Ry-Tan Construction, Inc. v. Washington Elementary School District No. 6

OPINION

McGREGOR, Vice Chief Justice.

¶ 1 We granted review primarily to consider whether a school district is contractually bound when it has accepted a construction bid but has not yet executed a written contract.¹ We conclude that a school district is not contractually bound prior to the execution of a written contract. We exercise jurisdiction pursuant to Article 6, Section 5.3 of the Arizona Constitution and Rule 23 of the Arizona Rules of Civil Appellate Procedure.

I.

¶2 On January 4, 1999, the Washington Elementary School District (the District) solicited bids for the construction of new classrooms. Ry-Tan Construction, Inc. was the lowest bidder. On February 12, 1999, the project architect recommended that the contract be awarded to Ry-Tan.

¶ 3 Representatives from the District met with Ry-Tan on March 1, 1999. At that meeting, the parties discussed problems that had arisen during a 1995 construction project that Ry-Tan had completed for the District. During that project, Ry-Tan began construction prematurely, prior to the completion of asbestos removal by an abatement contractor. As a result, the District sustained fines and citations. Ry-Tan signed an acknowledgment that it would “take all steps necessary to ensure that this type of situation does not occur again.”

¶4 On March 11, 1999, the School District’s governing board (the Board) voted to accept Ry-Tan’s bid, and the Board’s executive director signed a Notice to Proceed. The Board scheduled a meeting with Ry-Tan for March 12, 1999, at 3:00 p.m. At that meeting, the parties were to formally execute the contract documents and Ry-Tan was to receive the Notice to Proceed and provide required bonds.

¶ 5 On the evening of March 11, 1999, Ry-Tan took equipment to the construction site and began work prior to execution of the formal contract. Upon learning of Ry-Tan’s action, District personnel refused to sign the contract and cancelled Ry-Tan’s bid.

¶ 6 Ry-Tan denied that District personnel had instructed it not to begin work before signing the contract and argued that the District lacked authority to cancel or modify the contract. Nevertheless, the Board voted to re-bid the project.

¶ 7 Ry-Tan brought this action, contending that the Board’s approval of Ry-Tan’s bid created a binding contract. It further argued that signing the contract documents and posting the required bonds constituted mere formalities and did not serve as a condition precedent to contract formation. After hearing argument on cross-motions for summary judgment, the trial court held that Ry-Tan could proceed with its action, concluding that “there were only ministerial functions left to accomplish once the school board awarded the contract .... ”

¶ 8 The jury returned a verdict in favor of Ry-Tan. The court of appeals affirmed, holding that “a contract was formed between the School District and Ry-Tan as of the date of the Board’s vote, when the Board found that Ry-Tan was the lowest responsible bidder and made the award.” Ry-Tan Constr., Inc. v. Wash. Elementary Sch. Dist., 208 Ariz. 379, 389 ¶ 32, 93 P.3d 1095, 1105 (App.2004).

II.

¶ 9 More than fifty years ago, this court addressed the issue of contract formation involving public entities in Covington v. Ba-sich Brothers Construction Company, 72 Ariz. 280, 233 P.2d 837 (1951). That case arose after Basich Brothers Construction Company (Basich) submitted a bid to the Arizona State Highway Commission (the Commission) to build a road. Id. at 282, 233 P.2d at 838. As required by the bid specification, Basich’s “proposal guarantee,” a certified check for $30,000, accompanied the bid. The Commission accepted Basich’s bid and sent a letter awarding it the contract. Under the terms of Basich’s proposal, the company had ten days to execute a contract after receiving notice of the award.

¶ 10 Soon after it sent the letter awarding the contract, the Commission adopted a resolution stating that if Basich did not execute and return the contract within ten days of the date of the award, the award would be revoked and the proposal guarantee forfeited. Ten days after making the award, the Commission notified Basich that its proposal guarantee had been forfeited and the contract had been awarded to the next lowest bidder.

¶ 11 Basich then brought a mandamus action to recover the proposal guarantee. The trial court held that the notice given by the Commission of its intention to revoke the award was defective and ordered it to return the proposal guarantee. On appeal, we upheld the judgment of the trial court. Id. at 288, 233 P.2d at 842.

