As we have discussed in previous classes, an offer may typically be revoked at any time before the offeree accepts the offer. Today, we discuss an exception to that rule by looking at a 1958 California case, Drennan versus Star Paving. Drennan, a general contractor, prepared to bid for a construction contract. Before submitting his bid, Drennan had solicited other bids from several subcontractors, and the defendant, Star Paving, submitted the lowest bid for the paving subcontract. Drennan used Star Paving's bid to calculate his overall bid on the construction contract. Drennan was awarded the construction contract. After Drennan won the bid, but before he was able to notify Star Paving, Star Paving discovered that it's bid of $7,131.60 was an error and informed Drennan that he would not perform for less than $15,000. Drennan ended up engaging another paving subcontractor for $10,948 and sued Star Paving for the difference of $3,187. This is the difference between the defendants bid and the costs that Drennan actually had to pay a replacement paving subcontractor. The trial court found for the plaintiff, Drennan, and the incident court affirmed. So, the central issue in the case is this, did the plaintiffs reliance make the defendant"s offer irrevocable? The court here found, yes, the reliance did make the offer irrevocable. Star Paving argued that there was no enforceable contract between the parties on the ground that it made a revocable offer, and revoked it before plaintiff communicated his acceptance. However, the court in an opinion written by one of the most famous state court justices in our nation"s history, Justice Traynor, disagreed. Justice Traynor pointed to a promissory estoppel provision of the restatement. The famous Section 90 which says, under the First restatement that, "A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." Since the defendant reasonably relied on Star Paving's bid to commit itself to the construction contract at a price incorporating Star Paving bid, Star Paving's offer could not be revoked because injustice would otherwise result. So, in Drennan, the court relied on Section 90 of the restatement and you may recall Section 90 of the restatement from our earlier discussions of promissory estoppel in earlier classes. Can you remember what is promissory estoppel? Under the doctrine of promissory estoppel, if a promisee reasonably relies on a promise and changes her position accordingly, the promise may be binding even without consideration if justice so requires. Remember Ricketts versus Scott Thorne, where grandfather promised to pay his granddaughter $2,000 and in response, the granddaughter quit her job? Even though Justice Traynor used Section 90 to hold that Star Paving offer was irrevocable, the facts in Drennan don"t quite fit. Promissory estoppel applies when a promisee relies on an unconditional promise. But in Drennan, Star Paving only made an offer to enter into a bilateral contract but never promised to keep that offer open. An offer is a kind of conditional promise which is conditioned on the other side"s return promise. It can be argued that it was unreasonable for Drennan to rely on the conditional promise especially when Drennan could have made it unconditional by accepting. To resolve this dilemma, Justice Traynor held that "Reasonable reliance resulting in a foreseeable prejudicial change in position affords a compelling basis also for implying the subsidiary promise not to revoke an offer for a bilateral contract." In other words, a subcontractor's bid creates an implicit subsidiary promise not to revoke the offer if it becomes part of the winning bid. Traynor's reasoning is now enshrined in a separate section of the restatement, section 87 2 which reads, "An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character by the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice." Consider the following hypothetical, oil lease owner offered to enter a "farmout agreement" with oil driller. The offer stated that it was irrevocable for a period of 120 days plus a 30 day extension. Driller, who was to accept the offer by drilling on a designated parcel, paid nothing for the option. Before acceptance, Driller in reliance on the option drilled a test well on another parcel. The data from this test drilling would helped to evaluate whether to accept the offer. Before acceptance, however, Owner attempted to change the terms of the offer. Based on the holding in Drennan versus Star Paving, can Owner change the terms of the offer at this stage? No. The driller's reliance upon the written option, promise, made the offer irrevocable and Driller could create a contract on the original terms of the offer. This example is based on a real case, Strata production versus Mercury exploration. Another way to think about this case is by asking, who should bear the risk of a subcontractor error? The holding in this case puts the risk of error on the subcontractor. This seems reasonable. It forces a subcontractor to internalize the cost of its own mistake which creates an incentive for the subcontractor to be more careful. The general contractor on the other hand, doesn't have