Case Title: TM Delmarva Power v. NCP of Virginia

Citation: 

Docket Number: 010024

State: virginia

Court: Virginia Supreme Court

Date: 2002-01-11T00:00:00Z

Document:
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.  
 
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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 procedures1, 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. 
 
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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 Maine2, Kentucky, and California3 have  
                     
 
2 See Orthopedic Physical Therapy Ctr., P.A. v. Sports 
Therapy Ctrs., Ltd., 621 A.2d 402 (Me. 1993) (finding 
 
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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 Circuit4 
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 
 
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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.   
 
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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 
 
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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. 
 
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