754 P.2d 356 (1988)

POWDER HORN CONSTRUCTORS, INC., and St. Paul Fire and Marine Insurance Company, Petitioners,
v.
CITY OF FLORENCE, Respondent.

No. 85SC502.

Supreme Court of Colorado, En Banc.

April 25, 1988. Rehearing Denied June 6, 1988.

*357 Conover, McClearn & Heppenstall, P.C., Hugh J. McClearn, Catherine A. Lemon, Denver, for petitioners.

Law Office of Robert F.T. Krassa, P.C., Robert F.T. Krassa, Pueblo, for respondent.

Charles E. Grover, Denver, for amicus curiae Colorado Contractors' Ass'n, Inc.

KIRSHBAUM, Justice.

In City of Florence v. Powder Horn Constructors, Inc., 716 P.2d 143 (Colo.App.1985), the Court of Appeals affirmed a trial court judgment ordering forfeiture of a bid bond executed for the benefit of the City of Florence (the City) by the petitioners, Powder Horn Constructors, Inc. (Powder Horn) and Powder Horn's surety, St. Paul Fire and Marine Insurance Co. (St. Paul). The City filed a civil action requesting the forfeiture as damages for Powder Horn's refusal, as low bidder, to accept the City's award of a public improvement construction contract. Powder Horn asserted as a defense a right to equitable relief from the provisions of the bond on the ground that it had rescinded its bid; the trial court rejected this claim. The Court of Appeals held that under certain circumstances a low bidder for a public construction contract may rescind its bid, but affirmed the trial court's judgment. Having granted certiorari to review that decision, we reverse and remand with directions.

I

On December 24, 1981, the City published an advertisement for sealed bids for construction work on a water treatment facility. The bids were initially due on January 14, 1982, but that date was subsequently extended to January 19, 1982. On January 6, 1982, Powder Horn obtained a set of documents from the City detailing the engineering specifications for the project.

On January 19, 1982, Powder Horn submitted a bid of $699,500 for the project. As required by the terms of the bid documents, it also submitted a bid bond in the *358 sum of five percent of its total bid.^[1] When the bids were publicly opened late that same day, Powder Horn was identified as the low bidder. The second lowest bid price was $754,330.

The next day, January 20, Paul Gilbert, the City's consulting engineer in charge of administering the project, telephoned Michael O'Clair, a Powder Horn estimator, and advised him that in tabulating the bids he had found one item in Powder Horn's bid that appeared to be substantially low in view of the other bids submitted. Gilbert suggested that Powder Horn might want to review that particular item.

On January 21, Powder Horn's president, Cletus Donahue, informed Gilbert by telephone that Powder Horn had mistakenly omitted from its bid the sum of $66,660, representing the cost of one major item, and that the bid was therefore being withdrawn. On that same day, Donahue also wrote a letter to Gilbert's engineering firm in which he stated that a subtotal from one worksheet inadvertently had been omitted from the final bid amount, advised that the bid and the bid security were being withdrawn and offered to meet with the consulting engineers, the City attorney or other officials to demonstrate that the omission was an honest error.

On February 1, 1982, the City, through its city council, voted to award the contract to Powder Horn for the amount of $699,500. On February 4, Donahue sent a letter to Gilbert's engineering firm stating that Powder Horn would not accept the award of the contract. The City then awarded the contract to the second lowest bidder. That bidder accepted the contract and commenced work.

The City filed this action against Powder Horn and St. Paul, asserting a right to the amount of the bid bond as liquidated damages for Powder Horn's failure to execute the construction contract. The complaint alleged that although the City's actual damages equaled $54,830, the difference between Powder Horn's bid and the second lowest bid, Powder Horn's liability was limited to the amount of the bid bond. Powder Horn asserted as a defense that it had rescinded its bid and therefore could not be held liable under the terms of the bid bond.

The trial court found that Powder Horn had not exercised reasonable care in preparing its bid. Based on this finding, it determined that Powder Horn was liable to the City in the amount of the bid bond. The trial court also determined that Powder Horn's conduct constituted a unilateral mistake, that the mistake was material, that requiring Powder Horn to perform the contract would be unconscionable, and that Powder Horn had failed to establish that the City would not be prejudiced by the withdrawal of Powder Horn's bid.

