23.2 Arbitration

• Library: Virginia Construction Law Deskbook (Virginia CLE) (2019 Ed.)

23.2 ARBITRATION

23.201 Arbitration Practice in Virginia. Arbitration has a long history in Virginia. George Washington included the following arbitration provision in his will:

But having endeavoured to be plain, and explicit in all Devises—even at the expence of prolixity, perhaps of tautology, I hope, and trust, that no disputes will arise concerning them; but if, contrary to expectation, the case should be otherwise from the want of legal expression, or the usual technical terms, or because too much or too little has been said on any of the Devises to be consonant with law, My Will and direction expressly is, that all disputes (if unhappily any should arise) shall be decided by three impartial and intelligent men, known for their probity and good understanding; two to be chosen by the disputants—each having the choice of one—and the third by those two. Which three men thus chosen, shall, unfettered by Law, or legal constructions, declare their sense of the Testators intention; and such decision is, to all intents and purposes to be as binding on the Parties as if it had been given in the Supreme Court of the United States. ³⁰

The Virginia Supreme Court has confronted questions relating to whether an arbitration panel's ruling should be set aside as far back as 1791,

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less than three years after the ratification of the U.S. Constitution. ³¹ Echoing the grounds that would later come to be codified for vacating an arbitrator's decision, the Supreme Court stated that an award could be set aside for "some illegality or injustice apparent on the face of them, or for misbehaviour in the arbitrators." ³²

However, the common law generally did not favor arbitration, as courts were not willing to cede their jurisdiction to a contract. ³³ The modern era of arbitration in the United States began in the 1920s when New York adopted a pro-arbitration statute. ³⁴ Following New York's lead, the United States Congress enacted the Federal Arbitration Act, 9 U.S.C. §§ 1-16 in 1925. Similar pro-arbitration laws were then enacted by the majority of states based on a model law developed in 1955 by the National Conference of Commissioners on Uniform State Laws (NCUSSL). Virginia enacted the Virginia Uniform Arbitration Act in 1986. NCUSSL developed the Revised Uniform Arbitration Act (RUAA) in the summer of 2000. Virginia has not adopted the RUAA, although it has been introduced in the General Assembly in previous sessions.

23.202 Arguments for Arbitration of Construction Cases. Construction disputes are well suited to arbitration for a number of reasons. First, construction disputes often require specialized knowledge about construction means and methods not usually within the experience of state or federal district judges. Selecting an attorney, engineer, architect, or contractor already familiar with typical construction disputes, such as differing site conditions or the critical path method of scheduling, is a benefit to litigants. Second, arbitration is generally less time-consuming and less costly than traditional court litigation, offering the potential for a relatively prompt and cost-effective resolution. The parties and the arbitrators can work together to establish a process to hear evidence that meets the needs of the case. Third, complex construction projects usually generate enormous numbers of documents, including drawings, meeting minutes, daily reports, and email. The expansive approach to discovery of these relevant documents,

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particularly email, under federal and state civil procedure rules is time-consuming and very expensive. Conversely, discovery in arbitration is typically more limited and can potentially save time and money. Fourth, arbitration provides for limited rights of appeal. Thus, arbitration is designed to avoid re-litigating issues on appeal that were already decided, bringing an end to the dispute.

23.203 Virginia Uniform Arbitration Act. ³⁵

A. Introduction of the Virginia Uniform Arbitration Act. The Virginia Uniform Arbitration Act (VUAA) provides a statutorily authorized alternative to filing suit in court and offers parties an opportunity to resolve their dispute privately before a decision-maker of their own choosing in a manner that may be less time-consuming and expensive than traditional litigation. ³⁶

Construction firms working on public projects should understand that the General Assembly has authorized the Commonwealth of Virginia to enter into arbitration agreements only when the express terms of a statute allow it or when necessary by implication. ³⁷ Disputes on public projects are otherwise resolved by procedures established by the Virginia Public Procurement Act. ³⁸ Public entities can enter into agreements or contracts for non-binding arbitration and mediation of contract disputes. ³⁹

B. Enforcing Agreements to Arbitration. The VUAA states: "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 any contract." ⁴⁰ Courts use this section to enforce arbitration agreements. ⁴¹ Moreover, under

