July 1, 1997
By Gregory T. Spalj
Although many contractors would deny it, the practice of bid shopping is alive and well. Whether bid shopping is prudent economic analysis, or the product of greed practiced by the immoral, depends upon your perspective. If you are a contractor, you might think it is the former. If you are a subcontractor, you are likely to believe the latter. When the issue of bid shopping is presented to the court, some “ugly” things can happen.
Although all of the contractors and subcontractors reading this paper know what I mean when I refer to “bid shopping,” the body of law which governs the relationship between contractors and subcontractors in the courts does not include bid shopping as one of its topics. A court may not look at the ethics or morality of bid shopping. It may not even know what bid shopping is. It will not base its decision on the universal condemnation of the practice among subcontractors and suppliers. The court will analyze the situation in terms of “offers,” “acceptance” and “consideration.” These are terms of legal consequence in the area of contract law. If the court concludes that the subcontractor and the contractor have a contract, bid shopping will be prohibited as a breach of the contract. If there is no contract, then bid shopping will be considered no more than the further solicitation of additional offers.
Consider this case. A Minnesota city advertised for bids to build a wastewater treatment facility. A general contractor bidding on the project solicited a subcontract bid from a steel erector and used the steel erector’s quote in its bid to the municipality. The general contractor was declared the lowest responsive and responsible bidder and was awarded the contract. However, the general contractor awarded the steel erection subcontract to a different steel erector, presumably at a lower price than the initial subcontractor quoted.
The disappointed steel erector sued the general contractor. Noting that the general contractor listed it as a subcontractor in the general’s bid to the municipality, the steel erector argued that it had a contract with the general contractor and that it was unfair for the general contractor to be able to hold it to its bid without binding the general contractor to use it. The Minnesota Supreme Court was unsympathetic. The court held that even though a subcontractor may be bound to the general contractor to honor its bid as submitted, the general contractor is not required to contract with a subcontractor merely because it uses the subcontractor’s quote in its bid to the municipality and lists the subcontractor in the bid form.
The court reasoned that the steel erector merely made an offer that could be converted into a contract by a regularly communicated acceptance conveyed to it by the general contractor. Mere usage of the subcontractor’s quote, however, does not constitute an acceptance of the subcontractor’s offer. Therefore, no contract was formed between the steel erector and the general contractor when the steel erector’s bid was used as a part of the general contractor’s overall bid.
Proving that the law does not find equal footing a persuasive argument, the court noted that, in Minnesota, if the shoe had been on the other foot, the steel erector would have been obligated to perform in accordance with its bid. In other words, if the general contractor was awarded the contract and wanted to enter into a subcontract with the steel erector, the steel erector could not refuse to honor its bid. The court would find that a contract had been formed when the general contractor notified the steel erector of its decision and that the steel erector would, therefore, have become bound to perform in conformance with its bid.
The court did acknowledge that this was a “one-sided arrangement” which, on its face, seemed unfair, but it concluded that “a close examination of the construction business and the nature of the bidding process” reveals several justifications for the disparity. First, the court stated that a subcontractor is bound by its bid because the general contractor justifiably relies upon the subcontractor’s price for the specified work. The general contractor makes its bid after gathering and evaluating a number of the subcontract bids. Once the general contractor wins the prime contract from the awarding authority, it is bound to its own bid. For the subcontractor to be able to refuse performance would subject the general contractor to a financial detriment.
In contrast, the subcontractor submits bids to all or most of the general contractors that it knows are bidding on the project. The time and expense involved in preparing the bid is not segregated to any particular general contractor. The total cost of putting the bid together is a part of the subcontractor’s overhead. (Is bid preparation no less a part of a general contractor’s overhead?) Thus, whether or not any particular general contractor wins the contract is of little or no concern to the subcontractor!
Finally, the court reasoned that the nature of the bidding process compels allowing the general contractor sufficient leeway to maintain its flexibility in executing subcontracts and selecting subcontractors it will hire for a project. Typically, the subcontractors submit their bids only a few hours before the general contractor’s bid must be submitted to the awarding authority. These bids are taken over the phone and the general contractor must hurriedly compile its own bid. This period of time is hectic and the tasks to be completed are complex. Thus, the bidding process puts the subcontractor and the general contractor in a very different position as to the content of the subcontract. The subcontractors have the “luxury” of preparing their bids on their own timetable, subject only to the deadline for submitting their bids to the general contractors. The generals, on the other hand, are dealing with all of the various construction aspects of the project and with numerous potential subcontractors. They compile their bids within a few hours of the deadline for submission, and specifics are necessarily given less than thorough consideration and are left for future negotiations.
The court paid lip service to what it recognized as the “undesirable nature” of bid shopping, but found that the last-minute bidding process seemed well entrenched and appeared to be designed to adequately prevent bid shopping.
Contrast the previous case with one in which a general contractor sued a subcontractor to recover for damages the general contractor sustained when it had to seek a different HVAC subcontractor because the original subcontractor withdrew its bid. The Minnesota Supreme Court in this case held that because the general contractor relied on the original subcontractor’s bid when it submitted the general contractor’s bid, a doctrine called “promissory estoppel” prevented the subcontractor from withdrawing its bid. The court explained that the doctrine of promissory estoppel is appropriately applied when someone makes a promise reasonably expecting the other to act on it and the other does in fact act on it. The court noted that there was no contract, but found that justice demands the loss resulting from the subcontractor’s refusal to honor its bid be borne by the subcontractor. The court concluded that when a subcontractor makes a clear, definite offer expecting the general to place substantial reliance on the offer, and when the general does in fact reasonably rely thereon to its detriment using the subcontractor’s bid in preparing its own bid, the subcontractor is not free to withdraw its subcontract bid.
In a recent case that could have far-reaching ramifications in the construction industry, a Connecticut court held that bid shopping may be a violation of Connecticut’s Unfair Trade Practices Act. Minnesota also has an Unfair Trade Practices Act, and this decision could have application to Minnesota. In the Connecticut case, an electrical subcontractor submitted a bid to a general contractor on a school project. The general contractor used the subcontractor’s bid and listed the subcontractor as one of its subcontractors who would perform work if the contract was awarded. The general contractor was awarded the general contract and then began soliciting a lower electrical subcontract. (Classic bid shopping.) The original electrical subcontractor brought suit claiming breach of contract and a violation of the Unfair Trade Practices Act.
The Connecticut court first agreed with the general that no contract existed by the mere submittal of a bid to the general contractor without any statement or actions by the general contractor which would have allowed the subcontractor to conclude that the general had accepted its offer. However, referring to a legal treatise that described bid shopping as a “practice … generally condemned as unethical by construction industry associations …,” the court held that the practice could be an unfair method of competition or a deceptive act and thus might be an unfair trade practice under the law.
Minnesota has an Unfair Trade Practices Act that is similar to Connecticut’s and, thus, this decision might have implications here. It should be noted that under Minnesota’s Unfair Trade Practices Act, a prevailing party on an Unfair Trade Practices Act claim may be entitled to attorneys’ fees, an injunction, and even punitive damages.
One can conclude from this discussion that fairness is not a concept which, by itself, will get you much in the legal system. (Those of you who have been involved in litigation are no doubt already familiar with this and many other legal principles defying common sense.) Generally, a subcontractor is bound to its quote, but the general is not bound to use the subcontractor whose quote the general used in submitting the bid.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T