§19.2 Subcontract Formation

• Jurisdiction: Washington

§19.2 SUBCONTRACT FORMATION

Usually, an essential prerequisite to the formation of a contract is an agreement—a mutual manifestation of assent to the same terms. The agreement ordinarily is reached by a process of offer, acceptance, and consideration.

(1) Enforcing subcontractor bids

Offers generally are freely revocable prior to acceptance, unless supported by special consideration. Cent. Puget Sound Reg'l Transit Auth. v. Heirs & Devisees of Eastey, 135 Wn.App. 446, 454, 144 P.3d 322 (2006). An offer supported by consideration generally is referred to as an option. 1 Richard A. Lord, Williston on Contracts §5:16 (4th ed. 2002 & Supp. 2018).

The doctrine of promissory estoppel, however, is one of the exceptions to the rule that offers are generally revocable, in the general/subcontractor context. Under promissory estoppel, the general contractor receives limited protection if the general contractor uses the subcontractor's bid to compute its own bid to the owner. See Arango Constr. Co. v. Success Roofing, Inc., 46 Wn.App. 314, 323, 730 P.2d 720, 725 (1986). The promissory estoppel doctrine protects only the general contractor:

This concept applies readily to the unique situation of a subcontractor and a general contractor, as exists here. A subcontractor submits a bid

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to the general contractor, knowing the general cannot accept the bid as an offer immediately, but must first incorporate it into the general's offer to the prospective employer. The general contractor incorporates the bid in reliance upon the subcontractor to perform as promised, should the prospective employer accept the general's offer. Thus, the elements of predictable and justifiable reliance and change of position are satisfied. Numerous courts and authorities have opined that a subcontractor's bid upon which a general contractor relies should be deemed irrevocable for a reasonable time pursuant to the doctrine of promissory estoppel.

Ferrer v. Taft Structurals, Inc., 21 Wn.App. 832,835,587 P.2d 177(1978). Although a subcontractor is bound to its contract once the general contractor uses the subcontractor's bid, the general contractor has the choice of reopening negotiations with other subcontractors. See Milone & Tucci, Inc. v. Bona Fide Builders, Inc., 49 Wn.2d 363, 301 P.2d 759 (1956). This alternative allows the general contractor to use the low bid as leverage to reduce bids from other subcontractors (bid shopping) and encourages other subcontractors to undercut the low bidder (bid peddling) after the prime contract has been awarded by the owner.

As indicated, a contract is created by an offer, an acceptance, and consideration. The subcontractor's bid must include material terms necessary to make a contract, such as the time, place, or manner of performance and the amount of consideration. For a contract to arise, the acceptance must be unconditional. The rule of promissory estoppel prevents the subcontractor from withdrawing its bid for a limited time, allowing the general contractor to convey acceptance, and thereby form the contract. The requirements for an action based on promissory estoppel have been stated as follows:

(1) A promise which (2) the promisor should reasonably expect to cause the promisee to change his position and (3) which does cause the promisee to change his position (4) justifiably relying upon the promise, in such a manner that (5) injustice can be avoided only by enforcement of the promise.

Ferrer, 21 Wn.App. at 834.

In Ferrer, the Washington Court of Appeals recognized that promissory estoppel applies to the unique situation of a subcontractor and a general contractor. Id. at 835. The general contractor solicited bids from various subcontractors for formulation of a bid for a construction project. The owner was the City of Seattle. The general contractor incorporated the subcontractor's bid into its own bid to the city. The general contractor was awarded the project and notified the subcontractor. The subcontractor

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performed, but insisted it was due more money than its original bid. The general contractor refused to pay any additional money over and above the subcontractor's bid amount.

