Revocation of Offers
3. Revocation of Offers
As we have seen, an offer gives an offeree the power to form a contract by accepting. The Restatement (Second) of Contracts describes a number of ways that the offeree’s power to accept may end:
§ 36. Methods of Termination of the Power of Acceptance
(1) An offeree’s power of acceptance may be terminated by
(a) rejection or counter-offer by the offeree, or
(b) lapse of time, or
(c) revocation by the offeror, or
(d) death or incapacity of the offeror or offeree.
(2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.
We will discuss both the common law and UCC rules governing rejection and counter-offers in the next section. For the moment, note that an offer ordinarily remains open long enough to give the offeror a reasonable opportunity to accept. An oral offer made during a face-to-face or telephone conversation expires at the end of that conversation unless the offeror has indicates a willingness to keep the offer open beyond that time. The offeror nevertheless retains the right to terminate her offer at any subsequent time unless she has also expressly agreed not to revoke it—thus creating a “firm offer.”
Recall that in order to accept an offer of a unilateral contract an offeree must tender a performance rather than a reciprocal promise. The consequences of a revocation are especially acute when an offeror revokes such an offer after the offeree has begun performing. In the following excerpt, a scholar defends the early common law rule, which required full performance for acceptance:
Suppose A says to B, “I will give you $100 if you walk across the Brooklyn Bridge,” and B walks — is there a contract? It is clear that A is not asking B for B’s promise to walk across the Brooklyn Bridge. What A wants from B is the act of walking across the bridge. When B has walked across the bridge there is a contract, and A is then bound to pay to B $100. At that moment there arises a unilateral contract. A has bartered away his volition for B’s act of walking across the Brooklyn Bridge.
When an act is thus wanted in return for a promise, a unilateral contract is created when the act is done. It is clear that only one party is bound. B is not bound to walk across the Brooklyn Bridge, but A is bound to pay B $100 if B does so. Thus, in unilateral contracts, on one side we find merely an act, on the other side a promise.
It is plain that in the Brooklyn Bridge case as first put, what A wants from B is the act of walking across the Brooklyn Bridge. A does not ask for B’s promise to walk across the bridge and B has never given it. B has never bound himself to walk across the bridge. A, however, has bound himself to pay $100 to B, if B does so. Let us suppose that B starts to walk across the Brooklyn Bridge and has gone about one-half of the way across. At that moment A overtakes B and says to him, “I withdraw my offer.” Has B then any rights against A? Again, let us suppose that after A has said, “I withdraw my offer,” B continues to walk across the Brooklyn Bridge and completes the act of crossing.
Under these circumstances, has B any rights against A? In the first of the cases just suggested, A withdrew his offer before B had walked across the bridge. What A wanted from B, what A asked for, was the act of walking across the bridge. Until that was done, B had not given to A what A had requested. The acceptance by B of A’s offer could be nothing but the act on B’s part of crossing the bridge. It is elementary that an offeror may withdraw his offer until it has been accepted. It follows logically that A is perfectly within his rights in withdrawing his offer before B has accepted it by walking across the bridge — the act contemplated by the offeror and the offeree as the acceptance of the offer.
Maurice Wormser, The True Conception of Unilateral Contracts, 26 Yale L.J. 136-38 (1916).
More recent decisions have rejected this traditional approach. Courts now protect the offeree who has begun performance by barring revocation of the offer until the offeree has had a reasonable opportunity to complete the requested performance. The Restatement (Second) of Contracts sensibly describes the resulting obligation as an option contract.
§ 45. Option Contract Created by Part Performance or Tender
(1) Where an offer invites an offeree to accept by rendering a performance and does not invite promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.
(2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.
3.1 Irrevocable Offers
The rule for unilateral contracts described in Restatement (Second) § 45 creates an implied option contract once an offeree has begun performing and gives her a reasonable time to complete performance. In other circumstances, however, parties may prefer to create an express option contract.
Imagine, for example, that Amy is considering whether to expand her grape vineyard by buying additional acreage from Julian. Her decision about the purchase depends on the results of extensive soil tests and a detailed marketing study. Amy is unwilling to incur these costs unless she has some assurance that Julian will not sell the property to someone else. Recognizing Amy’s predicament, suppose that Julian offers to sell the acreage to her for $450,000 and further agrees to keep this offer open for one month while she completes her investigations.
We will see shortly that Julian’s offer may be binding as an option contract under Restatement (Second) § 87 if it satisfies certain formal requirements or, in some cases, simply as a result of Amy’s reliance on the offer. However, Amy may worry that enforcement under these provisions is too uncertain. In order to form an express option contract, Amy needs to pay Julian for the option. If she pays $200 in exchange for Julian’s promise to keep the offer open, the parties will have formed a binding option contract. The Restatement (Second) of Contracts endorses this approach:
§ 25. Option Contracts
An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.
It is frequently not feasible, however, to pay for an option contract. Under the Uniform Commercial Code, a merchant may also make a “firm offer” that will be binding as an option contract. The statutory provisions governing firm offers combine both formal and substantive requirements.
§ 2-205. Firm Offers
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such terms of assurance on a form supplied by the offeree must be separately signed by the offeror.
Students should also read Official Comments 1-5 from an outside source.
The Restatement (Second) provides a somewhat similar doctrinal mechanism for making firm offers.
§ 87. Option Contract
(1) An offer is binding as an option contract if it
(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or
(b) is made irrevocable by statute.
(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.
3.1.1 Discussion of Revocation and Firm Offers
As compared to an express option contract, both U.C.C. § 2-205 and Restatement (Second) § 87 involve far more subtle legal issues. Our next principal case, Pavel Enterprises v. A.S. Johnson Co., illustrates the application of the common law rules to construction bidding. But first consider a couple of simpler factual settings.
Suppose, for example, that I offer my son Eric $500 to juggle three tennis balls 5,000 times in succession. When Eric gets to 4,950, I yell “I revoke.” What would Wormser say about my attempted revocation?
