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Bar Journal 2018

Dispute Resolution Clauses in Private Construction Contracts

By Theresa Noble Hill

Most contracts involving the construction of a private project include some type of provision addressing dispute resolution.

This article is not intended to be an exhaustive review of Oklahoma law that may be involved in any particular contract or dispute. Instead, this article addresses the Oklahoma law that could render your dispute resolution clause void or unenforceable.

CHOICE OF LAW AND FORUM SELECTION PROVISIONS
Many construction contracts contain provisions addressing the applicable law and venue for resolving disputes. If these provisions do not specify Oklahoma law for an Oklahoma project and/or require dispute resolution proceedings outside Oklahoma, such provisions may run afoul of the express public policy of Oklahoma.

In 2010, the Oklahoma Legislature enacted an act relating to certain construction projects “establishing requirements for certain bid project contracts,” “specifying language on certain bid contracts,” “establishing requirements for certain privately negotiated contracts,” “specifying requirements for certain invited bids” and other provisions.1 “Bid projects” include “all private construction projects in which a set of plans or specifications or both plans and specifications are issued for bid.”2 “Private negotiated projects” appear to include most other private construction projects.3 However, any contract relating to a “single-, two-, three-, or four-family dwelling” is exempted from this act.4

It is important to carefully review any choice of law and forum selection provisions in a private construction contract to determine whether such provisions comply with this act. The act provides:

The following are against this state’s public policy and are void and unenforceable:

1. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract that makes the contract subject to the laws of another state or that requires any litigation, arbitration or other dispute resolution proceeding arising from the contract to be conducted in another state; and

2. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract that disallows or alters the rights of any contractor or subcontractor to receive and enforce any and all rights under this act.5

There are no reported decisions interpreting the broad language of “collateral to or affecting a construction contract.” As a result, when reviewing private construction projects, the practitioner must carefully consider not only any choice of law and forum selection clauses, but also provisions addressing insurance, subcontracts, consultant agreements and arbitration to ensure compliance with this act.

Outside the construction context,6 there is no stated public policy in Oklahoma against choice of law provisions applying the law of another state or venue selection clauses requiring proceedings in another forum outside Oklahoma. “Generally, [t]he law of the state chosen by the parties to govern their contractual rights and duties will be applied.”7 A party seeking to avoid enforcement of a contract will bear the burden of proving that the contract violated the public policy of Oklahoma. However, absent a clear statement of public policy, courts will only void such provisions when free of doubt.8

ARBITRATION PROVISIONS
Since 2010, there are no reported cases challenging an arbitration provision that would apply the law of another state to a conflict involving a private construction contract in Oklahoma or require arbitration proceedings outside of Oklahoma. The statutory prohibitions discussed above against certain choice of law and forum selection clauses will equally apply to arbitration provisions.9 Oklahoma’s Uniform Arbitration Act (OUAA)10 expressly provides an arbitration agreement is subject to the public policy of the state and the laws of the state outside the OUAA.11 Since 2010, the stated public policy of Oklahoma is that any contractual provisions in a construction contract that make the contract subject to the laws of another state or that require litigation, arbitration or other dispute resolution proceedings to be conducted outside the state are void and unenforceable.12

Overview of OUAA
Most practitioners are familiar with arbitration agreements. Oklahoma has a strong public policy in favor of arbitration.13 Courts generally favor arbitration provisions as an efficient and expedient manner to resolve conflicts.14 Oklahoma’s first Uniform Arbitration Act was effective from Oct. 1, 1978, through Jan. 1, 2006.15 The current OUAA expands an arbitrator’s authority to allow methods of discovery as they deem appropriate including taking depositions regardless of witnesses’ availability to attend arbitration hearings, issuing protective order, demanding compliance with the arbitrator’s discovery-related orders and compelling nonparty witnesses to testify or produce documents.16 Essentially, an arbitrator has the same discovery tools that are available in litigation.

Upon application, arbitration awards will be confirmed by a district court by order.17 Only in limited circumstances, set forth in statute, will a motion to vacate an arbitration award be granted.18 In reviewing a district court’s decision concerning a motion to vacate or modify an arbitration award, Oklahoma appellate courts review the question of law, whether the district court had authority to vacate the arbitration award, de novo.19 In reviewing an arbitrator’s decision, the trial court must give the arbitrator great deference and “cannot review the merits of the award, including any of the factual or legal findings.”20

In an arbitration arising from a construction contract, an arbitrator’s failure to award the prevailing party its attorney fees and expenses, pursuant to the parties’ agreement, exceeded his power. The Oklahoma Supreme Court has found that the district court did not err in vacating an arbitrator’s award in part and awarding the prevailing party attorney fees and costs.21

Potential Pitfalls
When reviewing a construction contract, consider whether multiple parties may be involved if a dispute occurs. A party who contracts with multiple entities on a construction project should ensure that it has consistent arbitration provisions across its separate contracts. For instance, if an owner and general contractor include no arbitration provision in their contract, but the general contractor has arbitration provisions in its contracts with its subcontractors, the subcontractors may compel arbitration if they are brought into litigation between a general contractor and owner. Courts will not easily infer a waiver of a contractual arbitration provision.22 Accordingly, a general contractor may find itself both in court and separate arbitrations involving the same project.

