Arbitration clauses arise in a variety of contractual settings such as consumer agreements, service contracts, partnership agreements, labor/employment contracts, leases, construction contracts, and settlement agreements. Of all the alternative dispute resolution options, arbitration is arguably the most efficient. It provides relative finality faster and (usually) less expensively than litigation. This article provides an overview of the mechanics of arbitration clauses.
Validity/Enforceability. In Illinois, arbitration is governed by the Uniform Arbitration Act (“UAA”) and the validity of an arbitration clause, by section 1 thereof.1 Essentially, arbitration clauses are contractual agreements subject to the same parameters of enforceability as contracts.2 In 2006, the Illinois Supreme Court decided the case of Kinkel v. Cingular Wireless, LLC, which determined the validity of an arbitration clause in a service agreement.3
At issue was the arbitration clause in a cell phone contract of adhesion, which contained rather biased anti-consumer provisions. Among them was a waiver of class action rights. The high court considered the issues of procedural and substantive unconscionability, along with the question of whether the Federal Arbitration Act (“FAA”) preempted the UAA.4
Although much of the opinion is case-specific, it offers the following holdings: (1) The FAA does not preempt, but rather frames the enforceability analysis as a contractual analysis under Illinois law.5 Put another way: the choice of law election for arbitration under state law renders the FAA inapplicable, notwithstanding interstate commerce implications.6 (2) Arbitration clauses must be analyzed on a case by case basis. 7 (3) Strong policy considerations favor enforceability of arbitration clauses; therefore, a court may sever an unconscionable class action waiver to salvage the remainder of the arbitration clause.8 (4) Procedural unconscionability pertains to the circumstances under which the contract was formed. An arbitration clause may not be enforced if it contains too much legalese, fails to warn about whom bears the costs for arbitration, or if it is buried and/or printed in proverbial “fine print.”9 (5) Substantive unconscionability is when the terms are oppressive or cause unfair surprise.10 In this analysis, courts will consider the parties’ relative bargaining power and the nature of the underlying claim.11
The circuit court is the proper tribunal to determine the validity of an arbitration clause, although the arbitrator may assess validity of the contract itself.12
Compelling/Opposing Arbitration. The making of any agreement considered an arbitration agreement under the UAA confers subject matter jurisdiction upon Illinois circuit courts.13 Venue is proper in the county in which the arbitration agreement states that the arbitration will occur (or did) occur.14 “Otherwise the application shall be made in the county where the adverse party resides or has a place of business or, if he hasno residence or place of business in this State, to the court of any county.”15
Once an initial application is made to a particular circuit court, all subsequent applications shall be made in that forum unless the court orders otherwise.16
The party wishing to arbitrate makes an “application” to the court, i.e. a motion to compel arbitration.17 Upon a showing that there is a valid agreement to arbitrate and the opposing party’s refusal to do so, the court shall order arbitration.18 “At a hearing to compel arbitration, the only issue for the trial court is whether an agreement exists to arbitrate the dispute in question.”19 (However, please see the discussion regarding issue “arbitrability” below.) Pending a ruling on a motion to oppose arbitration, the court may stay an arbitration proceeding “commenced or threatened” upon a showing there is no agreement to arbitrate.20 Conversely, an action pending in court may be stayed in whole or part depending upon severability of the issue to be arbitrated.21 Federal courts applying Illinois law unconscionable that it was not clearly disclosed to customers that due to the class action waiver, the cost to individuals for arbitration was $125 over a $150 charge). Have held that in the interests of economy and consistency, where one claim is arbitrable, to the extent that its resolution may “shed light” on the remaining issues, those claims should also be stayed.22
Finally, in most appellate districts in Illinois, the fact that a pending court action involves parties other than those who entered into the agreement to arbitrate, will not serve as a basis to deny a motion to compel arbitration.23
Waiver of Arbitration. The Illinois Fifth District Appellate Court succinctly restated Illinois law regarding waiver of arbitration as follows: “Although it is well-settled law that a contractual right to arbitrate can be waived like any other contract right, waiver will only be deemed to have occurred “when a party’s conduct has been inconsistent with the arbitration clause so as to indicate that he has abandoned his right to avail himself of such right.” [internal citation omitted] In Illinois, waiver has been found when: (1) a party has instituted legal proceedings and participated in a trial on the merits (Hilti, Inc. v. Griffith (1978), 68 Ill.App.3d 528, 533, 24 Ill. Dec. 859, 862, 386 N.E.2d 63, 66); (2) a party has filed an answer without asserting his right to arbitrate (Gateway, 76 Ill.App.3d at 816, 32 Ill.Dec. at 386, 395 N.E.2d at 616); and (3) a party that has sought arbitration files a motion for summary judgment on an arbitrable issue (Applicolor, Inc. v. Surface Combustion Corp. (1966), 77 Ill.App.2d 260, 267, 222 N.E.2d 168, 171).”24
