Failure to Mediate Prior to Litigation Held Grounds for Dismissal

Failure to Mediate Prior to Litigation Held Grounds for Dismissal

 A court will not substitute a judicial resolution for a contractually agreed-upon remedy when two sophisticated parties negotiate a contract at arm's length. In Dominion Transmission, Inc. v. Precision Pipeline [an enhanced version of this opinion is available to subscribers], the United States District Court for the Eastern District of Virginia dismissed a complaint where the two corporations had agreed to submit any disputes to mediation before commencing litigation and failed to do that. The basis for the dismissal, however, relied on the court's inherent authority to control its docket, not on any lack of subject matter jurisdiction.

Utility company Dominion Transmission contracted with Precision Pipeline to construct a portion of the Appalachian Gateway pipelines. The parties' contract provided that the parties would abide by a multi-tiered, progressive alternative dispute resolution ("ADR") process before commencing litigation. In the event of a dispute, (1) the aggrieved party was to notify the other party of the dispute; if the parties could not resolve the dispute, they were required to (2) meet and discuss the issue among the project managers; then (3) proceed to a meeting of senior officers; and finally (4) proceed to mediation governed by the American Arbitration Association standards.

After Precision completed the pipelines, the parties met to close out the contract but could not reach agreement. Precision presented change order requests and filed mechanics' liens and foreclosure actions. The parties communicated for several months, Dominion invoked its audit rights, and the parties disagreed over the amount, format and content of Precision's required production of information. Both parties referred to the ADR provision of the contract in their communications, and counsel for the parties met at least once, but neither party initiated a meeting of senior executives or submitted the dispute to formal mediation as steps (3) and (4) of the contractual ADR provision required. Instead, Dominion filed suit in the United States Court for the Eastern District of Virginia, and Precision moved to dismiss for lack of subject matter jurisdiction, arguing that the court lacked power to hear the case because a contractual condition precedent (submission to mediation) was not met.

The court examined the contractual language and found that it clearly required the parties to submit to mediation if the previous 3 steps failed to resolve the issues and that the parties could pursue litigation only if their attempts to mediate the disagreement failed. However, Precision had incorrectly invoked subject matter jurisdiction, which deals with the court's power to hear the case.

A plaintiff's failure to comply with the terms of a contract prior to bringing suit may affect the plaintiff's ability to bring the suit, but it does not affect the court's power to hear it. Dominion's failure to adhere to a condition precedent to filing suit rendered its complaint fundamentally flawed and impaired its right to access the court, but it had no effect on the court's subject matter jurisdiction. Although the court could not dismiss the complaint for lack of subject matter jurisdiction, it could determine an appropriate remedy for Dominion's failure to comply with the contract such as staying the case or dismissing the complaint. Courts have held that the proper disposition for failure to adhere to an arbitration clause is to stay the proceedings, while failure to comply with a mediation clause generally warrants dismissal.

Read the rest of the article at the Virginia Business Litigation Lawyer blog.

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