CITY OF CHAMBERLAIN, Applicant and Appellee, v. R.E. LIEN, INC., Appellant.
No. 18370.
Supreme Court of South Dakota.
Argued March 23, 1994. Decided Aug. 31, 1994.
521 N.W.2d 130
MILLER, Justice.
A trial court ruled
FACTS
On October 26, 1991, R.E. Lien, Inc. (Lien) entered into a contract with the City of Chamberlain (City) for construction of water mains and sewer lines in a four-block area of main street. The contract incorporated by reference drawings and specifications prepared by Pierce & Harris Engineering, Co.
The project did not go well. Lien asserted that the plans were grossly inadequate as to existing utilities and resulted in cost overruns and delays. City claimed Lien‘s wоrk was deficient and eventually ordered Lien off the job site. City then hired Morris, Inc. to complete the work.
When City refused to pay Lien the final contract price, Lien filed a demand for arbitration with the American Arbitration Association (Associаtion). City claimed the contract contained no agreement to arbitrate, but Association declared it would proceed in the absence of a court order staying the matter. City then requested an order from the circuit court quashing and staying the arbitration proceedings.
On May 20, 1993, the circuit court issued an order quashing and staying the arbitration proceedings. It found
STANDARD OF REVIEW
The issue of the constitutionality of a statute is a question of state law and is reviewed de novo by this court. In re K.O. Lee, 489 N.W.2d 606 (S.D.1992).
To succeed in a cоnstitutional challenge to a legislative act, the challenger must prove beyond a reasonable doubt that the legislature acted outside of its constitutional authority. Associated Gen. Contractors of South Dakota, Inc. v. Schreiner, 492 N.W.2d 916 (S.D.1992). We will review a law‘s constitutionality only when necessary for a determination upon the merits of a cause under consideration, and will first ascertain whether a construction of the statute, which avoids the constitutional question, is fairly possible. State v. Big Head, 363 N.W.2d 556 (S.D.1985). This сourt will uphold legislative enactments unless they are clearly and unmistakably unconstitutional. Oien v. City of Sioux Falls, 393 N.W.2d 286, 289 (S.D.1986); Matter of Certain Territorial Elec. Boundaries, 281 N.W.2d 65 (S.D.1979); Frawley Ranches, Inc. v. Lasher, 270 N.W.2d 366 (S.D.1978); County of Tripp v. State, 264 N.W.2d 213 (S.D.1978).
DECISION
I. SDCL 5-18-11 Is An Unconstitutional Delegation of Municipal Authority.
Municipalities in South Dakota have the freedom to enter into contracts for binding arbitration. L.R. Foy Construction Co. v. Spearfish Sch. Dist., 341 N.W.2d 383 (S.D.1983); City of Hot Springs v. Gunderson‘s,Inc., 322 N.W.2d 8 (S.D.1982). The question in this case is whether a municipality is bound by an arbitration clause contained in a statutorily required standardized form.
Lien first claims this is an action for enforcement of a contract, not a question of creation of a contract. This claim evades the question; it is elementary that before a court may enforce a contract there must be a determination that a valid contract was created.
The contract between Lien and City contains no express provision agreeing to arbitration. Lien claims that because its contract with City incorporated by reference the drawings and specifications of an engineering firm,
All сontracts shall be made and set forth in writing and shall be signed on behalf of the public corporation by the proper officials thereof and with the formalities required by the governing statutes regulating the particular public corporation involved. The writing shall embody therein all of the terms and conditions of the contract, and, when based upon plans and specifications prepared by an architect or engineer shall contain no general provisions at variancе with the general conditions of the latest edition of the standard form of the American institute of architects, except when in conflict with the laws of this state. (Emphasis added.)
The AIA general conditions contain the following provision mandating arbitrаtion:
4.5.1 Controversies and Claims Subject to Arbitration. Any controversy or Claim arising out of or related to the Contract or the breach thereof, shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitratiоn Association, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof[.]