In affirming the trial court's judgment, the Court of Appeals recognized that in some circumstances a bidder may be permitted to rescind a bid submitted for a public construction contract because of a mistake in calculating the bid. The Court of Appeals concluded that such a remedy is available only when the bidder proves by a preponderance of the evidence that: "(1) the mistake relates to a material feature of the contract; (2) it occurred despite the exercise of reasonable care; and (3) the public authority can be placed in status quo." City of Florence v. Powder Horn Constructors, Inc., 716 P.2d 143, 144 (Colo.App.1985). It held that Powder Horn could not rescind the bid because it had not exercised reasonable care in preparing it. The Court of Appeals also observed that a public entity which has not changed its position in reliance on a mistaken bid has suffered no actual damages and is able to maintain the status quo merely by accepting the second lowest bid "since it has lost only what it sought to gain by taking advantage of the mistake." Id. at 145.

We agree with the conclusion of the Court of Appeals that under certain circumstances a bidder submitting a bid for a public construction contract may be permitted to rescind the bid prior to its acceptance if it reflects a material mistake of fact. We do not agree, however, that the exercise of reasonable care is an appropriate *359 factor upon which to condition this right of rescission.

II

This case falls into that narrow class of public construction bid cases in which an issue of mistaken bid arises when, prior to the public entity's acceptance of the bid, the parties discover that the bid contains a material mathematical or clerical error. Powder Horn argues that under such circumstances the bidder should be allowed to withdraw its bid automatically without penalty. A substantial body of law supports Powder Horn's argument, in effect concluding that where a bidder submits a bid containing a material mistake of fact and the bid is apparently accepted there has not been any meeting of the minds because the bid accepted by the public entity is not the bid intended by the bidder. E.g., Moffett, Hodgkins & Clarke Co. v. Rochester, 178 U.S. 373, 20 S.Ct. 957, 44 L.Ed. 1108 (1900); Marana Unified School Dist. No. 6 v. Aetna Cas. & Sur. Co., 144 Ariz. 159, 696 P.2d 711 (Ariz.App.1984); Regional School Dist. No. 4 v. United Pac. Ins. Co., 4 Conn.App. 175, 493 A.2d 895, certif. denied, 196 Conn. 813, 494 A.2d 907 (1985); Baltimore County v. John K. Ruff, Inc., 281 Md. 62, 375 A.2d 237 (1977); Mississippi State Bldg. Comm'n v. Becknell Constr., Inc., 329 So.2d 57 (Miss.1976); City of Syracuse v. Sarkisian Bros., Inc., 87 A.D.2d 984, 451 N.Y.S.2d 945, aff'd, 57 N.Y.2d 618, 454 N.Y.S.2d 71, 439 N.E.2d 880 (1982); Arcon Constr. Co. v. State, 314 N.W.2d 303 (S.D. 1982); State Highway Comm'n v. Canion, 250 S.W.2d 439 (Tex.Civ.App.1952); see also D. Dobbs, Handbook on the Law of Remedies § 11.4 (1973) (observing that, where bid contains material mistake, failure to grant bidder relief results in public authority receiving more than it was seeking in the bargain). In addition, many courts, commentators and legislative bodies have either explicitly or implicitly recognized that a mathematical or clerical error yields an unintended bid, while an error in judgment, such as an error in estimating the number of hours of work necessary to complete a project, yields precisely the bid intended and is not deemed a mistaken bid. E.g., Boise Junior College Dist. v. Mattefs Constr. Co., 92 Idaho 757, 450 P.2d 604 (1969); State v. Hensel Phelps Constr. Co., 634 S.W.2d 168 (Mo.1982); Jobco, Inc. v. County of Nassau, 129 A.D.2d 614, 514 N.Y.S.2d 108 (1987); Muncy Area School Dist. v. Gardner, 91 Pa.Commw. 406, 497 A.2d 683 (1985); see generally 10 E. McQuillin, The Law of Municipal Corporations § 29.82 (3d ed. 1981); Rudland, Rationalizing the Bid Mistake Rules, 16 Pub.Cont.L.J. 446 (1986); see also M.F. Kemper Constr. Co. v. City of Los Angeles, 37 Cal.2d 696, 235 P.2d 7 (1951), superseded by statute, Cal.Pub.Cont.Code § 5103 (West 1985) (where mistake made bid materially different than intended, relief available for mistake in filling out bid form, but not for mistake in judgment); N.C.Gen.Stat. § 143-129.1 (1987) (if clerical mistake, agency shall allow withdrawal of bid without forfeiture of bid security); Model Procurement Code for State and Local Governments § 3-202(6) commentary (4) (1979) (observing that bid withdrawal should be permitted where there is reasonable proof of a material mistake of fact and intended bid is not ascertainable with reasonable certainty).^[2] It is undisputed here that Powder Horn's error was not an error in judgment. Under these circumstances, there is merit to Powder Horn's position that no agreement was or could have been consummated at the time the bids were opened.

