Thursday, July 21, 2016

There's no such thing as too much communication...Or is there?

In the matter of C.G. Schmidt, Inc. v. Permasteelisa North America the 7th Circuit decided that it indeed is possible for too much communication to scuttle a construction contract.  The appellate court affirmed the District Court's summary judgment decision that given the "extensive negotiations," the parties never entered into a binding contract. It also held that the General Contractor's promissory estoppel claim failed as a matter of law as well.

The project involved constructing an office building in Milwaukee, Wisconsin.  After protracted negotiations with the Subcontractor, the General Contractor bid on the project using a curtainwall Subcontractor's bid.  No written contract existed between the General Contractor and Subcontractor and indeed after submitting the bid the General Contractor continued to discuss terms with the Subcontractor.  The General Contractor successfully won the bid for the project.  Then the Subcontractor declined to provide the glass curtainwall due to "civil unrest in Thailand" where it would be producing the materials. The General Contractor brought suit against the Subcontractor for breach of contract and promissory estoppel.

The Wisconsin Uniform Commercial Code codifies that "offer and acceptance are defined more liberally than under Wisconsin common law." As such, "an enforceable contract may be formed by conduct, even without a signed writing embodying the agreement." The General Contractor therefore still had a viable contract claim even though the terms were not put into writing signed by both parties.  However, the General Contractor's breach claim still was defeated because "an intent to contract" did not exist. The Court observed that throughout the protracted negotiations (which included repeatedly updating the proposed contract price, debating terms, exchanging various versions of a production schedule, and jointly participating in project kick-off meetings) the Subcontractor made clear it only "intended to be bound after reviewing the prime contract [with the owner] and executing a formal subcontract with agreed upon language."  The General Contractor "never corrected this understanding nor expressed a contrary belief." Likewise, the General Contractor, the Court explained, acted as though there was no contract either -- where the General Contractor had internal policies to obtain "written agreements with all subcontractors" and to "clear [the subcontractor] with its risk management department" and where even the General Contractor's instant letter of intent stated that a future subcontract agreement would be executed to "supersede in all respects prior negotiations."  As the Court summarized "[t]o put this point another way, [the contractor] never accepted [the subcontractors] bid."  Therefore, no breach of a contract.

As for the promissory estoppel claim--that the General Contractor reasonably relied on the Subcontractor's bid when submitting its own bid to the owner--the Court was not persuaded as a matter of law. Wisconsin adheres to the general rule that "subcontractor should expect a general contractor to incorporate the subcontractor's bid" and if the general contractor gets the award, "it is only fair that [the general contractor] should have at least an opportunity to accept [the subcontractor's] bid."  However, here, where the General Contractor continued to discuss terms with the Subcontractor after submitting the bid and even after receiving the award, promissory estoppel could not lie.  As the Court explained:
This limit to the application of promissory estoppel exists because of the inequity in allowing the general contractor to shop for lower bids or negotiate with the subcontractor while holding the subcontractor to its bid. . . . . By limiting the application of promissory estoppel, the general contractor can either keep the subcontractor's bid open for a reasonable amount of time or seek a better deal, but not both.
Moreover, the Court pointed out, it was unreasonable for the General Contractor to rely on the Subcontractor's bid where the Subcontractor had advised "that it expected to review the prime contract [with the owner] and negotiate certain aspects of the subcontract prior to executing an agreement."  Such a "conditional promise" is not appropriate to rely upon.  Accordingly, the General Contractor's promissory estoppel claim was denied as well.
The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  She may be contacted at 401-490-3407 or

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