Is the Dispute Resolution Provision in Your Contract Enforceable?

Many general contractors have subcontracts that contain dispute resolution provisions requiring arbitration. The announced public policy of Arizona favors arbitration. Because of the public policy favoring arbitration, arbitration clauses are construed liberally, and any doubts about whether a matter is subject to arbitration are resolved in favor of arbitration.

General contractors occasionally will put additional qualifications into the dispute resolution provisions. Recent judicial decisions from Arizona and other states suggest that some of these provisions are of questionable enforceability.

Forum Selection Outside Arizona. Some subcontracts will contain a provision requiring resolution of all disputes in a jurisdiction outside of Arizona. For example, a clause may say something like: "Any dispute arising out of this subcontract must be brought in Los Angeles, California."

In response to subcontractor complaints about this type of provision, the Arizona legislature enacted a statute, A.R.S. § 41-2580, that provides that any provision in a construction contract performed in Arizona that makes the contract subject to the laws of another state or that requires litigation, arbitration or other dispute resolution proceedings to be conducted in another state is against Arizona's public policy and is void and unenforceable. The Arizona statute is modeled after statutes in several other states that attempt to prevent one contracting party from requiring another party to bring dispute resolution proceedings in a foreign jurisdiction.

Arizona law expressly invalidates any contractual provision that would require arbitration or litigation in a state other than Arizona. You shouldn't have to worry if you see such a clause in one of your subcontracts, right? Wrong.

The enforceability of Arizona's statute is in serious question, at least if your contract requires arbitration in another state. Although no Arizona court of appeals has yet addressed the issue, the Ninth Circuit Court of Appeals recently invalidated a similar California law in the case of Bradley v. Harris Research, Inc., 275 F.3d 884 (9th Cir. 2001). In that case, a California franchisee entered into a contract requiring disputes to be arbitrated in Utah. California, like Arizona, had a statute providing that any provision in an agreement restricting venue to a forum outside the state is void. The Ninth Circuit held that the California statute was unenforceable because it was pre-empted by the Federal Arbitration Act. This decision follows decisions in courts from other jurisdictions.

No Arizona court of appeals has ruled on this issue. However, the California case raises serious questions about the enforceability of Arizona's statute if arbitration is involved. Thus, it is not recommended that any party rely on this statute to assume automatically that a provision requiring arbitration in another state is void as a matter of law.

General Contractor's Option to Litigate or Arbitrate. Dispute resolution provisions sometimes allow one party to select whether to arbitrate or litigate the dispute. For example, a clause may require the subcontractor to arbitrate but give the general contractor discretion to decide whether the dispute is to be arbitrated or litigated. The enforceability of such a provision is open to debate.

In Stevens/Leinweber/Sullens, Inc. v. Holm Development & Management, Inc., 165 Ariz. 25, 795 P.2d 1308 (App. 1990), the Arizona Court of Appeals examined an arbitration agreement that gave the owner complete and sole discretion to select either arbitration or litigation to resolve claims under the contract. Although there were complicating factors in the case, the court refused to enforce the owner's choice of arbitration, suggesting that arbitration clauses that provided one party complete discretion were unenforceable because they were not supported by separate consideration.

But the Stevens decision may be limited to the unique facts of that case. In fact, courts from many other jurisdictions have consistently been taking a different stance. In Doctors' Associates, Inc. v. Distajo, 66 F.3d 438, 451 (2d Cir. 1995), for example, the Second Circuit Court of Appeals ruled that arbitration clauses that give one party the option to arbitrate or to litigate are enforceable. Distajo follows the overwhelming majority of judicial decisions from other jurisdictions.

No Arizona court has expressly overruled Stevens. However, on at least one occasion, a trial court has enforced the general contractor's option to choose whether a dispute was arbitrated or litigated.

In short, a clause that provides one party with the unilateral option to choose arbitration or litigation may or may not be enforceable in Arizona. As a result, anyone relying on such a provision should be warned.