What if anything is wrong with Wormser’s reasoning? Does Wormser accurately describe the agreement that the parties would have reached if they had considered this issue carefully at the outset of their relationship—the “hypothetical bargain” that they would have made? How would you apply this hypothetical bargain analysis to our juggling hypothetical?
Consider a more complicated contractual setting. What if Glen offers Rachel $500 to paint his garage? Rachel begins the prep work for this painting project (e.g., scraping, sanding and caulking) and then disappears for a month or two. Is Glen still obliged to let Rachel finish the painting work?
3.2 Principal Case – Pavel Enterprises, Inc. v. A.S. Johnson Co.
Pavel Enterprises, Inc. v. A.S. Johnson Company, Inc.
Court of Appeals of Maryland
342 Md. 143, 674 A.2d 521 (1996)
Karwacki, Judge.
[1] In this case we are invited to adapt the “modern” contractual theory of detrimental reliance,[1] or promissory estoppel, to the relationship between general contractors and their subcontractors. Although the theory of detrimental reliance is available to general contractors, it is not applicable to the facts of this case. For that reason, and because there was no traditional bilateral contract formed, we shall affirm the trial court.
I
[2] The National Institutes of Health [hereinafter, “NIH”], solicited bids for a renovation project on Building 30 of its Bethesda, Maryland campus. The proposed work entailed some demolition work, but the major component of the job was mechanical, including heating, ventilation and air conditioning [“HVAC”]. Pavel Enterprises Incorporated [hereinafter, “PEI”], a general contractor from Vienna, Virginia and appellant in this action, prepared a bid for the NIH work. In preparing its bid, PEI solicited sub-bids from various mechanical subcontractors. The A.S. Johnson Company [hereinafter, “Johnson”], a mechanical subcontractor located in Clinton, Maryland and the appellee here, responded with a written scope of work proposal on July 27, 1993.[2] On the morning of August 5, 1993, the day NIH opened the general contractors’ bids, Johnson verbally submitted a quote of $898,000 for the HVAC component.[3] Neither party disputes that PEI used Johnson’s sub-bid in computing its own bid. PEI submitted a bid of $1,585,000 for the entire project.
[3] General contractors’ bids were opened on the afternoon of August 5, 1993. PEI’s bid was the second lowest bid. The government subsequently disqualified the apparent low bidder,[4] however, and in mid-August, NIH notified PEI that its bid would be accepted.
[4] With the knowledge that PEI was the lowest responsive bidder, Thomas F. Pavel, president of PEI, visited the offices of A.S. Johnson on August 26, 1993, and met with James Kick, Johnson’s chief estimator, to discuss Johnson’s proposed role in the work. Pavel testified at trial to the purpose of the meeting:
I met with Mr. Kick. And the reason for me going to their office was to look at their offices, to see their facility, to basically sit down and talk with them, as I had not done, and my company had not performed business with them on a direct relationship, but we had heard of their reputation. I wanted to go out and see where their facility was, see where they were located, and basically just sit down and talk to them. Because if we were going to use them on a project, I wanted to know who I was dealing with.
Pavel also asked if Johnson would object to PEI subcontracting directly with Powers for electric controls, rather than the arrangement originally envisioned in which Powers would be Johnson’s subcontractor.[5] Johnson did not object.
[5] Following that meeting, PEI sent a fax to all of the mechanical subcontractors from whom it had received sub-bids on the NIH job. The text of that fax is reproduced:
Pavel Enterprises, Inc.
TO: PROSPECTIVE MECHANICAL SUBCONTRACTORS
FROM: ESTIMATING DEPARTMENT
REFERENCE: NIH, BLDG 30 RENOVATION
We herewith respectfully request that you review your bid on the above referenced project that was bid on 8/05/93. PEI has been notified that we will be awarded the project as J.J. Kirlin, Inc. [the original low bidder] has been found to be nonresponsive on the solicitation. We anticipate award on or around the first of September and therefor request that you supply the following information.
1. Please break out your cost for the “POWERS” supplied control work as we will be subcontracting directly to “POWERS”.
Please resubmit your quote deleting the above referenced item.
We ask this in an effort to allow all prospective bidders to compete on an even playing field.
Should you have any questions, please call us immediately as time is of the essence.
[6] On August 30, 1993, PEI informed NIH that Johnson was to be the mechanical subcontractor on the job. On September 1, 1993, PEI mailed and faxed a letter to Johnson formally accepting Johnson’s bid. That letter read:
Pavel Enterprises, Inc.
September 1, 1993
Mr. James H. Kick, Estimating Mngr.
A.S. Johnson Company
8042 Old Alexandria Ferry Road
Clinton, Maryland 20735
Re: NIH Bldg 30 HVAC Modifications
RC: IFB # 263-93-B (CM)-0422
Subject: Letter of Intent to Award Subcontract
Dear Mr. Kick:
We herewith respectfully inform your office of our intent to award a subcontract for the above referenced project per your quote received on 8/05/93 in the amount of $898,000.00. This subcontract will be forwarded upon receipt of our contract from the NIH, which we expect any day. A preconstruction meeting is currently scheduled at the NIH on 9/08/93 at 10 AM which we have been requested that your firm attend.
As discussed with you, a meeting was held between NIH and PEI wherein PEI confirmed our bid to the government, and designated your firm as our HVAC Mechanical subcontractor. This action was taken after several telephonic and face to face discussions with you regarding the above referenced bid submitted by your firm.
We look forward to working with your firm on this contract and hope that this will lead to a long and mutually beneficial relationship
Sincerely,
/s/ Thomas F. Pavel
President
[7] Upon receipt of PEI’s fax of September 1, James Kick called and informed PEI that Johnson’s bid contained an error, and as a result the price was too low. According to Kick, Johnson had discovered the mistake earlier, but because Johnson believed that PEI had not been awarded the contract, they did not feel compelled to correct the error. Kick sought to withdraw Johnson’s bid, both over the telephone and by a letter dated September 2, 1993:
A.S. Johnson Co.