*360 However, this legal analysis ignores an important distinction that has emerged in the law of public contracts—the assumption that bids for public construction contracts are generally considered to be irrevocable upon opening. See Jones, The Law of Mistaken Bids, 48 U.Cin.L.Rev. 43, 45 & n. 13 (1979). This principle serves to protect the integrity of the bidding process by encouraging the preparation of accurate bids, reducing possibilities of collusion and artificial bidding practices among contractors, and promoting predictability and certainty in the process of expending public funds.

Some jurisdictions have determined to further these policies by adopting a rule that generally prohibits rescission of a bid for a public construction contract at any time after the bids are opened. E.g., Anco Constr. Co. v. City of Wichita, 233 Kan. 132, 660 P.2d 560 (1983); City of Columbus v. Independent Towel Supply Co., 51 Ohio App.2d 250, 367 N.E.2d 915 (1977). Jurisdictions adopting this restrictive view are in the minority, however. See generally Rudland, Rationalizing the Bid Mistake Rules, 16 Pub.Cont.L.J. 446 (1986). Most jurisdictions have recognized that other important policies are also involved in the question of whether and under what circumstances a bidder on a public construction contract should be permitted to withdraw the bid. These policies include a reluctance to enforce penal forfeitures, a hesitancy to promote windfall profits in the absence of any change of position and a concern that agreements based on unilateral or mutual mistake may not represent that firm meeting of the minds that is essential to the law of enforceability of contracts. See generally Jones, The Law of Mistaken Bids, 48 U.Cin.L.Rev. 43 (1979); Rudland, Rationalizing the Bid Mistake Rules, 16 Pub.Cont.L.J. 446 (1986).

In view of the competing policy concerns raised in this kind of case, courts recognizing the right of a bidder to rescind a bid for a public construction contract have generally done so in the context of claims for equitable relief. See generally Rudland, Rationalizing the Bid Mistake Rules, 16 Pub.Cont.L.J. 446 (1986). The issue for these courts, as the Court of Appeals recognized, is reduced to the question of identifying the circumstances and the appropriate factors that will support a bidder's request for relief from the consequences of a mistaken bid. We agree with the conclusion of the Court of Appeals that the more fair and responsible policy is to recognize that prior to the public entity's acceptance of a bid for a public construction project a bidder may in some circumstances obtain equitable relief from the consequences of a bid containing a mathematical or clerical error.

The Court of Appeals relied principally on the case of John J. Calnan Co. v. Talsma Builders, Inc., 67 Ill.2d 213, 10 Ill.Dec. 242, 367 N.E.2d 695 (1977), in adopting a test that includes a requirement of proof of non-negligence to justify rescission of a public construction project bid prior to any acceptance thereof. Calnan arose in circumstances quite different from the factual context of this case, however. In Calnan, a subcontractor, John J. Calnan Co., filed an action to rescind a contract it already had entered into with Talsma Builders, Inc., a general contractor. Talsma had invited a rush bid from Calnan for the plumbing work on a public construction contract because a previous subcontractor had failed to obtain a surety bond. Calnan submitted a bid of $237,000 on May 14, 1974. The next day Calnan informed Talsma that the bid failed to reflect a $40,000 cost item for bathtubs. The parties subsequently executed an agreement based on the enhanced bid, but Calnan refused to provide a performance bond when requested to do so. In mid-September, after commencing work on the project, Calnan discovered that its original bid did not include a $31,000 cost item for the entire water supply system for the project. Calnan submitted a bill to Talsma for this sum as well as for sums allegedly due as periodic payments for work performed; when Talsma refused payment, Calnan filed an action to rescind the construction contract. Applying a three-part test to those facts, the Illinois Supreme Court concluded that Calnan *361 was not entitled to rescind the contract.