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the VUAA, a party to an enforceable arbitration agreement has the right to revoke its agreement only on grounds good for revoking other agreements. ⁴² Thus, an arbitration agreement reflecting the consent of both parties within the scope of the arbitration clause is enforceable. But absent consent, there can be no agreement to arbitrate. ⁴³

When the parties have agreed to submit their disputes to arbitration, but one party resists submission of a particular issue, the court determines the threshold question of arbitrability, namely, the scope of the arbitration agreement. ⁴⁴ Arbitration is considered a contractual matter and parties cannot be forced to arbitrate any issue they have not agreed to arbitrate. ⁴⁵ Virginia courts resolve these "arbitrability" disputes by interpreting arbitration clauses under general state law principles of contract law. ⁴⁶

Virginia courts generally distinguish between "broad" and "narrow" formulations when construing arbitration clauses and determining the arbitrability of the relevant issues, as do their federal counterparts. For instance, the language "arising out of or relating to this agreement" is considered broad; whereas, "arising hereunder" or "arising out of" are considered narrow. ⁴⁷ Virginia courts hold that broad arbitration clauses "embrace every dispute that has a significant relationship to the contract." ⁴⁸ Broad arbitration clauses may be interpreted to allow a nonsignatory to compel a signatory to the agreement to arbitrate a dispute. ⁴⁹

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An agreement that requires submission of the claim or controversy to arbitration as a condition precedent to instituting a suit or action arising therefrom is valid and enforceable. ⁵⁰ An agreement to arbitrate remains in effect after contract performance has ended or terminated. ⁵¹

C. Proceeding to Compel or Stay Arbitration. Virginia law provides that parties may move to compel or stay arbitration. ⁵² These actions may arise when one party files suit in court and the other seeks to enforce an arbitration agreement and compel arbitration. The VUAA authorizes a circuit court to resolve these controversies by determining whether there is an agreement to arbitrate a particular controversy. ⁵³ The statute confers upon the court the power to compel or stay arbitration proceedings upon making its findings. ⁵⁴ Virginia public policy favors arbitration and the validity of arbitration agreements. ⁵⁵ In rare cases, usually involving consumers, the doctrine of unconscionability may invalidate an arbitration agreement as it was not bargained for and lacked consent. ⁵⁶ Courts will stay an action in favor of arbitration. ⁵⁷

D. Waiving Arbitration. Parties demonstrate their consent to arbitration through express language in their contracts. Thus, what constitutes waiver is usually a question for the trier of fact to determine. In many cases, courts require the party alleging waiver to demonstrate "actual prejudice." ⁵⁸ In addition, courts do not grant claims of waiver easily due to

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Virginia's public policy favoring arbitration. ⁵⁹ In Ahern v. Toll Bros., ⁶⁰ the court held that the defendant's filing of a demurrer and motion craving oyer were insufficient to establish waiver of the arbitration provisions. Similarly, in Boehl v. BMW Restoration Co. of Virginia, ⁶¹ the court ruled, among other things, that a construction contract containing an arbitration provision was not a waiver of mechanics' lien rights, because the mechanics' lien rights were outside the scope of the arbitration clause.

E. Comparison to Federal Arbitration Act. In all material respects, the VUAA is similar to the Federal Arbitration Act ("FAA"). ⁶² Consequently, Virginia state court decisions often cite to federal case law when deciding arbitration disputes. If an arbitration agreement is within the coverage of the FAA because the dispute implicates interstate commerce, the FAA preempts the VUAA and the strong federal policy favoring arbitrability controls the court's interpretation. ⁶³

F. Procedural Aspects. Commencing an arbitration in Virginia is not governed by statute. It is commonly the subject of rules issued by an arbitration service provider, such as the AAA. It usually requires nothing more than filing a request for arbitration with the provider or the other party.

The VUAA does, however, establish statutory procedures for conducting the arbitration proceedings, including the process for initiating arbitration proceedings; the appointment and powers of arbitrators; the conduct of the hearings; representation by counsel; rules relating to witnesses, subpoenas, and depositions; and rules for making the arbitration award. ⁶⁴ These procedures are intended to provide a fundamentally fair arbitral process.

G....