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  • August 09, 2016

    Seventh Circuit Holds That General Contractor’s Bid Negotiations with Subcontractor Preclude
    Promissory Estoppel

    In a recent decision, the Seventh Circuit Court of Appeals weighed in on the application of promissory estoppel in the context of construction bidding. At issue is the impact of bid negotiations upon the general contractor’s ability to assert promissory estoppel where a subcontractor later declines or refuses to honor its bid.

    Steven J. Slawinski

    A general contractor typically obtains bids from subcontractors when preparing its own bid to the owner of a construction project. It will often use the bid prices of the subcontractors when determining its own bid price. If the owner hires the general, the general will select and hire its subcontractors. However, sometimes a subcontractor may refuse to honor its bid or to enter into a subcontract with the general. In such case, the general may be forced to hire a replacement subcontractor at a higher bid price, and may then seek to recover the additional cost from the bidding subcontractor, asserting promissory estoppel. But how a general contractor responds to a subcontractor’s bid may affect its ability to successfully assert a promissory estoppel claim. In C.G. Schmidt, Inc. v. Permasteelisa North America, __ F.3d __, 2016 WL 3349209 (7th Cir. 2016), the Seventh Circuit Court of Appeals held that the plaintiff general contractor’s bid negotiations with the subcontractor were fatal to its promissory estoppel claim.

    C.G. Schmidt (CGS) served as the general contractor for constructing an 18-story office building located at 833 E. Michigan Street in Milwaukee. In April 2013, Permasteelisa North America (PNA) submitted a bid to fabricate and install an exterior curtainwall system for the building. About two months later, CGS selected PNA as its “contractor of choice.” The project’s contract documents called for the execution of CGS’s standard subcontract form, and CGS had a policy of executing written subcontracts with all subcontractors. However, at the time that CGS awarded the project to PNA, CGS was not prepared to enter into a subcontract with PNA because CGS had not yet entered into a contract with the owner. CGS had determined that it would not execute a subcontract with PNA until it had first signed both a prime contract and a guaranteed maximum price amendment (GMPA) with the owner.

    Bryan Symes Steven Slawinski, Marquette 1986, is a shareholder with the Milwaukee law firm O’Neil, Cannon, Hollman, DeJong & Laing S.C. His practice focuses on construction and real estate litigation, business litigation, and construction law.

    Following the submission of PNA’s bid, CGS and PNA engaged in an ongoing “value engineering process,” modifying and refining the price and scope of the work to be performed under the proposed subcontract. During this process, PNA served a series of revised bid proposals and raised issues regarding the terms of CGS’s subcontract form.

    In February 2014, CGS issued a draft letter of intent to PNA, requesting its comments. On April 21, 2014, CGS and the project’s owner entered into a prime contract. On May 23, 2014, CGS issued a revised letter of intent to PNA, which stated CGS’s “intent . . . to enter into a subcontract” with PNA. Four days later, CGS and the project’s owner signed the GMPA. On May 29, 2014, PNA submitted what would become its last updated bid proposal, at $8,047,368, to CGS. On June 5, CGS sent PNA a revised draft of the project’s scope, showing a total contract price of $7,824,529.67. On June 13, CGS finally issued a proposed subcontract to PNA for electronic signature at a contract price of $7,797,464. PNA did not sign the proposed subcontract, nor otherwise respond to it. On June 16, CGS sent PNA a revised proposed subcontract for signature, stating a price of $7,751,916. PNA did not execute the revised subcontract, but instead informed CGS that it would not be proceeding with the project due to intervening production capacity issues. No written subcontract between CGS and PNA was ever signed.

    CGS hired a replacement curtainwall subcontractor at a higher price, and sued PNA in Federal District Court to recover the difference. CGS alleged claims for breach of contract and for promissory estoppel. Judge Stadtmueller granted PNA’s motion for summary judgment dismissing the action. With regard to the contract claim, Judge Stadtmueller held that the parties had never manifested an intent to be bound without a formal signed subcontract. Regarding CGS’s promissory estoppel claim, the District Court held that PNA’s bid did not constitute a “promise,” and that any reliance by CGS was unreasonable because the parties intended to be bound only upon the execution of a formal written subcontract. Judge Stadtmueller further held that justice did not require the enforcement of PNA’s bid. CGS appealed to the Seventh Circuit.

    The Seventh Circuit affirmed With respect to CGS’s contract claim, the Court of Appeals agreed with the District Court that “no reasonable jury could find that the parties manifested an intent to be bound.” The Court held that the parties had engaged in an ongoing negotiation that had never ripened into a contract. The Court further found that CGS had never accepted PNA’s bid, but had instead “deliberately refrained” from accepting it while its own negotiations with the owner continued. Finally, the Court noted that “[a]ny remaining doubt about the lack of a binding agreement [was] dispelled by the two letters of intent,” which “express[ed] in no uncertain terms that the parties had not yet solidified their relationship in a binding agreement.”

    Turning to the promissory estoppel claim, the Seventh Circuit held that CGS’s negotiations with PNA regarding its bid were fatal to this claim. The Court noted that “courts generally distinguish cases in which a general contractor attempts to renegotiate the subcontractor’s bid, a practice known as ‘bid chiseling’.” Citing Drennan v. Star Paving Co., 333 P.2d 757 (Cal. 1958), the Court held that a general contractor cannot delay acceptance of a bid in hope of getting a better price, nor reopen bargaining with the subcontractor while claiming a continuing right to accept the original bid. The Court explained that this rule is based upon “the inequity in allowing the general contractor to shop for lower bids or negotiate with the subcontractor while holding the subcontractor to its bid,” resulting in unfair bargaining power over the subcontractor.

    Applying these principles, the Court held that “CGS’s promissory estoppel claim fails as a matter of law,” finding that CGS had “delayed acceptance” of PNA’s bid “and negotiated with PNA while it also negotiated with the project owner,” and that CGS had even continued to negotiate with PNA after the GMPA had been signed. The Seventh Circuit further agreed with the District Court’s reasoning that “given both parties’ expectation of further negotiations, it is questionable whether we can construe PNA’s bid as a promise upon which CGS could reasonably rely.” The Court further held that there was “no injustice in permitting PNA to withdraw its bid,” because applying promissory estoppel “would essentially give CGS an option contract on PNA’s bid that it did not bargain for,” it would “put PNA at the mercy of CGS’s superior bargaining position,” and it would “transform these complex negotiations into a ‘no lose’ situation for CGS.”

    The Seventh’s Circuit’s message to general contractors is clear – if you open the door to bid negotiations with a subcontractor, you may also be closing the door to promissory estoppel. A general contractor must instead protect itself in other ways. For example, the general may enter into subcontracts containing a termination for convenience clause, to lock in commitments from subcontractors while the general cements its contract with the owner. The general may then issue one or more change orders due to any changes in scope resulting from “value engineering” or from its ongoing negotiations with the owner. But the general cannot have its cake and eat it too-it cannot hold the subcontractor to its bid, while it attempts to renegotiate the bid.

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