This case presents far different circumstances. The City was aware of the "possible" mistake in Powder Horn's bid before Powder Horn was, and Powder Horn communicated its intention to rescind its bid immediately, prior to any change of position by the City. The City did not accept the bid until later—at a time when it had full knowledge of both the mistake and the fact that because of the mistake Powder Horn had withdrawn its bid. No contract for construction of the project was ever executed by the parties, and there was no delay, no surprise, and no justifiable reliance by the City at the time it elected to accept the bid.

Although Calnan is distinguishable from this case, the question remains whether the formula articulated by the Illinois Supreme Court in that decision should be adopted in Colorado. That formula, as stated by the Court of Appeals, grants a bidder equitable relief from its bid if the following criteria are met:

(1) the mistake relates to a material feature of the contract; (2) it occurred despite the exercise of reasonable care; and (3) the public authority can be placed in status quo.

City of Florence v. Powder Horn Constructors, Inc., 716 P.2d 143, 144 (Colo. App.1985). Our inquiry is of course shaped by the particular circumstances of this case —the fact that Powder Horn's decision to rescind its bid was made promptly upon discovery of the mistake, at a time when the City had full knowledge of the mistake and prior to the City's decision to accept the bid. We are not persuaded that in this context the imposition of a requirement that the bidder establish freedom from negligence substantially furthers policies of encouraging fair bidding practices. To the contrary, such requirement would in these limited circumstances severely undermine policies of fostering fair dealing and certainty among contracting parties essential to any contract negotiation process. See Jones, The Law of Mistaken Bids, 48 U.Cin.L.Rev. 43 (1979).

The Court of Appeals concluded that requiring Powder Horn to prove it was not negligent in the preparation of its mistaken bid served to protect the integrity of the bidding process, to foster consistency in bid preparation throughout the state, and to discourage or prevent fraud and collusion. City of Florence v. Powder Horn Constructors, Inc., 716 P.2d at 145. Such salutary policies should, of course, be encouraged. However, requiring a bidder to demonstrate freedom from negligent conduct when the bid has not been accepted and the bid contains a mechanical error, as distinguished from an error of judgment, will significantly restrict the availability of this equitable remedy in circumstances wherein recognition of the remedy would not undermine those policies. Moreover, rejection of the negligence standard in these limited circumstances will foster other important policies of encouraging fair dealing by all parties to the bidding process.

The very term "mistake" generally connotes some degree of negligent conduct. See Mississippi State Bldg. Comm'n v. Becknell Constr., Inc., 329 So.2d 57 (Miss. 1976); Jones, The Law of Mistaken Bids, 48 U.Cin.L.Rev. 43, 70 (1979). In most circumstances it would be illogical, if not impossible, to require a bidder who has made a mistake in calculating a bid to establish that the mistake was one most reasonable bidders would make under the same or substantially similar circumstances.^[3] Requiring proof of freedom from negligence *362 focuses substantial attention on the cause of the mistake; the question of the availability of equitable relief from a mistaken bid should focus primarily on the consequences of the mistake. Furthermore, the three-part test articulated in Calnan would require a bidder to prove that its mistake was of sufficient magnitude to be considered material to the contract yet, incongruously, that the mistake was not the result of negligence.^[4]See A. Corbin, Corbin on Contracts §§ 608, 609 (1960) (noting that an error in computing a bid invariably involves at least negligence).

