Court Opinion

ID: 8995151
Source: CourtListenerOpinion
Date Created: 2022-11-27 12:31:21.909395+00
Date Added: 2024-06-11T17:11:01.281645
License: Public Domain

PAUL V. GADOLA, United States District Judge,
dissenting:
I respectfully dissent.
I do not believe that Illinois law is the law that should control this controversy; I believe that federal law should apply and that under federal law it is clear that there has been no waiver. Alternatively, I believe that even if Illinois law is applied the result is the same: there was no waiver.
Article 20 of the Construction Agreement between WorldSource Coil Coating, Inc. (“WorldSource”) and McGraw Construction, Inc. (“McGraw”) provides that “arbitration shall be ... governed by the laws of the State of Illinois.” (Emphasis supplied). This language, I believe, can be interpreted two ways. First, it can be interpreted to mean that disputes which the parties have agreed to arbitrate will be governed by Illinois law. Second, it can be interpreted as being ambiguous. I do not believe this language can be interpreted, as the majority has done by implication, to mean that all disputes, even those which the parties did not agree to arbitrate, are governed by Illinois law.
Assuming, arguendo, that the controversy is controlled by Illinois law, I believe that under Illinois law prejudice is a factor in determining whether there has been a waiver of arbitration. In light of the complete absence of prejudice I would hold that even under Illinois law there has been no waiver. Alternatively, even if prejudice is not a factor, I do not believe that the mere filing of a complaint and motion for emergency relief constitutes “submission” of ar-bitrable issues. Thus, I would hold that even if prejudice were not a factor, there has been no waiver.
I.
Before I begin my analysis, I note that the issue of choice of law is one which may be properly addressed by this court notwithstanding the fact that the parties and the trial court all relied on Illinois law in the proceedings below.
As a general rule, “[a] federal appellate court’s scope of review is limited to issues raised both below and on appeal.” Bethea v. Levi Strauss and Co., 916 F.2d 453, 455 (8th Cir.1990). The Supreme Court has held, however, that “[cjertainly there are circumstances in which a federal appellate court is justified in resolving an issue not passed on below, as where the proper resolution is beyond any doubt, or where ‘injustice might otherwise result.’ ” Singleton v. Wulff, 428 U.S. 106, 121, 96 S.Ct. 2868, 2877, 49 L.Ed.2d 826 (1976) (citations and footnote omitted). I believe that the choice of law issue presented in this case should be resolved by this court both because its resolution is beyond any doubt and because failure to resolve it will result in the injustice of compelling a party to litigate a matter which it agreed to arbitrate.
Other circuits have held that choice of law questions may be resolved for the first time on appeal. For example in Empire Life Ins. Co. v. Valdak Corp., 468 F.2d 330, 334 (5th Cir.1972), the court held that it was not bound by the trial court and the *480parties’ erroneous assumption that the Uniform Commercial Code was the applicable law. The court in Empire Life stated that “[a]ppellate review does not consist of supine submission to erroneous legal concepts even though none of the parties declaimed the applicable law below.” Id. In Goldstein v. Madison Nat. Bank of Washington, D.C., 807 F.2d 1070, 1072 n. 5 (D.C.Cir.1986), the court held that “application of the correct law is surely in the interest of justice, and well within the federal appellate court’s discretion to raise and decide on its own initiative.” Finally, in Bethea v. Levi Strauss and Co., 916 F.2d 453, 455 n. 6 (8th Cir.1990), the court noted that “an appellate court may, sua sponte, apply the correct rule (choice) of law to an issue properly before it even though neither party argued it at either the district or appellate level.” (Emphasis supplied).
II.
A. THE CHOICE OF LAW CLAUSE DOES NOT COVER DISPUTES OVER WAIVER
The parties agreed that Illinois law would govern any arbitration. The appel-lees argue that because the arbitration clause of the Construction Agreement broadly covers any controversy or claim arising out of or relating to the agreement, the choice of law provision was intended to apply to any dispute arising out of the contract, regardless of whether the parties had agreed to arbitrate. The appellees concede, however, that “[t]he question of whether there has been a waiver of arbitration is not arbitrable as a matter of right absent an express agreement that such an issue is arbitrable. The waiver question could, of course, be arbitrated by agreement, either under the original contract or by a subsequent agreement, but there is no such agreement here.” Letter by appellees to Leonard Green, Clerk of the Sixth Circuit, dated July 23, 1991 (citations omitted).
