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

We thought this Friday would be a good time to highlight some great pieces from around the web that you may find interesting:

• There is an article up at Blair Kamin’s Cityscapes (formerly The Skyline) about Jeanne Gang’s Dwell Magazine featured project.
• Ken Adam’s has an extremely informative discussion going over at Adam’s Drafting regarding re-writing the American Arbitration Association’s Standard Arbitration Clause in light of the Manual of Style for Contract Drafting’s proposals on clearer contract language.  The read is important for people honestly interested in their contract language and some possible implications of using the AAA’s recommended language.
• The Fair Housing Defense Blog has an article about occupancy standards and why they matter.  For those dealing with FHA issues on a regular basis, this piece will pique your curiosity.
• Anyone who’s a fan of the Car Talk Puzzler will get a kick out of the Friday fun going on over at the venerable Drug and Device Law.  You may also be curious about this piece they did over a week ago regarding some non-empirical evidence of the life of legal blogs.  (For the record, ILCLB’s at One Year and 10 months.)

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In using most standard-form agreements on a particular project the primary parties tend to negotiate the specific terms and reach an accord that will either include or exclude arbitration as their chosen form of primary dispute resolution. Opinions on the effectiveness and usefulness of arbitration are as varied as the fish in the sea.

The decision to utilize arbitration as the default on short standard form contracts is an individual one in the hands of the entity providing the contract for signature. In the construction industry there are many organizations offering arbitration services for one to choose from. But making sure the party who signs your contract will be bound by them is a trickier issue. Anyone wishing to add an enforceable arbitration provision to a short, standard form agreement would do well to familiarize themselves with the recent Illinois case of Timmerman v. The Grain Exchange, et al. (5^th Dist. Doc. No. 5-08-0404).

In Timmerman, farmers caught up in The Grain Exchange fiasco brought an action against the grain dealer they had contracts with for the supply of grain. The dealer had its license revoked and assigned the contracts it had with the farmers to another grain dealer after the revocation; also a defendant sued by the farmers.

The farmers sought a determination that they were not bound by the contracts because the grain dealer’s license had been revoked.  In arguing against such a finding, the grain dealers asked the court to determine that the arbitration provisions contained in the one-page-single-sided contracts that the farmers entered into with the grain dealer. The contracts were created by the dealer and contained a term stating that “the Rules of the National Grain and Feed Association” would apply to the contract. Nowhere did the contract mention arbitration, which is contained in the Rules referenced in the contract. And, the rules were not made available to the farmers prior to signing, nor were the farmers told that the Rules referenced in the contract contained an arbitration provision.

The district court found that the attempt to apply the Rules’ arbitration provision to the farmers would be procedurally unconscionable – “a situation where a term is so difficult to find, read, or understand that the plaintiff cannot fairly be said to have been aware he was agreeing to it.”

The appellate court agreed. In agreeing with the district court, the appellate court cited a long string of cases and examples of contractual provisions found to be unconscionable due to their placement in the contract, the lack of their conspicuous nature, the failure to point them out to signatories and the failure to allow signatories time to understand or peruse the contract before signing.

While many of the cases cited by the court are examples of what not to do, for those seeking to have an enforceable arbitration provision in a short contract there were several decisions referenced.

Of note was the appellate court’s recitation of the decision in Bunge Corp v. Williams (45 Ill. App. 3d 359) from 1977 which upheld an arbitration provision printed on the back of a contract where the words:

“THE TERMS PRINTED ON THE BACK HEREOF ARE A PART OF THIS CONTRACT.”

Appeared in bold letters just above the signature line on the front page.

The decision in Turner Construction v. Midwest Curtainwalls (187 Ill. App. 3d 417) from 1989 where a construction subcontract was valid where it incorporated an arbitration provision in the general contract by reference and stated that the general contract was “available for examination by the Subcontractor at all reasonable times at the office of the general contractor” and that the subcontractor “represents and agrees that it has carefully examined and understands the general contract.”

While any party to your agreement may attempt to challenge its arbitration provision, carefully crafting one that will be upheld with an eye to decisions regarding upheld provisions can help you overcome any such challenge.

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In a recent Seventh Circuit opinion, Haber v. Biomet, Inc. et al., (Doc. No 08-1670), the federal circuit court found that a state court determination could preclude it from considering an issue regarding the arbitrability of a contract dispute.

In Haber, the plaintiff brought an action in the Southern District of Indiana after it had been sued in Indiana state court by the defendant over a contract dispute. The plaintiff acted as a distributor of defendants prosthetic parts and the two actions were based on allegations that plaintiff performed some work on behalf of the defendants competitor.

The parties also had a disagreement over the proper dispute resolution portion of their contracts controlled their actions. The defendant believed that a litigation clause in a 1995 contract stating that any disputes would be settled through litigation in Indiana held sway and the plaintiff believed that an arbitration clause in a 1999 contract stating that arbitration would take place in Chicago, Illinois.

The federal district court held that it the Southern District of Indiana was an improper venue for an motion to compel arbitration based off an arbitration provision which stated that Chicago, Illinois would be the location of the arbitration. The State court denied a motion to compel arbitration in part, stating that the arbitration provision should apply to disputes arising out of the 1999 contract and that the litigation provision should apply to disputes arising out of the 1995 contract.

The plaintiff chose only to appeal the federal district court’s decision and the 7^th Circuit held that pursuant to Section 4 of the Federal Arbitration Act…

“The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed.” 9 U.S.C. §4

…it was plain that any determination about the arbitration in federal court needed to be filed in the Northern District of Illinois. The 7^th Circuit even noted how odd it was that there was no motion to transfer venue to the Northern District:

“We do find it strange that [Plaintiff] did not at some point file a motion for transfer to the Northern District of Illinois in Chicago”

The appellate court held that it was improper to bring the claim in the Southern District of Indiana.

With regard to the state court claim, the court found that it lacked the authority to review the decision because res judicata barred it from doing so given that the doctrine of issue preclusion applied once the state court made a determination regarding arbitrability. The state court decision should have been appealed.

The lessons regarding familiarizing yourself with the FAA are clear for practitioners. For those contracting for certain dispute resolution rights and entering into multiple agreements, it is painfully apparent how important consistency in those provisions can be.

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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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