September 2, 1993
PEI Construction
780 West Maples Avenue, Suite 101
Vienna, Virginia 22180
Attention: Thomas Pavel, President
Reference: NIH Building 30 HVAC Modifications
Dear Mr. Pavel,
We respectfully inform you of our intention to withdraw our proposal for the above referenced project due to an error in our bid.
As discussed in our telephone conversation and face to face meeting, the management of A.S. Johnson Company was reviewing this proposal, upon which we were to confirm our pricing to you.
Please contact Mr. Harry Kick, General Manager at [telephone number deleted] for any questions you may have.
Very truly yours,
/s/ James H. Kick
Estimating Manager
[8] PEI responded to both the September 1 phone call, and the September 2 letter, expressing its refusal to permit Johnson to withdraw.
[9] On September 28, 1993, NIH formally awarded the construction contract to PEI. PEI found a substitute subcontractor to do the mechanical work, but at a cost of $930,000.[6] PEI brought suit against Johnson in the Circuit Court for Prince George’s County to recover the $32,000 difference between Johnson’s bid and the cost of the substitute mechanical subcontractor.
[10] The case was heard by the trial court without the aid of a jury. The trial court made several findings of fact, which we summarize:
1. PEI relied upon Johnson’s sub-bid in making its bid for the entire project;
2. The fact that PEI was not the low bidder, but was awarded the project only after the apparent low bidder was disqualified, takes this case out of the ordinary;
3. Prior to NIH awarding PEI the contract on September 28, Johnson, on September 2, withdrew its bid; and
4. PEI’s letter to all potential mechanical subcontractors, dated August 26, 1993, indicates that there was no definite agreement between PEI and Johnson, and that PEI was not relying upon Johnson’s bid.
[11] The trial court analyzed the case under both a traditional contract theory and under a detrimental reliance theory. PEI was unable to satisfy the trial judge that under either theory a contractual relationship had been formed.
[12] PEI appealed to the Court of Special Appeals, raising both traditional offer and acceptance theory, and “promissory estoppel.” Before our intermediate appellate court considered the case, we issued a writ of certiorari on our own motion.
II
[13] The relationships involved in construction contracts have long posed a unique problem in the law of contracts. A brief overview of the mechanics of the construction bid process, as well as our legal system’s attempts to regulate the process, is in order.
A. CONSTRUCTION BIDDING.
[14] Our description of the bid process in Maryland Supreme Corp. v. Blake Co., 279 Md. 531, 369 A.2d 1017 (1977) is still accurate:
In such a building project there are basically three parties involved: the letting party, who calls for bids on its job; the general contractor, who makes a bid on the whole project; and the subcontractors, who bid only on that portion of the whole job which involves the field of its specialty. The usual procedure is that when a project is announced, a subcontractor, on his own initiative or at the general contractor’s request, prepares an estimate and submits a bid to one or more of the general contractors interested in the project. The general contractor evaluates the bids made by the subcontractors in each field and uses them to compute its total bid to the letting party. After receiving bids from general contractors, the letting party ordinarily awards the contract to the lowest reputable bidder.
Id. at 533-34, 369 A.2d at 1020-21 (citing [Franklin M. Schulz, The Firm Offer Puzzle: A Study of Business Practice in the Construction Industry, 19 U. Chi. L. Rev. 237 (1952)])
B. THE CONSTRUCTION BIDDING CASES-AN HISTORICAL OVERVIEW
[15] The problem the construction bidding process poses is the determination of the precise points on the timeline that the various parties become bound to each other. The early landmark case was James Baird Co. v. Gimbel Bros., Inc., 64 F.2d 344 (2d Cir.1933). The plaintiff, James Baird Co., [“Baird”] was a general contractor from Washington, D.C., bidding to construct a government building in Harrisburg, Pennsylvania. Gimbel Bros., Inc., [“Gimbel”], the famous New York department store, sent its bid to supply linoleum to a number of bidding general contractors on December 24, and Baird received Gimbel’s bid on December 28. Gimbel realized its bid was based on an incorrect computation and notified Baird of its withdrawal on December 28. The letting authority awarded Baird the job on December 30. Baird formally accepted the Gimbel bid on January 2. When Gimbel refused to perform, Baird sued for the additional cost of a substitute linoleum supplier. The Second Circuit Court of Appeals held that Gimbel’s initial bid was an offer to contract and, under traditional contract law, remained open only until accepted or withdrawn. Because the offer was withdrawn before it was accepted there was no contract. Judge Learned Hand, speaking for the court, also rejected two alternative theories of the case: unilateral contract and promissory estoppel. He held that Gimbel’s bid was not an offer of a unilateral contract[7] that Baird could accept by performing, i.e., submitting the bid as part of the general bid; and second, he held that the theory of promissory estoppel was limited to cases involving charitable pledges.
[16] Judge Hand’s opinion was widely criticized, see Note, Contracts-Promissory Estoppel, 20 Va. L. Rev. 214 (1933) [hereinafter, “ Promissory Estoppel ”]; Note, Contracts-Revocation of Offer Before Acceptance-Promissory Estoppel, 28 Ill. L. Rev. 419 (1934), but also widely influential. The effect of the James Baird line of cases, however, is an “obvious injustice without relief of any description.” Promissory Estoppel, at 215. The general contractor is bound to the price submitted to the letting party, but the subcontractors are not bound, and are free to withdraw.[8] As one commentator described it, “If the subcontractor revokes his bid before it is accepted by the general, any loss which results is a deduction from the general’s profit and conceivably may transform overnight a profitable contract into a losing deal.” Franklin M. Schultz, The Firm Offer Puzzle: A Study of Business Practice in the Construction Industry, 19 U. Chi. L. Rev. 237, 239 (1952).
[17] The unfairness of this regime to the general contractor was addressed in Drennan v. Star Paving, 333 P.2d 757, 51 Cal.2d 409 (1958). Like James Baird, the Drennan case arose in the context of a bid mistake.[9] Justice Traynor, writing for the Supreme Court of California, relied upon § 90 of the Restatement (First) of Contracts:
A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.