On the flip side, if separate contracts relating to the construction of a single project all contain arbitration provisions, a party may be joined into an arbitration initiated by other parties pursuant to a separate contract. In Highland Crossing, L.P. v. Ken Laster Co.,23 the owner of the project objected to being joined as an additional party to an arbitration pending between a subcontractor and general contractor. After an arbitration award was made to the subcontractor, the owner moved to vacate the arbitration award. The Oklahoma Court of Civil Appeals denied the owner’s motion, finding that all the respective construction contracts revealed all parties’ agreement to arbitrate. The owner’s contract with the general contractor contained an arbitration provision application to “any claim arising out of or related to the Contract [owner’s contract with general contractor].”24 The Highland Crossing court explained, “[i]t is clear that the parties’ respective contracts relate to the same construction project, reference the parties’ respective related duties and obligations, and were both executed to carry out the mutual intent of completion of the project.”25

The procedures for arbitration should be set forth in the contract. Many construction contracts incorporate the procedures of the American Arbitration Association or other private groups. If an arbitration clause refers to procedures established and maintained by another, be sure those procedures are appropriate and maintained. In Amundsen v. Wright,26 a homeowner and builder agreed that disputes would be submitted to “binding arbitration pursuant to the procedures established and maintained by the Central Oklahoma HomeBuilder’s (sic) Association.”27 The problem was that the Central Oklahoma Home Builders Association did not have procedures established for arbitration. The court denied the builder’s motion to compel arbitration finding it was impossible to compel arbitration because the procedure chosen by the parties did not exist.28

NOTICE PROVISIONS
Many arbitration provisions and dispute resolution provisions in construction contracts contain time limits for giving notice or commencing a claim. Arbitration agreements cannot unreasonably restrict the rights to receive notice of the initiation of an arbitration proceeding.29 Arbitration provisions or other dispute resolution provisions that purport to limit a party’s time to enforce its rights under contract may be subject to challenge pursuant to Oklahoma statute or the Oklahoma Constitution.

Specifically, 15 O.S. §216 addresses such time limitations contained in contracts:

Every stipulation or condition in a contract, by which any party thereto is restricted from enforcing his rights under the contract by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void.

Article 23 Section 9 of the Oklahoma Constitution provides:

Any provision of any contract or agreement, express or implied, stipulating for notice or demand other than such as may be provided by law, as a condition precedent to establish any claim, demand, or liability, shall be null and void.

Oklahoma courts will carefully review any notice of claims provision. In M.J. Lee Construction Co. v. Oklahoma Transportation Authority,30 the Oklahoma Supreme Court found that a notice of claim provision was not a condition precedent to liability, but could limit items of costs included in a contractor’s claim for additional compensation. While this case did not involve a private construction project, it is expected that Oklahoma courts would scrutinize notice provisions in private construction contracts in the same manner.31

CONCLUSION
When reviewing dispute resolution provisions in contracts for private construction projects, consider the following checklist:

1) Does the dispute resolution provision provide that the law of another state will apply to a dispute? If yes, consider whether 15 O.S. §§820 and 821 will void this provision.

2) Does the dispute resolution provision require litigation, arbitration or other proceedings outside the state of Oklahoma? If yes, consider whether 15 O.S. §§820 and 821 will void this provision.

3) Are there complementary arbitration provisions in all the related contracts for a certain project?

4) Does the dispute resolution provision provide for an award of attorneys’ fees and costs to the prevailing party?

5) Are the procedures for arbitration clearly set forth in the contract?

6) Are there notice requirements for claims? If so, are such provisions consistent with 15 O.S. §216 and Okla. Const., Art. 23, §9.

These are basic considerations for the drafting and review of dispute resolution provisions in a private construction contract. A myriad of other issues can arise when parties find themselves in a dispute, but the enforceability and constitutionality of the dispute resolution provision should not be subject to challenge.

ABOUT THE AUTHOR
Theresa Noble Hill is a partner with Rhodes, Hieronymus, Jones, Tucker & Gable PLLC in Tulsa. Her areas of emphasis include complex civil litigation, construction law and environmental law. She is the author of several publications addressing construction issues in Oklahoma, including authorship of the Oklahoma-specific chapters of State-by-State Guide to Construction Contracts and Claims and Fifty State Construction Lien and Bond Law.