Arbitration Logistics: Who/What/When/Where/How. Who Arbitrates: Under the UAA, if the arbitration clause specifies a method for appointing arbitrators, such method must be followed.25 However, if no method is prescribed then any means agreed upon by the parties is allowed.26 Although the UAA states in the latter instance, that if no agreement can be reached “the entire arbitration agreement shall terminate,” courts are loathe to apply this provision.27 While the UAA’s predecessor required three arbitrators, that is no longer so and the parties are free to specify the number of arbitrators. Who Appears: Under the UAA, parties have the right retain counsel and any waiver of counsel made prior to the proceeding is ineffective.28 If a party fails to appear at the proceeding, the arbitrator(s) may determine the case based upon previously submitted evidence.29
What: Whether a particular dispute falls within the ambit of an arbitration clause is referred to as the “arbitrability” of an issue. Illinois case law is not entirely consistent as to whether arbitrability is within the purview of the court or the arbitrating body. Citing the United States Supreme Court, a 2003 Third District case held that arbitrability is determined by the court.30 “[T]he question whether the parties have submitted a particular dispute to arbitration, i.e., the ‘question of arbitrability,’ is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.31 That holding was in apparent contradiction to the First District opinion in Jupiter Mech. Indus., Inc. v. Sprinkler Fitters & Apprentices Local Union No. 281.32 Perhaps the explanation for the discrepancy is simply that the First District Jupiter decision predated the U.S. Supreme Court Howsam decision cited in the Third District ACME case. However, this explanation is undermined by a 2012 Second District case called Smola v. Greenleaf Orthopedic Associates, S.C., which holds that arbitrability of a particular dispute shall be decided by the arbitrator.33 So, then how should one reconcile these decisions? In the two instances where the courts said arbitrability was for the arbitrator, the arbitration agreements at issue were “generic” or very broad in scope involving language like all claims and disputes arising out of the subject matter of the agreement. However, if the breadth of the clause is the determinative factor for whether arbitrability is decided by the court or the arbitrator, one can imagine the inconsistency that would yield. The other possible explanation is simply that the appellate districts are split on this issue.
When: Unless the arbitration agreement specifies otherwise, the arbitrators select a time and place for the proceeding and notice to the parties must be provided by personal service or registered mail at least five days before the arbitration.34 Once convened, the arbitrator(s) may adjourn the proceeding from time to time.35
Where: Generally speaking, because the parties have broad contractual powers, they can agree to arbitrate where the wish. Notwithstanding the foregoing, other provisions of Illinois law may conflict with this, e.g. Section 10 of the Building and Construction Contract Act, which purports to void any provision of a contract for building/construction to be performed in Illinois that is subject to the law of another state or requires any litigation, arbitration or dispute resolution to occur in another state.36 Although there are no Illinois cases analyzing this apparent conflict, there is a United States District Court opinion from Minnesota.37 There, the court held that under the Supremacy Clause, the FAA trumped the Illinois construction statute and granted petitioner’s motion to compel arbitration in Minnesota and to stay the pending Illinois court action.38
How Proceedings Are Conducted: Arbitrators have the power to issue subpoenas for the appearance of witnesses or production of documents and to administer oaths.39
The parties have the right to be heard, to present evidence “material” to the controversy and to cross-examine witnesses.40 If a witness is unavailable, a party may apply to take an evidence deposition.41 Where there is a panel of arbitrators, a majority rules regarding various rulings and conducting the proceeding generally.42 How Awards Are Made: The award must be in writing and signed by the arbitrators “joining in the award.”43 The award shall be made within the time period specified or otherwise agreed upon by the parties.44 The award shall be made in accordance to the rules chosen by the parties,45 accounting for other terms of the contract, as well as custom and usage of the applicable trade/industry.46 In fact, knowledge of the relevant industry is often a critical factor for specifying a particular arbitrator or even opting for arbitration in the first place.
