Reliance before the deal: bids, options and negotiations

Lancaster, California, the twenty eighth of July, nineteen fifty five. A general contractor is putting together his bid for a school job, and bids close at eight that evening. All afternoon his secretary takes telephone calls from subcontractors, fifty to seventy five of them, each bidding a piece of the work, and she writes each figure on a form and carries it into his office, where he posts it on a master cost sheet.
Late in the afternoon an estimator for a paving company calls. He gives his name and number and bids the paving work at seven thousand one hundred and thirty one dollars and sixty cents. The secretary asks him to repeat it. The contractor listens on the extension. It is the lowest paving bid, so he uses it, names the paving company in his own bid, and submits. His bid is the lowest. He is awarded the school.
The next morning he stops at the paving company's office on his way to Los Angeles. The first person he meets is their construction engineer, who tells him at once that they made a mistake in their bid the night before and cannot do it for that price.
They will not do the work for less than fifteen thousand dollars. Months later, after trying everyone, he gets the paving done for ten thousand nine hundred and forty eight dollars and sixty cents, and he sues for the difference.
So here is the question. In Module Two you learned that an offer can be revoked at any time before acceptance. The paving bid was an offer. The contractor had not accepted it when the engineer took it back the next morning.
So was the revocation good? Think about it before I go on, and notice what the contractor had already done with that bid. He had built it into a bid of his own, with a bond behind it, from which he could not walk away.
And now the question I keep asking. What exactly did these people promise each other? The paver promised to do the paving for that price. The contractor promised the paver nothing. He did not accept. He did not promise to give the paver the job if he won. He simply used the number. The California Supreme Court said so plainly. There was neither an option supported by consideration nor a bilateral contract binding on both parties.
Here is the first line for the board. An offer which the offeror should reasonably expect to induce substantial reliance before acceptance, and which does induce it, is binding as an option to the extent needed to avoid injustice. That is section ninety applied to an offer. The reliance does not accept the offer. It holds it open.
Second line. The older view refused this, and you need to know it, because some courts still hold it. An offer is made for an acceptance, not for reliance. Until the acceptance comes, the offeror has promised nothing, and reliance on an offer is reliance at your own risk. That is Judge Learned Hand in the Baird case, and we will hear him.
Third line, and it is the edge of the doctrine. Promissory estoppel does not require a promise definite enough to be an offer at all. Assurances given during negotiations, meant to be relied on and relied on as meant, can make the party who gave them answer for the losses they caused, even though no contract was ever close to being made. That is the grocer in Wisconsin, and we will end with him.
Now the case. Drennan against Star Paving, Supreme Court of California, nineteen fifty eight, Justice Traynor. The court began with section ninety and said flatly, this rule applies in this state. Then it asked what the paver should have expected. Defendant had reason to expect that if its bid proved the lowest it would be used by plaintiff. It induced action of a definite and substantial character on the part of the promisee.
The court found a promise inside the offer. The bid said nothing about revocation, so the court asked what conditions the law would imply in it, and it reasoned from the rule about offers for a unilateral contract, which cannot be revoked once performance has begun. Reasonable reliance resulting in a foreseeable prejudicial change in position affords a compelling basis also for implying a subsidiary promise not to revoke an offer for a bilateral contract.
And the absence of consideration is not fatal to the enforcement of such a promise. The very purpose of section ninety is to make a promise binding even though there was no consideration in the sense of something that is bargained for and given in exchange. Reasonable reliance serves to hold the offeror in lieu of the consideration ordinarily required to make the offer binding.
Then the sentence that shows why the paver, of all people, should be held. It was to its own interest that the contractor be awarded the general contract. The lower the subcontract bid, the lower the general contractor's bid was likely to be.
Defendant had reason not only to expect plaintiff to rely on its bid but to want him to. Clearly defendant had a stake in plaintiff's reliance on its bid. The paver was not a bystander to the reliance. It was the point of the bid.
Two limits, both in the opinion. First, a general contractor is not free to delay acceptance after he has been awarded the general contract in the hope of getting a better price. Nor can he reopen bargaining with the subcontractor and at the same time claim a continuing right to accept the original offer.
Second, on the mistake. If plaintiff had reason to believe that defendant's bid was in error, he could not justifiably rely on it, and section ninety would afford no basis for enforcing it.
Here the contractor had no reason to know, because paving bids in that desert varied by a hundred and sixty per cent between highest and lowest. So the mistake did not save the paver. As between the subcontractor who made the bid and the general contractor who reasonably relied on it, the loss resulting from the mistake should fall on the party who caused it. Judgment for three thousand eight hundred and seventeen dollars affirmed.
Now the older view. James Baird Company against Gimbel Brothers, Second Circuit, nineteen thirty three. A New York merchant sent twenty or thirty contractors an offer to supply all the linoleum for a Pennsylvania public building at a lump sum, having miscounted the yardage by about half. The offer said it was made for prompt acceptance after the general contract has been awarded.
One contractor used the price in its bid. The same day, the merchant discovered its mistake and telegraphed a withdrawal, which arrived that afternoon, after the bid had gone in but before the contract was awarded. The contractor won the contract and then formally accepted the linoleum offer. The merchant refused. Judge Hand held for the merchant.