¶ 12 We concluded that mandamus was the proper remedy, in part because the “proposal and award were preliminaries looking toward the execution of a formal contract____” Id. at 285, 233 P.2d at 840. We held that the Commission could revoke the award because “a contract with a public agency is not binding on the public agency until a formal contract is executed,” id, and that “the commission [had] the right to reject any and all bids at any time before a formal contract [was] entered into.” Id. at 286, 233 P.2d at 840-41. v Because no contract had been formed, the parties should be returned to their pre-award positions and the deposit returned to Basich.

¶ 13 If we apply Covington’s “bright-line” rule to the facts of this case, the District must prevail. Covington established that a public agency that accepts a bid on a public contract is not bound until a formal contract exists. Because Ry-Tan and the District never executed a formal contract, Ry-Tan cannot recover from the District if Covington controls. Ry-Tan successfully argued to the court of appeals, and argues here, that its situation can be distinguished from that considered in Covington. Alternatively, Ry-Tan suggests, we should overrule our decision in Covington.

III.

A.

¶ 14 The court of appeals accepted Ry-Tan’s approach, concluding first that it could distinguish Covington on the basis of its unusual facts. As the court explained, Covington was “a mandamus action clearly based in equity.” Ry-Tan Constr., 208 Ariz. at 385 ¶ 20, 93 P.3d at 1101. Expounding on that fact, the court held that Covington’s “statement regarding contract formation must be interpreted in that context.” Id. at ¶ 22, 93 P.3d 1095. The court then held that Covington “provides no indication that [the Arizona Supreme Court] was establishing a hard-and-fast rule that would trump different contract terms or different circumstances.” Id.

¶ 15 Although Covington arose out of a particular set of facts, as is true of every judicial decision, and also involved a request for mandamus relief, that opinion did establish a controlling, bright-line rule that governs contracts entered into by public entities after accepting a bid. The opinion gives no indication that this court intended to limit it to the facts or type of relief involved, and we see no basis for distinguishing it on either basis.

B.

¶ 16 The court of appeals also held that Covington does not control this action because “the procedures and formalities surrounding contract formation and the awarding of public contracts in Arizona have changed [since 1951].” Ry-Tan Constr., 208 Ariz. at 387 ¶ 25, 93 P.3d at 1103. The court noted that, since the Covington decision, “Arizona has adopted § 27 of the Restatement (Second) of Contracts.” Id. That statement is accurate but does little to advance our analysis.

¶ 17 Section 27 of the Restatement (Second) of Contracts provides that:

Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.

Restatement (Second) of Contracts § 27 (1981). In support of the proposition that Arizona has adopted this section, the court refers to three recent decisions of the court of appeals. See Tabler v. Indus. Comm’n, 202 Ariz. 518, 521 ¶ 10, 47 P.3d 1156, 1159 (App.2002); Johnson Int’l, Inc. v. City of Phoenix, 192 Ariz. 466, 470-71 ¶ 26, 967 P.2d 607, 611-12 (App.1998); AROK Constr. Co. v. Indian Constr. Servs., 174 Ariz. 291, 297, 848 P.2d 870, 876 (App.1993).

¶ 18 It is true that, in most contexts, section 27 captures a well-established rule of contract law. This rule, however, was not unknown to Arizona courts at the time we decided Covington. By that time, this court had already essentially adopted the Restatement view when it held that if parties expressed an intent to be contractually bound, they would be deemed so bound, even if the requisite formalities of acceptance were not explicitly followed. See Pratt-Gilbert Co. v. Renaud, 25 Ariz. 79, 86-87, 213 P. 400, 403 (1923) (holding that even though explicit contractual method of acceptance was not followed, conduct of parties expressed intent to be bound). Moreover, the Restatement (First) of Contracts, in effect when we decided Covington, included a provision almost identical to that of section 27 of the Restatement (Second) of Contracts.² The principle embraced by section 27 of the Restatement, therefore, was neither new nor unknown when we decided Covington,³

C.

