Illinois Construction Law Blog : Illinois Construction Lawyer & Attorney : Foran Glennon Palandech & Ponzi Law Firm : Chicago IL

The first district has upheld an arbitrator’s decision regarding the implication of an indemnity provision and given us a useful reminder that some rote contract language is actually important.

Undoubtedly in your contracts you’ve seen language binding or implicating those subsidiaries, affiliates, successors and assigns – some have argued that the language be removed from agreements or given their own clauses. In Rexnord Industries, LLC v. RHI Holdings, and The Fairchild Corporation (1^st Dist, Doc. No. 1-08-0562) it turned out to make quite a bit of difference.

In Rexnord, two parties agreed to an arbitration of the percentage of a $1.8 million settlement each was responsible for. The settlement was for an environmental claim against Rexnord. Rexnord had previously been owned by RHI, was sold to another company (A), which was acquired by yet another company (B) and was sold before the arbitration to yet another company (C).

The original sale agreement between RHI and company A obliged RHI to indemnify:

“[company A] its affiliates, subsidiaries, successors and assigns from "any and all losses, liabilities, claims, damages, *** costs, etc." relating to RHI's ownership and operation of the property before the spinoff date, "so long as these ‘Losses' arise out of or are in any way related or connected to any Environmental Law; result from any claim by any governmental or private party arising out of or in any way related or connected to any Environmental Law; or result from the generation, use, handling, storage, transport, disposal, release or threatened release of any Materials of Environmental Concern." The indemnity obligation created by the agreement applied "only to the excess of (x) Losses over (y) the sum of amounts collected by Purchaser or Rexnord from third parties." (Slip Op. at 2. emphasis added.)

An arbitrator determined that RHI was responsible for 90% and ordered that it pay Rexnord for that 90% and some other damages. It also determined that company B was an indemnitee under the agreement between RHI and company A. RHI asked a circuit court to vacate the award and the circuit court declined to do so. RHI then appealed.

On appeal, RHI argued that because company B had paid the $1.8 million it was not obliged to pay because company B was a “third party” by virtue of being a subsequent purchaser of company A and by having sold to company C prior to the arbitration. RHI also argued that the arbitrator should not have considered the position of company B as an indemnitee because company B was not a party to the arbitration.

The appellate court disagreed and upheld the award. In doing so, it found that:

• The arbitrator was correct in considering company B as an affiliate or successor.
• The clause for indemnification did not exclude amounts reimbursed by owners or affiliates.
• The arbitrator had the power to consider company B’s status because the issue was raised by Rexnord and RHI in the arbitration.
• Company B was a “successor” under the agreement even though it had subsequently sold Rexnord to company C.

This is a lesson for contracting parties. Even though some language may appear rote or inapplicable, understanding the effect of that language in the context of the deal and knowing the obligations it imposes may help in your transactions and knowing what a court will do can add certainty to the language you are choosing. The inclusion or exclusion of any contractual clause is a determination best made by the parties after considering the eventualities, risks and obligations they wish to plan for.

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Here’s an opinion from the Northern District, Blythe Holdings, Inc. v. Flawless Financial Corp., et al. (Doc. No. 06-C-5262, 2009), that should serve as a reminder to keep your registration as a professional design firm current.

The plaintiff’s sued numerous individuals and corporations over a complex real estate transaction in connection with redeveloping multiple vacant lots in the City of Chicago’s 16^th Ward. As part of the transaction, plaintiffs entered into an agreement with a defendant architecture firm. The agreement, which contained an arbitration provision, was signed by a principal of the firm who was a licensed architect. A $25,000 retainer was paid to the principal.

Soon enough, the deal went south and the plaintiff was involved in litigation when it believed that many of the lots involved in the transaction were completely unsuitable for development and that no work had been performed to secure the lots they had been promised.

In addition to suing the developers and the attorneys representing them, the plaintiffs sued the architect on the project to get their money back. The architect defendants moved to dismiss the complaint, or to stay the proceedings pending the arbitration they were entitled to under their contract. The plaintiffs responded that the contract was void and could not be enforced, because at the time they entered into the agreement, the architecture firm was no a registered professional design firm with the state of Illinois. (We’ve written about this before.) Alternatively, the plaintiffs argued that because the contract didn’t use the full name of the architecture firm, the contract should be declared void.

Neither of these arguments is very good. The second is laughable. While it is true that the Illinois Supreme court has yet to specifically address this issue, many courts have already reasoned that because the work is performed by a licensed architect, it is the licensure – which is proof that standards are met through the design professional’s credentialing process -  that keeps the public safe, which is the point of the process. The fact that an entity may register as a professional design firm has nothing to do with public safety; public safety is the policy behind the act that requires registration.  The court upheld the contracts and their arbitration provisions and allowed the action against the design professionals to proceed in arbitration against the desires of the plaintiffs.

Note, however, that there are criminal penalties for the failure to register your design firm. While the arguments may not be persuasive to a court in determining whether or not to uphold a contract… people doing business with you may report you to the Illinois Department of Professional Regulation for the failure to register your firm.

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    Chances are that if you’ve been through an arbitration you’re going to have a strong opinion about it.  It’s even likely that your experience has influenced you enough to include or delete arbitration clauses from your contracts.  Splitting the baby in two is a normal result and the parties are expected to air their grievances up front - it is, after all, an alternative to the litigation process, and should not be treated as a precursor to some other form of conflict resolution, and the opinion in the matter of  Environmental Barrier Co., LLC v. Slurry Systems, Inc. (7^th Circ. Doc. No 06-3910) is no exception.

    An arbitration claim was filed by a company that had purchased some of the assets of a subcontractor during the subcontractor’s bankruptcy.  The original arbitration claim was for $657,273.50 against the general contractor by the company that had purchased the sub’s contract in the bankruptcy (the “sub-purchaser”), and the final arbitration award was $388,919.88.  After the sub-purchaser moved to confirm the award in court, the general raised a new issue:  that there had been no agreement to arbitrate between the parties.  The seventh circuit addressed the issue and found in favor of the sub-purchaser.  The court raised policy concerns about allowing a party to sit on the issue of arbitrability throughout an arbitration and then to raise it after the parties have completed the arbitration process and have moved on to court.

“This is not a tactic we can accept, for sound policy reasons.  It is terribly wasteful of the arbitrator’s time, the parties’ time, and the court’s time.  Anyone who wants to object to arbitrability is entitled to make her position known to the arbitrator and the other party; the other party may then, if it wishes, respond with a petition for an order to compel arbitration under the Federal Arbitration Act…and obtain a judicial determination on arbitrability.  In addition, keeping the arbitrability card close to the chest would allow a party like [the general contractor] to take a wait-and-see approach: if it had liked [the arbitrator’s] decision, it would have remained silent, but since it did not, it is now complaining about arbitrability.”

    The court is correct, and this is a lesson for anyone getting ready to participate in an arbitration, or considering the merits of not participating.  The time to object is in the beginning.  The legal process, including arbitration, is about the resolution of disputes and not tactical gamesmanship.

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