractor who submits a bid offer to a general contractor, knowing that the general contractor is going to rely on its bid in submitting the general bid, is bound unless it can clearly be shown that the subcontractor’s bid offer was not final.” 620 F 2d 91, 97, cited at 696 F 2d 1080, 1085.
There are a number of factors in this case which bring it under the general rule. The subcontractor was specifically advised to check its bid, because it was the lowest. In response, AB&J Construction submitted a higher bid. It was again informed that it was lowest bidder and that Preload intended to use its bid. Written confirmation of the bid was requested and provided so that Preload could rely on it to make its bid to the owner. AB&J Construction intended its bid to be final and knew that Preload would rely on it. AB&J Construction’s bid was in fact the lowest and was relied upon by Preload, who was awarded the contract by the owner. Preload promptly advised AB&J Construction of its success and “tendered the work bid at its bid price.” Ibid., 1085[1].
AB&J Construction argued that Preload never intended to be bound by the subcontractor’s bid and therefore could not invoke the doctrine of promissory estoppel. The court rejected this contention. There was no doubt that Preload intended to have AB&J Construction perform the work covered by its bid. AB&J Construction’s bid did form the basis of Preload’s bid to, and subsequent contract with, the owner. The subcontractor was promptly informed of these facts. There was no doubt that Preload intended to become contractually obliged to pay for AB&J Construction’s work. Preload submitted a bid bond to the owner and entered into contract for the work, for which performance and payment bonds were required, and executed. AB&J Construction were aware of these demands by the owner, and would have benefited from the security provided by the payment bond. Ibid., 1086[2].
The subcontractor was entitled to make its subcontract with Preload and not PC, another company within the Preload group. But AB&J Construction’s withdrawal was not caused by the proposed change of employer. Its only reason for refusal given in response to Preload’s acceptance letter was that “it would be utterly impossible to perform the work in the allotted time”. The court found that AB&J Construction’s real reason for withdrawal was that it would lose money if it performed the contract. Its position was that it would not perform the subcontract in any circumstances. Ibid., 1087[3].
Under the rules established in Montgomery 620 F 2d at 96 and Drennan 333 P 2d at 760 the subcontractor is estopped from withdrawing its bid. “It is as if the subcontractor were [sic] contractually bound to keep its offer open.” Cf. Restatement (Second) of Contracts, s.90, Comment d (“[a] promise binding under this section is a contract ...”).
COMMENT
The courts have placed certain limits on the application of the promissory estoppel doctrine in the case of subcontract bids. For example, promissory estoppel does not operate to keep a bid open for acceptance beyond the time stipulated in the tender conditions, or beyond a reasonable time: Drennan 333 P 2d at 760; Wargo Builders Inc. v. Douglas L Cox Plumbing & Heating 268 NE 2d 597, 599 (1971). Neither does it operate to support ‘bid shopping’ or ‘bid chiselling’ or other related practice, whereby general contractors seek to drive down subcontract prices in the period after they have been awarded the main contract but before subcontract work is placed: Drennan, 333 P 2d at 760.
“Bid shopping commonly refers to a general contractor’s seeking of bids from subcontractors other than the one whose bid amount the general used in calculating its own bid, and often involves the general’s informing the other subcontractors of the amount of the low bid and inviting them to undercut it. Bid chiselling usually refers to the general contractor’s attempt to negotiate a lower price than that bid from the subcontractor whose bid figure the general employed in calculating its own bid, frequently by threatening to subcontract the work to a third party.” Preload 696 F 2d 1080, 1089[4]. The court referred to Comment, Construction Bidding Problem, 19 St Louis ULJ 552, 563-566 (1975).
When there is evidence of such sharp practice on the part of the general contractor, the court has several grounds on which to deny it recovery from the subcontractor. Those grounds might be
“that the general contractor did not in fact rely on the subcontractor’s bid, or failed to accept it within a reasonable time, or rejected it by a counter-offer, or, perhaps more persuasively, because in such circumstances there is a failure to meet s.90’s requirements that ‘injustice can be avoided only by enforcement of the promise.’” 696 F 2d 1080, 1089 [4].
But this case was not beyond the limits of the application of promissory estoppel. AB&J Construction’s bid could not be considered to be too incomplete or too indefinite so as to be considered final: IbidTexas law Preload also recovered attorney’s fees since this was a suit founded on an oral or written contract: Ibid, 1095 [17].., 1090 [6-11]. Preload did not come to court with “unclean hands” in failing to disclose its corporate structure. There was no evidence of intentional deception, and in any event the general contractor’s action was not material to the subcontractor. Therefore Preload was quite properly awarded recovery of its loss against AB&J Construction under the doctrine of promissory estoppel: Ibid., 1091 [13]. The recovered loss was the difference between AB&J Construction’s bid and the price bid by the subcontractor eventually appointed. Under
Preload follows, and is similar to, the Californian case of Drennan v Star Paving Co (1958), supra, but in this case the trial court had found the subcontractor liable to the general contractor in both contract and promissory estoppel. On appeal, the subcontractor denied liability under both theories. The Court of Appeals confirmed liability under promissory estoppel theory only. There is no reported argument on the claim in contract.