Numerous courts and commentators have concluded that in public construction contract cases in which a bidder seeks equitable relief from bond forfeiture provisions because of a mistaken bid, the fundamental issue is whether the bidder made an honest or good faith mistake and any question of gross or extreme negligence of the bidder should be considered only as evidence of the bidder's lack of good faith. E.g., Marana Unified School Dist. No. 6 v. Aetna Cas. & Sur. Co., 144 Ariz. at 159, 696 P.2d at 711; Naugatuck Valley Dev. Corp. v. Acmat Corp., 10 Conn.App. 414, 523 A.2d 924 (1987); Mississippi State Bldg. Comm'n v. Becknell Constr., Inc., 329 So.2d 57 (Miss.1976); Balaban-Gordon Co. v. Brighton Sewer Dist. No. 2, 41 A.D.2d 246, 342 N.Y.S.2d 435 (1973); State v. Union Constr. Co., 9 Utah 2d 107, 339 P.2d 421 (1959); Jones, The Law of Mistaken Bids, 48 U.Cin.L.Rev. 43, 80 (1979); Rudland, Rationalizing the Bid Mistake Rules, 16 Pub.Cont.L.J. 446, 455 (1986); cf. BCM Corp. v. United States, 2 Cl.Ct. 602 (1983) (under federal law, where public agency is on actual or constructive notice of bidder's unreasonable mistake and accepts bid without verifying its accuracy, presumption arises that agency acted in bad faith in attempt to take advantage of bidder); see § 24-101-104, 10 C.R.S. (1982) (imposing a good faith standard upon all parties involved in state procurement activities); see also A. Corbin, Corbin on Contracts § 609 (1960) (bidding process will retain stability by requiring bidder to prove substantial mistake). This approach recognizes that a bidder should not be allowed to rescind a mistaken bid if the bid were made in bad faith and emphasizes the desirability of ensuring that public projects proceed on the basis of accurate cost estimates. A contrary rule would encourage manipulative bidding practices and undermine the stability of the bidding process. Furthermore, evenhanded application of a good faith standard ensures fair treatment of all parties involved in dealings with municipal authorities, thereby enhancing the integrity of the bidding process.

In this context, it is noteworthy that in adopting the Procurement Code, §§ 24-101-101 to XX-XXX-XXX, 10 C.R.S. (1982) (the Code), mandatorily applicable to state executive agencies contracting for construction projects on the basis of competitive bidding, the General Assembly has indicated that one of the public policies to be served by the provisions regulating the awarding of bids for public projects is that of ensuring the fair and equitable treatment *363 of all parties to the bidding process. See § 24-101-102. Although the Code does not apply to this bidding process, its policy of ensuring good faith negotiation of public contracts is notable.^[5] The degree of negligence exhibited by a bidder may well bear upon whether a bid was made in good faith, and in that respect an inquiry into the cause of the mistake may be material to the ultimate determination of whether equitable relief from a mistaken bid should be granted.^[6] However, when a bid containing a clerical or mathematical error is proffered in good faith, the fact that the mistake resulted from negligent conduct should not foreclose the ability to rescind the bid prior to acceptance thereof if no harm results from the rescission.

The City argued that failure to require a bidder to demonstrate freedom from negligent conduct as a condition to the exercise of any right to rescind a mistaken bid would reward careless bid preparation. However, in the competitive environment of public contracting a bidder invariably has a compelling incentive to bid accurately— to submit a bid in an amount lower than that at which the bidder can realistically perform the work is tantamount to submitting no bid at all. See Rudland, Rationalizing the Bid Mistake Rules, 16 Pub.Cont.L.J. 446, 455 (1986) (observing that a bidder gains nothing by withdrawing its bid). Far from being rewarded, a bidder allowed to rescind its bid prior to any acceptance thereof loses any possibility of reaping profit from fulfillment of the construction contract. In contrast, careless bid preparation is actually rewarded where the bidding process fails to closely circumscribe a bidder's ability to amend its bid after opening but before acceptance. E.g., Model Procurement Code for State and Local Governments § 3-202(6) commentary (2), (3) (1979) (bidder should not be allowed to amend bid after opening unless mistake is not one of judgment and intended bid is clearly evident from bid documents).

