LAW: THE CONTRACTOR'S SIDE: Fight it out in court

April 7, 2011

Dispute resolution provisions in contracts and subcontracts frequently contain language requiring a claimant to mediate a dispute before instituting arbitration or litigation.


Dispute resolution provisions in contracts and subcontracts frequently contain language requiring a claimant to mediate a dispute before instituting arbitration or litigation.

These clauses are intended to ensure that parties to the contract formally attempt to resolve a dispute before they commit to costly adversarial proceedings. Mediation clauses are universally enforced, and if the nonclaiming party so desires, a court or arbitration panel will either dismiss a case filed prematurely or “stay” it pending mediation. However, a case recently decided in Kansas serves as a rare example of a court refusing to enforce such a provision where it made little sense to do so.

Vanum Construction Co., Inc. v. Magnum Block, L.L.C., 245 P.2d 1069 (Kan. App. 2010) involved a subcontractor hired to construct a retaining wall. During a walkthrough of the project as the work was nearing completion, the prime contractor discovered cracks and shifts in the retaining wall. Ultimately, the prime concluded that the subcontractor had failed to properly construct the wall, and it demanded that the subcontractor rebuild it at no additional expense to the prime. The subcontractor refused, and the prime hired another contractor to tear down and rebuild a portion of the wall.

Later, the prime notified the subcontractor that it intended to file a lawsuit and it requested the subcontractor to agree to mediate the dispute because the subcontract provided that “[a]ny claim arising out of or related to this Subcontract . . . shall be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party.” Receiving no response from the subcontractor, the prime filed suit for breach of contract, negligence and breach of implied warranty. In response, the subcontractor filed a counterclaim alleging that the prime breached the contract by failing to fully pay for the work. A trial was held and a jury found in favor of the subcontractor on all accounts.

Prior to trial, however, the prime asked the court to dismiss the counterclaim because the subcontractor failed to attempt mediation first. Although the court initially reserved its ruling on the prime’s motion and allowed the trial to proceed, it promptly dismissed the counterclaim after the jury returned its verdict. The court observed that the mediation clause was “clear and unambiguous” and it ruled that “[t]o find that this contract provision only requires one offer to mediate on the part of the first party who wishes to assert a claim and does not apply to a subsequent claim raised by the other party; or that it does not apply to claims by the defendant instituted after the plaintiff has instituted its own claims; would require this Court to read into the contract provision words that simply are not there.” The subcontractor appealed.

The Kansas Court of Appeals noted that “[a]t first blush, the district court’s interpretation and application of the mediation clause appears reasonable.” However, it also recognized that the subcontractor’s counterclaim was “compulsory” pursuant to the court’s rules thus obligating the subcontractor to file it in the same lawsuit or lose the right to do so in the future. It further recognized that the objective of the mediation clause—avoiding potential litigation—could not have been furthered in this case because the prime contractor had already filed suit. Accordingly, it held that under the circumstances, common sense dictated that the mediation clause did not apply to a subcontractor’s counterclaim filed after litigation already commenced.

The Kansas Court of Appeals’ decision is refreshing because the court departed from a mechanical reading of the clause and based its ruling upon the objective of the parties and the absurd results that would occur if blindly enforced. Nevertheless, as there is no guarantee that courts in other states would rule the same way, contractors and subcontractors should always strive to adhere strictly to dispute and claims resolution procedures in their contracts.

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