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By
Peter K. Zweighaft
Thelen Reid Brown Raysman & Steiner LLP
On
January 10, 1994, the City of Eufaula, Oklahoma, and the
Eufaula Industrial Authority entered into a contract with
Wyatt-Doyle & Butler Engineers, Inc. for development
of an amphitheater and amusement park. The contract provided
that the engineer was to be paid by the Authority. If the
authority failed to pay, the city would be liable for payment.
The contract also contained a dispute resolution clause
providing for arbitration.
The
authority made several payments to the engineer, then filed
for bankruptcy. The city refused to pay the engineer the
balance owing. The engineer initiated arbitration. The arbitrator
determined that the city owed the engineer $184,641.42,
plus interest. When the city failed to pay, the engineer
sued to have the award confirmed and judgment entered against
the city.
Before
the trial court, the city argued that the contract was void
and that the court lacked jurisdiction because the arbitration
award violated Article 10, §26 of the Oklahoma Constitution.
Section 26 provides:
"Except
as herein otherwise provided, no county, city, town, township,
school district, or other political corporation, or subdivision
of the state, shall be allowed to become indebted, in
any manner, or for any purpose, to an amount exceeding,
in any year the income and revenue provided for such year
without the assent of three-fifths of the voters...."
The
trial court agreed with the city's arguments and refused
to confirm the award. After the Court of Civil Appeals affirmed
the trial court's ruling, the engineer appealed to the Oklahoma
Supreme Court. It also affirmed. Wyatt-Doyle & Butler
Engineers, Inc. v. The City of Eufaula, 2000 OK 74;
13 P.3d 474; 2000 Okla. LEXIS 75 (2000).
The
Supreme Court rejected the engineer's argument that there
was no basis under Oklahoma's Arbitration Act to vacate
the award. To hold otherwise, the court found, would allow
an arbitrator and the Arbitration Act to circumvent a constitutional
mandate.
The
engineer advanced two arguments to avoid Article 10, §26.
First, the engineer argued that its agreement with the city
did not constitute a debt contemplated by Article 10, §26
because the obligation created by the contract was contingent
on the default of the authority. The court disagreed, citing
a 1914 case in which the court struck down a statute that
permitted courts to validate an unconstitutional indebtedness
of a municipality. If courts lack the authority to subsequently
validate a contractual obligation, the Supreme Court reasoned,
the municipality certainly lacked the same authority. For
the engineer, this case meant that a contractual obligation
made in one fiscal year could not be validated in a succeeding
fiscal year.
The
Supreme Court wrote that Article 10, §26 essentially
forces municipalities to operate on a cash basis and prevents
indebtedness payable out of tax revenues from extending
beyond one year. The Legislature cannot relieve a municipality
of this obligation.
The
engineer also argued that a debt for purposes of applying
Article 10, §26 does not arise under an agreement unless
the agreement states a sum certain to be paid within a specified
period of time. The court rejected this argument by analogizing
to a 1935 lawsuit by a funeral home. There, the funeral
home contracted with a county to embalm, furnish graves
for and bury paupers. The funeral home was to be paid a
set amount of money for each person buried. The county,
however, failed to set aside enough in its annual budget
for such expenses and the funds were exhausted. When the
funeral home billed for 35 burials, the county declined
to pay for lack of funds. Both the trial court and the Supreme
Court ruled for the county, holding that the contract violated
Article 10, §26. Here, the funeral home case was cited
to show that even though an obligation is based on a contingent
event, the resulting debt still would violate Article 10,
§26.
The
Supreme Court wrote that cases interpreting Article 10,
§26 fall into two general categories: 1.) Cases
where the obligation is imposed by the federal or Oklahoma
constitution; and 2.) Cases where the obligation
is imposed by the Legislature or by a voluntary contract
entered into between the parties. Obligations falling under
the first category are not controlled by Article 10, §26,
but those falling into the second category are. The Supreme
Court concluded that the engineer's claim fell into the
second category of cases. Thus, the engineer's contract
violated Article 10, §26.
The
Supreme Court concluded that the engineer should have been
aware of Oklahoma's constitutional limitations. The engineer's
" 'inconvenience must yield to the larger and more
important necessity of enforcing the safeguards enacted
by the people into the Constitution for the proper handling
of their own public funds.' " The court particularly
noted that Article 10, §26 served to protect taxpayers
rather than local governments.
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For more information about the issues covered in this report, please contact Peter K. Zweighaft in our Los Angeles office at 213-576-8063 or at pzweighaft@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contract's Department, click here.
©2002 Thelen Reid Brown Raysman & Steiner LLP
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