Restatement (First) of Contracts § 90 (1932).[10]
[18] Justice Traynor reasoned that the subcontractor’s bid contained an implied subsidiary promise not to revoke the bid. As the court stated:
When plaintiff[, a General Contractor,] used defendant’s offer in computing his own bid, he bound himself to perform in reliance on defendant’s terms. Though defendant did not bargain for the use of its bid neither did defendant make it idly, indifferent to whether it would be used or not. On the contrary it is reasonable to suppose that defendant submitted its bid to obtain the subcontract. It was bound to realize the substantial possibility that its bid would be the lowest, and that it would be included by plaintiff in his bid. It was to its own interest that the contractor be awarded the general contract; the lower the subcontract bid, the lower the general contractor’s bid was likely to be and the greater its chance of acceptance and hence the greater defendant’s chance of getting the paving subcontract. Defendant had reason not only to expect plaintiff to rely on its bid but to want him to. Clearly defendant had a stake in plaintiff’s reliance on its bid. Given this interest and the fact that plaintiff is bound by his own bid, it is only fair that plaintiff should have at least an opportunity to accept defendant’s bid after the general contract has been awarded to him.
Drennan, 51 Cal.2d at 415, 333 P.2d at 760.
[19] The Drennan court however did not use “promissory estoppel” as a substitute for the entire contract, as is the doctrine’s usual function. Instead, the Drennan court, applying the principle of § 90, interpreted the subcontractor’s bid to be irrevocable. Justice Traynor’s analysis used promissory estoppel as consideration for an implied promise to keep the bid open for a reasonable time. Recovery was then predicated on traditional bilateral contract, with the sub-bid as the offer and promissory estoppel serving to replace acceptance.
[20] The Drennan decision has been very influential. Many states have adopted the reasoning used by Justice Traynor. See, e.g., Debron Corp. v. National Homes Constr. Corp., 493 F.2d 352 (8th Cir.1974) (applying Missouri law); Reynolds v. Texarkana Constr. Co., 237 Ark. 583, 374 S.W.2d 818 (1964); Mead Assocs. Inc. v. Antonsen, 677 P.2d 434 (Colo.1984); Illinois Valley Asphalt v. J.F. Edwards Constr. Co., 45 Ill.Dec. 876, 413 N.E.2d 209, 90 Ill.App.3d 768 (Ill.Ct.App.1980); Lichtefeld-Massaro, Inc. v. R.J. Manteuffel Co., 806 S.W.2d 42 (Ky.App.1991); Constructors Supply Co. v. Bostrom Sheet Metal Works, Inc., 291 Minn. 113, 190 N.W.2d 71 (1971); E.A. Coronis Assocs. v. M. Gordon Constr. Co., 90 N.J. Super 69, 216 A.2d 246 (1966).
[21] Despite the popularity of the Drennan reasoning, the case has subsequently come under some criticism.[11] The criticism centers on the lack of symmetry of detrimental reliance in the bid process, in that subcontractors are bound to the general, but the general is not bound to the subcontractors.[12] The result is that the general is free to bid shop,[13] bid chop,[14] and to encourage bid peddling,[15] to the detriment of the subcontractors. One commentator described the problems that these practices create:
Bid shopping and peddling have long been recognized as unethical by construction trade organizations. These ‘unethical,’ but common practices have several detrimental results. First, as bid shopping becomes common within a particular trade, the subcontractors will pad their initial bids in order to make further reductions during post-award negotiations. This artificial inflation of subcontractor’s offers makes the bid process less effective. Second, subcontractors who are forced into post-award negotiations with the general often must reduce their sub-bids in order to avoid losing the award. Thus, they will be faced with a Hobson’s choice between doing the job at a loss or doing a less than adequate job. Third, bid shopping and peddling tend to increase the risk of loss of the time and money used in preparing a bid. This occurs because generals and subcontractors who engage in these practices use, without expense, the bid estimates prepared by others. Fourth, it is often impossible for a general to obtain bids far enough in advance to have sufficient time to properly prepare his own bid because of the practice, common among many subcontractors, of holding sub-bids until the last possible moment in order to avoid pre-award bid shopping by the general. Fifth, many subcontractors refuse to submit bids for jobs on which they expect bid shopping. As a result, competition is reduced, and, consequently, construction prices are increased. Sixth, any price reductions gained through the use of post-award bid shopping by the general will be of no benefit to the awarding authority, to whom these price reductions would normally accrue as a result of open competition before the award of the prime contract. Free competition in an open market is therefore perverted because of the use of post-award bid shopping.
Bid Shopping, at 394-96 (citations omitted). See also Flag Pole, at 818 (bid mistake cases generally portray general contractor as victim, but market reality is that subs are usually in weaker negotiating position); Jay M. Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678, 707-08 (1984). These problems have caused at least one court to reject promissory estoppel in the contractor-subcontractor relationship. Home Elec. Co. v. Underdown Heating & Air Conditioning Co., 86 N.C.App. 540, 358 S.E.2d 539 (1987). See also Note, Construction Contracts-The Problem of Offer and Acceptance in the General Contractor-Subcontractor Relationship, 37 U. Cinn. L. Rev. 798 (1980). But other courts, while aware of the limitations of promissory estoppel, have adopted it nonetheless. See, e.g., Alaska Bussell Elec. Co. v. Vern Hickel Constr. Co., 688 P.2d 576 (Alaska 1984).[16]
[22] The doctrine of detrimental reliance has evolved in the time since Drennan was decided in 1958. The American Law Institute, responding to Drennan, sought to make detrimental reliance more readily applicable to the construction bidding scenario by adding § 87. This new section was intended to make subcontractors’ bids binding:
§ 87. Option Contract
…
(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.”
