TM Delmarva Power, L.L.C. v. NCP of Virginia, L.L.C.

PRESENT: All the Justices

TM DELMARVA POWER, L.L.C., ET AL.
OPINION BY
v. Record No. 010024 JUSTICE DONALD W. LEMONS
January 11, 2002
NCP OF VIRGINIA, L.L.C.

FROM THE CIRCUIT COURT OF ACCOMACK COUNTY
Glen A. Tyler, Judge

In this interlocutory appeal, pursuant to Code § 8.01-

581.016(1), we consider whether the trial court erred in denying

a motion to compel arbitration.

I. Facts and Proceedings Below

In October 1999, TM Delmarva Power, L.L.C. (“TMDP”) and NCP

of Virginia, L.L.C. (“NCP”) entered into an operating agreement

(“Agreement”) to construct a power plant. TMDP and NCP formed

Commonwealth Chesapeake Company, L.L.C. (“CCC”) to develop,

construct, finance, own, and operate the power plant. The

Agreement includes Section 11.12, entitled “Dispute Resolution.”

Section 11.12(a) establishes procedures for dispute resolution

by certain designated “Conciliators,” and Section 11.12(b)

provides for “Resolution by Arbitration.”

A conflict arose regarding the propriety of capitalizing

certain expenses and TMDP’s right to hire a national accounting

firm to serve as an accountant and auditor for CCC. NCP

initiated a conciliation procedure in accordance with Section

11.12(a) of the Agreement. The conciliation procedure proved
unsuccessful and NCP filed a bill for declaratory judgment.

TMDP subsequently filed a motion to compel arbitration and for

stay, alleging that “Section 11.12 of the Operating Agreement

contain[ed] a comprehensive and binding conciliation and

arbitration procedure applicable to ‘any material dispute,

disagreement or controversy concerning this Agreement.’ ” NCP

opposed the motion to compel, arguing that, “[a] mere agreement

to submit to arbitration and no more does not constitute a

condition precedent and will not prevent a party from

maintaining an action in a court of law to enforce its rights

under the contract.” The trial court denied TMDP’s motion to

compel on the ground that the Agreement did not compel

arbitration. TMDP appeals the adverse ruling of the trial

court.

II. Standard of Review

We are not bound by the trial court’s construction of

contract terms, but rather, “[w]e have an equal opportunity to

consider the words within the four corners of the disputed

provision.” Wilson v. Holyfield, 227 Va. 184, 188, 313 S.E.2d

396, 398 (1984). Therefore, we consider the arbitration

provision of the Agreement de novo.

III. Analysis

TMDP argues that the trial court erred by failing to give

effect to the plain meaning of the terms in the Agreement.

2
According to TMDP, the arbitration clause plainly means that the

parties agreed to arbitrate their disputes upon the request of

either party. NCP maintains that the word “may” in the

arbitration provision renders the provision permissive, not

mandatory; therefore, NCP contends that it reserved its right to

pursue litigation despite TMDP’s request for arbitration.

Contracts between parties are subject to basic rules of

interpretation. Contracts are construed as written, without

adding terms that were not included by the parties. Wilson, 227

Va. at 187, 313 S.E.2d at 398. Where the terms in a contract

are clear and unambiguous, the contract is construed according

to its plain meaning. Bridgestone/Firestone v. Prince William

Square Assocs., 250 Va. 402, 407, 463 S.E.2d 661, 664 (1995);

Ross v. Craw, 231 Va. 206, 212, 343 S.E.2d 312, 316 (1986). A

contract is not ambiguous merely because the parties disagree as

to the meaning of the terms used. Id. at 212-13, 343 S.E.2d at

316. Furthermore, contracts must be considered as a whole

“without giving emphasis to isolated terms.” American Spirit

Ins. Co. v Owens, 261 Va. 270, 275, 541 S.E.2d 553, 555 (2001).

Finally, no word or clause in a contract will be treated as

meaningless if a reasonable meaning can be given to it, and

parties are presumed not to have included needless words in the

contract. D.C. McClain, Inc. v. Arlington County, 249 Va. 131,

135-36, 452 S.E.2d 659, 662 (1995).