1. Laws 2010, SB 1012, c. 208, §1, emerg. eff. May 5, 2010. This act also addresses payment terms, suspension of work and related terms that are not addressed here.
2. 15 O.S. §820(A)(1).
3. 15 O.S. §820(B).
4. 15 O.S. §821(A).
5. 15 O.S. §821(B).
6. The Fair Pay for Construction Act contains similar provisions relating to certain public construction project, See 61 O.S. §§221 et seq.
7. Leritz v. Farmers Insur. Co., 2016 OK 79 ¶2, fn. 2, 385 P.3d 991, 992 (citing Restatement (Second) of Conflict of Laws, §187 (1971)); Fossil Creek Energy Corp. v. Cook’s Oilfield Services, 2010 OK CIV APP 123, ¶11, 242 P.3d 537, 541, fn 5. See also Telex Corp. v. Hamilton, 1878 OK 32, ¶¶7-8, 576 P.2d 767, 767 (implying that, even if the contract had not been entered into and performed in Oklahoma, Oklahoma law would have been applied because the contract so provided); and Victory Energy Operations, L.L.C. v. Rain CII Carbon, L.L.C., 2014 OK CIV APP 83, ¶10, 335 P.3d 809, 812.
8. See In re Kaufman, 2001 OK 88, ¶18, 37 P.3d 845, 854 (“Our power to void a contract as being in contravention of public policy is delicate and undefined. We exercise it only in cases free from doubt.”). See also 15 O.S., §211; Hamilton v. Cash, 1939 OK 255, 91 P.2d 80, 81.
9. 15 O.S. §§820 and 821.
10. 12 O.S. §§1851 et seq.
11. 12 O.S. §1855(A).
12. 15 O.S. §821(B)(1).
13. 12 O.S. §1855(B)(1) and 1857(A).
14. Willco Enterprises, LLC v. Woodruff, 2010 OK CIV APP 18, ¶14, 231 P.3d 767; Long DeGreer, 1987 OK 104, ¶5, 753 P.2d 1327, 1328; Voss v. City of Oklahoma City, 1980 OK 148, ¶8, 618 P.2d 925, 928.
15. 15 O.S. §§801, et seq. and repealed by Laws 2005, SB 873, c. 364, eff. Jan. 1, 2006.
16. 12 O.S. §1868. See also Willco Enterprises, LLC v. Woodruff, 2010 OK CIV APP 18 at ¶20, 231 P.3d at 774.
17. 12 O.S. §1873.
18. 12 O.S. §1874 provides that:

A. Upon an application and motion to the court by a party to an arbitration proceeding, the court shall vacate an award made in the arbitration proceeding if:

1) The award was procured by corruption, fraud, or other undue means;

2) There was:

a. evident partiality by an arbitrator appointed as a neutral arbitrator,

b. corruption by an arbitrator, or

c. misconduct by an arbitrator prejudicing the rights of a party to the arbitration proceeding;

3) An arbitrator refused to postpone the hearing upon showing of sufficient cause for postponement, refused to consider evidence material to the controversy, or otherwise conducted the hearing contrary to Section 6 of this act, so as to prejudice substantially the rights of a party to the arbitration proceeding;

4) An arbitrator exceeded the arbitrator’s powers;

5) There was no agreement to arbitrate, unless the person participated in the arbitration proceeding without raising the objection under subsection C of Section 16 of this act not later than the beginning of the arbitration hearing; or

6) The arbitration was conducted without proper notice of the initiation of an arbitration as required in Section 10 of this act so as to prejudice substantially the rights of a party to the arbitration proceeding.

19. Sooner Builders & Investments, Inc. v. Nolan Hatcher Construction Services, L.L.C., 2007 OK 50, ¶8, 164 P.3d 1063.
20. Fraternal Order of Police, Lodge 142 v. City of Perkins, 2006 OK CIV APP 122, ¶4, 146 P.3d 829, 830 (internal citation omitted).
21. Sooner Builders & Investments, Inc. v. Nolan Hatcher Construction Services, L.L.C., 2007 OK 50, 164 P.3d 1063.
22. Willco Enterprises, LLC, 2010 OK CIV APP 18 at ¶36, fn. 18, 231 P.3d at 778 (reviewing factors to analyze whether waiver has occurred since the new OUAA and review of cases finding waiver and no waiver.)
23. 2010 OK CIV APP 124, 242 P.3d 567.
24. Highland Crossing, 2010 OK CIV APP 124 at ¶11, 242 P.3d at 571.
25. Id. at ¶12.
26. 2010 OK CIV APP 75, 240 P.3d 16.
27. Amundsen, 2010 OK CIV APP 75 at ¶2.
28. Id. at ¶¶16–18.
29. 12 O.S. §1855(B)(2).
30. 2005 OK 87, ¶¶27 - 30, 125 P.3d 1205, 1213-1214.
31. See also McDonald v. Amtel, Inc., 1981 OK 78, 633 P.2d 743 (holding that a contract provision providing that no civil or equitable anti-trust action by either party shall be brought unless instituted within two years of the date of the transaction upon which the action is based was found to be void and unenforceable under the Oklahoma Constitution.)


Originally published in the Oklahoma Bar Journal -- OBJ 89 pg. 28 (February 2018)

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