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Despite clear evidence of a concluded contract, a Massachusetts federal district court retained the authority to decide whether a public works contract was unenforceable due to a foreign corporation's failure to follow state filing requirements.
In City of Westfield v. Harris & Associates Painting, Inc., Civ. A. No. 07-30241-MAP, 2008 WL 2856421 (D. Mass. July 24, 2008), the City of Westfield (Westfield) and Harris, a foreign corporation, entered into a public works contract. The contract contained an arbitration agreement. After a dispute arose over delays in performance, Harris and Westfield proceeded to arbitration.
At the time of contracting, Westfield was subject to a state law prohibiting cities from entering into public works contracts with foreign corporations that failed to make certain regular filings with the Secretary of State. See Mass. Gen. Laws ch. 30, § 39L (prohibiting the city from entering such contracts); Mass. Gen. Laws ch. 181, §§ 3, 5 (setting forth the filing requirements for foreign corporations doing business in Massachusetts).
After discovering that Harris was not compliant with the filing statute at the time of contracting, Westfield sought declaratory relief from the court to stay arbitration and grant summary judgment in its favor.
As a preliminary matter, the Court examined whether the issue of the contract's validity was a matter reserved for the arbitrator. While the Court acknowledged the general rule favoring arbitrability where, as here, the contract so provides, the Court curiously determined that Westfield's contract fit within the exception applicable when parties dispute "whether the signor lacked authority to commit the alleged principal." Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444-46 n.1 (2006).
Characterizing the controversy regarding Westfield's legal "authority" to contract with Harris as a dispute over "agency," the Court concluded that "the contract's validity is a matter for judicial review rather than arbitration." But see Buckeye, 546 U.S. at 444 n.1 (stating that "[t]he issue of the contract's validity" is a matter for the arbitrator, while the different "the issue [of] whether any agreement… was ever concluded" is a matter for the court). Despite clear, uncontroverted evidence that a contract was in fact concluded by Westfield and Harris, the Court proceeded to decide the issue of validity without any further explanation.
According to the Court, the violation of a regulatory requirement should only nullify a public works contract under Massachusetts law when voiding the contract is necessary "to effectuate the purpose of the relevant rule." While no relevant precedent dealt specifically with ch. 30, § 39L, the Court found a close analogy in Mass. Gen. Laws ch. 156D, § 15.03 (imposing a general registration mandate on foreign corporations). Because the state legislature expressly provided that violations of ch. 156D, § 15.03, were not punishable by invalidation of contracts, the Court held that invalidation would not effectuate the purpose of ch. 30, § 39L either.
Finally, the Court noted that Westfield had made no showing that Harris's failure to comply with the filing statute had material adverse consequences that would warrant invalidation of the entire contract. Because the contract – and the arbitration agreement within – was valid and enforceable, the court stayed the case pending the outcome of the already commenced arbitration proceeding.
The holding in City of Westfield is reminiscent of a recent California Court of Appeals case, which advanced the same questionable rationale for deciding the validity of a concluded contract contrary to the clear intent of the parties. Betts v. Compaction Plus, Inc., Nos. E043258, E043739, 2008 WL 2811215, at *5 (Cal. Ct. App. July 22, 2008) (citing "an exception to the general rule permits judicial review when the entire contract is unenforceable because a party is not licensed" as a contractor under state law).
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