Thus, the appellees explicitly concede that a dispute over waiver is not arbitrable absent an express agreement and that there was no such agreement. I do not doubt that the parties intended to arbitrate every arbitrable dispute and that each such dispute would have been subject to Illinois law as the parties had agreed. To say, however, that the parties agreed that Illinois law would apply to a dispute that was not arbitrable, notwithstanding the broad arbitration clause, is, I believe, incredible.
No matter how else the contract is interpreted, the scope of the choice of law provision is dependent on the arbitration clause. The parties agreed that Illinois law would apply to any arbitration. Moreover, the parties had agreed to arbitrate all disputes arising from the agreement. Hence, argue the appellees, the parties agreed that Illinois law apply to all disputes, even those disputes not subject to arbitration. This argument is fallacious. The fallacy is one of equivocation: the term “all disputes” means one thing in the premise of the argument and something else in the conclusion.
The parties’ agreement to arbitrate all disputes does not mean that the parties agreed to arbitrate all disputes. It means that the parties agreed to arbitrate all disputes that were arbitrable under the language of their agreement. As appellees concede, waiver is not arbitrable absent an explicit agreement to arbitrate waiver issues. In this instance, the parties had no such explicit agreement.
The contract at issue provides the framework for a sophisticated commercial relationship between the parties. Obviously, the parties had the aid of competent counsel in drafting and reviewing the contract. I presume that the parties were aware that the arbitrability of waiver is contingent on an explicit agreement to arbitrate the issue. Accordingly, when the parties agreed to submit all disputes to arbitration, they meant all disputes that do not require an explicit agreement to arbitrate. The language “all disputes” or “any controversy or claim arising out of or relating to the agreement” simply does not and cannot cover issues which require an explicit agreement to arbitrate.
Reading the choice of law clause together with the arbitration clause, properly un*481derstood, the choice of law clause means that Illinois law will apply to all disputes that do not require an explicit agreement to arbitrate. Since the appellees agree that there was no explicit agreement to arbitrate the waiver issue, and since the waiver issue is not arbitrable absent an explicit agreement to arbitrate the issue, the parties did not agree that Illinois law would apply to the issue of waiver.
B. IF THE CHOICE OF LAW CLAUSE IS AMBIGUOUS, IT SHOULD BE INTERPRETED IN FAVOR OF ARBITRATION
Alternatively, there is a weak but color-able argument that the choice of law provision is ambiguous.1 If such a proposition is accepted, I believe it still follows that Illinois law would not apply.
First, it is amply clear that arbitration is universally favored as the method of settling commercial disputes. See, e.g., Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983); see, also, Brennan v. Kenwick, 97 Ill.App.3d 1040, 54 Ill.Dec. 574, 576, 425 N.E.2d 439, 441 (1981). The Supreme Court in Moses H. Cone also held that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” Id. 460 U.S. at 24-25, 103 S.Ct. at 941-42 (emphasis supplied) (footnote omitted).
Obviously, choice of law questions can, and, as in the instant case, frequently do, impact on arbitrability. It is not inconceivable that a choice of law issue would be determinative, as it may be in this case, of the ultimate issue of waiver and arbitrability. To the extent choice of law provisions that impact the ultimate issue of arbitrability are ambiguous, I believe the ambiguity should be resolved in favor of arbitration. Because it is arguably less certain under Illinois law that there has been no waiver, the choice of law clause, if it is ambiguous, should be interpreted not to cover the issue of waiver.
In conclusion, I would hold that whether the choice of law provision is interpreted, as I believe it must be, to mean that the parties agreed only that Illinois law would apply to disputes that are arbitrable absent an explicit agreement to arbitrate or whether the clause is interpreted as being ambiguous, it follows that the parties did not agree that Illinois law would apply to otherwise nonarbitrable disputes such as waiver. Both parties agree that if Illinois law does not apply, federal law does.
III.
The choice of law question in this matter is arguably determinative of the waiver question. By this, I mean that if Illinois law is deemed to control the controversy, there is a weak argument that appellant waived its right to arbitrate.2 If, on the other hand, Illinois law is deemed not to control, I believe it is clear that appellant has not waived its right to arbitrate.