The trial court found that the subcontractor's initial bid (the bid that was used by the general contractor in compiling its bid to the city) was relied upon by the general contractor but was never formally accepted because it was never reduced to writing. The general contractor appealed, arguing that the subcontractor's initial bid constituted an irrevocable offer for a reasonable time, and that the general contractor's subsequent letting of the subcontract to the subcontractor constituted adequate acceptance. The Court of Appeals held that a subcontractor's bid, upon which a general contractor has relied, is deemed irrevocable for a reasonable time pursuant to the promissory estoppel doctrine. Id. The subcontractor submits a bid to the general contractor, knowing that the general contractor cannot accept the bid as an offer immediately but must first incorporate it into the general contractor's offer to the owner. Id. The general contractor incorporates the subcontractor's bid in reliance that the subcontractor will perform as promised if the general contractor is the successful bidder to the owner. Id. The elements of predictable and justifiable reliance and change of position are thus satisfied, and a breach of contract action based on the subcontractor's original bid is appropriate. Id.

Similarly, in Arango, 46 Wn.App. 314, the subcontractor discovered a mistake in its price after its bid had been incorporated into the general contractor's bid to the owner, and argued that its bid to the prime contractor was conditioned upon a written confirmation. Because the subcontractor's bid was never confirmed in writing, it asserted there was no subcontract. The Court of Appeals recognized that construction bidding is treated as a "unique category," id. at 321, because construction bidding deadlines make the drafting of written agreements impossible. Therefore, general contractors must rely on oral bids of subcontractors. Id. The court held that, as a matter of law, "a subcontractor's bid is considered an irrevocable offer until the award of the prime contract; then, the general contractor's acceptance of the bid results in a bilateral contract." Id. at 323.

(2) Subcontractors' attempts to enforce their bids

Washington courts have rejected subcontractors' contentions that the mere use of their bids by a contractor constitutes an acceptance. In Plumbing Shop, Inc. v. Pitts, 67 Wn.2d 514, 408 P.2d 382 (1965), a mechanical subcontractor commenced an action for breach of an

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alleged implied contract against a general contractor after the general contractor had confirmed the subcontractor's bid. The general contractor was deemed the low bidder by the owner. The general contractor thereafter requested a cost breakdown and various submittals from the subcontractor (whose price it had used in its bid to the owner), but hired another subcontractor to perform the mechanical work. The original subcontractor sued the general contractor for the profits it had anticipated making on the project. The court held that in the absence of an agreement on essential terms, such as bonding, liquidated damages, manner of payment, and work progress completion dates, it was readily apparent that the general contractor and subcontractors must have intended to set those particulars and others out in a written contract to be executed at a later date. Id. at 520.

The subcontractor also argued that the implied-in-fact contract between it and the general contractor was complete—despite the lack of a writing—because custom and usage of trade may be used to fix the time upon which the contract would be performed and any other terms not agreed upon. The court disagreed, holding that business practice and custom may be used in the process of determining if an implied contract exists, as well as in the interpretation of existing contracts, but its role is not to fill in all essential terms of an incomplete agreement. The alleged implied-in-fact contract before the court contained only one complete term—the agreed upon price. Id. at 522. To imply the remaining essentials by way of custom and usage would violate the elementary principle that courts will not make a contract for the parties. Id. The Supreme Court affirmed the dismissal of the subcontractor's action.

In Milone & Tucci, 49 Wn.2d 363, the general contractor used a subcontractor's bid in its proposal, but later discovered that the subcontractor had not submitted the lowest bid. After being awarded the general contract, the general contractor awarded the subcontract to another subcontractor. Although the trial court had found that construction industry usage dictated that an implied contract was created by the general contractor's use of the subcontractor's bid in this situation, the Supreme Court reversed on the ground that there had been no return promise (no acceptance). The court stated that the mere use of a subcontractor's bid price by the general contractor in preparing its bid did not constitute an acceptance of the subcontractor's offer. Id. at 370. With respect to custom and usage in implied contracts, the court stated:

Usage and custom are admissible in evidence to explain the terms of an express or implied contract once the contract is established. The fallacy

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of the trial court's second theory is that an implied contract cannot arise from proof of usage and custom. The effect of custom or usage upon contractual obligations is dependent upon the existence of an actual contract between the parties. Where there is no contract, proof of usage and custom will not make one.

Id. at 366-67.

When a general contractor uses a subcontractor's or supplier's bid but in no way communicates any commitment to...