9.4 Contracts with Subcontractors

• Library: Virginia Construction Law Deskbook (Virginia CLE) (2019 Ed.)

9.4 CONTRACTS WITH SUBCONTRACTORS

9.401 In General. Contractors normally rely on one or more subcontractors in performing a construction contract. The relative rights and obligations among the contractor, owner, and sub-contractor further complicate the construction contract.

9.402 Reliance/Promissory Estoppel. Before a contractor submits a bid on a project, it often solicits quotes from subcontractors for performance of various parts of that project. The contractor may then price its

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bid to the project owner based on the price it expects to pay subcontractors. However, the contractor may be surprised to find that the subcontractor is not bound by its bid.

A contract is formed by an offer and acceptance, and the subcontractor is not bound by its quote until it is accepted by the contractor. ⁴³ This may place a contractor in an untenable position if the subcontractor refuses to perform on the terms in its bid, but contractors have found few remedies in the law.

Before 1997, there were a number of cases and authorities arguing that the subcontractor should be bound by the doctrine of promissory estoppel. ⁴⁴ The Restatement (Second) of Contracts explains this doctrine:

A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or for-bearance is binding if injustice can be avoided only by enforcement of the promise. ⁴⁵

Based on promissory estoppel, subcontractors should be bound by their quotes if the contractor reasonably relied on them. ⁴⁶ However, in 1997, the Virginia Supreme Court rejected the Restatement position and held that promissory estoppel is not a cognizable cause of action in Virginia. ⁴⁷ The Court reaffirmed this position in Mongold v. Woods. ⁴⁸

9.403 Meeting of the Minds. In some cases, a contractor may accept the bid but propose contract terms that differ from the original bid. No contract is formed until there is a "meeting of the minds" in which the parties

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fully agree on the terms of the contract. When the subcontractor submits a bid, he or she expects to be considered for a contract, but the mere intent to form a contract in the future is not sufficient to bind the subcontractor to the proposed terms:

The whole question is one of intention. If the parties are fully agreed, there is a binding contract, notwithstanding the fact that a formal contract is to be prepared and signed; but the parties must be fully agreed and must intend the agreement to be binding. If though fully agreed on the terms of their contract, they do not intend to be bound until a formal contract is prepared, there is no contract, and the circumstances that the parties do intend a formal contract to be drawn up is strong evidence to show that they did not intend the previous negotiations to amount to an agreement. ⁴⁹

Even though the parties have not entered into a formal written agreement, an offer may be accepted, and a contract formed, by their actions. ⁵⁰ In Galloway Corp. v. S.B. Ballard Construction Co., ⁵¹ the Virginia Supreme Court held a subcontractor liable despite the lack of a formal written agreement. The court explained: "As Empire undertook to perform the contract according to its terms, an acceptance by performance resulted. The absence of an authorized signature does not defeat the existence of the contract." ⁵² The court held that the subcontractor had accepted the terms of the contract by its performance.

The court distinguished Galloway in Brooks & Co. General contractors v. Randy Robinson Contractor, Inc. ⁵³ In Brooks, the subcontractor, Robinson, submitted a bid and was told that it would get the work. After the

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conversation, the contractor sent an unsigned contract to the subcontractor, but neither party ever signed the written contract. Robinson claimed that an oral contract was formed when the contractor accepted its bid and that it performed under that oral contract rather than the unsigned written agreement. Furthermore, the contractor had not signed the written contract because it expected the subcontractor to make changes. The court distinguished Galloway in that the contractor in Galloway had manifested an intent to be bound by the written contract by signing it. Accordingly, the court in Brooks held that there had been no meeting of the minds on the written agreement, and Robinson did not accept the written contract by its performance. ⁵⁴

Even though a subcontractor may have no formal agreement, it may still be entitled to compensation for its services under the doctrines of quantum meruit or unjust enrichment. ⁵⁵

9.404 Requirement of Privity. Another problem that arises between contractors, subcontractors, and project owners involves the subcontractor's right to compensation for additional work performed and for unexpected costs and expenses. The "Economic Loss Rule" prohibits recovery for economic loss absent privity of contract or physical injury to person or property. If the subcontractor has no privity of contract with the owner, it often has no right to recover compensation from the owner.

In Blake Construction Co. v. Alley, ⁵⁶ the Virginia Supreme Court reaffirmed the requirement of privity. In that case, a contractor had entered into a contract with the commonwealth to construct an office building, and the commonwealth entered into a separate design contract with an architect. There was no direct contractual relationship between the contractor and the architect. The contractor brought suit against the architect, alleging that the contractor incurred economic loss because of the negligent acts of the architect. The Supreme Court stated the common law rule, "a party not in privity may not recover damages where there is no physical injury to person or property." ⁵⁷ However, the contractor argued that this rule had been abrogated by section 8.01-223 of the Virginia Code: "In cases not provided for in

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§ 8.2-318 ⁵⁸ where recovery of damages for injury to person, including death, or to property resulting from negligence is sought, lack of privity between the parties shall be no defense."

The court found that this statute was expressly limited to cases involving injury to person or property. The court concluded that the statute did not abrogate the common law requirement of privity to recover for economic loss alone. ⁵⁹

9.405 Pass-Through Claims. Many jurisdictions allow "passthrough claims" brought by the contractor to sidestep the privity requirement and vindicate a subcontractor's right to recover for additional work performed and...