Promissory Estoppel:What it is and how it can work in construction cases
A recent California Appellate case held that a prime contractor can recover from a subcontractor if the prime contractor reasonably relied upon the subcontractor's bid. This is based on a theory called promissory estoppel. The case also dealt with the attempt to withdraw a bid. The nature of promissory estoppel is:
"A promise which the promissor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promissee (the one to whom the promise is made) and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise."
In essence, if one makes a promise or a statement that would lead a reasonable person to rely on that statement, and that person does rely on it, it becomes binding if injustice can be avoided only by the enforcement of the promise.
In this case, Diede Construction was awarded a $12 million contract to renovate Livermore's city hall building. Monterey Mechanical submitted a bid as a subcontractor to Diede. However, Monterey's subcontract bid included a mistake of approximately $300,000. Monterey Mechanical informed Diede of this mistake and asked it to withdraw its bid. Diede would not attempt to withdraw its bid, and it told Monterey Mechanical that it expected Monterey to honor its bid. Monterey refused to honor its bid and do the work. Diede hired another subcontractor to perform the work at an increased in price.
Not surprisingly, the follow-on subcontractor charged more for the work than Monterey would have charged because of the mistake. Diede sued Monterey for the difference. The trial court denied Diede's claim because Diede did not attempt to withdraw its bid and instead signed the contract with the city even though it knew that Monterey had made a mistake in its bid. Essentially the court would have required the prime contractor to use another subcontractor.
The Appellate court reversed that holding. The Appellate court stated that the only means of withdrawing a mistaken bid on a public works project is set out in the code. The code does not apply to mistakes in bids of the subcontractor, but only mistakes in bids of the prime contractor. Further, Diede was not required to relieve Monterey of its mistake.
The appellate court held that the only issue that remained was whether Diede justifiably relied on Monterey's bid. As an example, if Monterey's bid was so low that no reasonable contractor would have relied on it, then Promissory Estoppel would not work.
Therefore, the appellate court held that Diede could recover on the basis of promissory estoppel if it reasonably relied on Monterey's bid. The case was sent back to the trial court for that determination.
Note that if a subcontractor's bid is way out of line, many prime contractors will contact the bidding subcontractor and ask if he wishes to change his bid.
"This article was originally posted on ww.reevesjournal.com."