City claims that
The Legislature shall not delegate to any special commission, private corporation or associatiоn, any power to make, supervise or interfere with any municipal improvement, money, property, effects, whether held in trust or otherwise, or levy taxes, or to select a capital site, or to perform any municipal functions whatеver.2
This Court has previously addressed the constitutionality of statutes delegating municipal functions to a special commission, private corporation or association. In City of Sioux Falls v. Sioux Falls Firefighters, Local 814, 89 S.D. 455, 234 N.W.2d 35 (1975), we declared an entire chapter of the code,
[T]he framers of our Constitution saw a need to “cure the evil” of interference with municipal functions by the legislature in this state. This court has previously dеtermined the setting of salaries to be a legislative function of a city. . . . We hold, therefore, that under the language of Article III, § 26 of this state‘s Constitution,
SDCL 9-14A-18 is clearly unconstitutional.
Sioux Falls Firefighters, 89 S.D. at 460, 234 N.W.2d at 37-38.
In an earlier case, citing the same constitutional provision, this Court found unconstitutional an ordinance passed by an initiative in Sioux Falls. The ordinance tied the future salaries of city firemen and policemen to a yearly wage scale formulated by trade unions and private contractors. Schryver v. Schirmer, 84 S.D. 352, 171 N.W.2d 634 (1969). We held, “it is unconstitutional because it delegates to private persons and agencies the absolute power to fix salaries
This case goes far beyond what was found to be unconstitutional in Sioux Falls Firefighters. In that case, the muniсipal authority was delegated to a board, a sort of quasi “public commission” and the board‘s authority was limited to labor disputes and arbitration. 89 S.D. at 457, 234 N.W.2d at 36. Here,
This delegation by the legislature is clearly an unconstitutional interference with a municipal function in light of precedent in this state. City has met its burden of proving clearly and unmistakably that
II. SDCL 21-25A-1 Is Not An Unconstitutional Delegation of Municipal Authority.
The trial court also found
A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract. This chapter also applies to arbitration agreements between employers and employees or between their respective representatives.
As previously stated, it is axiomatic that municipalities in South Dakota have the freedom to enter into contracts for binding arbitration. L.R. Foy, 341 N.W.2d 383; Hot Springs v. Gunderson‘s, 322 N.W.2d 8 (reversing trial court‘s denial of a mоtion to compel arbitration where city and construction company had entered valid contract requiring compulsory arbitration). As Justice Henderson explained concerning the Spearfish School District‘s right to bargain for arbitration: “These parties bargained for arbitration. There existed a freedom of contract between the parties. Neither party had to ‘adhere’ to entering into a contract calling for arbitration.” L.R. Foy, 341 N.W.2d at 388 (Henderson, J. specially concurring).
We affirm the trial court‘s decision that
WUEST, HENDERSON and AMUNDSON, JJ., concur.
SABERS, J., concurs in result in part and dissents in part.
SABERS, Justice (conсurring in result in part and dissenting in part).
On Issue II, I concur in the result that
I respectfully dissent on Issue I. The majority opinion incorrectly concludes that
The majority opinion incorrectly relies upon City of Sioux Falls v. Sioux Falls Firefighters, Local 814, 234 N.W.2d 35 (S.D. 1975). That case dealt with the setting of salaries by an arbitration panel, a function that had previously been deemed a municipal function by this court. Id. See Schryver v. Schirmer, 171 N.W.2d 634 (S.D.1969). Here, the City argues that the enforcement of contracts is a municipal function. However, the power to enter into a contract and the power to enforсe it are entirely different than the power to determine, resolve or arbitrate through judicial or quasi-judicial means. In Firefighters, arbitration was attempted to create a contract between labor and the City of Sioux Falls, 171 N.W.2d 634, while here, arbitratiоn would be used to settle a dispute concerning an existing contract.
The City also claims that arbitration is not mandatory under the AIA standard form. However, the AIA standard form clearly states that any dispute or controversy “shall” be settled by arbitration. Thе word “shall” means that arbitration is mandatory. Along with the right to enter into contracts comes the responsibility to be bound by the terms thereof. As noted earlier, the use of binding arbitration in settling contract disputes with private parties is not usurping a municipаl function.
Therefore,