Post-Award Proceedings: So you have an award…Pursuant to Section 9 of the UAA, the arbitrators may modify or correct an award to clarify it, correct an evident miscalculation or to correct an issue of form and not substance.47 Under this section a party making an application directly to the arbitrating body must do so within twenty days of the delivery of the award, with written notice to opposing party that includes notice that the other party has ten days to serve any objection.48 Such a change may also occur by submission from a court in which there is an application pending for judicial confirmation, vacation or modification of an award pursuant to sections 11, 12 and 13, respectively.49
If no party has made a timely application to vacate or modify an award under section 12 or 13, respectively, then the court shall confirm an arbitration award upon application of a party.50 A motion to modify or correct an award must be filed with 90 days of delivery of the award and may be based on the following grounds: (1) an evident miscalculation or error in describing/identifying a person, thing or property; (2) an award upon a matter not submitted to the arbitrators; (3) the award is flawed in form.51 Upon ruling on a motion to modify or correct (whether granting or denying), the court shall confirm the award.52 A party may file one motion that seeks to vacate per section 12 and alternatively to modify under section 13.53
To vacate (“reject”) an award, one must act promptly by filing a motion with the court within 90 days of delivery of the award.54 There is a narrow exception in that if the motion to vacate is based upon corruption or fraud, the 90 days tolls until the party knew or should have known such grounds existed.55 There are five enumerated bases for a motion to vacate under Section 12 of the UAA, as follows: (1) The award was procured by corruption, fraud or other undue means; (2) There was evident partiality by an arbitrator appointed as a neutral or corruption in any one of the arbitrators or misconduct prejudicing the rights of any party; (3) The arbitrators exceeded their powers; (4) The arbitrators refused to postpone the hearing upon sufficient cause being shown therefor or refused to hear evidence material to the controversy or otherwise so conducted the hearing, contrary to the provisions of Section 5, as to prejudice substantially the rights of a party; or (5) There was no arbitration agreement and the issue was not adversely determined in proceedings under Section 2 and the party did not participate in the arbitration hearing without raising the objection; but the fact that the relief was such that it could not or would not be granted by the circuit court is not ground for vacating or refusing to confirm the award.56
If a motion to vacate is denied and no motion to modify is pending, the court shall confirm the award.57 Appealability: Denial of a motion to compel arbitration/to stay litigation is a final and appealable order under Supreme Court Rule 307, whereas a denial of a motion to dismiss based on an arbitration clause is not.58 Also, at least in the Second District, where a party has filed a motion to vacate an award, denial of a motion to transfer venue from the county where the respondent resides to where the arbitration occurred, is not appealable.59
Conclusion. Arbitration clauses can be expeditious and cost-effective means of resolving disputes. They are governed by particular rules and mechanics, which affect one’s substantive rights. Therefore, practitioners should be mindful of these rules when drafting or enforcing arbitration clauses.
1 710 ILCS 5/1 et seq.
2 710 ILCS 5/1 (“A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable save upon such grounds as exist for the revocation of any contract, except … [those] subject to the Health Care Arbitration Act.”).
3 Kinkel v. Cingular Wireless LLC, 223 Ill. 2d 1, 857 N.E.2d 250 (Ill. 2006).
4 Kinkel, 223 Ill. 2d at 1, 857 N.E.2d at 250.
5 Kinkel, 223 Ill. 2d at 20, 857 N.E.2d at 263.
6 Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 109 S. Ct. 1248 (U.S. 1989); Tortoriello v. Gerald Nissan of N. Aurora, Inc., 379 Ill. App. 3d 214, 225, 882 N.E.2d 157, 168 (2nd Dist.2008); Glazer’s Distributors of Illinois, Inc. v. NWS-Illinois, LLC, 376 Ill. App. 3d 411, 421, 876 N.E.2d 203, 212 (1st Dist. 2007); Yates v. Doctor’s Associates, Inc., 193 Ill. App. 3d 431, 437, 549 N.E.2d 1010, 1015 (5th Dist.1990).
7 Kinkel, 223 Ill. 2d at 20, 857 N.E.2d at 263.
8 Kinkel,223 Ill. 2d at 48, 857 N.E.2d at 278 (severing the unconscionable class waiver, yet still separately concluding that the arbitration clause was nonetheless unconscionable itself ).
9 Kinkel, 223 Ill. 2d at 22-28, 857 N.E.2d at 264-266.
10 Kinkel, 223 Ill. 2d at 28-43, 857 N.E.2d at 266-275.
11 Kinkel, 223 Ill. 2d at 28-29, 857 N.E.2d at 267 (finding it
12 Tortoriello, 379 Ill. App. 3d at227, 882 N.E.2d at 169-170, quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-46, 126 S. Ct. 1204, 1209, 163 L. Ed. 2d 1038 (U.S. 2006).
13 710 ILCS 5/16.
14 710 ILCS 5/17.
15 710 ILCS 5/17.
16 710 ILCS 5/17.
17 710 ILCS 5/2.
18 710 ILCS 5/2(a).
19 City of Peru v. Illinois Power Co., 258 Ill. App. 3d 309, 311, 630 N.E.2d 454, 456 (3rd Dist. 1994); Nagle v. Nadelhoffer, Nagle, Kuhn, Mitchell, Moss & Saloga, P.C., 244 Ill. App. 3d 920, 925, 613 N.E.2d 331, 334 (2nd Dist.1993).
20 710 ILCS 5/2(b).
21 710 ILCS 5/2(c).
