Whether a subcontractor is bound by a price proposal submitted to a general contractor, in a situation in which negotiations regarding price and subcontract terms take place after the proposal is submitted. C.G. Schmidt, Inc., v. Permasteelisa North America. United States Court of Appeals, Seventh Circuit (2016), by Hugh Anderson

C.G. Schmidt (CGS) was a candidate to be the general contractor on an 18-story office building project in Milwaukee. CGS’s initial proposal to the owner was based in part on a $12 million sub-bid for the building’s curtain wall, by Permasteelisa North America (PNA). CGS and PNA refrained from entering  into a subcontract while CGS and the owner conducted final negotiations on the prime contract (including the GMP); and at the same time PNA and CGS negotiated the price and terms of the proposed subcontract, with CGS seeking a curtain wall price in the $7-8 million range. Over a year after the initial bid, CGS used the most recent PNA number ($8.4) in a final submittal to the owner, which was accepted. Even after the prime contract’s GMP was finalized, CGS and PNA continued their negotiation of subcontract price and terms. Ultimately the CGS-PNA negotiations broke down, PNA declined to serve as the sub, and CGS was forced to subcontract with a more expensive curtain wall sub.

CGS later sued PNA, seeking compensation for the excess amount that it had paid the second curtain wall sub as a result of PNA’s refusal to execute a subcontract. One theory of recovery was promissory estoppel. Under this legal principle, if a general contractor relies on a bid or quote from a subcontractor, and the general is awarded the work, the subcontractor is required to enter into a subcontract at the amount that the general relied on. The fundamental purpose of the promissory estoppel doctrine is to avoid injustice to the general contractor. In the PNA case, the federal district court held that promissory estoppel did not apply under the facts presented. The decision was appealed to the Seventh Circuit.

Decision: The Seventh Circuit affirmed the district court’s decision in favor of PNA. The court held that the doctrine of promissory estoppel remains strong in Wisconsin, but there are significant well-established exceptions. A general contractor is not free to delay acceptance in the hope of getting a better price, nor can the general reopen bargaining with the subcontractor while simultaneously asserting  that there is  a continuing right to accept the original offer. The court referred to the circumstances as “bid chiseling.”  Given the ongoing  negotiations, it was  not reasonable for the general contractor to rely on prices  that were on the table. Applying  promissory estoppel  to  bind  PNA  would  have  given  CGS an  option  contract  that  it  did  not bargain for or pay for, and would have put PNA at CGS’s mercy. The Seventh Circuit’s final conclusion was that in “complex negotiations between sophisticated parties, it is preferable to leave the losses where they fall, rather than enforcing preliminary negotiation positions with contingencies and uncertainty.

Comment: EJCDC only indirectly addresses the subcontractor selection process, through a suggested instruction to bidders that requires the submittal of the names of proposed subcontractors within five days of the bid opening.

Promissory estoppel in favor of a general contractor is typically a one-way street. In the absence of a specific advance agreement, a general contractor is not bound to subcontract with a sub whose bid or quote the general has used to get the award of contract.

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