Keep Your Business Profitable by Avoiding the Ten Killer Contract Clauses
Part 1: IT ALWAYS STARTS WITH YOUR BID
By R. Russell O’Rourke, Esq.
Chair, Construction Law Practice
Meyers, Roman, Friedberg & Lewis LPA
If you bid to a contractor, subcontractor or even a supplier, can you withdraw your bid before they accept it? What if they tell you that they are accepting it, but give you a contract that has horrible terms, terms you never anticipated when you gave them your bid—are you still stuck? What if those terms would have made you think twice about bidding or at least made you consider bidding a lot higher to cover your additional risk, is there still no way out?
Every law student learns in the very first class they take in law school, Contracts, that to form a valid contract you need the Legal Capacity and Authority to enter into the contract (your receptionist may have the authority to enter into a contract on his or her own behalf, but generally not on your behalf) and Mutual Consideration (I will do this work and you will pay me that money), which is all bound up in the concept of Offer and Acceptance. Generally, if you change your mind, an offer can be withdrawn before it is accepted. That is also generally NOT the case in construction bidding.
Bidding, particularly by a subcontractor or supplier, is different than the standard “offer” because when you bid to a contractor, subcontractor or supplier, you expect, actually hope, that that party will use your bid as the basis for their bid. In other words, you expect them to “rely” on your bid when they prepare their bid. That reliance is an equitable principle recognized by courts across the country that creates an additional factor which may prohibit you from withdrawing your bid.
There are several reasons that you may want to withdraw your bid, such as:
- you recognize that your estimator missed something and you are underbid;
- the bid wasn’t accepted when you thought it would be and now they want you to start work at an inconvenient time so you don’t have the available work force, weather conditions are now adverse or the material or equipment is no longer available at the same price—any or all of which will cost you more money;
- your bid is accepted by delivering a contract that has horrible terms, some or all of the 10 Killer Contract Clauses, which raises your risk too high for the reward you expect;
- the schedule is unreasonable;
- you bid to a subcontractor and the subcontractor’s bid was accepted by a contractor that you don’t want to work for;
- many others that you and I have both experienced.
We all see these happen almost every day. Are you forced to perform your obligations under the contract and lose money? Are you forced to accept the 10 Killer Contract Clauses? Do you have any power to negotiate? Do you have any power to walk away? The answer is a very definite…maybe.
So, how do you get out of the contract or better yet, negotiate a fair contract and keep the job at a fair price on fair terms? It always starts with your bid. If you conditioned your bid and those conditions are not met by the contractor, Ohio case law tells us that you have the right to accept the contract as proposed, negotiate a fair contract or if you can’t negotiate fair terms, just walk away. Be careful on the walk-away option, just because you have the right to walk away, doesn’t mean that you won’t be sued. We have the case law that we do here in Ohio and across the country because subs and suppliers like you have exercised their rights and over-zealous contractors have sued them. Since this can be tricky and many contractors are ready to sue subs and suppliers who don’t do what they want them to do, my suggestion here is that you talk with your construction law attorney early so that you start out with a good bid, then negotiate the fair terms that you need to be profitable.
Our primary case in point is Complete General Construction Co. v. Kard Welding, Inc., 2009 Ohio 1861 (10th App. Dist., Franklin County). In this case Kard bid to Complete. Prior to Complete’s acceptance, Kard realized that it missed a portion of the scope and attempted to withdraw its bid and re-bid (actually, this happened prior to Complete’s bid, but Complete claimed that it never received the withdrawal or second bid). Fortunately for Kard, it had conditioned its bid on acceptance within 30 days. Unluckily for Complete, it did not accept the bid until after that 30-day period had expired. The Court held that the time period was a condition of the bid which had not been met and therefore Complete lost the power to accept the bid and hold Kard to its contract.
The important lesson here is not that you should limit your bid to acceptance within 30 days, as your bid could easily be accepted within that time and you would be stuck, but that a good conditional bid can save you from a bad contract. The Complete Court goes on to discuss not only why a bidder can be held to its bid, going back to the seminal 1958 California case, Drennan v. Star Paving Co., but also discusses if and when a bidder can be held to contract terms which were not it its bid. The Court held that the bidder “is only bound by the terms of its original offer,” but noted that a contractor could possibly add new terms to the agreement if the new terms were “customary in the industry,” unless they materially differ from the terms of the bid. If there are materially different terms which conflict with your bid, the acceptance is only a counter-offer giving YOU the power to accept or reject.
So, how do you qualify your bid to assure that you get a fair contract from the start, or either have the power to negotiate a fair contract or walk away? You can require that the contract contain a laundry list of your “must have” terms either added to your bid form or by using a form like the American Subcontractors Association Bid Proposal (2013) which is currently available as a free download at www.ASAOnline.com and contains very favorable terms and conditions, as well as requiring the use of the ConsensusDOCS 750 (2011) (Agreement between Contractor and Subcontractor). Alternatively, your bid could also provide that, “This Bid is expressly made conditional upon the use of an unmodified…(pick your favorite industry form)”. For subcontractors you may want to name the ConsensusDOCS 750 (2011) or the AIA A401 (2007)—both are industry-accepted forms, but the ConsensusDOCS forms were negotiated by industry participants, including general contractors, subcontractors, specialty contractors and owners—rather than the AIA form which is dictated by the AIA, so it’s your choice. For suppliers needing good purchase order terms, you can name the ConsensusDOCS 703 (or 702A for commodity goods). One other alternative is rather than require a specific contract form, your bid can be “expressly conditioned upon the inclusion of the American Subcontractors Association Subcontract Addendum (2011)”—the Short Form Subcontract Addendum is currently available as a free download at www.ASAofOhio.com.
Using these bidding suggestions may not get you the document or specific terms that you required as a condition of your bid, but it does require that your conditions are met by the party accepting your bid if they want to force you to perform without negotiation. If they don’t meet the terms of your bid, their response to your bid is only a counter-offer and you have the choice: 1) accept the proposed contract; 2) negotiate a fair subcontract; or 3) walk away.