WHAT DO YOU DO WITH A DEFECTIVE BID?

By: Brian S. Case

When it comes to risk-taking for contractors, except for the risks associated with the actual physical undertaking of the construction work, the greatest risk a contractor undertakes is providing its bid to perform the intended work. Whether the contractor is a general contractor or a subcontractor, the risks of communicating a final quote are significant since, the legal consequences are, in most instances, severely placed at the feet of the contractor. Of course, the exact nature of these legal consequences will to some degree depend upon whether the work is private or public, performed by subcontractor or general contractor, and the particular facts surrounding the dispute.

Generally speaking, a contractor’s bid is its quote to perform a specific task, trade, or project. Obviously, a contractor should therefore take care in insuring that there are very specific or objective criteria defining the “scope of work” upon which the bid is based. What follows is a discussion of the risks, liabilities, and entitlements of contractors with respect to mistakes in the bidding process.

1.0 CONTRACTUAL PRECEPTS OF CONTRACTOR BIDS

In most instances, a bid by a contractor to perform construction services is, by its very nature, an “offer” in the legal sense in that it usually contains a specific price quote to perform a specific scope of work. Normally, if an offer is not otherwise revoked, it must be accepted by the offeree with the intent to create the formation of a contract before a legal obligation can be binding. However, contrary to this general rule, contractor bidding carries with it many exceptions and nuances of which contractors and legal practitioners should be aware.

1.1 Private Work/Doctrine of Promissory Estoppel

Probably the largest area of dispute in private works which surrounds this issue of bids and their contractual precepts is the area of subcontractor bids to general contractors. Although generally a bid is nothing more than an offer which may be revoked prior to acceptance, in California it has long been held that a subcontractor’s bid to a general contractor may be held irrevocable where the general contractor has relied upon such bid to its detriment.

The California Supreme Court in Drennan v. Star Paving Company (1958) 51 Cal.2d 409, held that although bidding on private works is not regulated by any specific statutory scheme as in public works, other basic legal principles are at work which should prevent a subcontractor from withdrawing its bid to a general contractor under the doctrine of promissory estoppel. This conclusion is enforced, absent extraordinary circumstances, even where the subcontractor’s bid contains a mistake or error.

Thus, although under normal law of contract formation one might argue that a contract is not formed where a subcontractor has attempted to withdraw its bid prior to formal acceptance by the general contractor, in construction law the general contractor can enforce the bid against the subcontractor, as well as any additional damages for delay, impact, or disruption to the project, as a consequence of a subcontractor’s failure to honor its bid.

The normal circumstances for application of such a conclusion follow a general contractor’s use of a subcontractor’s bid in its proposal to an owner which is subsequently accepted or is binding upon the general contractor. In those instances, the normal precepts for promissory estoppel — reliance by the general contractor and a detrimental effect such as the general contractor being bound to perform the work at a specified price which included the subcontractor’s bid — would apply.

It should be noted that the conclusion by the Supreme Court in the Drennan v. Star Paving Company case, as well as the general principles in other California cases, is not without exceptional circumstances which may create the exception to the rule. Where, for example, a prime contractor has actual knowledge or some reason to know that a subcontractor’s bid contains an error, then the equitable doctrine of promissory estoppel probably would not apply and, absent actual acceptance prior to revocation, a subcontractor could avoid the errors of his bid. Brunzell Construction Company v. G.J. Weisbrod (1955) 134 Cal.App.2d 278.

However, the area of a general contractor’s imputed knowledge because it should have known of a mistake in a subcontractor’s bid is very gray and the benefit will probably be given to the general contractor absent other factors. For example, in Norcross v. Winters (1962) 209 Cal.App.2d 207, the California Court of Appeal held a subcontractor to an alleged mistake in bid which amounted to $4,800. The evidence before the trial court indicated that the bids from other subcontractors for the project ranged from $7,490 to a little over $8,100, and the court concluded that the difference between the defendant subcontractor’s bid and the other bids were not of such magnitude to impute knowledge of the mistake to the general contractor. See also C & K Engineering Contractors v.Amber Steel Company (1978) 23 Cal.3d 1, where the Supreme Court determined that a general contractor had reasonably relied on the subcontractor’s bid and the subcontractor was estopped from revoking it, and Saliba-Kringlen Corp. v. Allen Engineering Company (1971) 15 Cal.App.3d 95, where the court determined that a subcontractor’s attempt to extricate itself from its bid by giving notice to the general contractor before the owner accepted the quote from the general contractor was unreasonable and the subcontractor was required to honor its bid.