3
 The clause in dispute, Section 11.12. Dispute Resolution,

provides in pertinent part:

(a) Resolution by Conciliators. If any
material dispute, disagreement or
controversy between the Parties arises with
respect to this Agreement, and it cannot be
settled by mutual accord, any Party may seek
to have the dispute resolved in accordance
with the following procedures:

(i) Either Party may refer the
disagreement to the chief executive
officer or equivalent of each of the
Parties or to another executive. . .
(the “Conciliators”). . . .

(ii) The procedure for resolving such
dispute shall in each instance be
determined by the Conciliators. . .

(b) Resolution by Arbitration. If any
material dispute, disagreement or
controversy concerning this Agreement is not
settled in accordance with the procedures
set forth in Section 11.1(ii)[sic]. . . then
either Party may commence arbitration
hereunder by delivering to the other Party a
notice of arbitration.

In its entirety, Section 11.12 of the Agreement establishes

a two-step mechanism that either party may employ for the

resolution of disputes concerning the Agreement. In the present

case, NCP invoked Section 11.12(a) when it initiated

conciliation procedures. When the conciliation procedures

proved unsuccessful, NCP filed suit and TMDP responded by

invoking Section 11.12(b) concerning arbitration.

4
 The language of Section 11.12 essentially constructs an “if

– then” proposition –- if a party seeks conciliation and it is

not successful, then either party may require arbitration. The

word “may,” as used in both Sections 11.12(a) and (b), means

that either party may invoke the dispute resolution procedures,

but neither is compelled to invoke the procedures. Once a party

invokes the conciliation procedures 1 , the other party is bound to

participate. Likewise, once a party invokes the arbitration

provision, the other party is bound to arbitrate.

In order to interpret the provision as requiring the

consent of the non-initiating party before proceeding to

arbitration, we would have to add the words “with the consent of

the other party” following the phrase “either [p]arty may

commence arbitration.” However, our rules of contract

interpretation do not permit the addition of words not included

by the parties. Wilson, 227 Va. at 187, 313 S.E.2d at 398.

Furthermore, if we were to find the arbitration provision

permissive, even when invoked by a party, the provision would be

rendered meaningless and unnecessary because parties can choose

to submit disagreements to arbitration without specific

arbitration clauses. A wholly permissive arbitration provision

would be meaningless, and we will not treat a contract provision

1
The arbitration provision is at issue in the present case,
therefore our discussion will be limited to that provision only.

5
as meaningless when a reasonable meaning can be given to it.

D.C. McClain, Inc., 249 Va. at 135, 452 S.E.2d at 662.

NCP argues that the use of the word “may” renders the

arbitration clause permissive; therefore, NCP argues, neither

party is bound to submit disputes to arbitration but can pursue

litigation if it chooses. NCP’s interpretation of the clause

puts too much emphasis on an isolated word and ignores the

context in which the word is used. American Spirit, 261 Va. at

275, 541 S.E.2d at 555. As we stated in Pettus v. Hendricks,

113 Va. 326, 330, 74 S.E. 191, 193 (1912), while the word

“shall” is primarily mandatory in effect, and “may” is primarily

permissive in effect, “courts, in endeavoring to arrive at the

meaning of written language, whether used in a will, a contract,

or a statute, will construe ‘may’ and ‘shall’ as permissive or

mandatory in accordance with the subject matter and context.”

Here, the word “may” is permissive, but it clearly means

that either party has the discretion to choose arbitration if

conciliation is not successful. However, once this discretion

is exercised, arbitration is compelled under the agreement.

Numerous decisions from other jurisdictions support our

interpretation of the dispute resolution clause in this case.

State courts in Maine 2 , Kentucky, and California 3 have

2
See Orthopedic Physical Therapy Ctr., P.A. v. Sports
Therapy Ctrs., Ltd., 621 A.2d 402 (Me. 1993) (finding

6
interpreted similar dispute resolution clauses to mean that

arbitration is mandatory once initiated by a party. For

example, the Supreme Court of Kentucky interpreted a similar

provision that stated, “[a]ll claims, disputes and other matters

. . . arising out of, or relating to, the [contract]. . . may be

decided by arbitration.” City of Louisa v. Newland, 705 S.W.2d

916, 917 (Ky. 1986). The court held that the use of the word

“may” in the arbitration provision made arbitration compulsory

“once either party demand[ed] it,” and found the contract

mutually binding on both parties. Id. at 919.

