Opinion ID: 3134750
Heading Depth: 1
Heading Rank: 2

Heading: analysis

Text: Defendants maintain that, in its order of February 15, 1995, the municipal court determined the issue of arbitrability in defendants’ favor. Salsitz and D’Ugo did not appeal that order. Defendants note that the amended verified complaints plaintiffs subsequently filed in chancery court sought to stay and permanently enjoin the arbitration proceedings on the grounds that no agreement to arbitrate existed, and sought a declaration that the arbitration clauses were invalid or nonbinding. Defendants conclude the chancery court was correct in dismissing plaintiffs’ amended verified complaints because the doctrine of res judicata barred relitigation of the issue of arbitrability. We disagree. In Donaldson, Lufkin & Jenrette Futures, Inc. v. Barr , 124 Ill. 2d 435 (1988), this court explained when it is appropriate for the circuit court to determine the issue of arbitrability in the first instance: “Where the language of the arbitration agreement is clear, and it is apparent that the dispute sought to be arbitrated falls within the scope of the arbitration clause, the court should decide the arbitrability issue and compel arbitration. [Citations.] Similarly, if it is apparent that the issue sought to be arbitrated is not within the ambit of the arbitration clause, the court should decide the arbitrability issue in favor of the opposing party, because there is no agreement to arbitrate. [Citations.] ‘Thus, the arbitrability issue emerges as essentially one of giving effect to the parties’ expressed intention about the use of arbitration.’ [Citation.] The paramount factor in determining the parties’ intention is the scope of the arbitration clause in the contract.” Donaldson , 124 Ill. 2d at 445. This court noted, however, that a problem arises when the parties broadly agree to arbitrate and it is still unclear whether the subject matter of the dispute falls within the scope of the arbitration agreement. When the issue of contractual intention is reasonably debatable, should the determination of arbitrability be made by the court or by the arbitrator in the first instance? Having examined cases from other jurisdictions and reviewed the intent of the drafters of the Uniform Arbitration Act (see 710 ILCS 5/1 et seq . (West 1996)), this court held that: “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 arbitration agreement, the question of substantive arbitrability should initially be decided by the arbitrator.” Donaldson , 124 Ill. 2d at 447-48. See also Comdisco, Inc. v. Dun & Bradstreet Corp. , 306 Ill. App. 3d 197, 203-04 (1999). However, the arbitrator’s decision is subject to an “ultimate determination of arbitrability by the court.” Donaldson , 124 Ill. 2d at 451. A court may vacate an arbitration award if it determines there was no arbitration agreement. See 710 ILCS 5/12(a)(5) (West 1996). In the present case, each stock option agreement contained a broad arbitration clause. Nonetheless, the parties disagreed as to the scope of the clause. Defendants argued that Salsitz’s and D’Ugo’s claims for breach of contract and fraud were subject to arbitration and moved to dismiss the complaint. Salsitz and D’Ugo argued their claims for breach of contract were based on an oral agreement between the parties terminating their relationship and providing for the return of Salsitz’s and D’Ugo’s investments in AUS and were not subject to arbitration pursuant to the arbitration clauses in the stock option agreements. Salsitz and D’Ugo also argued their claims for fraud, although related to the parties’ original agreement to invest in AUS, fell outside the scope of the agreement and were not subject to arbitration. The municipal court did not decide the issue of arbitrability. Rather, the municipal court stayed Salsitz’s and D’Ugo’s action, and directed that an arbitrator determine whether their claims were arbitrable. Salsitz and D’Ugo did not pursue arbitration. Instead, on November 17, 1995, Salsitz and D’Ugo nonsuited the action in municipal court. Meanwhile, on November 16, 1995, defendants filed their demand for arbitration, seeking monetary damages for violation of the Illinois Trade Secrets Act, for tortious interference with defendants’ existing contracts and with prospective business relations, for breach of contract, and for breach of fiduciary duty. The arbitrator determined that defendants’ claims were arbitrable and entered the arbitration award from which plaintiffs seek relief. Under these circumstances, we reject defendants’ contentions that the municipal court determined the issue of arbitrability in their favor, and that plaintiffs’ amended verified complaints were an effort to relitigate that issue.