However, there is one case which seems to have muddied the waters in this area. Architects and Contractors Estimating Service, Inc. v. Smith (1985) 164 Cal.App.3d 1001. In this case, the California Court of Appeals held that a contractor may avoid the legal obligations of its bid where there is either mistake or fraud. At first blush then, it appears that although a subcontractor may be estopped from revoking its bid to a general contractor who has relied upon it, where there is either mistake or fraud, the subcontractor might be able to avoid the problems of an error in its bid. However, a careful reading of the Smith case reveals that this conclusion is very limited as the facts in Smith are very unique.

First, with respect to the grounds to avoid the bid on mistake, the appellate court very carefully identified, to support its finding of avoidance due to mistake, that the contractor involved had bid the project as its first project and had told the general contractor that he had provided a quote without reviewing the plans and specifications. Furthermore, the court found, both with respect to the mistake and fraud counts, that the general contractor had encouraged the subcontractor to fix its price based upon assurances of a profit margin and the general contractor was aware of the inability of the subcontractor to perform the work at the price it bid. It, therefore, could be argued that the Smith case really is nothing more than an application of the “knew or should have known” rule couched in terms of avoidance by mistake or fraud.

Assuming the Smith case is really just a knew or should have known conclusion, it seems clear that in order for there to be imputed knowledge of the general contractor of a mistake in a subcontractor’s bid, a subcontractor must be able to demonstrate a large and substantial variance from all of the other responsive bids. Of course, this area of the law is susceptible to frequent litigation and the subcontractor would be well advised to, therefore, take great care in its quoting of a bid to a general contractor.(1)

A special note should also be made concerning quotes of suppliers of material. Commercial Code Section 2205 makes a merchant’s offer, known to be relied on by a licensed contractor, irrevocable for ten days after the awarding of the contract to the prime contractor. In order for the contractor, however, to rely upon such merchant’s offer, the contractor must confirm in writing the offer within 48 hours after it is made. Therefore, a supplier who has provided a quote which contains an error might be held to its price.

From the above discussion in private works, subcontractors have little to cheer about in this area of law. General contractors on the other hand can expect a “fair” treatment by the courts when it comes to subcontractor bids. With respect to the general contractors bid to an owner in a private works setting, the general contractor can expect the same treatment that subcontractors are given. That is unless they can show either an “acceptance” by the owner or some sort of estoppel the owner may avoid any contractual relationship merely because the general has communicated a price. However it will be difficult for an owner to demonstrate detrimental reliance upon a general contractor’s bid and it is reasonable to therefore expect that a general contractor might be able to avoid a mistake in its bid where it is withdrawn before the owner accepts or relies upon it. Where the bid has already been accepted by the owner, the general contractor will have to pursue normal recession remedies based upon fraud or mistake to be relieved of an error in its bid. See Section 2.0 following.

1.2 Public Works Statutory Bidding Obligations

As mentioned above, the bidding process on public works differs substantially from normal contractual precepts of offers and acceptance. This is because on public projects there are statutory and bidding procedures which impose responsibilities and liabilities on general contractors and subcontractors who are bidding to public owners. Many of these statutory procedures are now embodied in the California Public Contract Code.

Under the competitive bidding statutes for public works, bids of contractors are considered irrevocable offers. M.F. Kemper Construction Company v. City of Los Angeles (1951) 37 Cal.2d 696. In addition, most Public Contract Code statutes require that a general contractor in submitting its bid to the public owner must supply a bid bond which obligates the contractor to perform the work as bid and provides a guarantee usually of ten percent by the surety on the bid bond in the event the general contractor refuses to execute the general contract once it is accepted by the owner.

Thus, again, although the public owner may not have yet formally accepted the bid, in public projects a contractor is bound to its bid pending the owner’s decision whether to accept the lowest responsible bid. City of Susanville v. Lee C. Hess Company (1955) 45 Cal.2d 684. Accordingly, during the period of time that an owner is reviewing a general contractor’s bid on a public work, the general contractor is bound to the owner to perform the project for the amount of its bid. Menefee v. County of Fresno (1985) 163 Cal.App.3d 1175.

Consequently, subcontractors can expect that their bids to a general contractor bidding on a public work will be similarly bound against them to the extent that the general contractor becomes the successful lowest responsible bidder to the owner. See Drennan v. Star Paving Company, supra.(2)

Although as indicated above, a general contractor is generally bound to perform its work for the price contained in its bid even where there has been a mistake in its bid, this general rule is not without exceptions where certain specific factors can be shown and the contractor has procedurally acted diligently. For example, pursuant to California Public Contract Code Section 5101, et seq., a contractor may be relieved of its bid where the mistake is of the type and character to which the statute describes and written notice was given to the public entity within five days after the opening of the bid.