Several federal decisions also support this interpretation

of the arbitration provision. For example, the United States

Court of Appeals for the Fourth Circuit examined an arbitration

provision that stated, “[i]f any misunderstanding or dispute

arises . . . such misunderstanding or dispute may be submitted

to arbitration.” United States v. Bankers Ins. Co., 245 F.3d

315, 318 (4th Cir. 2001). The court held that the “use of

permissive phraseology is not dispositive.” Id. at 320.

Accordingly, the court found that the clause had the effect of

arbitration mandatory when requested by a party under the
arbitration clause that stated “disputes. . . may be settled by
arbitration.”)
3
See Service Employees Int’l Union, Local 18, AFL-CIO v.
American Bldg. Maint. Co., 29 Cal. App. 3d 356 (1972) (holding
that a provision which stated “the issue in dispute may be
submitted to an impartial arbitrator” gave an employee a right

7
giving the aggrieved party the choice “between arbitration and

abandonment of his claim.” Id. at 321.

The United States Court of Appeals for the Eighth Circuit 4

similarly found that an agreement providing that disputes or

disagreements “may be submitted to arbitration” reflected that

the parties intended arbitration to be mandatory. American

Italian Pasta Co. v. The Austin Co., 914 F.2d 1103 (8th Cir.

1990). The court held that there would be no reason for the

arbitration language if the parties intended arbitration to be

permissive because parties can always voluntarily agree to

submit to arbitration even in the absence of an arbitration

provision. Id. at 1104.

Finally, the public policy of Virginia favors arbitration.

Virginia adopted the Uniform Arbitration Act in 1986, and the

Code states in pertinent part that “[a] written agreement . . .

to submit to arbitration any controversy . . . arising between

the parties is valid, enforceable and irrevocable, except upon

such grounds as exist at law or in equity for the revocation of

to have the issue submitted to arbitration, regardless of the
use of the word “may.”)
4
The United States Court of Appeals for the Eighth Circuit
had occasion to interpret another similar arbitration provision
in Bonnot v. Congress of Indep. Unions Local #14, 331 F.2d 355
(8th Cir. 1964). The collective bargaining agreement in Bonnot
stated that “either party may request arbitration.” Id. at 356.
The court held that the word “may” in the clause did not render
the clause permissive, but instead gave an aggrieved party the

8
any contract.” Code § 8.01-581.01. This language illustrates

Virginia’s public policy in favor of arbitration and the

validity of arbitration agreements. In light of Virginia’s

public policy and the plain language of the Agreement, we hold

that the arbitration provision in the present case provides for

mandatory arbitration once arbitration is requested by either

party.

Accordingly, we will reverse the judgment of the trial

court, and remand with instructions to enter an order compelling

arbitration.

Reversed and remanded.

JUSTICE LACY, with whom JUSTICE HASSELL and JUSTICE KOONTZ join,
dissenting.

I respectfully dissent from the majority's opinion in this

case.

This case presents an issue of first impression for the

Supreme Court of Virginia: whether contractual language

permitting one party to pursue arbitration constitutes the

parties' written agreement to arbitrate their disputes upon the

election of either party.

"[A]rbitration is a matter of contract and a party cannot

be required to submit to arbitration any dispute which he has

choice between arbitration or abandonment of their claim. Id.
at 359.

9
not agreed so to submit." AT&T Technologies, Inc. v.

Communications Workers of America, 475 U.S. 643, 648 (1986); see

also Doyle & Russell, Inc. v. Roanoke Hosp. Ass'n, 213 Va. 489,

494, 193 S.E.2d 662, 666 (1973). The contract in the present

case contains no language that clearly demonstrates the parties'

agreement that invocation of arbitration by one party would bind

the other party to an arbitration proceeding. The contract

states only that, "either Party may commence arbitration

hereunder by delivering to the other Party a notice of

arbitration." Because of the ambiguity in this contract,

general rules of contract interpretation must be used to

determine whether the parties had an agreement to arbitrate.

