Vanum v. Block

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No. 103,385

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

VANUM CONSTRUCTION CO., INC.,
Appellee,

v.

MAGNUM BLOCK, L.L.C.,
Appellant.


SYLLABUS BY THE COURT

1.
Under the facts of this case, when parties to a construction contract agreed to
mediate any claim arising out of or related to the contract as a condition precedent to the
institution of legal or equitable proceedings by either party, only the plaintiff, i.e., the
party instituting the lawsuit, was required to attempt mediation before filing suit. The
plain language of the contract did not require the defendant, who filed a compulsory
counterclaim after the commencement of litigation, to offer to mediate that counterclaim
before filing the counterclaim.

Appeal from Johnson District Court; THOMAS M. SUTHERLAND, judge. Opinion filed December
10, 2010. Reversed and remanded with directions.

Suzanne R. Bruss and John G. Schultz, of Franke, Schultz & Mullen, P.C., of Kansas City,
Missouri, for appellant.

Peter Maharry, of Fisher, Patterson, Sayler & Smith, LLP, of Overland Park, for appellee.

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Before MALONE, P.J., CAPLINGER AND LEBEN, JJ.

CAPLINGER, J.: Vanum Construction Company, Inc., (Vanum), plaintiff-appellee,
and Magnum Block, L.L.C., (Magnum), defendant-appellant, entered into a contract in
which Magnum agreed to build a retaining wall and install pavers for a construction
project led by Vanum. After Vanum discovered cracks in the retaining wall, it sued
Magnum for breach of contract, negligence, and breach of implied warranty. In its
answer, Magnum asserted a counterclaim alleging Vanum failed to pay Magnum for
work performed under the contract. A jury found in favor of Magnum on Vanum's claims
and the counterclaim.

In this appeal, Magnum challenges the district court's decision to reverse the jury
verdict on the counterclaim and grant a post-verdict motion for judgment as a matter of
law in favor of Vanum. The court granted the motion after determining Magnum's
counterclaim was barred by Magnum's failure to comply with a mediation clause in the
parties' contract which required mediation of "[a]ny claim arising out of or related to" the
contract "as a condition precedent to . . . the institution[] [of] legal or equitable
proceedings by either party." For the reasons discussed below, we conclude the plain
language of the contract did not require Magnum, which filed a compulsory counterclaim
after the commencement of litigation, to offer to mediate that counterclaim before filing
its counterclaim against Vanum. Therefore, we reverse the district court and remand with
directions to reinstate the jury's verdict in favor of Magnum.
FACTUAL AND PROCEDURAL BACKGROUND

In October 2005, Vanum, a general contractor, entered into a contract with MC
Ironhorse Retail Office, LLC, to build Ironhorse Office Centre in Leawood. Magnum, a
subcontractor, subsequently contracted with Vanum to build a retaining wall for the
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project. The parties later revised the contract to expand Magnum's scope of work to
include installation of paver crosswalks. The following provisions which are central to
this appeal were included in the parties' contract (hereinafter the mediation clause):

"6.1 MEDIATION
"6.1.1 Any claim arising out of or related to this Subcontract, except claims as
otherwise provided in Subparagraph 4.1.5 and except those waived in this Subcontract,
shall be subject to mediation as a condition precedent to arbitration or the institution[]
[of] legal or equitable proceedings by either party.
"6.1.2 The parties shall endeavor to resolve their claims by mediation which,
unless the parties mutually agree otherwise, shall be in accordance with the Construction
Industry Mediation Rules of the American Arbitration Association currently in effect.
Request for mediation shall be filed in writing with the other party to this Subcontract
and the American Arbitration Association. The request may be made concurrently with
the filing of a demand for arbitration but, in such event, mediation shall proceed in
advance of arbitration or legal or equitable proceedings, which shall be stayed pending
mediation for a period of 60 days from the date of filing, unless stayed for a longer period
by agreement of the parties or court order.
"6.1.3 The parties shall share the mediator's fee and any filing fees equally. The
mediation shall be held in the place where the Project is located, unless another location
is mutually agreed upon. Agreements reached in mediation shall be enforceable as
settlement agreements in any court having jurisdiction thereof."