Public Contract Code Section 5103 provides:

“Grounds for relief:

“The bidder shall establish to the satisfaction of the court that:

“(a) A mistake was made.

“(b) He or she gave the public entity written notice within five days after the opening of the bids of the mistake, specifying in the notice in detail how the mistake occurred.

“(c) The mistake made the bid material different than he or she intended it to be.

“(d) The mistake was made in filling out the bid and not due to error in judgment or to carelessness in inspecting the site of the work or in reading the plans or specifications.”

Essentially, this procedure for relief from error in a bid allows the general contractor to obtain relief from the forfeiture of its bid bond and although the contractor may not utilize the process to reform its bid in an effort to obtain a contract for a different amount, if the public entity attempts to enforce the contractor’s bid against the contractor’s bid bond, the contractor may seek an action to obtain relief from the forfeiture by way of a lawsuit. Balliet Bros. Construction v. Regents of the University of California (1978) 80 Cal.App.3d 321.

Generally speaking, the type of mistake which may be relieved under Public Contract Code Section 5103, et seq. involves mistakes which can be construed as “clerical mistakes” rather than mistakes in judgment or negligence on the part of the contractor providing its bid. White v. Berrenda Mesa Water District (1970) 7 Cal.App.3d 894.

The above-mentioned statutory relief procedures generally take the place of normal actions for recision based on error and where the contractor fails to adhere to the substantive and procedural elements of the relief from forfeiture procedures, it may be determined to be deemed a waiver of the right to relief even for clerical errors. A & A Electric, Inc. v. City of King (1976) 54 Cal.App.3d 457; Lemoge Electric v. County of San Mateo (1956) 46 Cal.2d 659.(3)

A separate relief from error of a general contractor’s bid with respect to the listing of subcontractors is set forth in Public Contract Code Section 4107.5. As mentioned in Footnote 2, a subcontractor who has been listed in a general contractor’s bid to a public entity generally may enforce its subcontractor bid against the successful-bidding general contractor. Where, however, a general contractor has inadvertently listed the subcontractor in its bid to the public entity, the general contractor may be relieved of the duty to the listed subcontractor. Again, the time limitations and ability of a general contractor to avoid such an alleged inadvertent clerical error are very restrictive.

Pursuant to Public Contract Code Section 4107, the general contractor must give notice to the public entity within two working days after the time the general contractor’s bid is open as well as provide a copy of such notice to the subcontractor claimed to have been inadvertently listed. Thereafter, the subcontractor who has allegedly been inadvertently listed may, and if it wishes to enforce its claims shall, within six working days of the general contractor’s bid opening, submit any written objections to the general contractor’s intentions to replace the subcontractor.

Finally, the public entity must notice a public hearing on the matter and reach specific conclusions. The hearings involved in such a substitution and claim of inadvertent listing are very strictly limited, both in time and subject matter, and if a contractor or practitioner is faced with this problem, due care should be taken in immediately complying with the statutory responsibilities.

2.0 CORRECTION OF BIDS AFTER AWARD OR ACCEPTANCE

With respect to errors or mistakes discovered after the award or acceptance of the bid of a contractor, in most instances the law in California does not differ substantially from pre-award or pre-acceptance instances. In general, the doctrine of relief from mistakes for public works is dictated by Public Contract Code Section 4103, et seq., and to the extent that the general contractor can meet the procedural requirements (five days) of this code section as well as the substantive tests, then the general contractor should have no problem in obtaining relief from its mistake in bid.

However, it should be noted that in many instances the public entity may not actually award the contract until after the statutory time period has expired. To compound this, it may be the actual award which led the contractor to “discover” its mistaken bid which under reasonable circumstances had not been discovered within the statutory period. At this time there is very little help for such a problem in California authorities; however, it may not be unreasonable to assert that if the mistake was one which could not reasonably have been discovered prior to the award, then the general contractor should be able to obtain relief from the statutory limitation period and proceed under a common law theory to rescind under the doctrine enunciated in Elsinore Union Elementary School District v. Kastorff (1960) 54 Cal.2d 380.

In the private construction sector, the same rules apply with respect to bids which have been formally accepted by the offeree prior to the offerer’s discovery of its error. Generally, the doctrine the promissory estoppel will apply even though no formal written contract is executed between the parties. C & K Engineering Contractors v. Amber Steel Company (1978) 23 Cal.3d 1. However, there may be exceptions where the bid was obtained either through fraud or mistake. Architects and Contractors Estimating Service, Inc. v. Smith (1985) 164 Cal.App.3d 1001.

Furthermore, it must be emphasized that even if relief would be available to the bidder, the only relief a court would provide is relief from the forfeiture of its bid and not a reformation of the contract. This is because, although the bid did not accurately reflect the offerer’s intentions, it did reflect the offeree’s intention who accepted the bid and, therefore, reformation is not an available remedy. Lemoge Electric v. San Mateo (1956) 46 Cal.2d 659.

