O'Shea v. New Jersey Schools Construction Corporation (New Jersey Appellate Division: 2006)
Fletcher-Harlee Corp. v. Pote Concrete Contractors, Inc. (Third Circuit Court of Appeals: 2007)
Two recent cases dealing with New Jersey law examine from different points of view the implications that ensue as a result of a general contractor's utilization of a subcontractor's bid price when the general contractor submits its bid for the overall work to the owner. O'Shea involves the submission of a bid to a state agency charged with supervising school construction projects in distressed municipalities, pursuant to one of the state's many procurement laws for public contracting. Fletcher-Harlee involves a bid submission on a private contract.
Under the public bidding laws in New Jersey, bids for a single overall contract must list the four "major" subcontractors who will perform the plumbing, HVAC, structural steel and electrical work. The rationale given for this requirement is to prevent general contractors from bid shopping, thereby depriving the public entity of any savings realized on lower prices that the general contractors may obtain. Multi-prime contracting was at one time the norm under the bidding statutes, and the change in the law favoring single prime was not without concessions to these industry groups.
In O'Shea, the Mechanical Contractors Association challenged the Schools Construction Corporation's (SCC) practice of permitting general contractors to substitute for the major subcontractors initially named in the bids. Indeed, the SCC's bid form provided that substitutions of the major listed subcontractors could be made only with the SCC's written permission. The SCC had adopted a written policy that allowed substitutions "where the subcontractor identified in the price proposal was going out of business; refused to perform; refused to adhere to the contract requirements; stated in writing that it was overextended or overcommitted and provided a reasonable explanation for same; or under 'any other circumstance where the [SCC] deems there to be a rational basis for the substitution.'" The SCC claimed it had the discretion to implement a policy since the subcontractor listing requirement was adopted for the public entity's own benefit.
The court disagreed based on caselaw interpreting other New Jersey bidding laws that strictly prohibited substitutions of the bid-named major trade subcontractors in the post- award/pre-subcontracting period. The ruling was that the practice was contrary to public bidding laws and therefore was prohibited. Nevertheless, the court stated in a footnote that the "opinion does not affect a general contractor's remedies if a subcontractor breaches after a contract between the general contractor and the subcontractor has been signed."
The issue seemingly left unresolved in O'Shea is what are a general contractor's remedies and obligations if in fact the named subcontractor refuses to perform, declines to hold its price or otherwise fails to meet the contractual obligations of the bid prior to a final executed contract. Indeed, the cases that the appellate court relied upon in O'Shea did not involve these types of situations; what was involved in those cases were situations where the general contractor sought to substitute the names of unnamed trade contractors as a result of the failure to list any name in the bid or the naming of more than one subcontractor for a specific trade, leaving open the option to choose one or the other. The cases did not involve situations in which a subcontractor refused to meet the contract requirements that it apparently agreed to prior to bid.
However, the Fletcher-Harlee case may have unwittingly provided the answer. The case was decided a few months after O'Shea, and without any reference to or reliance upon that matter. It involved a general contractor's suit against a concrete subcontractor whose bid price the general contractor relied on when it submitted its overall bid to the owner. However, the concrete subcontractor refused to deliver the concrete at its quoted price, resulting in the contractor having to pay in excess of $200,000 above the price that it had relied upon for the price of concrete in forming its overall bid. In denying liability, the subcontractor cited its clear and unequivocal response to the general contractor's solicitation, which stipulated that the subcontractor's price quotation was "for informational purposes only, did not constitute a 'firm offer' and should not be relied on." The subcontractor's response further stated that it did not agree to be held liable for any of the terms it submitted.
While the court agreed that the subcontractor's restrictive language released it from any legal obligation to the general contractor, the court took advantage of the opportunity to set forth the normal industry practice and the principles of law that have been established to set the industry's ground rules with respect to bids:
In the construction industry, general contractors compete for work by submitting bids detailing how they will complete the project, the materials they will use, the time it will take, and the price they will charge. To prepare these bids, general contractors in turn solicit bids from more specialized subcontractors. It is well understood in the industry that bids at both levels are "firm offers"; in other words, subcontractors submit bids expecting to be held to their terms if selected. General contractors rely on subcontractors' bids to create a single-priced package of work. A subcontractor's subsequent refusal to honor its bid wreaks havoc on the general contractor's bid — and can quickly turn a profitable project into a financial "black hole" (emphasis supplied).
The court explained that a general contractor's solicitation to a subcontractor to submit a bid was an invitation to make an offer, that the general contractor's response to that invitation was an offer, and, implicitly, that the general contractor's reliance upon and use of that offer in its own bid constituted a contract that bound the subcontractor to its bid price.
Therefore, turning back to the ruling in O'Shea, it certainly could be argued based on the principles enunciated in Fletcher-Harlee that the general contractor accepts an offer and forms a contract with a subcontractor when it lists that trade as one of the named contractors in its bid. Consequently, a listed subcontractor's refusal to hold to its bid price or to perform the entire scope of the work would constitute a contract breach entitling the general contractor to substitute for the named subcontractor.
Editor's Note:
Inevitably, there will arise situations in public bidding in which the general contractor and listed subcontractor fail to come to terms prior to a final written contract being executed. Must then a general contractor forfeit its bid, or be held to post-bid unreasonable terms dictated by the listed trade? The solution may be for the general contractor to confirm in writing the listed subcontractor's price and scope that the subcontractor will be responsible for. That way, there is no question that a contract has been created as set forth in Harlee and that the breach has occurred, allowing the contractor the limited leeway to substitute as set forth in O'Shea.
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