Whilst the common law doctrine of estoppel by representation applies to facts only, the equitable doctrine of promissory estoppel applies to promises, as here. The theory requires a promise which is intended to create legal relations, and which the promisor knows will be acted upon, and it is in fact acted upon by the promisee. For the argument as to whether detrimental reliance is required under this doctrine, see Cooke & Oughton (1993) The Common Law of ObligationsLondon: p.78. The development of this theory in England in the Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130. case has been discussed in Craig’s Procurement Law (1999) at §2.12. Applying the doctrine of promissory estoppel can be seen as a means of circumventing the consideration doctrine in contract. (2d ed) Butterworths,
In the bidding situation of this case which was not covered by a ‘tendering contract’, the promise does not relate to an existing contractual obligation. Therefore, it seems that there must be some detrimental reliance on the part of the promisee. The Australian High Court applied this theory in Walton’s Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 (HCA), where a builder undertook extensive siteworks in the anticipation of a contract which never materialised. In the circumstances the owner was estopped from denying the existence of the contract, and the contractor was compensated on the basis its detriment suffered as a result of the broken promise.
Two solutions to the bid shopping problem have emerged in North America. They are bid depositories and bid listing of subcontractors. A useful description of how bid depositories work is to be found in Oakland-Alameda County Builders’ Exchange v FP Lathrop Construction Co 4 Cal 3d 354; 93 Cal Rptr 602; 482 P 2d 226 (1971), discussed in Craig’s Procurement Law (1999) at §14.11.
“Bid depositories are creations of the construction industry, generally established by construction trades subcontractors to control the process of submitting subbids to general contractors who are bidding on large construction jobs. The operation of a typical bid depository is succinctly described by a commentator as follows: ‘A ‘locked box’ procedure is the most common method of depository operation. Subcontractors wishing to bid to one or more general contractors on a certain job submit bids in sealed envelopes to the depository. An envelope containing a bid addressed to each general contractor to whom the subcontractor wishes to bid is placed in the ‘locked box’, and another envelope containing a copy of that bid is addressed to the depository itself and similarly deposited in the box or another secure receptacle. There will be a cut-off point, typically 4 hours or so before the prime bid opening time (ie the time by which all bids must be submitted to the owner or awarding authority), and after that cut-off point (or depository closing time) is reached, no more bids may be received, and none received may be amended or withdrawn.
Promptly at the depository closing time, the locked box is opened, and the envelopes contained therein are dispensed to the general contractors to whom addressed. Each general contractor then prepares his own bid to the owner or awarding authority based upon the subbids received and his estimates of his own work costs.’” 482 P 2d 226, 227, citing material from Orrick, Trade Associations are Boycott-Prone -- Bid Depositories as a Case StudyMcGraw-Hill, Colorado, USA: p.57. (1968) 19 Hastings LJ 505, 520. See also Leiby, LR (1988) Florida Construction Manual (2d ed)
As might be supposed from the above description of the process, bid depositories have been held, to be in violation of US anti-trust law and in restraint of open price competition amongst subcontractors: see discussion in Craig’s Procurement Law (1999) at §§14.9 and 14.11.
An owner’s requirement that a general contractor must list the subcontractors’ bids used to compile the prime bid amounts to a public recognition of reliance on those listed bids. It is then more difficult for a general contractor to deny such reliance and shop the bid. They may, of course, be quite justifiable grounds for substituting a fresh subcontractor, for example if a listed subcontractor becomes insolvent, or admits insufficient capacity to complete the work in accordance with the subcontract or prime contract requirements. A failure by a prime contractor to satisfy a tender stipulation that requires subcontract listing has been held to render that tender unresponsive: EM Watkins & Co v Board of RegentsFlorida. 414 So 2d 583 (1982)
A general contractor who has shopped a subcontractor’s bid may find that it is later prevented from enforcing that bid under the doctrine of promissory estoppel. That outcome would seem to be consistent with policy of s.90 of the Restatement which permits recovery under this theory if ‘injustice can be avoided only by enforcement of the promise.’
|
|
| Last Updated ( Monday, 20 August 2007 ) |
| < Prev | Next > |
|---|
