Binding Bids

The construction industry operates by word-of-mouth to a great extent. Therefore the question: How binding is someone's word. A typical example of verbal arrangements in the construction industry is subcontractor bidding. In typically last-minute preparation of their bids contractors and subcontractors rely on verbal prices from subcontractors and material/equipment suppliers. The contractor or subcontractor involved will usually rely upon those verbal bids in fixing his own bid. If awarded the contract, he would then call upon the bidder to perform or supply equipment or materials at the price verbally bid. What happens if the bidder refuses or has attempted to withdraw his bid sometime earlier? Legally the bid is an offer and under traditional law an offer may generally be withdrawn at any time before it is accepted by the party to whom the offer is made. Another legal rule involved is that to be a valid contract the parties must agree upon all material terms. The application of those legal principles to the above examples suggests two problems: (1) if the bidder can withdraw or refuse to honor its bid, the whole bidding process is frustrated, and (2) the verbal bid usually includes only a price. Agreement on many other terms would still need to be agreed upon in the formation of a binding contract. A number of courts have wrestled with this problem. Older cases usually ruled that verbal bids were not binding. However, a number of recent court decisions have ruled that the bidder can be legally bound to his bid made with the knowledge that it would be relied upon by the party to whom the bid was submitted. Those courts' rulings are based upon doctrines of fairness and practicality, recognizing that to rule otherwise would be unfair to the party whose own bid relied on the bidder's price.

In the construction industry, bidding practices, constraints of time and last minute pricing efforts do not usually allow for solicitation and the submission of written bids containing all legal niceties.

One recent court decision [Harry Harris, Inc. v. Quality Construction Company of Benton, Kentucky, Inc., 593 S.W.2d 892 (Ky. App. 1979)] ruled against the subcontractor who attempted to withdraw its bid after discovering a $9,000 error. The court permitted the contractor to recover the difference between that subcontractor's bid and the higher cost paid another subcontractor for the work involved.

Colorado Rule

A Colorado appellate court decision held that a subcontractor-bidder was bound by his bid and liable for damages when it refused to perform because the contractor had relied on his bid. Mead Assoc., Inc. v. Antonsen, 677 P.2d 434 (Colo. App. 1984).

The fact that there is a lack of uniformity in court decisions in the several states, suggests the establishment of bidding procedures designed for the purpose of avoiding problems of this nature.

Such procedures should include the best documentation possible. At a very minimum a written memorandum of every verbal bid should be made and kept. The memorandum should include the name of its author, the name of the company and person making the bid, the precise time and date, the amount and scope or identification of the work, materials or equipment contemplated and any other details involved.

Consideration should also be given to letter confirmation of bids containing language to the effect that if awarded the contract, the bidder will be expected to enter into a subcontract or purchase order arrangement with terms as set forth in an enclosed subcontract or purchase order form. Naturally, if time permits, a written contract or subcontract, subject to award, would be legally preferable.

Apart from the practical lessons to be learned from this discussion is the fact that the law is not static. As typified by the Kentucky and Colorado cases cited above, the law does change to meet current business conditions and concepts of fairness and practicality. However, change is usually slow and evolutionary and for that reason sound business practices dictate efforts to either conform to existing law or meet legal changes.