See United States v. Bankers Ins. Co., 245 F.3d 315, 319 (4th

Cir. 2001).

The majority's conclusion that permissive language must be

construed as mandatory is based on the rationale that to do

otherwise would render the arbitration clause meaningless.

However, the cases upon which the majority relies, Bankers

Insurance Company, 245 F.3d 315 (4th Cir. 2001); American

Italian Pasta Company v. The Austin Company, 914 F.2d 1103 (8th

Cir. 1990); Bonnot v. Congress of Independent Unions Local #14,

331 F.2d 355 (8th Cir. 1964); Service Employees International

Union, Local 18 v. American Building Maintenance Company, 29

Cal. App. 3d 356 (1972); City of Louisa v. Newland, 705 S.W.2d

10
916 (Ky. 1986); and Orthopedic Physical Therapy Center v. Sports

Therapy Centers, 621 A.2d 402 (Me. 1993), do not support the use

of this rationale in the context of this case.

Bonnot and Service Employees were labor cases in which the

arbitration clauses at issue were part of collective bargaining

agreements, which required the parties to exhaust the grievance

procedures provided in the agreements before pursuing

litigation. The language of the contracts was permissive and

allowed either party to elect arbitration. In these cases, the

courts held that the term "may" was intended to give the parties

the choice of arbitrating their complaints or abandoning them.

Because the parties had no options outside of the agreements

until they exhausted all grievance procedures within the

agreement, their choice of arbitration would be meaningless

unless their election of arbitration mandated the participation

of the other parties. Bonnot, 331 F.2d at 359; Service

Employees, 29 Cal. App. 3d at 360; see also Austin v. Owens-

Brockway Glass Container, Inc., 78 F.3d 875 (4th Cir. 1996).

American Italian Pasta Co. did not involve a collective

bargaining agreement but applied Bonnot in a non-labor context

where the language of the contract limited the parties' right to

pursue legal action until after the parties pursued dispute

resolution procedures prescribed by the contract.

11
 Thus in these cases, the arbitration clauses were part of

agreements which required compliance with dispute resolution

processes before recourse to the courts. If a party could

refuse a request for arbitration by the other party, the

requesting party would be forced to abandon its claim because

under the agreement judicial relief could not be invoked without

exhaustion of the resolution procedures, including arbitration.

In the instant case, however, the parties were not subject

to a collective bargaining agreement or any other separate

agreement or clause requiring that that dispute resolution

mechanisms be exhausted prior to litigation. Nothing in the

terms of the contract limited the options of the parties such

that failure of one party to participate in either conciliation

or arbitration would leave the complaining party without a

remedy. The contract, as written, made two dispute resolution

options available to an aggrieved party and did not limit any

party's access to the courts. Therefore, unlike the Bonnot line

of cases, the arbitration option does not have to be mandatory

to make a party's choice of that option meaningful. Cf. State

of the Arts, Inc. v. Congress Property Management Corp., 688

A.2d 926, 928 (Me. 1997).

The second argument made by this line of cases is that the

parties could have voluntarily agreed to arbitration at any

time, and, therefore, the inclusion of an arbitration clause

12
would be meaningless unless it was intended to express the

parties' agreement to arbitrate. Bankers Ins. Co., 245 F.3d at

321; American Italian Pasta Co., 914 F.2d at 1104; City of

Louisa, 705 S.W.2d at 919; Orthopedic Physical Therapy Ctr., 621

A.2d at 403.

The arbitration clause in Bankers Insurance Company was a

stand-alone clause that did not introduce any procedures for

arbitration, but merely stated that any "misunderstanding or

dispute may be submitted to arbitration." 245 F.3d at 318.

Unlike the clause at issue in this case, that clause would have

been purposeless if it were not an expression of the parties'

agreement to arbitrate.

