United States v. AL-CON DEVELOPMENT CORPORATION, 7924.

• Decision Date: 10 November 1959
• Docket Number: No. 7924.,7924.
• Citation: 271 F.2d 904
• Parties: UNITED STATES of America, for the use and benefit of AIR-CON, INC., and L. A. Thumm, trading as Virginia Heating Distributors, Appellants, v. AL-CON DEVELOPMENT CORPORATION, Hartford Accident & Indemnity Company, and Great American Indemnity Company, Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

271 F.2d 904 (1959)

UNITED STATES of America, for the use and benefit of AIR-CON, INC., and L. A. Thumm, trading as Virginia Heating Distributors, Appellants, v. AL-CON DEVELOPMENT CORPORATION, Hartford Accident & Indemnity Company, and Great American Indemnity Company, Appellees.

No. 7924.

United States Court of Appeals Fourth Circuit.

Argued October 22, 1959.

Decided November 10, 1959.

Richard H. Catlett, Jr., Richmond, Va. (Christian, Barton, Parker & Boyd, Richmond, Va., on brief), for appellants.

William Earle White, Jr., Richmond, Va. (Wm. Earle White, Petersburg, Va., Minor, Thompson & White, Richmond, Va., and White, Hamilton, Wyche & Shell, Petersburg, Va., on brief), for appellees.

Before SOBELOFF, Chief Judge, and SOPER and BOREMAN, Circuit Judges.

BOREMAN, Circuit Judge.

This is an appeal from an order entered by the United States District Court for the Eastern District of Virginia, which order directed a stay in proceedings until such time as the issues raised by the pleadings had been submitted to arbitration.

Jurisdiction of the lower court is based upon the Miller Act (40 U.S.C.A. § 270a to 270d). The action was instituted as a result of a contract dispute in connection with the construction of a government housing project, on which project the principal defendant, Al-Con Development Corporation, was general contractor and the plaintiffs, acting together, were a subcontractor. The defendant insurance companies are parties hereto only because of their undertakings as sureties for the principal defendant.

The complaint was filed on the 10th day of November, 1958. On November 20, 1958, the defendants, by counsel, notified the plaintiffs that they would seek an extension of time for filing their answer, and served the plaintiffs with a motion for enlargement of time within which to file their answers or other pleadings. Pursuant to this motion, the district court, on December 10, 1958, entered an order granting defendants a period of thirty days from that date within which to file answer or other pleadings. On March 12, 1959, pursuant to agreement of counsel, the district court entered an order granting leave to the defendants to file answer or other pleadings, and on that same day defendants filed the following pleadings in the following order:

1. A motion for arbitration and stay of proceedings;

2. A petition for an order directing arbitration and stay of proceedings;

3. Answer to the bill of complaint.

On June 10, 1959, the plaintiffs having indicated an unwillingness to arbitrate, the district court entered an order directing that the cause be stayed until the "condition precedent be complied with by way of arbitration." This appeal followed.

Al-Con Development Corporation, as general contractor, and Al's Sheet Metal Company, Incorporated, as subcontractor, entered into an agreement under the terms of which the latter was to furnish labor and materials in connection with the installation of heating plants on a construction project. Paragraph 20 of the contract between the parties is the only one relevant to the issue raised by this appeal and is as follows:

"20. Arbitration. In case of any dispute between the parties as to the interpretation of this agreement or the performance of the same, either party may demand that the dispute be submitted to arbitration. The demand shall be in writing, shall be served on the other party and shall specify the arbitrator chosen by the party making the demand. Within 7 days after receipt of the demand, the other party shall appoint an arbitrator, by written notice served on the party making the demand. The two arbitrators so chosen shall select a third arbitrator. The decision of any two arbitrators shall be binding and conclusive, shall be in writing, and shall be a condition precedent to any right of legal action. In no case shall submission of a matter to arbitration be a cause for delay or discontinuance of any part of the work. Each party shall bear the expense of its own arbitrator and the expense of the third arbitrator and other costs of the arbitration shall be divided equally between the parties."