Next, defendants renew their argument that in order to preserve the issue of arbitrability, plaintiffs had to file an interlocutory appeal from the chancery court’s order of August 19, 1997, denying plaintiffs’ motion to stay the arbitration proceedings. Since plaintiffs failed to file an interlocutory appeal, they forfeited their right to contest the arbitrability of disputes arising under the letters of understanding. We reject this argument for two reasons. First, a party who decides not to file an appeal from an interlocutory order of the circuit court denying a stay of arbitration does not lose the opportunity to contest the arbitrability of the dispute in a subsequent appeal from a final judgment of the court confirming the arbitration award. Supreme Court Rule 307 regulates appeals from interlocutory orders of the circuit court. 188 Ill. 2d R. 307. The rule confers on parties the right to appeal certain interlocutory orders before entry of final judgment by the circuit court. An order of the circuit court to compel or stay arbitration is injunctive in nature and subject to interlocutory appeal under paragraph (a)(1) of the rule. Notaro v. Nor-Evan Corp. , 98 Ill. 2d 268, 271 (1983). The rule, however, does not require that a party appeal from an interlocutory order of the circuit court denying a stay of arbitration. Under the rule, the party has the option of waiting until after final judgment has been entered to seek review of the circuit court’s interlocutory order. See Anderson v. Financial Matters, Inc. , 285 Ill. App. 3d 123, 135 (1996); Alpine Bank v. Yancy , 274 Ill. App. 3d 766, 768 (1995); Davis v. Bughdadi , 120 Ill. App. 3d 236, 241 (1983). The optional nature of Rule 307 is manifest from the language it employs. Rule 307 plainly states that an appeal “may” be taken to the appellate court from an interlocutory order of the circuit court. Use of the word “may” is generally regarded as indicating that action is permissive rather than mandatory. See People v. Reed , 177 Ill. 2d 389, 393 (1997). There is no basis for construing the term differently here. In the present case, plaintiffs could have filed an appeal from the interlocutory order of the chancery court, denying their motion for a stay of arbitration. They did not do so. However, it was not mandatory that they appeal from the interlocutory order. Plaintiffs could await the final judgment of the chancery court to seek review of the interlocutory order. Thus, plaintiffs’ failure to file an appeal from the interlocutory order did not result in a forfeiture of their right to contest the arbitrability of disputes arising under the letters of understanding. Second, in its order of August 19, 1997, the chancery court did not determine the issue of arbitrability. Rather, the chancery court denied plaintiffs’ motion for a temporary restraining order and deferred its ruling on the issue of arbitrability. As noted above, a court may determine that an arbitrator should decide the issue of arbitrability in the first instance. However, the arbitrator’s decision is subject to an “ultimate determination of arbitrability by the court.” Donaldson , 124 Ill. 2d at 451. As late as January 1999, the chancery court believed that the issue of arbitrability was subject to review. Indeed, the chancery court ruled on the issue, and, because the court believed that the arbitrator’s ruling on arbitrability was subject to deference, the court determined not to upset that ruling. In light of the fact that the chancery court did not rule on the issue of arbitrability until January 1999, it would seem anomalous to rule that plaintiffs were required to file an appeal on September 19, 1997, the cutoff date for an interlocutory appeal from the August 19 order, and, having failed to file such an appeal, plaintiffs forfeited their right to contest the arbitrability of claims arising under the letters of understanding. We refuse to so hold.