Restatement (Second) of Contracts § 87 (1979).[17]
[23] Despite the drafter’s intention that § 87 of the Restatement (Second) of Contracts (1979) should replace Restatement (First) of Contracts § 90 (1932) in the construction bidding cases, few courts have availed themselves of the opportunity. But see, Arango Constr. Co. v. Success Roofing, Inc., 46 Wash.App. 314, 321-22, 730 P.2d 720, 725 (1986). Section 90(1) of the Restatement (Second) of Contracts (1979) modified the first restatement formulation in three ways, by: 1) deleting the requirement that the action of the offeree be “definite and substantial;” 2) adding a cause of action for third party reliance; and 3) limiting remedies to those required by justice.[18]
[24] Courts and commentators have also suggested other solutions intended to bind the parties without the use of detrimental reliance theory. The most prevalent suggestion[19] is the use of the firm offer provision of the Uniform Commercial Code. Maryland Code (1992 Repl.Vol.), § 2-205 of the Commercial Law Article. That statute provides:
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
[25] In this manner, subcontractor’s bids, made in writing and giving some assurance of an intent that the offer be held open, can be found to be irrevocable.
[26] The Supreme Judicial Court of Massachusetts has suggested three other traditional theories that might prove the existence of a contractual relationship between a general contractor and a sub: conditional bilateral contract analysis; unilateral contract analysis; and unrevoked offer analysis. Loranger Constr. Corp. v. E.F. Hauserman Co., 384 N.E.2d 176, 376 Mass. 757 (1978). If the general contractor could prove that there was an exchange of promises binding the parties to each other, and that exchange of promises was made before bid opening, that would constitute a valid bilateral promise conditional upon the general being awarded the job. Loranger, 384 N.E.2d at 180, 376 Mass. at 762. This directly contrasts with Judge Hand’s analysis in James Baird, that a general’s use of a sub-bid constitutes acceptance conditional upon the award of the contract to the general. James Baird, 64 F.2d at 345-46.
[27] Alternatively, if the subcontractor intended its sub-bid as an offer to a unilateral contract, use of the sub-bid in the general’s bid constitutes part performance, which renders the initial offer irrevocable under the Restatement (Second) of Contracts § 45 (1979). Loranger, 384 N.E.2d at 180, 376 Mass. at 762. This resurrects a second theory dismissed by Judge Learned Hand in James Baird.
[28] Finally, the Loranger court pointed out that a jury might choose to disbelieve that a subcontractor had withdrawn the winning bid, meaning that acceptance came before withdrawal, and a traditional bilateral contract was formed. Loranger, 384 N.E.2d at 180, 376 Mass. at 762-63.[20]
[29] Another alternative solution to the construction bidding problem is no longer seriously considered-revitalizing the common law seal. William Noel Keyes, Consideration Reconsidered—The Problem of the Withdrawn Bid, 10 Stan. L. Rev. 441, 470 (1958). Because a sealed option contract remains firm without consideration this alternative was proposed as a solution to the construction bidding problem.[21]
III
[30] If PEI is able to prove by any of the theories described that a contractual relationship existed, but Johnson failed to perform its end of the bargain, then PEI will recover the $32,000 in damages caused by Johnson’s breach of contract. Alternatively, if PEI is unable to prove the existence of a contractual relationship, then Johnson has no obligation to PEI. We will test the facts of the case against the theories described to determine if such a relationship existed.
[31] The trial court held, and we agree, that Johnson’s sub-bid was an offer to contract and that it was sufficiently clear and definite. We must then determine if PEI made a timely and valid acceptance of that offer and thus created a traditional bilateral contract, or in the absence of a valid acceptance, if PEI’s detrimental reliance served to bind Johnson to its sub-bid. We examine each of these alternatives, beginning with traditional contract theory.[22]
A. TRADITIONAL BILATERAL CONTRACT
[32] The trial judge found that there was not a traditional contract binding Johnson to PEI. A review of the record and the trial judge’s findings make it clear that this was a close question. On appeal however, our job is to assure that the trial judge’s findings were not clearly erroneous. Maryland Rule 8-131(c). This is an easier task.
[33] The trial judge rejected PEI’s claim of bilateral contract for two separate reasons: 1) that there was no meeting of the minds; and 2) that the offer was withdrawn prior to acceptance. Both need not be proper bases for decision; if either of these two theories is not clearly erroneous, we must affirm.
[34] There is substantial evidence in the record to support the judge’s conclusion that there was no meeting of the minds. PEI’s letter of August 26, to all potential mechanical subcontractors, reproduced supra [¶ 5], indicates, as the trial judge found, that PEI and Johnson “did not have a definite, certain meeting of the minds on a certain price for a certain quantity of goods….” Because this reason is itself sufficient to sustain the trial judge’s finding that no contract was formed, we affirm.
[35] Alternatively, we hold, that the evidence permitted the trial judge to find that Johnson revoked its offer prior to PEI’s final acceptance. We review the relevant chronology. Johnson made its offer, in the form of a sub-bid, on August 5. On September 1, PEI accepted. Johnson withdrew its offer by letter dated September 2. On September 28, NIH awarded the contract to PEI. Thus, PEI’s apparent acceptance came one day prior to Johnson’s withdrawal.
[36] The trial court found, however, “that before there was ever a final agreement reached with the contract awarding authorities, that Johnson made it clear to [PEI] that they were not going to continue to rely on their earlier submitted bid.” Implicit in this finding is the judge’s understanding of the contract. Johnson’s sub-bid constituted an offer of a contingent contract. PEI accepted that offer subject to the condition precedent of PEI’s receipt of the award of the contract from NIH. Prior to the occurrence of the condition precedent, Johnson was free to withdraw. See 2 Williston on Contracts § 6:14 (4th ed.). On September 2, Johnson exercised that right to revoke.[23] The trial judge’s finding that withdrawal proceeded valid final acceptance is therefore logical and supported by substantial evidence in the record. It was not clearly erroneous, so we shall affirm.