In reviewing the competing policy considerations presented here, we conclude that, in the absence of controlling legislation, a bidder for a public construction contract who submits a bid containing a mistake may rescind the bid prior to its acceptance if the bidder establishes by a preponderance of the evidence that the mistake is of a clerical or mathematical nature, that the mistake was made in good faith and relates to a material aspect of the bid, and that the public authority did not rely to its detriment on the mistaken bid. If a bidder proves all of these elements, rescission of the bid should be granted because the bid apparently accepted was not the bid intended and, therefore, was not a valid bid. If, however, the bidder fails to prove each of the elements of the equitable test, the bid submitted must be deemed the bid intended and the public entity may recover proven damages to the extent the bidder fails to perform its contractual obligations—such as the public entity's loss of bargain in being forced to forego the valid low bid and award the contract to the next lowest bidder. Such test will not undermine the integrity of the bid process, will promote fair dealing by all parties to that process and will promote contractual certainty by encouraging early discovery and disclosure of material mistakes in bids.

In this case, prior to advertising for bids the City's consulting engineer estimated the total cost of the project to be $890,000 —well above Powder Horn's bid of $699,500. Moreover, the City alerted Powder *364 Horn of a possible mistake when it reviewed the bids submitted and noted that on one item Powder Horn had bid $169,500, the next lowest bidder had bid $216,600 and the remaining eight bidders had bid from $230,000 to $330,000. Furthermore, Powder Horn notified the City of the nature of its mistake and its intent to withdraw the bid prior to the awarding of the contract, when no action had yet been taken in reliance on Powder Horn's inaccurate bid and when other bids were still available to the City.

These circumstances reveal an absence of one of the basic policies underlying the enforcement of contracts—if one party creates reasonable expectations in the other party, those expectations should be fulfilled, either by performance or by award of damages. See D. Dobbs, Handbook on the Law of Remedies § 11.4 (1973). Here, the City did not act upon any reasonable expectations, but rather sought to take advantage of Powder Horn's mistake and gain a windfall profit. If Powder Horn was acting in good faith, requiring it to forfeit its bid bond even though the City knew of the mistake prior to accepting the bid would contravene fundamental principles of fairness and encourage bad faith negotiations subsequent to bid opening. See Jackson Enters., Inc. v. Maguire, 144 Colo. 164, 355 P.2d 540 (1960) (equity will not allow a party to knowingly take advantage of a mistake of another); Model Procurement Code for State and Local Governments § 3-202(6) commentary (6) (1979) (a suspected mistake can give rise to a duty on the part of the public authority to seek confirmation of bid; bidder who demonstrates mistake should be allowed to correct or withdraw bid).^[7]

It is undisputed that the City did not solicit new bids when Powder Horn withdrew its bid and, therefore, incurred no administrative costs of rebidding the project. Cf. Board of Regents of Murray State Normal School v. Cole, 209 Ky. 761, 273 S.W. 508 (1925) (withdrawing bidder held liable to public authority for costs of rebidding the contract). The City ultimately awarded the contract to the next lowest bidder, which bid was, assuming rescission of Powder Horn's bid, the lowest valid bid. Thus in this case the City did not change its position in reliance on the mistaken bid. E.g., Regional School Dist. No. 4 v. United Pac. Ins. Co., 4 Conn.App. 175, 493 A.2d 895 (public authority is unharmed by mistake where notified of mistake prior to award of contract), certif. denied, 196 Conn. 813, 494 A.2d 907 (1985); Boise Junior College Dist. v. Mattefs Constr. Co., 92 Idaho 757, 450 P.2d 604 (1969) (same conclusion); Mississippi State Bldg. Comm'n v. Becknell Constr., Inc., 329 So.2d 57 (Miss.1976) (same conclusion); Smith & Lowe Constr. Co. v. Herrera, 79 N.M. 239, 442 P.2d 197 (1968) (same conclusion); Balaban-Gordon Co. v. Brighton Sewer Dist. No. 2, 41 A.D.2d 246, 342 N.Y.S.2d 435 *365 (1973) (same conclusion); see also City of Baltimore v. De Luca-Davis Constr. Co., 210 Md. 518, 124 A.2d 557 (1956) (observing that the courts were virtually unanimous in permitting withdrawal of bids where public authority was notified of mistake prior to award of contract); see also A. Corbin, Corbin on Contracts § 609 (1960) (offeree is unharmed where notice of mistake given before acceptance of bid).