During a walkthrough of the project in spring 2006, Vanum discovered cracks and
shifts in the retaining wall and nearby asphalt and curbing and also noticed a light pole
leaning near the wall. Vanum met with Magnum and others to discuss the problems and
perform testing on the wall. Ultimately, Vanum concluded Magnum failed to properly
construct the wall and asked Magnum to rebuild the wall at Magnum's expense. Magnum
denied fault for any alleged defects and refused to rebuild the wall without a new
contract. Consequently, Vanum hired another contractor to tear down and rebuild a
portion of the wall.
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In September 2007, Vanum notified Magnum it intended to file a lawsuit to
recover costs incurred from reconstruction of the retaining wall. However, Vanum
offered to delay filing the petition for 60 days pending Magnum's agreement to
participate in mediation. Magnum did not respond to Vanum's offer.

In February 2008, Vanum sued Magnum alleging breach of contract, negligence,
and breach of implied warranty. In correspondence dated February 12, 2008, Vanum
notified Magnum it would delay the request for service of summons on the petition
"pending an opportunity for the parties to submit this matter to early mediation."
Magnum did not respond to Vanum's offer to mediate. In April 2008, Vanum requested
service of summons and filed an amended petition.

In its answer, Magnum denied Vanum's allegations, asserted several affirmative
defenses, and asserted a counterclaim seeking $24,731.14 plus interest in damages and
alleging Vanum breached the contract when it failed to pay Magnum for work performed
under the contract.

In its answer to the counterclaim, Vanum denied Magnum's allegations, asserted
various affirmative defenses, and specifically asserted Magnum's counterclaim was
"barred in whole or in part by its failure to comply with all conditions precedent to this
action including but not limited to those identified in the contract."

From the time of Magnum's answer to the counterclaim until the final pretrial
conference, both parties participated in discovery and filed various pretrial motions.
Although the record indicates Vanum did not seek to dismiss the counterclaim based on
Magnum's failure to mediate or move to compel mediation, the pretrial order identifies an
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issue to be determined at trial as "[w]hether Magnum breached the contract by not
offering to mediate prior to bringing its counterclaim."

After court-ordered mediation failed, the case was tried to a jury. At the close of
all of the evidence, Vanum moved for judgment as a matter of law on the counterclaim,
citing Magnum's failure to comply with the mediation clause. The district court denied
the motion, but noted it could be renewed after trial if the jury returned a verdict in
Magnum's favor. The court further noted that although the parties had not put on any
evidence regarding Magnum's failure to comply with the mediation clause, it was "a legal
issue" rather than a jury issue.

The jury returned a verdict in favor of Magnum on Vanum's claims and on
Magnum's counterclaim, and awarded Magnum $24,731.14. Following the trial, Vanum
renewed its motion for judgment as a matter of law on the counterclaim, citing several
undisputed facts. Magnum agreed the facts essentially were undisputed, but argued the
mediation clause did not apply to compulsory counterclaims asserted in an existing
action.

The district court ultimately issued an amended memorandum decision finding the
following facts undisputed:

"1. Defendant's counter-claim arises out of the contract between the parties.
"2. Plaintiff extended an offer of mediation to defendant prior to filing this
action.
"3. Defendant refused this offer.
"4. Defendant did not offer to mediate its claim against plaintiff prior to
filing its counter-claim.
"5. Section 6.1.1 of the contract between the parties provides: 'Any claim
arising out of or related to this Subcontract, except claims as otherwise provided in
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Subparagraph 4.1.5 and except those waived in this Subcontract, shall be subject to
mediation as a condition precedent to arbitration or the institution[] [of] legal or equitable
proceedings by either party.'
"6. The claim at issue is not one provided for in Subparagraphs 4.1.5."

Finding the language of the mediation clause to be "clear and unambiguous," the
district court concluded Magnum's counterclaim was barred by Magnum's failure to
attempt mediation before asserting the counterclaim. Specifically, the court concluded the
mediation clause applied to "'any claim,'" Magnum's counterclaim arose from the parties'
contract and was not subject to any exceptions in the provision, and, therefore, the
counterclaim was subject to mediation as a "'condition precedent'" to the institution of
legal proceedings by Magnum. The court reasoned:

"[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."