B. DETRIMENTAL RELIANCE
[37] PEI’s alternative theory of the case is that PEI’s detrimental reliance binds Johnson to its bid. We are asked, as a threshold question, if detrimental reliance applies to the setting of construction bidding. Nothing in our previous cases suggests that the doctrine was intended to be limited to a specific factual setting. The benefits of binding subcontractors outweigh the possible detriments of the doctrine.[24]
[38] This Court has decided cases based on detrimental reliance as early as 1854,[25] and the general contours of the doctrine are well understood by Maryland courts. The historical development of promissory estoppel, or detrimental reliance, in Maryland has mirrored the development nationwide. It was originally a small exception to the general consideration requirement, and found in “cases dealing with such narrow problems as gratuitous agencies and bailments, waivers, and promises of marriage settlement.” Jay M. Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678, 680 (1984). The early Maryland cases applying “promissory estoppel” or detrimental reliance primarily involve charitable pledges.
[39] The leading case is Maryland Nat’l Bank v. United Jewish Appeal Fed’n of Greater Washington, 286 Md. 274, 407 A.2d 1130 (1979), where this Court’s opinion was authored by the late Judge Charles E. Orth, Jr. In that case, a decedent, Milton Polinger, had pledged $200,000 to the United Jewish Appeal [“UJA”]. The UJA sued Polinger’s estate in an attempt to collect the money promised them. Judge Orth reviewed four prior decisions of this Court[26] and determined that Restatement (First) of Contracts § 90 (1932) applied. Id. at 281, 407 A.2d at 1134. Because the Court found that the UJA had not acted in a “definite or substantial” manner in reliance on the contribution, no contract was found to have been created. Id. at 289-90, 407 A.2d at 1138-39.
[40] Detrimental reliance doctrine has had a slow evolution from its origins in disputes over charitable pledges, and there remains some uncertainty about its exact dimensions.[27] Two cases from the Court of Special Appeals demonstrate that confusion.
[41] The first, Snyder v. Snyder, 79 Md.App. 448, 558 A.2d 412 (1989), arose in the context of a suit to enforce an antenuptial agreement. To avoid the statute of frauds, refuge was sought in the doctrine of “promissory estoppel.”[28] The court held that “promissory estoppel” requires a finding of fraudulent conduct on the part of the promisor. See also Friedman & Fuller v. Funkhouser, 107 Md.App. 91, 666 A.2d 1298 (1995).
[42] The second, Kiley v. First Nat’l Bank, 102 Md.App. 317, 649 A.2d 1145 (1994), the court stated that “[i]t is unclear whether Maryland continues to adhere to the more stringent formulation of promissory estoppel, as set forth in the original Restatement of Contracts, or now follows the more flexible view found in the Restatement (Second) Contracts.” Id. at 336, 649 A.2d at 1154.
[43] To resolve these confusions we now clarify that Maryland courts are to apply the test of the Restatement (Second) of Contracts § 90(1) (1979), which we have recast as a four-part test:
1. a clear and definite promise;
2. where the promisor has a reasonable expectation that the offer will induce action or forbearance on the part of the promisee;
3. which does induce actual and reasonable action or forbearance by the promisee; and
4. causes a detriment which can only be avoided by the enforcement of the promise.[29]
[44] We have adopted language of the Restatement (Second) of Contracts (1979) because we believe each of the three changes made to the previous formulation were for the better. As discussed earlier, the first change was to delete the requirement that the action of the offeree be “definite and substantial.” Although the Court of Special Appeals in Kiley v. First Nat’l Bank, 102 Md.App. 317, 336, 649 A.2d 1145, 1154 (1994) apparently presumed this to be a major change from the “stringent” first restatement to the “more flexible” second restatement, we perceive the language to have always been redundant. If the reliance is not “substantial and definite” justice will not compel enforcement.
[45] The decisions in Snyder v. Snyder, 79 Md.App. 448, 558 A.2d 412 (1989) and Friedman & Fuller v. Funkhouser, 107 Md.App. 91, 666 A.2d 1298 (1995) to the extent that they required a showing of fraud on the part of the offeree are therefore disapproved.
[46] In a construction bidding case, where the general contractor seeks to bind the subcontractor to the sub-bid offered, the general must first prove that the subcontractor’s sub-bid constituted an offer to perform a job at a given price. We do not express a judgment about how precise a bid must be to constitute an offer, or to what degree a general contractor may request to change the offered scope before an acceptance becomes a counter-offer. That fact-specific judgment is best reached on a case-by-case basis. In the instant case, the trial judge found that the sub-bid was sufficiently clear and definite to constitute an offer, and his finding was not clearly erroneous.
[47] Second, the general must prove that the subcontractor reasonably expected that the general contractor would rely upon the offer. The subcontractor’s expectation that the general contractor will rely upon the sub-bid may dissipate through time.[30]
[48] In this case, the trial court correctly inquired into Johnson’s belief that the bid remained open, and that consequently PEI was not relying on the Johnson bid. The judge found that due to the time lapse between bid opening and award, “it would be unreasonable for offers to continue.” This is supported by the substantial evidence. James Kick testified that although he knew of his bid mistake, he did not bother to notify PEI because J.J. Kirlin, Inc., and not PEI, was the apparent low bidder. The trial court’s finding that Johnson’s reasonable expectation had dissipated in the span of a month is not clearly erroneous.
[49] As to the third element, a general contractor must prove that he actually and reasonably relied on the subcontractor’s sub-bid. We decline to provide a checklist of potential methods of proving this reliance, but we will make several observations. First, a showing by the subcontractor, that the general contractor engaged in “bid shopping,” or actively encouraged “bid chopping,” or “bid peddling” is strong evidence that the general did not rely on the sub-bid. Second, prompt notice by the general contractor to the subcontractor that the general intends to use the sub on the job, is weighty evidence that the general did rely on the bid.[31]Third, if a sub-bid is so low that a reasonably prudent general contractor would not rely upon it, the trier of fact may infer that the general contractor did not in fact rely upon the erroneous bid.