Here is his reasoning on promissory estoppel, and it is the exact opposite of Traynor's. Offers are ordinarily made in exchange for a consideration, either a counter promise or some other act which the promisor wishes to secure.
But an offer for an exchange is not meant to become a promise until a consideration has been received. In the case at bar the defendant offered to deliver the linoleum in exchange for the plaintiff's acceptance, not for its bid, which was a matter of indifference to it.
And his advice to contractors. The contractors had a ready escape from their difficulty by insisting upon a contract before they used the figures, and in commercial transactions it does not in the end promote justice to seek strained interpretations in aid of those who do not protect themselves. Twenty five years later Traynor answered that the sub wanted the reliance and profited from it. Most states have followed Traynor. Know both, and know which is the majority.
Now the edge. Hoffman against Red Owl Stores, Supreme Court of Wisconsin, nineteen sixty five. Hoffman ran a bakery in Wautoma, Wisconsin, and wanted a Red Owl grocery franchise. Over about two years a Red Owl representative gave him a series of assurances. Foremost, in the court's words, were the promises that for the sum of eighteen thousand dollars Red Owl would establish Hoffman in a store.
On those assurances he bought a small grocery to get experience, then sold it, fixtures and inventory, on the promise that he would be in his new store by fall. He paid a thousand dollars on a lot in Chilton.
He sold his bakery building at Red Owl's urging, at a loss, on the assurance that this was the last step necessary to have the deal go through. He rented a house, moved his family. And the figure kept rising, from eighteen thousand to twenty four thousand one hundred, then two thousand more. The deal collapsed.
There was never a contract. Nothing was agreed about the size, cost, design and layout of the store, or the terms of the lease. The question the court put to itself was whether the promise needed for promissory estoppel must be so definite that it would be a contract if accepted.
It said no. Section ninety, the court held, does not impose the requirement that the promise giving rise to the cause of action must be so comprehensive in scope as to meet the requirements of an offer that would ripen into a contract if accepted.
The court then listed the three questions, and they are your board. Was the promise one which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee? Did the promise induce such action or forbearance? Can injustice be avoided only by enforcement of the promise? The first two are for the jury. The third, the court said, involves a policy decision by the court.
Hoffman recovered his losses. The two thousand dollars lost on the bakery building, the thousand dollars on the lot, a month's rent, the moving expense, and the loss on the grocery fixtures measured by the difference between what he sold them for and what they were worth. Not the profits of a store that never existed. This is not a breach of contract action, the court said. Damages should be only such as are necessary to prevent injustice. That measure is next lecture's subject.
Now let's change one fact. The general contractor in California wins the school job, and instead of telling the paver, spends a week calling other pavers to see whether anyone will beat seven thousand one hundred and thirty one dollars. Nobody will. He then tries to hold the original paver to its bid. Is the bid still open? Choose an answer before I go on.
Most people say yes, because the reliance already happened when the bid was used. But the court closed this door in so many words. A general contractor is not free to delay acceptance after he has been awarded the general contract in the hope of getting a better price.
The option exists to protect reliance, not to give the contractor a free week of shopping with the sub's number in his pocket. Once he shops, he has treated the bid as something other than the offer he relied on, and most courts release the sub.
Change one fact again. The paving bid was one thousand dollars, for a job every other paver bid above seven thousand, and the contractor noticed. Choose.
Most people say the sub is still bound, because a bid is a bid. But go back to the board. Section ninety requires reliance the promisor should expect and that is reasonable. If plaintiff had reason to believe that defendant's bid was in error, he could not justifiably rely on it. A figure that is plainly a slip is not something a reasonable contractor builds a bond on. He should have called. No option.
Change one fact a third time. Red Owl's representative had said only, if the numbers work out we will see what we can do, and Hoffman sold his bakery on the strength of that. Choose.
This one has an answer, and it is no. Section ninety needs a promise, and a promise is a commitment, even if it is not definite enough to be an offer. We will see what we can do is not a commitment to anything. Hoffman won because the assurances were concrete and repeated, eighteen thousand dollars, a store by fall, the last step necessary. Take those away and there is nothing for the doctrine to hold.
Here is what people get wrong here, and why it is tempting. The first mistake is reading Drennan as making every offer irrevocable. It makes an offer irrevocable when the offeror should expect substantial reliance before acceptance and gets it, for a reasonable time, and only so far as injustice requires. Most offers induce no reliance at all. The second mistake is thinking Hoffman found a contract. It did not. It found a promise, reliance, and injustice, and it paid the reliance, not the bargain.
The third mistake is confusing section ninety with the mailbox rule from Lecture Eight. The mailbox rule is about when an acceptance takes effect. Drennan is about whether an offer can be revoked before any acceptance at all. Different questions, different lectures.
Here is the rule, in one breath. An offer that the offeror should expect to be relied on before acceptance, and which is relied on, cannot be revoked for a reasonable time so far as injustice requires, and beyond offers altogether, a concrete assurance given in negotiations, relied on as intended, makes its maker answer for the reliance losses it caused, contract or no contract. Now, five questions.