22 Hackman v. Dickerson Realtors, Inc., 520 F. Supp. 2d 954, 962 (N.D. Ill. 2007).
23 Nagle, 244 Ill. App. 3d at 925-926, 613 N.E.2d at 335.
24 City of Centralia v. Natkin & Co., 257 Ill. App. 3d 993, 996, 630 N.E.2d 458, 461 (5th Dist. 1994)
25 710 ILCS 5/3.
26 710 ILCS 5/3.
27 See e.g. Heiden v. Galva Foundry Co., 223 Ill. App. 3d 163, 166, 584 N.E.2d 518, 521 (3rd Dist. 1991) (reversing trial court’s denial of motion to compel arbitration where the parties did not agree upon a successor arbitrator, reasoning that “we are of the opinion that the Illinois Uniform Arbitration Act was not intended to be interpreted in a rigid or formalistic manner.”)
28 710 ILCS 5/6.
29 710 ILCS 5/5(a).
30 ACME-Wiley Holdings, Inc. v. Buck, 343 Ill. App. 3d 1098, 1103, 799 N.E.2d 337, 341 (3rd Dist. 2003) citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S. Ct. 588, 591, 154 L. Ed. 2d 491 (U.S. 2002).
31 ACME-Wiley Holdings, Inc. v. Buck, 343 Ill. App. 3d at 1103, 799 N.E.2d at 341 citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S. Ct. 588, 591, 154 L. Ed. 2d 491.
32 Jupiter Mech. Indus., Inc. v. Sprinkler Fitters & Apprentices Local Union No. 281, 281 Ill. App. 3d 217, 223, 666 N.E.2d 781, 785 (1st Dist. 1996). (“In this State, when the language of an arbitration clause is broad, and it is unclear whether the subject matter of the dispute falls within the scope of the arbitration agreement, ‘the question of substantive arbitrability should initially be decided by the arbitrator.’”) Note: Although the First District’s Jupiter decision was in the context of collective bargaining, the court specifically noted that it relied on precedent that was outside that context. 33 Smola v. Greenleaf Orthopedic Associates, S.C., 2012 IL App (2d) 111277, 982 N.E.2d 936 (2nd Dist. 2012) (“[W]hen the language of an arbitration clause is broad and it is unclear whether the subject matter of the dispute falls within the scope of [the] arbitration agreement, the question of substantive arbitrability should initially be decided by the arbitrator.”)
34 710 ILCS 5/5(a).
35 710 ILCS 5/5(a).
36 “Application of laws of another state. A provision contained in or executed in connection with a building and construction contract to be performed in Illinois that makes the contract subject to the laws of another state or that requires any litigation, arbitration, or dispute resolution to take place in another state is against public policy. Such a provision is void and unenforceable.” 815 ILCS 665/10.
37 M.A. Mortenson/Meyne Co. v. Edward E. Gillen Co., CIV.03-5135 PAM/RLE, 2003 WL 23024511, 4 (D. Minn. Dec. 17, 2003).
38 M.A. Mortenson, CIV.03-5135 PAM/RLE, 2003 WL 23024511.
39 710 ILCS 5/7(a).
40 710 ILCS 5/5(b).
41 710 ILCS 5/7(b).
42 710 ILCS 5/7(c)
43 710 ILCS 5/8(a).
44 710 ILCS 5/8(b).
45 710 ILCS 5/8(c).
46 710 ILCS 5/8(c)
47 710 ILCS 5/9.
48 710 ILCS 5/9.
49 710 ILCS 5/9.
50 710 ILCS 5/11.
51 710 ILCS 5/13(a).
52 710 ILCS 5/13(b)
53 710 ILCS 5/13(c).
54 710 ILCS 5/12(b). See also Ill. Sup.Crt. Rule 95 “Form of Notice of Rejection” for mandatory arbitration cases.
55 710 ILCS 5/12(b).
56 710 ILCS 5/12(a).
57 710 ILCS 5/12(d).
58 E.J. De Paoli Co. v. Novus, Inc., 156 Ill. App. 3d 796, 799, 510 N.E.2d 59, 60-61 (1st Dist. 1987).
59 State Farm Mut. Auto. Ins. Co. v. Hayek, 349 Ill. App. 3d 890, 812 N.E.2d 1035 (2nd Dist. 2004). In the interests of full disclosure, this author’s law firm represented the appellee, which successfully had the appeal dismissed. But see Foley v. Greer, 333 Ill. App. 3d 500, 775 N.E.2d 665 (5th Dist. 2002).
Rachael A. Gould is an associate with the law firm of Momkus McCluskey, LLC and practices in civil litigation, insurance coverage, insurance defense, and commercial litigation. Ms. Gould handles cases before courts throughout Northern Illinois and in the United States District Court for the Northern District of Illinois. She received her JD from The George Washington University Law School.