[50] In this case, the trial judge did not make a specific finding that PEI failed to prove its reasonable reliance upon Johnson’s sub-bid. We must assume, however, that it was his conclusion based on his statement that “the parties did not have a definite, certain meeting of the minds on a certain price for a certain quantity of goods and wanted to renegotiate….” The August 26, 1993, fax from PEI to all prospective mechanical subcontractors, is evidence supporting this conclusion. Although the finding that PEI did not rely on Johnson’s bid was indisputably a close call, it was not clearly erroneous.
[51] Finally, as to the fourth prima facie element, the trial court, and not a jury, must determine that binding the subcontractor is necessary to prevent injustice. This element is to be enforced as required by common law equity courts—the general contractor must have “clean hands.” This requirement includes, as did the previous element, that the general did not engage in bid shopping, chopping or peddling, but also requires the further determination that justice compels the result. The fourth factor was not specifically mentioned by the trial judge, but we may infer that he did not find this case to merit an equitable remedy.
[52] Because there was sufficient evidence in the record to support the trial judge’s conclusion that PEI had not proven its case for detrimental reliance, we must, and hereby do, affirm the trial court’s ruling.
IV
[53] In conclusion, we emphasize that there are different ways to prove that a contractual relationship exists between a general contractor and its subcontractors. Traditional bilateral contract theory is one. Detrimental reliance can be another. However, under the evidence in this case, the trial judge was not clearly erroneous in deciding that recovery by the general contractor was not justified under either theory.
JUDGMENT AFFIRMED, WITH COSTS.
3.2.1 Discussion of Pavel Enterprises
In Pavel Enterprises, the court refers to two seminal cases (Baird and Drennan) that take diametrically opposed views of the rules governing the enforcement of construction bids. Under the comparatively restrictive approach of Baird, how could the general contractor have secured an irrevocable offer for the linoleum?
How does Drennan allow parties to accomplish the same objective without requiring any additional steps?
Can you apply a hypothetical bargain analysis to the problems that commonly arise in construction bidding? Does that analysis justify constraining subcontractors who wish to disavow their bids? What limitations, if any, should we impose on the rights that these rules confer on general contractors?
3.3 The Mirror Image Rule
Recall from our discussion of Restatement (Second) § 36 that an offeree loses the power of acceptance when she rejects an offer or makes a counter-offer. The following case involves an application of this rule.
3.4 Principal Case – Dataserv Equipment, Inc. v. Technology Finance Leasing
Dataserv Equipment, Inc. v. Technology Finance Leasing Corp.
Court of Appeals of Minnesota
364 N.W.2d 838 (1985)
Wozniak, Judge.
[1] This is an appeal from a judgment entered after trial to the district court determining that appellant was subject to the jurisdiction of Minnesota courts and that appellant breached a contract to purchase certain computer equipment. We … reverse on the question of contract formation.
FACTS
[2] Appellant Technology Finance Group, Inc. (Technology), a Nevada corporation with its principal place of business in Connecticut, and Respondent Dataserv Equipment, Inc. (Dataserv), a Minnesota corporation with its principal place of business in Minneapolis, are dealers in new and used computer equipment.
[3] On or about August 29, 1979, Dataserv’s Jack Skjonsby telephoned Technology’s Ron Finerty in Connecticut and proposed to sell to Technology, for the price of $100,000, certain IBM computer “features” which Dataserv had previously purchased in Canada.
[4] As a result of long distance telephone conversations between Skjonsby and Finerty, on August 30, 1979, Finerty sent Skjonsby a written offer to purchase the features and on September 6, 1979, Dataserv sent to Technology a proposed form of contract. Dataserv’s proposed contract form included a nonstandard provision, appearing in the contract form as clause 8 and referred to by the parties as the “Indepth Clause.” The clause provided that installation of the features would be done by Indepth, a third party. The contract also provided that “[t]his agreement is subject to acceptance by the seller … and shall only become effective on the date thereof,” and “[t]his agreement is made subject to the terms and conditions included herein and Purchaser’s acceptance is effective only to the extent that such terms and conditions are conditions herein. Any acceptance which contains conditions which are in addition to or inconsistent with the terms and conditions herein will be a counter offer and will not be binding unless agreed to in writing by the Seller.”
[5] On October 1, Finerty wrote Skjonsby that three changes “need to be made” in the contract, one of which was the deletion of clause 8. The letter closed with: “Let me know and I will make the changes and sign.” Two of the changes were thereafter resolved, but the resolution of clause 8 remained in controversy.
[6] Later in October 1979, Dataserv offered to accept, in substitution for Indepth, any other third-party installation company Technology would designate. Technology never agreed to this.
[7] On November 8, 1979, Dataserv by telephone offered to remove the Indepth clause from the contract form. Technology responded that it was “too late,” and that there was no deal.
[8] On November 9, 1979, Finerty called Dataserv, and informed them that “the deal was not going to get done because they’d waited until too late a point in time.” During this period of time, the market value of the features was dropping rapidly and Dataserv was anxious to complete the deal. It is undisputed that the market for used computer equipment, including its features, is downwardly price volatile.
[9] By telex dated November 12, 1979, Dataserv informed Technology that the features were ready for pickup and that the pickup and payment be no later than November 15, 1979.
[10] On November 13, 1979, Finerty responded by telex stating:
[S]ince [Dataserv] had not responded in a positive fashion to Alanthus’ [Alanthus is the former name of Technology Finance Group] letter requesting contract changes…its offer to purchase [the features] was withdrawn on 11/9/79 via telephone conversation with Jack Skjonsby. Ten to fifteen days prior, I made Jack aware that this deal was dead if Dataserv did not agree to contract changes prior to the “Eleventh Hour.”
[11] On June 19, 1980, the features were sold by Dataserv to another party for $26,000. It then sought a judgment against Technology for the difference between the sale price of the features and the contract price.
[12] By its Answer and by way of pretrial motion, Technology claimed that the court lacked jurisdiction over the person of the defendant. The trial court denied the motion on February 20, 1981.