In the petition for an order directing arbitration and stay of proceedings, the defendants named their arbitrator as required by the provisions of the contract. A copy of this written demand for arbitration and the name of the arbitrator was served on counsel for the plaintiffs.

The plaintiffs contend (1) the terms of the contract contained in paragraph 20 do not make arbitration a condition precedent to litigation; and (2) the defendants have waived any rights of arbitration they may have had under the contract. The defendants concede that the provisions of the Federal Arbitration Act (9 U.S.C. § 1 through § 14) are not applicable here and that, if the lower court has the power to stay proceedings, pending arbitration, it must find that authority in the law of the State of Virginia. Plaintiffs maintain that, under Virginia law, the court had no such power and authority. The lower court ordered that the defendants "are entitled to such an arbitration of the issues as a condition precedent to maintaining the suit" and "that the above entitled cause be stayed without any adjudication by this court of the issues involved until the aforesaid condition precedent be complied with by way of arbitration."

Both plaintiffs and defendants cite Big Vein Pocahontas Co. v. Browning, 1923, 137 Va. 34, 120 S.E. 247, 249, to support their respective positions. In that case the contract read, in part, as follows: "* * * if the lessors shall dispute the same the lessee's claim, the matter shall be referred to arbitrators * * *." The Supreme Court of Appeals of Virginia, in discussing what appears to be a mandatory provision for arbitration, and in holding that this agreement to arbitrate could not be enforced, said:

"It is settled law that the authority of arbitrators, where they are required to pass upon the ultimate liability of the parties, may be revoked at any time before the award is made; and the agreement to arbitrate will be no bar to an action on the original contract, because such a course is supposed to oust the courts of their jurisdiction * *," (citing cases).

"In Corbin v. Adams, supra 76 Va. 58, at page 61, it is said: `Such an agreement not consummated by an award is universally held to be no bar to a suit at law or equity; nor can it be the foundation of a decree for specific execution. In its very nature it must rest on the good faith and consent of the parties concerned. Parties litigant cannot by such agreements oust the jurisdiction of the courts or deprive themselves of the right to resort to the legal tribunals for the settlement of their controversies.\' Citing Morse on Arbitration, 79, 90."

However, the court recognized the validity of an agreement to arbitrate, where arbitration is made a condition precedent to litigation, by stating:

"This general rule is subject to an exception, namely, that the parties may, by contract, lawfully make the decision of the arbitrators a condition precedent to a right of action on the contract. In such case, until the decision is made, the courts have no jurisdiction of the case, and, therefore, cannot be said to be ousted of their jurisdiction."

The court further said:

"Only such agreements * * * as make the award of arbitrators a condition precedent to the maintenance of a subsequent suit in the courts, are held to be valid and irrevocable."

In Bernhard v. Jones, 156 Va. 476, 159 S.E. 82, 83, the Supreme Court of Appeals of Virginia referred to the earlier Big Vein case and restated the exception to the general rule regarding arbitration by contract in the language following:

"The numerous authorities cited by the appellant, holding as a general rule, at common law, that a party to an arbitration agreement has the right to withdraw from the agreement before an award is made, have no application to this case. The principles of law applied in some jurisdictions, that parties cannot, by agreement, oust the courts of jurisdiction granted them by law, and cannot debar themselves from appealing to the courts, likewise does not apply to this case. * * *

"The contract in the instant case, by its express terms, made the findings of the arbitrators a condition precedent to the right of any party to the contract, to bring any action or suit based thereon. This case clearly falls within the exception above set forth in the case of B. V. Pocahontas Co. v. Browning, supra."

The plaintiffs contend that the language of the above quoted paragraph 20 of the contract indicates that arbitration "is merely optional to the parties" and the mere fact that the contract contains the words ...