The arbitration clause in City of Louisa would not only

have been meaningless if it did not mandate the participation of

both parties at either party's election of arbitration, it also

would have been contrary to language in the remainder of the

arbitration clause. The agreement at issue in City of Louisa

stated that, "all claims, disputes and other matters . . . may

be decided by arbitration." 705 S.W.2d at 917. The sentences

following specifically refer to "[t]his agreement to arbitrate"

and to the "demand for arbitration" that the electing party

files with the other party. Id. Read in context, the

permissive arbitration language was followed by language that

made clear the parties' agreement to arbitrate and that either

13
party may "demand" the other's participation in arbitration. By

contrast, the arbitration clause at issue in the present case

includes the phrase "notice of arbitration shall specify the

matters as to which arbitration is sought." (emphasis added)

Contrary to the language in City of Louisa, a party in this case

does not have the right to demand arbitration, but may only seek

to have arbitration. The non-compulsory nature of the phrase

"to which arbitration is sought," when contrasted with the

language from City of Louisa is even more evidence that the

dispute resolution provision in the present case does not

include an agreement to arbitrate.

As discussed above, American Italian Pasta Company relies

on the reasoning of the Bonnot case for its holding and only

secondarily includes the statement that the arbitration clause

would be meaningless if it were not mandatory because the

parties could agree to arbitrate in the absence of such a

clause. 914 F.2d at 1104. But while both American Italian

Pasta Co. and Orthopedic Physical Therapy Ctr. recite this

principle, they do no more than state it and fail to explain its

application to the circumstances of those cases. Therefore,

they have little precedential value.

As NCP points out, this Court has held that "words are not

meaningless merely because they impose no legal obligation.

Parties frequently include precatory language in agreements

14
. . . to express a sentiment, wish, or desire with regard to the

parties' future course of conduct." Ross v. Craw, 231 Va. 206,

214-15 (1986). The majority recognizes that "the word 'may' is

permissive, but it clearly means that either party has the

discretion to choose arbitration if conciliation is not

successful." This is the plain meaning of the subject clause

and it does not become meaningless simply because it does not

create a legal obligation for the other party to participate in

arbitration. Instead, it has meaning because it introduces the

option of arbitration as a means of dispute resolution and the

remainder of § 11.12 of the contract, which mandates the

procedures that the parties must follow if arbitration is

pursued.

Finally, the majority relies upon a public policy in favor

of arbitration. Public policy in Virginia is by no means

against arbitration, but the cases both in Virginia and in other

jurisdictions that discuss the presumption in favor of

arbitration do so in terms of the scope of arbitration

agreements, not the existence of such agreements. The

presumption is applied when a court is trying to determine

whether the conflict at issue is within the scope of an already

established agreement to arbitrate. The presumption in favor of

arbitrability arises only after a determination has been made

that the parties agreed to arbitrate. First Options of Chicago,

15
Inc. v. Kaplan, 514 U.S. 938, 945-46 (1995); Bell Atlantic

Corporation v. CTC Communications Corp., 1998 Va. LEXIS 20160

(2nd Cir. 1998); Bonnot, 331 F.2d at 359. The present case

calls upon this Court to determine whether there is an agreement

to arbitrate, not whether an issue falls within the scope of

that agreement. Therefore, the presumption in favor of

arbitrability does not apply.

Instead, legal precedent relevant to these determinations

discusses the importance of a party's "right to a court's

decision about the merits of its dispute," a right that is

relinquished by an agreement to arbitrate. First Options of

Chicago, 514 U.S. at 942; cf. Waterfront Marine Construction,

Inc. v. North End 49ers Sandbridge Bulkhead Groups A, B and C,

251 Va. 417, 426-27, 468 S.E.2d 894, 899 (1996). It is this

principle, that all parties have an important right to judicial

resolution of their conflicts, that should serve as a guide when

interpreting the language of a contract.

For these reasons, I believe that the cases relied upon by

the majority do not support the holding that TMDP and NCP had an

agreement to arbitrate. Rather, I conclude that the arbitration

clause is meaningful without mandating arbitration because it

introduces a dispute resolution option and the procedures to be

followed if the parties elect arbitration and, applying the

principle that parties have a right to judicial resolution of

16
their conflicts, an agreement to arbitrate must be clearly

understood from the terms of the contract. Finding no such

agreement in this contract, I would affirm the judgment of the

trial court.

17