Of course, the factual context in other cases may support the conclusion that the public entity did change its position in reliance on the mistaken bid. For example, expenses of a decision to rebid a contract or costs of delays in completion of a construction project may be found directly attributable to the mistaken bid. The question of whether a public entity changes its position in reliance on a mistaken bid for purposes of determining whether the bidder may rescind the bid is distinct from the issue of what damages a public entity might be entitled to recover if the bidder is not entitled to rescind the bid.

Because neither the trial court nor the parties had an opportunity to address the issues in this case under the appropriate legal standard, a remand is necessary to provide that opportunity. However, as the Court of Appeals concluded, the City did not change its position in reliance on the mistaken bid, and it is undisputed that the mistake was of a material clerical nature. Thus, the only element to be addressed on remand is whether Powder Horn's mistake was made in good faith. If Powder Horn fails to establish this element, its equitable defense falls, its bid must be deemed valid and, therefore, the City may recover pursuant to the terms of the bid bond as a result of Powder Horn's failure to carry out its obligations as low bidder.^[8] However, if Powder Horn establishes a good-faith mistake, it will be entitled to rescind the bid and the City can recover no damages.

III

The City argues that whatever standard might be applied to Powder Horn's equitable claim, the parties agreed that if Powder Horn was designated the low bidder and subsequently failed to execute a construction contract Powder Horn's bid bond was payable as liquidated damages. We find this argument unpersuasive.

A fundamental rule of contract law is that the court should strive to ascertain and effectuate the mutual intent of the parties. Martinez v. Continental Enters., 730 P.2d 308 (Colo.1986); Pepcol Mfg. Co. v. Denver Union Corp., 687 P.2d 1310 (Colo.1984); Griffin v. United Bank of Denver, 198 Colo. 239, 599 P.2d 866 (1979). Intent may be determined by reference to separate ancillary instruments. Town of Estes Park v. Northern Colo. Water Conservancy Dist., 677 P.2d 320 (Colo.1984). A bond, like other contracts, should be construed to give effect to the intent of the parties, and reference may be made to the bond and other instruments to which the bond refers to ascertain intent. General Ins. Co. of Am. v. City of Colorado Springs, 638 P.2d 752 (1981); Central Sur. & Ins. Corp. v. American Emp. Ins. Co., 150 Colo. 6, 370 P.2d 455 (1962); Covey v. Schiesswohl, 50 Colo. 68, 114 P. 292 (1911).

The essential elements of a liquidated damages provision are: (1) that the parties intended to liquidate damages; (2) that at the time of contracting the amount of damages specified was a reasonable estimate of the presumed actual damages that the breach would cause; and (3) that at the time of contracting it was difficult to ascertain the amount of actual damages that would result from a breach. Rohauer v. Little, 736 P.2d 403 (Colo.1987); O'Hara Group Denver, Ltd. v. Marcor Hous. Sys., Inc., 197 Colo. 530, 595 P.2d 679 (1979); Perino v. Jarvis, 135 Colo. 393, 312 P.2d 108 (1957). An obligation created by a *366 bond agreement will be viewed as a provision for a penalty, rather than as a liquidated damages provision, unless the bond, or other instruments to which it refers, shows that the parties intended otherwise. Turck v. Marshall Silver Mining Co., 8 Colo. 113, 5 P. 838 (1884); Moore v. Kline, 26 Colo.App. 334, 143 P. 262 (1914). Here, the bid bond provided in pertinent part as follows:

BID BOND

... [W]e, the undersigned, POWDER HORN CONSTRUCTORS, INC.... as Principal, and ST. PAUL FIRE AND MARINE INSURANCE COMPANY as Surety, are hereby held and firmly bound unto CITY OF FLORENCE, COLORADO as OWNER in the penal sum of Five Percent (5%) of the Total Amount of Bid

. . . .

The Condition of the above obligation is such that whereas the Principal has submitted to CITY OF FLORENCE, COLORADO a certain BID, attached hereto and hereby made a part hereof to enter into a contract in writing, for the Florence-Coal Creek-Williamsburg Regional