Britney Spears probably did not envision that title of her most famous song would apply with equal vigor to love (her interpretation) and contract provisions requiring mediation as a condition precedent to filing arbitration (our interpretation).  A recent case from the Houston Court of Appeals styled Mark S. Burke, et al. v. J.B. Roberson, Jr., et al. shows how many times a party may have to do it (arbitration) again when it fails to fulfill a mediation condition precedent in the contract.

A “binding dispute resolution” clause is found in most standard form construction contracts.  It outlines the procedures the parties are to use when a dispute arises either during construction of the project or after substantial completion. You may have seen the “arbitration box” checked on an AIA A101-2017 Standard Form of Agreement Between Owner and Contractor construction contract. So, if a dispute arises the parties can immediately file their claim and proceed to arbitration, right?  Not necessarily and not so fast.

Many contracts, including AIA standard form contracts, require parties fulfill certain obligations prior to initiating arbitration. One such obligation is attending non-binding mediation to endeavor to resolve the dispute.  Depending on how they are phrased, such clauses can create “conditions precedent.”

In Burke, the Houston Court of Appeals agreed that the arbitrator’s award should be vacated because the parties failed to fulfill a condition precedent to arbitration, mediation.  Sadly, the parties spent the time and money to go through the arbitration process, obtained an award, only to have it invalidated because the parties did not mediate prior to commencing arbitration. As Ms. Spears might say, “oops”.

The contract in Burke was a formation agreement between members of an oil field services company. When the oil and gas industry lost steam in 2015, a dispute arose between Burke, one of the members, and the other members regarding Burke’s distributions.  Burke accused the other members of breaching their contractual and fiduciary duties, and demanded mediation pursuant to the formation agreement. The agreement stated as follows.

[A]ny controversy which touches on or concerns this Agreement shall be resolved by mediation, and if such mediation is unable to resolve any controversy then exclusively by binding arbitration administered pursuant to American Arbitration rules applicable for commercial disputes.

Burke sent mediation demands to the other members, though none of them ever responded and mediation never occurred. Burke subsequently filed an arbitration demand pursuant to the formation agreement naming all members as respondents. In the arbitration demand, Burke asserted that all conditions precedent to arbitration had been satisfied, as the members had “failed and refused” to respond to his mediation demands.

After the final hearing the arbitrator issued a final award in favor of Burke holding that the arbitrator had jurisdiction over the matter because the American Arbitration Association “assured” him, and Burke had “also confirmed,” that “all notices” had been “properly made” to the other members. Burke filed an application to confirm the final award in the trial court. The members answered and moved to vacate the award, which the trial court granted, rendering the final judgment unenforceable.

The arbitration in Burke was conducted under the Texas Arbitration Act (TAA).  Under the TAA, a trial court “shall” confirm an arbitral award “unless grounds are offered for vacating” the award. One of those grounds is arbitrators exceeding their powers, such as when arbitrators decide matters not properly before them. Here, the other members argued the arbitrator exceeded his powers by deciding a matter not properly before him because mediation, a condition precedent to arbitration, did not occur. Burke argued that the matter was properly before the arbitrator because the parties impliedly waived their right to mediation by ignoring his mediation demands. The Court did not agree with Burke.

The Court held that the formation agreement specifically created conditional language to which all parties agreed. Thus, under the formation agreement, before the parties have the right and duty to arbitrate, the parties must submit the dispute to mediation and until they do so, the controversy is not properly before the arbitrator. As the Court reiterated, although there was some dispute over the mediation notice and responses to it, none of the parties disputed that condition precedent was not satisfied. The parties did not mediate Burke’s claims before Burke initiated arbitration.

This case emphasizes the need to understand and abide by mandatory dispute resolution procedures in any contract, including design and construction contracts.  Our attorneys in Dallas and Austin have significant experience interpreting and enforcing dispute resolution clauses, including mediation condition precedent provisions, and are available to answer any questions you have and help you understand the legal implications of contractual agreement. You may contact us at info@gstexlaw.com with any questions you may have.

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