[13] At trial the parties stipulated that as of November 8, 1979 Dataserv telephonically offered to take out the Indepth Clause. The trial court found that this telephone call operated as an acceptance of Technology’s counteroffer of October 1, 1979, thereby establishing a contract between the parties embodying the terms of Dataserv’s printed standard contract dated September 6, 1979, minus clause 8 thereof. The trial court found that as of November 15, 1979, Technology breached its contract to Dataserv’s damage, and awarded Dataserv $74,000 in damages, plus interest from the date of the breach.
***
ANALYSIS
[14] Technology claims that the trial court erred in finding that the parties entered into a contract. It contends that Dataserv’s response to its counteroffer operated, as a matter of law, as a rejection, terminating Dataserv’s power to subsequently accept the counteroffer.
[15] Under familiar principles of contract law, a party’s rejection terminates its power of acceptance. Restatement (Second) of Contracts § 38 (1981). Once rejected, an offer is terminated and cannot subsequently be accepted without ratification by the other party. Nodland v. Chirpich, 240 N.W.2d 513, 307 Minn. 360 (1976).
[16] The critical issue is whether Dataserv rejected Technology’s October 1 counteroffer. Dataserv responded to Technology’s October 1 counteroffer by agreeing to delete two of the three objectionable clauses, but insisting that the third be included. By refusing to accept according to the terms of the proposal, Dataserv rejected Technology’s counteroffer and thus no contract was formed. Moreover, Dataserv’s offer to substitute other third party installation companies, which Technology rejected, operated as a termination of its power to accept Technology’s counteroffer. Dataserv’s so-called “acceptance,” when it offered to delete clause 8 on November 8, 1979, was without any legal effect whatsoever, except to create a new offer which Technology immediately rejected.
[17] Dataserv’s November 8 “acceptance” was also ineffective because it was not signed in accordance with the offer’s conditions. While it is true that Minn.Stat. §336.2-204 does not require a signed agreement prior to formation of a contract, where the parties know that the execution of a written contract was a condition precedent to their being bound, there can be no binding contract until the written agreement was executed. Staley Manufacturing Co. v. Northern Cooperatives, Inc., 168 F.2d 892 (8th Cir.1948).
[18] Having found that no contract was formed between the parties, it is unnecessary to address the question of mitigation of damages.
DECISION
[19] Technology was subject to the jurisdiction of Minnesota courts. No contract was formed between the parties.
Affirmed in part, reversed in part.
3.4.1 The Mirror Image Rule and the Last Shot Doctrine
Parties often negotiate by exchanging written or oral proposals that they hope will culminate in a binding contractual agreement. In many negotiations, these proposals take the form of offers and counter-offers. As we have seen, an offer gives an offeree the power to form a contract by assenting to the proposed bargain. Thus, when Leslie offers to sell Josh her 2006 Acura TL for $25,000, Josh can either accept her offer and form a binding contract or reject it and continue negotiating for a better deal. In these situations, the legal consequences of Josh’s response are clear.
But what happens if the offeree’s response cannot be so easily classified? Suppose that Josh replies with enthusiastic assent to the bargain but, at the same time, indicates that he expects the deal to include the stylish fleece seat covers and portable GPS unit with which Leslie has equipped her car. As we will shortly learn, the Uniform Commercial Code provision that applies to this sale (recall that a car is unquestionably a “good” within the meaning of the UCC) departs significantly from the traditional common law approach to this situation. Nevertheless, it is instructive to consider how the common law rules would treat this interaction.
Under the so-called “mirror image rule,” an acceptance must manifest assent to all and only the precise terms of the offer. A purported acceptance like Josh’s that proposes different or additional terms would be treated as a counter-offer. The offeree may not add conditions or limitations to his acceptance, and any attempt to vary the terms of the original offer is equivalent to a rejection of that offer. Thus, Josh’s response would terminate his power of acceptance and give rise to a new offer that Leslie may accept or reject as she wishes. Only if the parties agreed to keep the original offer open, for example, by creating an option contract, would Josh retain the ability to form a contract by accepting Leslie’s original offer.
Suppose now that Airport Motors and Wheels for Less are negotiating a similar deal by mail. Airport Motors sends Wheels for Less a letter containing the initial offer described above along with terms specifying that the vehicle is being sold “as is” with no warranty of any kind. In reply, Wheels for Less writes to accept and requests delivery within one week, but the acceptance letter also includes the company’s standard “Terms of Sale” providing for a 90-day warranty against any defects in the engine or transmission. Airport Motors responds the next day with a “Confirmation of Sale” form that describes the vehicle and reiterates the company’s disclaimer of any warranties. Several days later, Airport Motors delivers the Acura and Wheels for Less accepts the delivery. During a test drive the next week, the engine’s head gasket cracks. Wheels for Less seeks to enforce the terms of the warranty contained in the company’s acceptance.
The mirror image rule implies that both the second and third communications were counter-offers that rejected the preceding offers. So do the parties have a contract, and if so, what are its terms? Under the so-called “last shot doctrine,” a court applying traditional common law principles would hold that by accepting delivery of the car and remaining silent in the face of the “Confirmation of Sale,” Wheels for Less accepted the terms of Airport Motors’ final counter-offer. The idea is that the “Confirmation of Sale” was the “last shot fired” between the parties during their negotiations. Now that their conduct demonstrates the existence of a contract, the common law uses a rather formal and mechanical rule to determine whose terms prevail. In our case, there is no enforceable warranty and this buyer would be out of luck.
Bear in mind, however, that the Uniform Commercial Code governs this transaction involving the sale of goods. As we will see in the next section, UCC§2-207 produces exactly the opposite result on the facts we have been considering.
3.4.2 Discussion of Dataserv Equipment, Inc. v. Technology Finance Leasing Corp.
What is it about Dataserv’s response to Technology’s offer that causes the court to rule that there is no contract?
Supposing for a moment that the parties in Dataserv Equipment had gone on to perform. Can you see how the “last shot doctrine” has the potential to produce formalistic and arbitrary results?
