The Hidden Power of Routine Contract Provisions

The Hidden Power of Routine Contract Provisions

Mar 4, 2014

Sometimes contractual provisions considered to be routine or boilerplate can have practical consequences down the road. A recent case from the U.S. District Court for the Eastern District of Virginia reminds us that choice of law, forum selection, methods of giving notice and other seemingly incidental elements may spawn real difficulties if their consequences are not fully anticipated at the outset. The case is Dominion Transmission Inc. v. Precision Pipeline, Inc.

Dominion Transmission Inc. v. Precision Pipeline, Inc.: Case Summary

When Dominion and Precision negotiated a contract for the construction of a portion of the Appalachian Gateway pipelines in West Virginia and Pennsylvania, they agreed upon an alternative dispute resolution (ADR) provision that was likely intended to provide a roadmap to negotiations to avoid protracted litigation. In particular, article 23 of the contract stated that in the event of a dispute between the parties, before commencing litigation: 1) the aggrieved party must notify the other party of the dispute and, if the matter was not immediately resolved; 2) the parties’ project managers must meet and discuss the issue among them; if that failed to resolve the dispute, then 3) the parties must convene a meeting among “senior officers” to discuss the issue further. If the senior officers failed to solve the problem, then 4) parties must proceed to mediation governed by American Arbitration Association (AAA) standards. A party could only file suit after each step was consecutively exhausted.

As it happened, a dispute developed, but the ADR process soon got off the prescribed track. Dominion filed suit before seeking AAA mediation. Precision moved to dismiss, arguing that the court lacked subject matter jurisdiction because Dominion failed to follow the procedures established by the contract.

U.S. District Court Ruling

Judge John A. Gibney, Jr. of the U.S. District Court, Richmond Division, began his case summary by distinguishing between the two ways a litigant may challenge subject matter jurisdiction:

  1. the first asserts that even assuming all facts pled by the plaintiff are true, the pleadings fail to state a claim upon which jurisdiction can be based; or
  2. the second challenge denies the court’s authority to hear the matter irrespective of the truth of the facts.

Precision’s motion to dismiss fell into the second category, allowing the court to weigh the evidence to determine the question of jurisdiction.

Predictably, Precision’s asserted that Dominion failed to complete a condition precedent to litigation when they skipped mediation. Dominion argued that because Precision had filed and moved to enforce mechanic’s liens, Precision had waived its right to insist on mediation or should be estopped from insisting on strict compliance with the ADR language.

The court disagreed with Dominion, noting that a waiver must be knowing and intentional. It concluded that federal case law “is not dispositive on the issue of waiver in the context of mechanic’s liens.” Since federal law has long favored ADR provisions, the filing and perfection of mechanic’s liens does not provide “clear, precise and unequivocal evidence” that Precision intended to waive its rights to arbitration.

Similarly, the court rejected Dominion’s theory that Precision should be estopped to demand ADR compliance because Precision breached article 23 first by filing lien claims. The court rejected the “first to breach” argument because it would place too high a burden on a party seeking access to contractually provided ADR provisions.

In ruling for Precision, the court distinguished between a failure to fulfill a required contract term – which may affect the plaintiff’s ability to bring the suit – and a jurisdictional requirement which limits the court’s authority to hear the case. In the final analysis, the court’s ruling appears to hinge on the familiar presumption in favor of ADR and the court’s insistence that the parties follow the process they established – even if it proves more cumbersome and unwieldy than the parties anticipated.

What This Means for Contract Negotiators

The takeaway for contract negotiators is that the provisions of a contract that prove to be the most important depend entirely on circumstances that cannot be known at the time the contract is drafted. The wise negotiator takes nothing for granted.