RY-TAN CONST. v. WASHINGTON ELEMENTARY 6

• Court: Arizona Supreme Court
• Writing for the Court: McGREGOR, Vice Chief Justice.
• Citation: RY-TAN CONST. v. WASHINGTON ELEMENTARY 6, 111 P.3d 1019, 210 Ariz. 419 (Ariz. 2005)
• Decision Date: 25 May 2005
• Docket Number: No. CV-04-0300-PR.,CV-04-0300-PR.
• Parties: RY-TAN CONSTRUCTION, INC., an Arizona corporation, Plaintiff-Appellee, v. WASHINGTON ELEMENTARY SCHOOL DISTRICT NO. 6, a political subdivision of the State of Arizona; The Governing Board of the Washington Elementary School District, a Legislative Body of Washington Elementary School District No. 6, Defendants-Appellants.

111 P.3d 1019

210 Ariz. 419

RY-TAN CONSTRUCTION, INC., an Arizona corporation, Plaintiff-Appellee, v. WASHINGTON ELEMENTARY SCHOOL DISTRICT NO. 6, a political subdivision of the State of Arizona; The Governing Board of the Washington Elementary School District, a Legislative Body of Washington Elementary School District No. 6, Defendants-Appellants.

No. CV-04-0300-PR.

Supreme Court of Arizona, En Banc.

May 25, 2005.

Francis J. Slavin, P.C., by Francis J. Slavin, Ellen B. Davis, Phoenix, Attorneys for Ry-Tan Construction, Inc.

Jennings, Strouss & Salmon, P.L.C., by David B. Earl, David J. Cantelme, Gordon L. Lewis, Phoenix, Attorneys for Washington Elementary School District No. 6; The Governing Board of the Washington Elementary School District No. 6.

Holm, Wright, Hyde & Hays, P.L.C., by Brad Holm, Phoenix, Attorneys for Amicus Curiae City of Phoenix and League of Arizona Cities and Towns.

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. Basich 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. 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...