The Illinois Uniform Arbitration Act embodies a legislative policy favoring enforcement of agreements to arbitrate future disputes. Donaldson , 124 Ill. 2d at 443; Flood v. Country Mutual Insurance Co. , 41 Ill. 2d 91, 93 (1968). Accordingly, the Act empowers the circuit court, upon application of a party to a dispute, to compel or stay arbitration, or to stay court action pending arbitration. United Cable Television Corp. v. Northwest Illinois Cable Corp. , 128 Ill. 2d 301, 306 (1989); Donaldson , 124 Ill. 2d at 443. The courts of this state favor arbitration as well. Arbitration is regarded as an effective, expeditious, and cost-efficient method of dispute resolution. United Cable , 128 Ill. 2d at 306; Johnson v. Baumgardt , 216 Ill. App. 3d 550, 555-56 (1991). Thus, wherever possible, the courts construe arbitration awards so as to uphold their validity. Rauh v. Rockford Products Corp. , 143 Ill. 2d 377, 386 (1991); Christian Dior, Inc. v. Hart Schaffner & Marx , 265 Ill. App. 3d 427, 431 (1994). While arbitration is a favored method of dispute resolution, this court has consistently cautioned that an agreement to arbitrate is a matter of contract. United Cable , 128 Ill. 2d at 306; Flood , 41 Ill. 2d at 93. The parties to an agreement are bound to arbitrate only those issues they have agreed to arbitrate, as shown by the clear language of the agreement and their intentions expressed in that language. Rauh , 143 Ill. 2d at 387; Flood , 41 Ill. 2d at 94. An arbitration agreement will not be extended by construction or implication. Flood , 41 Ill. 2d at 94. It follows that, where the arbitrator decides the question of arbitrability in the first instance, the circuit court must review the arbitrator’s decision de novo . Donaldson , 124 Ill. 2d at 451; Amgen, Inc. v. Ortho Pharmaceutical Corp. , 303 Ill. App. 3d 370, 378 (1999). See also Woonsocket Teachers’ Guild, Local 951 v. Woonsocket School Committee , 770 A.2d 834, 837 (R.I. 2001); DMS Properties-First, Inc. v. P.W. Scott Associates, Inc. , 748 A.2d 389, 392 (Del. 2000) (and cases cited therein); Ex parte Stamey v. Easter , 776 So. 2d 85, 88 (Ala. 2000); In re Arbitration Between: Independent School District No. 88, New Ulm, Minnesota v. School Service Employees Union Local 284 , 503 N.W.2d 104, 105 (Minn. 1993); Grad v. Wetherholt Galleries , 660 A.2d 903, 908 (D.C. App. 1995); Oil, Chemical & Atomic Workers International Union v. Lone Star Producing Co. , 332 S.W.2d 151, 154 (Tex. Civ. App. 1959). Were it not so, a party would be bound by the arbitration of disputes he has not agreed to arbitrate and would be left with only a court’s deferential review of the arbitrator’s decision on the question of arbitrability. First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 942, 131 L. Ed. 2d 985, 992, 115 S. Ct. 1920, 1923 (1995). We agree with the court’s observation in Grad : “To require any degree of judicial deference to an arbitrator’s decision regarding arbitrability where a proper objection to the arbitrator’s authority has been lodged would vitiate the consent basis of statutory arbitration by permitting an arbitrator to clothe herself with actual authority, based on the agreement of the one party asserting the claim.  [A]ny judicial determination of arbitrability is necessarily de novo .” Grad , 660 A.2d at 908. There are, of course, instances where the parties agree to submit the question of arbitrability itself to arbitration. In those instances, the circuit court should review the question of arbitrability deferentially, that is, the court’s standard for reviewing the arbitrator’s decision on arbitrability should be the same standard courts apply when they review any other matter that the parties have agreed to arbitrate. First Options , 514 U.S. at 943, 131 L. Ed. 2d at 993, 115 S. Ct. at 1923; AT&T Technologies, Inc. v. Communications Workers of America , 475 U.S. 643, 649, 89 L. Ed. 2d 648, 656, 106 S. Ct. 1415, 1418 (1986). But, as the Court cautioned in First Options : “Courts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clea[r] and unmistakabl[e]’ evidence that they did so. [Citations.] In this manner the law treats silence or ambiguity about the question ‘ who (primarily) should decide arbitrability’ differently from the way it treats silence or ambiguity about the question ‘ whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement’–for in respect to this latter question the law reverses the presumption. [Citations.]  [G]iven the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration, one can understand why courts might hesitate to interpret silence or ambiguity on the ‘who should decide arbitrability’ point as giving the arbitrators that power, for doing so might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide.” (Emphases in original.) First Options , 514 U.S. at 944-45, 131 L. Ed. 2d at 994, 115 S. Ct. at 1924-25. In the present case, nothing in the stock option agreements indicates that the parties intended to submit the question of arbitrability to arbitration. It follows that the chancery court should have reviewed the question of arbitrability de novo . Further, since the question of arbitrability is one of contract law, it also follows that our review of the chancery court’s order confirming the arbitration award and dismissing the amended verified complaints is de novo . First Options , 514 U.S. at 948, 131 L. Ed. 2d at 996, 115 S. Ct. at 1926. The stock option agreements provided that defendants would issue a stock option incentive bonus, consisting of an option to purchase 35 shares of common stock, to the individual participant for every kilowatt of wholesale electric contracted for and sold by the participant, or for every kilowatt of wholesale electric projects for which the participant provided or secured nonrecourse funding. Each stock option agreement contained an arbitration clause binding the individual participant and defendants to arbitrate disputes arising under the stock option agreement. The stock option agreements, however, were separate agreements from the letters of understanding. And while each stock option agreement contained an arbitration clause, the letters of understanding did not. In their demand for arbitration, defendants sought an injunction preventing plaintiffs from unfairly competing with AUS, and sought monetary damages for violation of the Illinois Trade Secrets Act, for tortious interference with defendants’ existing contracts and with prospective business relations, for breach of contract, and for breach of fiduciary duty. Thus, the disputes between the parties, as framed by the demand for arbitration, arose from the letters of understanding, that is to say, from plaintiffs’ agreement to invest in AUS; plaintiffs’ participation in AUS management; plaintiffs’ termination of their relationship with AUS; and various actions detrimental to AUS that plaintiffs took once the relationship ended. The disputes between the parties did not arise from the stock option incentive bonus defendants committed to give plaintiffs based upon plaintiffs’ performance with AUS. As such, the disputes between the parties did not fall within the scope of the arbitration clauses and were not subject to arbitration. The chancery court erred in confirming the award of the arbitrator and dismissing plaintiffs’ amended verified complaints.
Citing Tri-City Jewish Center v. Blass Riddick Chilcote , 159 Ill. App. 3d 436 (1987), defendants maintain that plaintiffs waived any objections to arbitrability by participating in the arbitration hearings. We disagree. In Tri-City , the defendant made a demand for arbitration in December of 1983, and the arbitration hearings were held in November of 1985. By letter dated April 24, 1984, the plaintiff advised the American Arbitration Association that the dispute might not be arbitrable and it might seek a court-ordered stay of the proceedings. However, the plaintiff did not challenge the jurisdiction of the arbitration panel prior to the hearings. In February of 1986, the arbitrators rendered an award granting $65,000 to the defendant in payment of its fees and $40,000 to the plaintiff for damages. The plaintiff subsequently filed suit seeking to vacate the arbitration award. The circuit court found that the plaintiff had waived its objections to the arbitration by participating in the proceedings, and dismissed the complaint. The appellate court affirmed the dismissal of the complaint. The court noted that any issue regarding the arbitrability of a dispute is waived by participation in the arbitration proceedings. Although the plaintiff had notified the American Arbitration Association that it might seek a court-ordered stay of the proceedings, the plaintiff had not done so. The court deemed the issue of arbitrability waived inasmuch as it was raised by the plaintiff subsequent to the rendition of the arbitration award. Tri-City , 159 Ill. App. 3d at 439. Tri-City is inapposite. In the present case, plaintiffs objected to the arbitration proceedings in a timely manner. At the introductory hearing with the arbitrator, Salsitz and D’Ugo objected that no agreement to arbitrate existed. Thereafter, on August 8, 1997, plaintiffs filed a verified complaint in chancery court for declaratory and injunctive relief, seeking to stay and permanently enjoin the arbitration proceedings on the grounds that no agreement to arbitrate existed. Plaintiffs also sought a declaration that the arbitration clauses did not apply to any dispute under the letters of understanding and, in particular, to the claims in the arbitration proceedings. In addition, on August 13, 1997, plaintiffs filed a motion for a stay of arbitration, and, on August 15, 1997, plaintiffs filed a motion for a temporary restraining order to enjoin the continuation of the arbitration hearings. The arbitrator rendered the award on January 18, 1998. A timely objection preserves the right to challenge an award, even where the parties participate in the arbitration proceedings. Ure v. Wangler Construction Co. , 232 Ill. App. 3d 492, 499 (1992); Bisluk v. Town Realty, Inc. , 90 Ill. App. 3d 1039 (1980); 710 ILCS 5/12(a)(5) (West 1996). We hold that plaintiffs did not waive their objections to the arbitrability of the disputes.