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Real Estate Law

When Is Mandatory Arbitration Not Mandatory?

I have discussed my views on mandatory mediation in construction contracts at other places here at Musings and also discussed how the contract is king here in Virginia. A recent Charlottesville, Virginia Circuit Court case, [subscribers can access an enhanced version of this opinion: | Lexis Advance], combined these two concepts to allow a subcontractor to proceed straight to litigation despite various ADR provisions in the contract between it and the general contractor.

In ProBuild v. DPR & Continental Casualty, the Court looked at a series of ADR steps that were to be followed in the contract between the parties in order to allow DPR, the general contractor to require arbitration as opposed to litigation. The Court considered the surety’s motion to stay the litigation against it pending arbitration between ProBuild and DPR.

In ProBuild, the Court looked at a contractual provision that provided certain steps to be followed in the event of a dispute, starting with a notice of dispute, followed by negotiation, followed by mediation should the disputing party request it, and in the event that mediation was tried and failed, the disputing party or general contractor could require arbitration. The Court determined that ProBuild, the subcontractor, was the disputing party under the contract, had pursued unsuccessful formal negotiations and that neither ProBuild nor DPR requested mediation. The Court then held that because unsuccessful mediation was a prerequisite to required arbitration and because mediation was never pursued, the mandatory arbitration clause did not apply. In doing so the Court stated:

I believe that what is set out in the dispute resolution section is a required sequence of events: formal dispute notice, required informal negotiation, and required mediation at the discretion of the disputing party and mandatory binding arbitration at the general contractor’s discretion. It seems to me that each is anticipated as a required step before the next step is taken. Note that 17.2.3 clearly anticipates the “commencement” of mediation proceedings, prior to the disputing party being able to require arbitration.

Furthermore, the Court held that DPR as the general contractor could not become a disputing party and request mediation and arbitration once litigation had commenced. The Court held that phone conversations and a letter discussing some disputed items did not qualify as a formal notice of dispute such that DPR could be considered a “Disputing Party” under the contract. Therefore, the Court stated:

The general contractor was not in a position properly to demand mediation and they did not participate in one, such that it could have demanded arbitration. I find the general contractor cannot become “the” disputing party after the filing of the lawsuits, if they had not already filed a formal Notice of Dispute.

Because DPR failed to follow the terms of the contract to the letter and could not become a disputing party after the fact, the Court refused to stay the proceedings and allowed ProBuild to proceed with its claim in Circuit Court.

The lesson here is that parties to a construction contract must carefully review the contract between them (preferably with the assistance of a Virginia construction lawyer) and must follow them to the letter if these terms are to be enforced. As always, I recommend that you read the case in full to get all of the nuance.

As always, I welcome your comments. Please subscribe to keep up with this and other Construction Law Musings.

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