¶ 19 Ry-Tan also argues that the Arizona School District Procurement Code (the Code), Ariz. Admin. Code (A.AC.) R7-2-1001 to R7-2-1195, dramatically altered the landscape of school procurement contracts and effectively displaced the common law rule of Covington. The state board of education adopted the Code in 1987 pursuant to legislative authority. A.R.S. § 15-213.J (Supp.2004). By its terms, the Code governs the “expenditure of public monies” for a school district’s procurement of “construction, materials and services.” A.A.C. R7-2-1002.A.

¶20 The legislature, of course, can modify or abrogate the common law. To do so, however, it must express its intent clearly and, “[a]bsent a clear manifestation of legislative intent to abrogate the common law, we interpret statutes with every intendment in favor of consistency with the common law.” Pleak v. Entrada Prop. Owners’ Ass’n, 207 Ariz. 418, 422 ¶ 12, 87 P.3d 831, 835 (2004) (citation omitted). This general rule carries even greater force when the entity enacting the scheme is an administrative agency acting only within the limited authority granted by the legislature. See Gunty v. Dep’t of Employment Serv., 524 A.2d 1192, 1197 (D.C.1987) (holding that unless an administrative regulation fairly expresses an intention to modify the common law, it should not be interpreted to do so). We conclude that the provisions of the Code do not modify or abrogate the common law bright-line rule adopted in Covington.

¶ 21 We note first that the Code explicitly states that the common law of contracts, the Uniform Commercial Code, and principles of law and equity as they exist in Arizona supplement the terms of the Code. A.A.C. R7-2-1002.D. The Covington decision, of course, is part of Arizona’s common law of contracts and, as such, operates with other common law sources to supplement the terms of the Code. Because the Code by its terms incorporates Covington, we will, if possible, interpret its holding as being consistent with, rather than abrogating, the Covington holding.

¶ 22 As Ry-Tan argues, some portions of the Code suggest that the District could not cancel an award. For example, the Code directs that, after receipt and review of proffered bids, a “contract shall be awarded to the lowest responsible and responsive bidder whose bid conforms in all material respects to the requirements and evaluation criteria set forth in the invitation for bids.” A.A.C. R7-2-1031.A (emphasis added). Other sections of the Code authorize a public entity to reject a bid before award, but do not authorize such an action after an award. See A.A.C. R7-2-1074 (providing that after receipt of bids, but before award, the district may cancel a solicitation if advantageous, but only before award); A.A.C. R7-2-1076.A. (providing that a district may reject nonre-sponsive or nonresponsible bids only before a contract is awarded). Ry-Tan asserts that these provisions support the notion that the District entered into a contract with Ry-Tan at the time it accepted the company’s bid and could not thereafter cancel the award. While the Code’s language could be interpreted that strictly, nothing in the Code expressly prohibits a public entity from withdrawing a bid after acceptance of the bid but prior to the award of a contract.

¶ 23 Moreover, in other sections, the Code itself distinguishes between bid awards and the execution of final contracts. For example, A.A.C. R7-2-1111 requires that bid security must accompany certain bids.⁴ The purpose of bid security, or a bid bond, is to “compel[ ] [a] contractor to enter into the contract according to the terms of his bid.” Marshall v. Dietrich, 30 Ariz. 54, 62, 243 P. 910, 913 (1926).

¶ 24 A separate Code provision, however, requires a bidder to post a performance bond upon formal execution of the contract. A.A.C. R7-2-1112. “[T]he purpose of a performance bond is to insure the proper completion of [a] public works project ____” Hartford Accident & Indem. Co. v. Ariz. Dep’t of Transp., 172 Ariz. 564, 568, 838 P.2d 1325, 1329 (App.1992). The second bond requirement is inconsistent with the notion that the bid award results in a final contract. That is, if the award of a bid immediately created a binding contract, no bid security to assure entry into the already-completed contract would be necessary. Instead, the Code presumably would require only a performance bond to ensure completion of the project. Ry-Tan’s reading of the Code thus renders the bid security required by A.A.C. R7-2-1111 superfluous.

¶ 25 Additionally, Ry-Tan’s approach creates substantial difficulties for bidding entities attempting to comply with A.A.C. R7-2-1112.B. That provision states that the

performance bond and the payment bond shall be delivered by the contractor to the school district at the time the contract is executed. If a contractor fails to deliver the required performance bond or payment bond, the contractor’s bid shall be rejected, its bid security shall be enforced, and award of the contract shall be made pursuant to this Title.