Accordingly, the court reversed the jury verdict, and granted Vanum's motion for
judgment as a matter of law on the counterclaim.
DISCUSSION
In this appeal of the district court's decision, Magnum argues the district court
erred in interpreting and applying the mediation clause to require Magnum to attempt
mediation before asserting its compulsory counterclaim in the existing lawsuit. Further,
Magnum contends the district court erred in setting aside the jury verdict because
Magnum's failure to comply with a condition precedent, i.e., to mediate before filing its
counterclaim, did not cause Vanum's failure to perform under the contract.
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The primary issue in this case is whether the district court erred in concluding that
the mediation clause applied to a compulsory counterclaim asserted in an existing
lawsuit. Resolution of this issue requires interpretation of the mediation clause in the
parties' contract.

We have unlimited review over the interpretation and legal effect of a written
contract. Regardless of the district court's construction of a written contract, we may
construe a written contract and determine its legal effect. Shamburg, Johnson &
Bergman, Chtd. v. Oliver, 289 Kan. 891, 900-01, 220 P.3d 333 (2009).

"The primary rule for interpreting written contracts is to ascertain the parties'
intent. If the terms of the contract are clear, the intent of the parties is to be determined
from the contract language without applying rules of construction. [Citation omitted.]"
Carrothers Constr. Co. v. City of South Hutchinson, 288 Kan. 743, 751, 207 P.3d 231
(2009). "Unambiguous contracts are enforced according to their plain, general, and
common meaning in order to ensure the intentions of the parties are enforced." Johnson
County Bank v. Ross, 28 Kan. App. 2d 8, 10, 13 P.3d 351 (2000). "The law favors
reasonable interpretations, and results which vitiate the purpose of the terms of the
agreement to an absurdity should be avoided. [Citation omitted.]" 28 Kan. App. 2d at 10-
11.

The parties dispute the meaning of Section 6.1.1 of the mediation clause which
provides:

"Any claim arising out of or related to this Subcontract, except claims as
otherwise provided in Subparagraph 4.1.5 and except those waived in this Subcontract,
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shall be subject to mediation as a condition precedent to arbitration or the institution[]
[of] legal or equitable proceedings by either party."

It is undisputed that Magnum's counterclaim arose out of or was related to the
parties' contract, that the exceptions stated in the mediation clause do not apply, and that
Magnum failed to attempt mediation before asserting its compulsory counterclaim.

Nevertheless, Magnum argues the mediation clause does not apply to compulsory
counterclaims asserted by a defendant in an existing lawsuit. Magnum focuses on the
phrase "institution[] [of] legal or equitable proceedings" and suggests the mediation
clause does not apply to the defendant's assertion of a compulsory counterclaim in a
lawsuit previously instituted by the plaintiff. Magnum further argues the district court's
interpretation of the mediation clause is unreasonable in light of the statutory requirement
that compulsory counterclaims be asserted in an answer which must be filed within 20
days of service of the plaintiff's petition.

Vanum focuses on the phrase "any claim" and argues the mediation clause applies
to any type of claim, with no exception for compulsory counterclaims.

At first blush, the district court's interpretation and application of the mediation
clause appears reasonable. The plain language of the mediation clause provides that "any
claim arising out of or related to" the parties' contract "shall be subject to mediation as a
condition precedent to . . . the institution[] [of] legal or equitable proceedings by either
party." (Emphasis added.)

A "counterclaim" is defined as "[a] claim for relief asserted against an opposing
party after an original claim has been made; esp., a defendant's claim in opposition to or
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as a setoff against the plaintiff's claim." Black's Law Dictionary 402 (9th ed. 2009).
Thus, because a counterclaim is simply a specific type of claim, the district court's
interpretation of the mediation clause to include counterclaims seems reasonable.

Yet that interpretation ignores the contract's requirement that mediation occur "as
a condition precedent to . . . the institution[] [of] legal or equitable proceedings by either
party." As Magnum points out, the term "institute" means "[t]o begin or start;
commence." Black's Law Dictionary 868 (9th ed. 2009).

