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Save Money: Know Who Bears the Risks of a Subcontractor's Bid

Today, we are going to step back to 1960, the year of bouffants, John F. Kennedy, and contracting lawsuits. Many people ask about subcontracting bids and when they become valid or enforceable under Utah law. Union Tank Car Co. v. Wheat Bros. provides an excellent illustration on that matter.

The Story: Union Tank's tanks

In September, 1960, the Union Tank Car Company submitted a bid to Kaiser Engineers to furnish, erect, and paint four large steel tanks for a project involving the Atomic Energy Commission. These tanks were special tanks and would require an equally special paint: phenoline paint, specifically. This paint was so special that it cost more than four times as much as regular paint: $26 per gallon as compared to $6 per gallon. This paint was needed to make the tanks resistant to radiation and protect their contents: high-purity demineralized water.

Previous to submitting their bid to Kaiser, Union Tank had received a killer deal from the Wheat Brothers, a painting contractor - a deal $8,000 lower than any other deal, to be exact. Wheat Brothers had a bid to paint the tanks for only $22,498 which was 35 percent lower than any other bid. It turns out, Wheat Brothers bid was much lower because they didn't know the tanks had to be painted with very expensive paint and assumed the job would be done with regular paint.

On August 16 of the same year, Union Tank called Wheat Brothers to solicit a bid. Union Tank gave a brief description of the project. Wheat Brothers submitted a bid later that day; the bid was uniquely low. The next day, Union Tank called back to ask if the price was "all right." Wheat Brothers replied that it was. The two parties exchanged a bid sheet and project specifications between them. The specification sheet and also their verbal conversation mentioned that phenoline paint must be used; however, neither party was aware of the extraordinary price of the paint.

In September, Union Tank called once more to confirm the price of Wheat Brothers' bid, stating that they planned to begin the project soon if all the prices were right. Union Tank also mentioned Wheat Brothers' bid was low. Even so, Wheat Brothers again confirmed the price.

Soon after, Wheat Brothers realized their mistake and discovered the extra high cost of phenoline paint. They promptly notified Union Tank by letter that they withdrew their bid. But by the time the letter arrived, it was too late, and Union Tank's bid had already been accepted.

Union Tank sued to recover the difference between what they ended up paying for the paint job and what Wheat Brothers had initially bid.

The Law: If there is no contract, a party can still recover through promissory estoppel.

In this type of scenario, the law is fairly simple. However, much of the judge's decision comes down to the specific facts.

In simple terms, if a contract has not been completed, then the promisee (a recipient of a promise - Union Tank) can still recover based on promissory estoppel. Promissory estoppel generally means the at-fault party must complete the contract or pay for it.

Promissory estoppel applies if

"A promise which the promisor [Wheat] should reasonably expect to induce action of a definite and substantial character on the part of the promisee [Union Tank] and which does induce such action is binding if injustice can be avoided only by enforcement of the promise.'"

In other words, if someone relies financially on the promise of another and injury can only be avoided if the promise is enforced, then promissory estoppel applies.

Also:

•● The promisor must have been aware of all the material, or relevant, facts;

•● The promisor must have known the promisee would rely on the promise, and;

•● The promisee acted with reasonable care and prudence, relied on the promise, and suffered a loss

The Ruling: Promissory estoppel does not apply

The court sided with Wheat Brothers and found there to be no contract. It decided promissory estoppel did not apply because Wheat Brothers was not aware of the extraordinary cost of the paint, Union Tank never attempted to bring their attention to that specific issue, and once Wheat Brothers learned of it, they withdrew promptly. Furthermore, Union Tank had ample opportunity to mitigate the miscommunication by exercising more caution.

The Takeaway: A general contractor can't rely on a subcontractor's erroneous bid when the subcontractor doesn't know all material facts.

This case illustrates the requirements for promissory estoppel in Utah are designed to protect a promisor from being liable for a promise made without knowledge of all material facts. General contractors: make sure all material facts are laid out clearly in project documents. Subcontractors: be sure to ask the right questions and act promptly to withdraw if there is an error in your bid. To be safe: consult an attorney.

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