Recent amendment guts the Arbitration Act

A major change has been made to the Illinois version of the Uniform Arbitration Act. In 2010, the governor signed into law House Bill 5888. P.A. 096-1476. Under this bill, any party to an arbitration proceeding may challenge the ruling of the arbitrator if the arbitrator did not (1) follow the applicable “rules of law,” (2) decide in accordance with terms of the contract, or (3) “take into account the uses of trade applicable to the transaction.” 710 ILCS 5/8 (2010). This amendment is effective January 1, 2011.

In only rare circumstances have Illinois courts set aside arbitration rulings when the arbitrator did not follow the law. The courts have refused to do so for several reasons. First, arbitration was developed as an alternative to litigation with the hope that disputes could be resolved quickly while avoiding costly litigation. If the arbitration statutes or courts start to require arbitrators to follow the law, any ruling of an arbitrator could be challenged in court and may be vacated. Thus, the dispute may not be speedily resolved.

Second, arbitration is an informal process which should result in less expense to the parties, especially because most arbitration proceedings do not allow protracted discovery. If stringent statutory or court-imposed rules of proceeding are imposed, the arbitration proceeding may become more expensive.

Third, the parties voluntarily selected arbitration. They are presumed to know the benefits and detriments arbitration. They opted for arbitration, thinking that any dispute between them should be resolved quickly and efficiently. The courts should respect their desire.

Essentially, the Illinois courts do not look upon themselves as appellate tribunals to judge the results of arbitration proceedings. This view is expressed in the Arbitration Act. The act contains a provision under which a party may also ask the court to confirm an award. 710 ILCS 5/11 (2010). If the court confirms the award, the court may enter judgment and the party seeking confirmation can use the judicial process to enforce the award. The Act also has a provision under which a party may ask the court to vacate the award. 710 ILCS 5/12 (2010). The grounds for vacating are limited.

Under the Arbitration Act, the court may overturn an award if (1) the award was procured by corruption or fraud, (2) the arbitrator was partial, (3) the arbitrator exceeded his or her powers, (4) the arbitrator unreasonably refused to postpone the hearing or hear evidence, or (5) there was no agreement to arbitrate. 710 ILCS 5/12 (2010). However, the courts have created another ground for setting aside the award, not contained in the statute. Although the award may not be set aside because of mistakes in judgment, fact or law, a court may reverse an award where a “gross error of law or fact appears on the award’s face.” Glasso v. KNS Companies, Inc., 364 Ill. App. 3d 124, 131, 845 N.E.2d 857 (1st Dist. 2006). To determine if there has been a gross error or fact or law, the court “must be able to conclude from an award’s face that the arbitrator was so mistaken as to the law that, if apprised of the mistake, he would have acted differently.” Herricane Graphics, Inc. v. Blinderman Construction Co., Inc., 354 Ill. App. 3d 151, 156, 820 N.E. 2d 619 (2d Dist. 2004).

Under the Federal Arbitration Act, a court may overturn an award if (1) the award was procured by fraud, corruption or undue means, (2) the arbitrator was partial or corrupt, (3) the arbitrator was guilty of misconduct in refusing to postpone the hearing, refusing to hear pertinent and material evidence, or any misbehavior which prejudiced the rights of a party; or (4) the arbitrator exceeded or so imperfectly executed its powers that a final award was not made. 9 U.S.C. § 10 (2010).

Federal courts, interpreting the Federal Arbitration Act (“FAA”), have developed the doctrine of “manifest disregard of the law which may be used to set aside an award.” Under this doctrine, the award of an arbitrator may be overruled if the arbitrator deliberately chose to disregard a statute or rule of law. 9 U.S.C. § 10(a)(4) (2010). See also Domke on Com. Arb., See 38.9. To set aside an award for manifest disregard of the law, the party challenging the award must literally show from the record that the arbitrator knew the law and consciously chose not to follow it. Illinois also has adopted the manifest disregard rule. Anderson v. Golf Mill Ford, Inc., 383 Ill. App. 3d 474, 479, 890 N.E.2d 1023 (1st Dist. 2008).

Arbitration was devised as a dispute resolution mechanism to avoid costly and timely battles in court and to ensure confidentiality. Unfortunately, the recent amendment to the Arbitration Act opens the door to circumvent the purpose of arbitration. Under this rule, any party wishing to challenge the award at the confirmation hearing will have additional arrows for its quiver. The circuit court will be turned into an appellate court, because it will have to review the record to determine whether the arbitrator followed the rule of law to reach his or her award. Then, if one of the parties is not satisfied with the result before the circuit court, then he or she can appeal to the Illinois Appellate Court.

Arbitration should be a quick and economical alternative to litigation. This amendment defeats the aim of the Arbitration Act. Moreover, the expense of arbitration will be increased because the parties may have to spend additional fees fighting over the confirmation of the award in the circuit court and maybe even in the appellate court.

If you favor arbitration, don’t give up hope. You could argue that your transaction has connection outside of Illinois and that FAA applies to your dispute, because there is sufficient interstate commerce to bring the dispute within the scope of the FAA. In R.A. Bright Construction, Inc. v. Weis Builders, Inc., 402 Ill. App. 3d 248, 930 N.E.2d 565 (3d Dist. 2010), a general contractor was successful in forcing a subcontractor to arbitrate a dispute in Minnesota under the venue section of the contractual arbitration provision. The court pointed out three facts supporting application of the FAA pursuant to the commerce clause. They were: (1) the subcontractor purchased $75,000 of material from a Wisconsin company, (2) the general contractor was a Minnesota corporation with offices in four states, and (3) the parties were building a store for a national retailer. The court also held that the federal act pre-empted the Illinois Building and Construction Act, 815 ILCS 665/1 et seq. (2010), which voids contract clauses in construction contracts mandating that the dispute resolution forum be in another state. ■

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Mr. Schoumacher is with the firm of Querrey & Harrow, Ltd. in Chicago, Illinois. This article was originally published in the Querrey & Harrow Construction Law Quarterly.