3.0 CORRECTION OF BIDS AFTER COMMENCEMENT OF CONSTRUCTION

With respect to mistakes in bids which are discovered after the commencement of construction, again the same rules which were applicable in Sections 1.0 and 2.0 would apply here. Additionally, where the correction of the bid really involved a reflection of costs which were estimated on errors or ambiguities in the plans and specifications rather than a mistake in bid, then the contractor may seek an adjustment to its contract price through contractual change orders or other equitable relief.

Relief has been granted contractors to either upwardly adjust their contract sum or seek recovery outside the contract in the following instances:

  1. Unjust enrichment – Earheart v. William Lowe Company (1979) 25 Cal.3d 503; but see no unjust enrichment conferred. Nibbi Bros. v. Brannan Street Investors (1988) 205 Cal.App.3d 1415.
  2. Equitable adjustment to contract price due to mistake in plans and specifications – Jasper Construction, Inc. v. Foothill Junior College District (1979) 91 Cal.App.3d 1; but see Welch v. State (1983) 139 Cal.App.3d 546.
  3. Implied misrepresentations – Tonkin Construction Company v. County of Humboldt (1987) 188 Cal.App.3d 828; but see Jasper Construction, Inc. v. Foothill Junior College District (1979) 91 Cal.App.3d 1.
  4. Excessive change orders/cardinal change/abandonment – C. Norman Peterson Company v. Container Corp. of America (1985) 172 Cal.App.3d 628; State v. Guy F. Atkinson Company (1986) 187 Cal.App.3d 25; but see Huber, Hunt & Nichols, Inc. v. Moore (1977) 67 Cal.App.3d 278.
  5. Interference with contract by third party – J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799.
  6. Breach of warranty – Souza and McCue Construction Company v. Superior Court (1962) 57 Cal.2d 508; but see Wunderlich v. State (1967) 65 Cal.2d 777; but see also E.H. Morrow Company v. State (1967) 65 Cal.2d 787.
  1. If a subcontractor is bound to a general contractor under the subcontractor’s bid even absent a formal acceptance, one would believe that a similar conclusion would be likely when the tables are turned vice versa. However, that is not the case under California law since a subcontractor generally does not place the necessary detrimental reliance upon a prime contractor’s use of a subcontractor’s bid in order to satisfy the requirements of the doctrine of equitable promissory estoppel. This conclusion was voiced in a recent federal case employing California law which held that not only does a subcontractor not have a contractual remedy, but it may not enforce its bid by way of promissory estoppel. Electrical Construction and Maintenance Company v. Maeda Pacific Corp. 764 F.2d 619 (9th Cir., 1985). It should also be pointed out that even if a promissory estoppel argument on behalf of the subcontractor could be made, the cause of action would be subjected to a shorter statute of limitations such as the two-year statute of limitation rather than the normal four-year statute of limitation followed for written contracts.
  2. Unlike the private construction project, a subcontractor on a public work inherits certain rights which offset the burden of its bid being irrevocable pending the decision by the owner with respect to the acceptance of the general contractor’s bid. Under California public works law, subcontractors who are listed on a general contractor’s bid to a public entity may invoke the benefits of Public Contract Code Section 4104, et seq. These statutes provide that a general contractor’s bid which is accepted by a public entity may not substitute any other subcontractor in the place of one who is listed on the general contractor’s bid absent very specific situations. If the general contractor attempts to substitute a listed subcontractor on a public work, the public entity must disallow such substitution without a noticed hearing and findings of one of these specific exceptions. Absent a reasonable conclusion of one of these specific exceptions, a subcontractor may enforce its bid against the successful general contractor and seek all resulting damages as a consequence of the general contractor’s failure to allow the subcontractor to perform its work. Southern California Acoustics Company v. C.V. Holder, Inc. (1969) 71 Cal.2d 719. Of course, even exceptions to general rules are not without their exceptions and practitioners in this area should carefully review the applicable authorities. Interior Systems, Inc. v. Dell E. Webb Corp. (1981) 121 Cal.App.3d 312.
  3. Of course, in addition to the statutory relief from inadvertent error procedures, a general contractor may withdraw its bid without liability where the public entity knew or should have known that the bid was unreasonably low and, therefore, contained an error. M.F. Kemper Construction Company v. Los Angeles (1951) 37 Cal.2d 696. Of course, this area also is quite gray and the careful general contractor or practitioner will endeavor to limit the necessity of having to prove that such a wide divergence in bids constituted an imputed knowledge on behalf of the public owner.

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