Id. (emphasis added).

¶ 26 If we were to accept Ry-Tan’s argument that its contract with the District was “executed” at the time the District accepted its bid, then the Code required the District to reject Ry-Tan’s bid because Ry-Tan did not deliver the requisite bonds at the time of execution. Indeed, were we to interpret the Code as establishing that a contract is executed when a bid is accepted, the Code would necessarily require that all bidders be present at the time the bids are opened, with the requisite bonds in hand. We do not consider that reading of the Code appropriate or practical.

¶ 27 On the other hand, the provisions above, when read together, anticipate an interval between a bid’s award and execution of the contract, an interval that allows the successful bidder to present the required bonds at execution of the contract. That interpretation is fully consistent with, and allows us to give full effect to, Covington. Because the Code includes no express statement to the contrary, we hold that the Code did not change or abrogate the Covington bright-line rule.

IV.

¶28 The final question for us is whether public policy requires that we overrule our decision in Covington. As noted, Arizona’s governmental entities and bidding companies have relied on Covington’s bright-line rule for half a century. Without compelling reasons, we are reluctant to overturn longstanding precedent. “[P]eople should know what their rights are as set out by judicial precedent and having relied on such rights in conducting their affairs should not have them done away with by judicial fiat.” White v. Bateman, 89 Ariz. 110, 113, 358 P.2d 712, 713-14 (1961).

¶ 29 We detect no change in public policy that would lead us to set aside Covington’s bright-line rule. In situations such as this, public funds are at stake. It is vitally important that the elected officials responsible for the disbursement of such funds retain the flexibility needed to make decisions in the public’s best interest. Allowing a public entity an opportunity to reject a bid until execution of a formal contract occurs provides additional flexibility to respond to conditions that arise after the bid award and before execution of the contract, as occurred in this case, and further opportunity to consider the public interest.

V.

¶ 30 Both parties agree that this matter arises out of contract, and both request attorneys’ fees pursuant to A.R.S. § 12-341.01 (2003). In our discretion we determine that, as the prevailing party, the District shall recover those reasonable fees incurred on appeal. Wenk v. Horizon Moving & Storage Co., 131 Ariz. 131, 133, 639 P.2d 321, 323 (1982). We will determine the amount of fees in accord with Rule 21 of the Arizona Rules of Civil Appellate Procedure.

VI.

¶ 31 For the foregoing reasons, we vacate the opinion of the court of appeals and reverse the superior court judgment. We remand this matter to the superior court with instructions to enter judgment for the District.

CONCURRING: CHARLES E. JONES, Chief Justice, REBECCA WHITE BERCH and MICHAEL D. RYAN, Justices.

1 . We granted review on other issues but, because our resolution of this question resolves this controversy, we do not reach those issues.

2 . Mutual manifestations of assent that are in themselves sufficient to make a contract will not be prevented from so operating by the mere fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but other facts may show that the manifestations are merely preliminary expressions as stated in § 25.

Restatement (First) of Contracts § 26 (1932).

3 . The court of appeals also noted that the Coving-ton court relied on Williston’s treatise on contracts, notably this passage:

In the formation of public contracts the formalities required by law or by the request for bids, such as a written contract, or the furnishing of a bond, often indicate that even after acceptance of the bid no contract is formed, until the requisite formality has been complied with.

Ry-Tan Constr., 208 Ariz. at 384 ¶ 19, 93 P.3d at 1100 (quoting Covington, 72 Ariz. at 285, 233 P.2d at 840 (quoting 1 Samuel Williston, Willi-ston on Contracts § 31 (1936))). The court of appeals quotes extensively from the current version of Williston and notes that editions "then and now, support[ ] an approach to contract formation based on the applicable facts and circumstances.” Ry-Tan Constr., 208 Ariz. at 388 ¶ 28, 93 P.3d at 1104. This is undoubtedly so. The fact remains, however, that this court adopted our bright-line rule rather than an indeterminate, flexible approach.

4 . Bid security may come in the form of a bond or a certified or cashier’s check, A.A.C. R7-2-1111.-C.l & 2, and must be an amount equal to at least ten percent of the bid. A.A.C. R7-2-1111.B.