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