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, 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 Pipeline.jpgStates 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.

The court then addressed Dominion’s argument that Precision had waived its right to mediation by filing mechanics’ liens on Dominion’s property. Waiver requires (1) knowledge of facts basic to the exercise of the right; and (2) intention to relinquish that right, and Dominion had to prove these elements by clear, precise and unequivocal evidence. The court examined case law and found that not only does federal law favor the enforcement of ADR provisions, and showing intentional and knowing waiver is very difficult, but it did not address whether filing mechanics’ liens is sufficient to indicate waiver of contractual ADR rights. Given the federal preference for enforcement of ADR provisions, Dominion’s burden to prove waiver and the high standard required for establishing waiver, Dominion’s argument failed.

Dominion also argued that Precision should be estopped from relying on the ADR provision because of its own previous breach of the same provision by filing the mechanics’ liens. The “first to breach” rule provides that the party first to breach a material term of a contract cannot later attempt to enforce that contract. The court dismissed this argument as well, finding it unsupported in case law and illogical. Dominion provided no precedent to support its claim that the rule should apply in the context of access to a contractually guaranteed ADR process. Also, Dominion’s approach would require the party asserting the ADR provision to shoulder the evidentiary burden whereas the party seeking to avoid the ADR provision would bear no such burden of proof despite its decision to race to court in defiance of the provision. The court found that such an evidentiary hurdle to the enforcement of ADR provisions would undermine them.

The court held that the dispute should not be before it until Dominion complies with the ADR provision of the contract, and it granted Precision’s motion to dismiss.

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