We agree. A civil action is commenced, or instituted, when a plaintiff files a
petition and perfects service of process. K.S.A. 60-203(a); Underhill v. Thompson, 37
Kan. App. 2d 870, 875, 880, 158 P.3d 987, rev. denied 285 Kan. 1177 (2007).
Accordingly, the plain language of the mediation clause supports Magnum's argument
that only the plaintiff, i.e., the party instituting the lawsuit, bears the burden to attempt
mediation before filing suit.

Moreover, we are aware of no Kansas cases applying a mediation clause against a
defendant asserting a compulsory counterclaim in an existing lawsuit. Magnum points out
that the two cases cited by Vanum, Crandall v. Grbic, 36 Kan. App. 2d 179, 138 P.3d
365 (2006), and Santana v. Olguin, 41 Kan. App. 2d 1086, 208 P.3d 328 (2009), rev.
denied 290 Kan. ___ (May 18, 2010), are distinguishable. Each of those cases concerned
compulsory counterclaims and found dismissal of the plaintiffs' claims to be appropriate
when the plaintiffs failed to comply with a mediation clause. Although neither Crandall
nor Santana involved counterclaims, Vanum nevertheless contends the cases are directly
on point because they do not "narrowly confine presuit mediation clauses to specific
types of claims."

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In Crandall, 36 Kan. App. 2d 179, plaintiffs sued defendant following a real estate
transaction under theories of breach of fiduciary duty, fraud, misrepresentation, and
violation of the Kansas Consumer Protection Act. 36 Kan. App. 2d at 180. The district
court granted defendant's motion for summary judgment on the merits of each of
plaintiffs' claims. 36 Kan. App. 2d at 185-97. Additionally, the district court granted
summary judgment because plaintiffs failed to comply with a mediation clause in the
parties' contract. 36 Kan. App. 2d at 197-98. The clause at issue in Crandall provided:

"'29. MEDIATION. Any dispute or claim arising out of or relating to this
Contract, the breach of this Contract or the services provided in relation to this Contract,
shall be submitted to mediation in accordance with the rules and procedures of the
Homesellers/Homebuyers Dispute Resolution System. Disputes shall include
representation made by the Buyer, Seller, or any real estate broker/licensee in connection
with the sale, purchase, financing, condition, or other aspect of the Property including,
without limitation, allegations of concealment, misrepresentation, negligence, and/or
fraud. . . . The following matters are excluded from mediation hereunder . . . (e) violation
of Kansas real estate license laws.'" 36 Kan. App. 2d at 197-98.

On appeal, plaintiffs argued their lawsuit was excluded from mediation because it
involved a violation of Kansas real estate license laws. 36 Kan. App. 2d at 198. A panel
of this court rejected that argument as well as plaintiffs' suggestion that their attempt to
mediate after defendant had filed a motion for summary judgment precluded defendant
from raising the failure to mediate as an affirmative defense. 36 Kan. App. 2d at 198. The
panel stated:

"The Purchase Contract is clear on this issue, any dispute 'shall be submitted to
mediation.' As cited above, the law favors reasonable interpretations of contracts. To
allow the plaintiffs to attempt mediation to avoid summary judgment after defendant had
devoted time and money defending their suit is unreasonable. Although defendant is
entitled to summary judgment on all issues because of the plaintiffs' failure to prove their
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claims, the district court was correct to grant defendant a summary judgment by reason of
plaintiffs' failure to timely seek mediation." 36 Kan. App. 2d at 198.

In Santana, 41 Kan. App. 2d 1086, the district court dismissed plaintiff's claims of
negligence, fraud, and violations of the Kansas Consumer Protection Act against two
defendants, based on plaintiff's failure to comply with a mediation clause in a real estate
purchase contract. 41 Kan. App. 2d at 1087, 1092. The clause at issue in that case was
identical to the mediation clause in Crandall, and the district court relied on Crandall to
support its ruling. 41 Kan. App. 2d at 1093. A panel of this court, following Crandall,
affirmed the district court's ruling, stating:

"We acknowledge that the subject provision does not expressly require that submission to
mediation must precede the filing of suit and that it could easily have so provided by
insertion of the phrase 'prior to filing suit.' Nevertheless, we conclude that this sequence
is implied or contemplated when considering the totality of the provision. A material part
of the provision is the covenant to submit claims to mediation in accordance with the
'Homesellers/Homebuyers Dispute Resolution System' and its rules and procedures." 41
Kan. App. 2d at 1093-94.

