Greg is a general contractor. Owen owns property and invites Greg to submit a bid for the construction of a gas station and convenience store on the property. Greg obtains a bid from Stan to perform the electrical work for the project and relies on Stan’s bid when preparing his own bid to Owen. Owen accepts Greg’s bid.
Greg notifies Stan that Owen awarded him the contract, at which point Stan advises that he misquoted the project and that he will not perform the electrical work without a significant increase in his original bid price. The unexpected increase means Greg will make little, if any, profit on the project. Does Greg have a viable breach of contract claim against Stan?
Raise your hand if you believe the answer is “yes.” For the reasons discussed below, those of you currently raising your imaginary hand are wrong.
CONSIDER THIS
To prevail in a lawsuit against Stan alleging breach of contract, Greg must prove that a valid contract exists. The determination of whether a binding contract was formed between a subcontractor and a general contractor is governed by Pennsylvania common law principles of contract. Under Pennsylvania law, contract formation requires a valid offer, acceptance and consideration or a mutual meeting of the minds. Stan’s submission of a bid in response to Greg’s invitation to bid is clearly an offer. The question is, did Greg accept Stan’s offer?
The general rule in Pennsylvania is that a binding contract is formed only when the general contractor unequivocally communicates its acceptance of the bid directly to the subcontractor. The inclusion of a subcontractor’s bid in a general contractor’s own bid submission does not alone create a contract. This is true even if the general contractor notifies the subcontractor that it is the lowest bidder and/or if the project owner awards the project to the general contractor. To create a binding contract, the general contractor must expressly communicate acceptance of the subcontractor’s bid. Any response that adds qualifications or conditions will be deemed a counteroffer and a rejection of the bid.
In this scenario, Greg told Stan that Owen awarded him the contract. Greg, however, never told Stan that he accepted Stan’s bid and planned to use him for the project. Based on these facts, there is no binding contract.
WHAT ABOUT PROMISSORY ESTOPPEL?
Promissory estoppel, also referred to as detrimental reliance, is the legal principle that a promise is enforceable by law, even if made without consideration, when one party has made a promise to another party, who then relies on the promise to their detriment. Recovery under a promissory estoppel theory does not require a formal contract.
Unfortunately for Greg, Pennsylvania appellate courts have repeatedly declined to apply the principle of promissory estoppel in the context of subcontractor bidding, noting that a subcontractor is not required to respond to and often has little control over the use of their bid by the general contractor. Rather, the courts have held that liability, in these situations, can be resolved using traditional contract principles.
In other words, Greg must unequivocally accept Stan’s bid to create a binding contract. If he does not, Stan may withdraw or revise his bid without legal recourse from Greg, even after Owen awards Greg the contract. While Stan may choose to honor his original bid as a show of goodwill or to preserve his business reputation, he is not contractually required to do so.
STEPS TO PROTECT
The following are examples of steps general contractors, like Greg, can take to help protect themselves from unexpected surprises from subcontractors, like Stan:
- include in the bid submission form a statement that you may rely on the subcontractor’s bid when preparing your own submission to the project owner;
- notify the winning subcontractor in writing that you will use its bid when preparing your submission to the project owner and that you plan to use the subcontractor if awarded the contract;
- promptly notify the subcontractor in writing that you accept its offer after being awarded the contract.
Please contact MacDonald Illig at 814/870- 7600 should you have any questions about contract formation as it relates to the bidding process and/or the legal rights of general contractors or subcontractors.
Michael Garcia is a partner at MacDonald Illig Attorneys and a member of the Firm’s Litigation Practice Group. He has extensive experience in insurance defense cases, professional liability defense, commercial/business litigation and municipal liability.
