U.S. Fourth Circuit Court of Appeals Interprets Modified Version of AIA A201 to Require Agreement By Parties to Mediate as Condition Precedent to Arbitration

Perdue Farms, Inc. v. Design Build Contracting Corp.
2008 U.S. App. LEXIS 2861 (4th Cir. Feb. 8, 2008)

The Fourth Circuit held that where a condition precedent to arbitration, in this case voluntary mediation, was not fulfilled, a party to a contract had no right to force arbitration of the underlying dispute. The case arose when an owner sued its general contractor in district court to recoup additional monies due to the owner after the owner directly paid the general contractor’s subcontractors monies in excess of the contract sum. The contractor moved to dismiss the lawsuit, or stay and compel arbitration between the parties, arguing that the dispute was subject to mandatory arbitration. The underlying contract between the parties was a modified version of the AIA Standard Form of Agreement between Owner and Contractor (A101-1997) and incorporated a modified version of the General Conditions of the Contract for Construction (AIA A201-1997). The parties’ contract eliminated a broad mandatory arbitration clause usually found at Article 4.6.1 of the General Conditions. The modified contract instead provided that a claim is subject to mediation only “if mutually agreed by the parties.” The contract then provided that “[c]laims not resolved by mediation shall be decided by arbitration.” The District Court held that the contract eliminated a broad mandatory arbitration clause and instead conditioned arbitration on voluntary mediation. The court held that as the parties chose not to mediate, and in fact did not mediate the dispute, arbitration was never triggered. The court also concluded that although there is a federal policy favoring arbitration in the Federal Arbitration Act, that policy does not compel arbitration where the parties’ contract itself does not require arbitration. On appeal, the Fourth Circuit affirmed the findings of the District Court. The Fourth Circuit held that where a condition precedent to arbitration is not fulfilled, a party does not have a right to arbitrate. The Court held that the clause that all “claims not resolved by mediation shall be decided by arbitration” had to be interpreted in light of the clause providing that a claim is subject to mediation “only if agreed by the parties.” The Fourth Circuit concluded that arbitration was mandatory only where the parties mutually agreed to mediate the claims, in fact did attempt to mediate the claims, and failed. The Fourth Circuit also upheld the findings of the District Court regarding the Federal Arbitration Act, holding that the FAA “does not mandate the arbitration of all [contract] claims, but merely the enforcement … of privately negotiated arbitration agreements.” The Fourth Circuit concluded that the FAA cannot change the terms of a contract to make the contract more susceptible to arbitration than the contract itself provides.

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