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By Aaron R. Gruber
Thelen Reid Brown Raysman & Steiner LLP
Diede Construction, Inc. submitted a $12 million bid and was awarded a contract to renovate the City Hall in Livermore, California. After bids were submitted and opened but before the prime contract was executed, Diede was informed by one of its subcontractors, Monterey Mechanical Co., that Monterey had mistakenly omitted a $300,000 item when it submitted its bid of $1,775,000 to Diede. Monterey said it would not perform and said Diede should seek to withdraw its bid on grounds of mistake. Diede, however, executed the general contract as bid, choosing not to seek relief from the city for Monterey's mistake. It did not wish to put its bid bond at risk or forgo its chance to earn a profit on the job. Afterward, when Diede requested that Monterey honor its bid, Monterey refused, and Diede was forced to hire a third party to perform the work at an additional cost of $467,064.
At the end of the project, Diede sued Monterey to recover the costs it incurred in hiring a replacement subcontractor. Diede's suit sought recovery based on the principle of promissory estoppel (detrimental reliance), asserting that Diede had a legal right to rely on Monterey's bid and Monterey, being aware of this reliance, had an obligation to perform at the bid price it originally quoted to Diede. Monterey responded that under California Public Code §§5101 and 5103, Monterey had the right to withdraw its bid on grounds of mistake. Furthermore, Monterey argued, because it had informed Diede before execution of the general contract of the mistake in Monterey's bid, Diede did not have the right to rely on Monterey's bid. The trial court agreed with Monterey, holding that Diede at least had an obligation to seek to withdraw its bid.
On appeal, the California Court of Appeal held that Public Code §§5101 and 5103 do not apply to subcontractor bid errors. Diede Construction, Inc. v. Monterey Mechanical Co., 125 Cal.App.4th 380 (2004). Rather, only Diede, as general contractor, could rely on Public Code §§5101 and 5103 to withdraw a bid due to mistake. Monterey could not rely on the statutes to defeat Diede's detrimental reliance claim. Further, the Court of Appeals held that Diede was under no obligation to seek to withdraw its bid because of Monterey's mistake and that Diede's decision to perform the work and not attempt to invoke California Public Code §§5101 and 5103 was irrelevant to Diede's claim of detrimental reliance.
The Court of Appeal remanded the matter to the trial court for a determination of whether Diede's reliance on Monterey's bid in fact was justified. In other words, was it reasonable for Diede to believe that the bid, when submitted, did not contain an error? If a mistake was apparent, the reliance was not reasonable, and Diede would be liable for the difference in construction costs. If it was reasonable to rely on the bid, Monterey would be obligated to Diede to complete the work at its quoted price or to pay Diede for the cost differential of hiring a replacement to perform Monterey's scope of work. Under such circumstances, enforcement of the bid would be necessary to avoid injustice. Otherwise, Diede would be paying for Monterey's mistake by incurring costs and forgoing profit.
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For more information about the issues covered in this report, please contact Aaron R. Gruber in our San Francisco office at 415-369-7621 or at agruber@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2006 Thelen Reid Brown Raysman & Steiner LLP
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