Court of Appeals of Maryland Holds General Contractor May Not Enforce a Subcontractor’s Bid Where There Had Been No Detrimental Reliance Nor a Contractual Relationship Formed

Pavel Enterprises, Inc. v. A.S. Johnson Company, Inc.,
342 Md. 143; 674 A.2d 521; (1996)

The National Institutes of Health (NIH) solicited bids for a renovation project. Pavel Enterprises Incorporated (PEI), a general contractor, prepared a bid for the NIH work. In preparing its bid, PEI solicited sub-bids from various mechanical subcontractors. The A.S. Johnson Company (Johnson), a mechanical subcontractor, responded with a written scope of work proposal on July 27, 1993, giving a verbally submitted bid price on the morning of August 5, 1993, the day NIH opened the general contractors’ bids. Neither party disputes that PEI used Johnson’s sub-bid in computing its own bid.

In mid-August, NIH notified PEI that its bid would be accepted, prompting PEI to send a fax (dated August 26, 1993) to all of the mechanical subcontractors from whom it had received sub-bids, requesting certain information. On August 30, 1993, PEI informed NIH that Johnson was to be the mechanical subcontractor on the job and followed this with written confirmation accepting their bid. Johnson replied saying their bid contained an error and was too low. They had not sought to correct it earlier because they believed that PEI had not been awarded the contract. PEI informed Johnson that they could not withdraw, but when formally awarded the contract on September 28th, 1993, PEI were forced to use a substitute contractor.

PEI brought suit against Johnson to recover the $32,000 difference in subcontractor costs. For damages to be recoverable PEI had to prove that they had a contractual relationship with Johnson. The trial court analyzed the case under traditional contract theory and under detrimental reliance but would not support the claim of a bilateral contract or the alternative that PEI’s detrimental reliance binds Johnson to its bid. The Court of Appeals of Maryland affirmed their decision and decided that recovery by the general contractor was not justified.

The Court of Appeals discussed various leading cases on the subject and analyzed the different theories given.

In the notable case, James Baird Co. v. Gimbel Bros., Inc., 64 F.2d 344 (2d Cir. 1933), it was decided that the subcontractor’s initial bid was an offer to contract and, remained open only until accepted or withdrawn. The use of the sub-bid constituted acceptance conditional of general award. The court dismissed the promissory estoppel doctrine.

In the next landmark case, Drennan v. Star Paving, 51 Cal. 2d 409, 333 P.2d 757 (1958), the court reasoned that the subcontractor’s bid contained an implied subsidiary promise not to revoke the bid. The court used promissory estoppel as consideration for an implied promise to keep the bid open for a reasonable time.

In Loranger Constr. Corp. v. E.F.Hauserman Co., 376 Mass. 757, 384 N.E.2d 176 (1978), the Supreme Judicial Court of Massachusetts suggested three other theories which could be used to prove the existence of a contractual relationship:

  1. Conditional bilateral contract – exchange of promises before bid opening can make a valid bilateral promise conditional upon award.
  2. Unilateral contract analysis – use of sub-bid in general-bid constitutes part performance rendering initial offer irrevocable.
  3. Unrevoked offer analysis – bid had not been withdrawn therefore acceptance made it a bilateral contract.

If PEI could prove any of the above theories then a contractual relationship existed and Johnson’s failure to perform could entitle PEI to damages. Trial court held (and this was affirmed by the Court of Appeal) that the sub-bid was an offer to contract.

Did PEI make a timely and valid acceptance of the offer therefore creating a bilateral contract? It was found that there was no meeting of the minds (shown by PEI’s faxed letter to potential subs on August 26th); and that the offer was withdrawn prior to acceptance (final acceptance only occurred upon PEI’s receipt of the general contract award which happened on September 28th).

Alternatively, did PEI’s detrimental reliance serve to bind Johnson to it’s bid? The Appeal Court used a four-part test:

  1. Was there a clear and definite promise?
  2. Did promisor have reasonable expectations that the offer would induce action?
  3. Did this induce actual and reasonable action?
  4. Which caused a detriment which could only be avoided by enforcement of the promise?

The Trial Court concluded from the evidence that PEI had not proven its case for detrimental reliance, and the Court of Appeals of Maryland affirmed this decision.

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