The Santana panel concluded that "mediation is intended to provide an alternative
to litigation and thus creates a condition precedent to litigation that the parties mediate
their disputes. Our conclusion is consistent with case law that has construed contracts
with grievance procedures as requiring pursuit of such procedures prior to litigation.
[Citations omitted.]" 41 Kan. App. 2d at 1094. The panel also refused to distinguish
Crandall on the basis that Santana moved to compel mediation earlier in the litigation
process than the plaintiffs in Crandall. The panel reasoned that "mediation cannot
effectively and fully serve its purpose of alternative resolution unless attempted prior to
suit." 41 Kan. App. 2d at 1095.
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We can cull several principles from Crandall and Santana: (1) mediation clauses
should generally be construed to require a plaintiff to pursue mediation before filing a
claim, even in the absence of explicit language requiring that mediation precede
litigation; (2) the purpose of a mediation clause is fully served only if mediation precedes
litigation; and (3) if a plaintiff fails to comply with a mediation clause before filing a
claim in court, the plaintiff's claim may be dismissed. Santana, 41 Kan. App. 2d at 1094-
95; Crandall, 36 Kan. App. 2d at 198.

Applying these principles here, we note that the mediation clause in this case
explicitly makes mediation a condition precedent to litigation, and, unlike the plaintiffs in
Crandall and Santana, the plaintiff here did attempt mediation before instituting the
lawsuit.

The unique wrinkle in the case at bar is that the defendant, Magnum, not only
failed to respond to Vanum's offers to mediate Vanum's claims, but also failed to offer to
mediate its own counterclaim. Nevertheless, because the purpose of a mediation clause is
to resolve disputes through mediation before pursuing litigation, we conclude that
purpose would not be served by requiring a defendant to attempt mediation of a
compulsory counterclaim before asserting that counterclaim in ongoing litigation.

Finally, our research has revealed no case law from federal courts or other states
applying a mediation/arbitration clause to a compulsory counterclaim asserted in an
existing lawsuit. Like Crandall and Santana, most cases involve a plaintiff's failure to
comply with a mediation clause which is often addressed through a defendant's motion to
dismiss or motion to compel mediation and/or arbitration. See e.g, N-Tron Corp. v.
Rockwell Automation, Inc., ___ F. Supp. 2d ___, 2010 WL 653760, *7 (S.D. Ala. 2010)
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(noting that courts have discretion to dismiss or stay proceedings when plaintiffs fail to
comply with arbitration or mediation provisions before filing suit); Tattoo Art, Inc. v. Tat
Intern., LLC, 711 F. Supp. 2d 645, 649-54 (E.D. Va. 2010) (granting defendants' motions
to dismiss based on plaintiff's failure to request mediation before filing suit as required by
parties' contract); HIM Portland, LLC v. DeVito Builders, Inc., 317 F.3d 41, 42-44 (1st
Cir. 2003) (affirming district court's refusal to compel arbitration because neither party
had requested mediation); Kemiron Atlantic, Inc. v. Aguakem Intern., Inc., 290 F.3d
1287, 1288-91 (11th Cir. 2002) (affirming district court's denial of defendant's motion to
stay proceedings pending arbitration when neither party took necessary steps to trigger
arbitration clause in parties' contract); Ponce Roofing, Inc. v. Roumel Corp., 190 F. Supp.
2d 264, 266-67 (D. Puerto Rico 2002) (same).

In sum, even though the mediation clause at issue here appears broad enough to
include compulsory counterclaims asserted in an existing suit, the plain language of the
clause makes clear that the burden to attempt mediation must be borne by the party
instituting the lawsuit. Further, from a common-sense standpoint, the purpose of a pre-
litigation mediation clause would not be served by requiring a defendant to offer to
mediate a compulsory counterclaim asserted after litigation has commenced. For these
reasons, we conclude the district court erred in interpreting the mediation clause to bar
Magnum's counterclaim.

Based on this conclusion, we find it unnecessary to address Magnum's second
issue. Accordingly, we reverse the district court's ruling and remand with directions to
reinstate the jury verdict and award.

Reversed and remanded with directions.