much control over whether its subcontractors make mistakes in their bids. If the cost of mistake was shouldered by the general contractor, it might have to add a premium to its bid to compensate itself for the occasional mistake by a subcontractor. This in turn would increase the cost of construction contracts. In other words, the subcontractor is probably the least cost avoider in this case and so should bear the risk. The court seems to recognize this principle when it says, "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." Now, there are circumstances, however, when the general contractor might be the least cost avoider. For example, if there"s a large mistake in the offered bid such as leaving off a zero, creating a bid 10 times smaller than the next lowest bid, the general contractor should easily recognize that this is a mistake and may be point it out. If this had happened in Drennan, it may have changed the outcome. The court specifically considered this point but found that the general contractor, "Had no reason to know that the defendant had made a mistake in submitting its bid." Under Drennan, a subcontractor's bid becomes an irrevocable offer when the general contractor relies on it in a winning bid. However, the general contractor has still not accepted the subcontractor's bid and might solicit a new round of subcontractor bids something that is called bid shopping. Justice Traynor was careful to point out, "A general contractor is not free to delay acceptance after he has been awarded the general contracted in the hope of getting a better price nor can he reopen bargaining with the subcontractor and at the same time claim the continuing right to accept the original offer." So the subcontractor's offer is only irrevocable if the general contractor does not misuse its option power. Since the overall project contract has already been awarded at this point, only the general contractor, not the project owner, will profit from this bid shopping. Recognizing this potential for abuse, in 1963, the California Legislature adopted a subletting and subcontracting Fair Practices Act. The statute provides that the general contractor bidding on "Any public work or improvement must disclose in its bid the name of any subcontractor whose bid is incorporated into and exceeds one percent of the price of the general contractor's bid." The statute further provides that a general contractor whose bid on a public project is accepted shall not replace the subcontractor listed in his bid with another subcontractor except under certain conditions and with the awarding authority's consent. So, what are the consequences of the statute? Since a general contractor cannot bargain with subcontractors after winning the bid, he must make an all or nothing choice beforehand and it would induce all competition beforehand to better solicit a number of bids. Given that X-posed competition may not redound to the public buyer's benefit, the statutes make some sense if it leads to more ex ante competition for subcontracts. But in some circumstances, generals may not have time for pre-bid competition and the statute may not allow subs to exercise some market power. it's difficult to assess whether this merely protects subs or creates some inappropriate market power for subcontractors. The asymmetry created by the holding in Drennan could also be modified by contract. For starters, the court states, "Had Star Paving's bid expressly stated or clearly implied that it was revocable at any time before acceptance, we would treat it accordingly." In other words, the holding in Drennan that a subcontractor's bid becomes an irrevocable offer if it comes part of the winning bid is merely a default rule and may be contracted around by the subcontractors in their initial offer. Alternatively, a bidder with a strong bargaining power might insist upon a conditional bilateral contract. I will bid and do the job only if you promise to award the contract to me if you use my bid as a part of your winning overall submission. This strategy creates a bilateral contract which is immediately binding but which only has to be performed if the general wins the general project competition. Is the Drennan default necessarily the best choice? Well, 25 years earlier, no less than the Learned Hand decided a similar case, James Baird vs Gimbel brothers, just the opposite way. Finding that under New York law, the general contractor's reliance did not by default make a subcontractor's offer irrevocable. But again, the Learned Hand subcontracting rule was merely a default in that generals could always require as a condition of using the subcontractors bid that the subcontractor promise not to revoke the offer. This is a context where in equilibrium, the default rule might not matter because both generals and subs are likely to choose the degree of irrevocability that maximizes their joint gains of trade. Let"s review. Today, we considered an example of an irrevocable offer. Ordinarily, an offer is revocable at any time prior to acceptance. However, when an offer forcibly induces reliance by the offeree prior to acceptance, the offeror may be prohibited from revoking.
