May 12, 2006

Contracts With Public Entities –Formality Required

Introduction

The ability of public entities to enter into contracts is often limited by law. Such limitations often take the form of procedures that must be followed before an enforceable contract can arise. These procedures may appear to be mere formalities that require agreed upon contracts to be presented to and passed by a board of commissioners and recorded on meeting minutes or they can be bidding mechanisms that must be followed in order for the public entity to be empowered to enter into any agreement in the first place. Regardless of whether such procedures appear to be mere formalities or take the form of systems designed to obtain favorable pricing, they all share common characteristics. They are all intended to ensure that the public money is spent wisely, that value is obtained in exchange for that public money and that oversight of spending is maintained.

From the perspective of a contractor though, those procedures, whatever form they take, can be stumbling blocks to formation of enforceable contracts. Failure to comply with them on the part of the contractor or the public entity can have dire consequences for the contractor. If the proper procedures are not followed, a contractor can find itself with no way to obtain compensation for work that it has performed. In Board of School Commissioners of Mobile County v. Coastal Builders, Inc., 2005 WL 3445986 (Ala.Civ.App.), an agreement between a contractor and a public owner to remedy a bid error was stricken as void because of a failure to comply with competitive bidding statutes even though it was clear that the public entity had intended to enter into the agreement sought to be enforced by the contractor.

Factual Background

Coastal Builders, Inc. submitted a bid and was the successful bidder on a project for the construction of a school for the Board of School Commissioners of Mobile County, Alabama. After Coastal Builders was awarded the contract, it discovered that it had failed to include in its bid the cost of a specified control package. The cost of the control package was $38,329.  Coastal Builders promptly notified the school board of its error at a “pre-construction meeting” that took place two days after Coastal Builders was awarded the contract. At that meeting the parties discussed how to address the problem of the omission of the control package. The school board told Coastal Builders that the problem would be solved either by adding the cost of the control package to Coastal Builder’s bid, executing a “change order” to alter the bid, or by the school board making a direct payment to the supplier of the control package. Although the meeting ended without a decision as to the actual method of addressing the problem, it was clear that the school board had agreed to pay the costs for the control package that Coastal Builders had inadvertently omitted from its bid. Coastal Builders left the meeting understanding that the problem with the omission would be remedied.

Almost a month after the pre-construction meeting, both Coastal Builders and the school board executed the contract for the project. Coastal Builders was then still operating under the understanding that the school board had agreed to remedy Coastal Builders inadvertent omission. Not until two months after the contract had been executed did the school board notify Coastal Builders that it was not going to cover the cost of the control package. Coastal Builders then filed suit, alleging that the school board had agreed to pay for the control package or add the cost of the control package to Coastal Builder’s contract. The trial court entered judgment in favor of Coastal Builders and the school board appealed.

Appellate Court’s Opinion

The Court of Civil Appeals of Alabama reversed the trial court and held that the Alabama Competitive Bid Law precluded the school board from being ordered to pay for the cost of the control package. The Competitive Bid Law “requires that a contract [involving $7,500 or more] that provides for the expenditure of county or municipal funds ‘shall be made under contractual agreement entered into by free and open competitive bidding, on sealed bids, to the lowest responsible bidder.’ ” The school board argued that any agreement that it purportedly entered into with Coastal Builders relating to the control package would be subject to the Competitive Bid Law because the cost of the control package exceeded $7,500. As a result, the school board argued, any such agreement would be void and unenforceable because it had not been entered into by free and open competitive bidding.

The court began its analysis by noting that the purpose of the Competitive Bidding Law was to get the best quality equipment at the lowest possible price. The law was enacted for the benefit of the public and not those that were seeking public contracts. However, the court was troubled by the school board’s use of the competitive bid law as a means of avoiding the agreement reached at the preconstruction meeting and specifically stated in the opinion that courts “do not condone the use of the Competitive Bid Law as a means for a party to escape liability for a contract it voluntarily entered into. Nevertheless, the court held that the amount at issue for the cost of the control package was sufficient to trigger application of the Competitive Bid Law and, thus, the court held that it was bound to apply that law. Accordingly, despite the fact that the appellate court concluded that the evidence that had been before the trial court indicated that the school board had agreed to allow Coastal Builders to remedy its bid to encompass the cost of the control package, the court held that the agreement was void for failure to comply with the Competitive Bid Law.

Practical Implications

Although this case was founded upon the application of a specific public bidding statute in Alabama, it should serve more generally as a cautionary tale. Nearly every state has laws governing and restricting the ability of its public entities to enter into contracts. As a result, contractors should be wary when entering into any agreement with a public entity lest they find themselves in an unfortunate position similar to that of the contractor in the Coastal Builders case. Contractors should make sure that any agreement that they believe they have entered into with a public body is an agreement that is enforceable and it may be prudent to consult with an attorney for help in making this analysis. This may be a fairly complex process and one that can be made even more complicated by the existence of differing rules applicable to different public entities within the same state. Had Coastal Builders understood that the “agreement” it thought it had reached with the school board was not enforceable, it may have been able to take other steps to protect itself from its bid error prior to executing the contract. However, by the time Coastal Builders learned that it did not have an enforceable agreement, it was far too late.