A. WAIVER UNDER FEDERAL LAW
I begin with the proposition that prejudice is part and parcel of waiver of arbitration issues under federal law. For example, in Morrie and Shirlee Mages Foundation v. Thrifty Corp., 916 F.2d 402, 405, (7th Cir.1990) the court held that in deters mining whether waiver has occurred “[o]ne of the relevant circumstances is the prejudice suffered by the objecting party as a result of the acts purportedly constituting waiver.”
In the case at bar, it could not be more clear that appellees were not prejudiced by the court proceedings.
On June 5, 1990, McGraw filed a complaint for emergency relief in the Hancock *482Circuit Court, Commonwealth of Kentucky. In its complaint, McGraw specifically stated that “the claims of the parties are subject to mandatory arbitration,” citing Article 20 of the Construction Agreement. In its accompanying motion for emergency relief and brief in support thereof, McGraw clearly reiterated its intention to proceed with arbitration. See appellant’s brief at 5-6.
Appellees make much ado over the fact that appellant’s complaint contained a prayer for compensatory and punitive damages. However, at the hearing on August 3,1990, when the state court granted McGraw’s motion for a voluntary dismissal, McGraw explained that it had prayed for damages in the complaint because it believed that the complaint would not be complete without a prayer for damages and that emergency relief could not be afforded if the complaint were deficient. See appellant’s brief at 14.
On June 13, 1990, the state court held a hearing on McGraw’s motion for emergency relief. At the hearing, McGraw repeatedly emphasized that it did not intend to waive its right to arbitration by seeking emergency relief. After hearing argument, the court denied McGraw’s motion for emergency relief.
On June 18 and 19, 1990, McGraw asked appellees to agree to an order dismissing McGraw’s state court complaint without prejudice. Neither appellee agreed to a voluntary dismissal. In the thirteen (13) days between the filing of McGraw’s complaint and the request made by McGraw of appellees that the complaint be voluntarily dismissed, appellees were called upon only to respond to McGraw’s motion for emergency relief.
If these circumstances constitute prejudice, then the term is utterly without substance. Obviously, having to defend against a motion for emergency relief did not prejudice the appellees whatever. Prejudice in this context means that a party was forced to bear the expense of a lengthy trial, E.C. Ernst, Inc. v. Manhattan Construction Co. of Texas, 559 F.2d 268, 269 (5th Cir.1977), cert. denied, 434 U.S. 1067, 98 S.Ct. 1246, 55 L.Ed.2d 769 (1978); that helpful evidence was lost because of the delay in proceeding to arbitration, In re Mercury Construction Corp., 656 F.2d 933, 940 (4th Cir.1981) (en banc), aff'd sub nom. Moses H. Cone Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983); or that the party seeking arbitration used litigation to obtain discovery rights not otherwise available, Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 n. 7 (2d Cir.1968). Although this list is not exclusive, it is demonstrative of actions deemed to be prejudicial to a party asserting waiver. The short duration and temporary nature of the immediate relief sought by McGraw clearly demonstrate that appellees were not prejudiced by the state court proceedings.
Although prejudice is merely a factor, albeit a significant one, in a case such as this where a party clearly and repeated asserts that it is not waiving its right to arbitration as it seeks emergency relief, where the duration of the proceedings is extremely short, and where the party asserting waiver has not been prejudiced whatever, it is clear that under federal law there is no waiver. Accordingly, if federal law were to apply, I would hold that McGraw did not waive its right to arbitrate.
B. WAIVER UNDER ILLINOIS LAW
The majority holds that under Illinois law a showing of prejudice is unnecessary. Alternatively, the majority argues that appel-lees were prejudiced. I believe that prejudice is a factor under Illinois law. Assuming, arguendo, that prejudice is not a factor under Illinois law, I believe that by merely filing a complaint and motion for emergency relief McGraw did not “submit” arbitrable issues to the court.

i. Is Prejudice A Factor Under Illinois Law1

The majority has accepted appellees’ proposition that under Illinois law waiver can be found without any prejudice whatever. The majority seems to accept that Kos-takos v. KSN Joint Venture No. 1, 142 Ill.App.3d 533, 96 Ill.Dec. 862, 865, 491 *483N.E.2d 1322, 1325 (1st Dist.1986) stands for the proposition that in deciding waiver of arbitration issues, courts “must also look at any delay in defendants’ assertion of their right to arbitrate, and any prejudice the delay caused plaintiff.” (Emphasis supplied). The majority asserts, however, that Kostakos is factually distinguishable from the case at bar, and concludes that, therefore, appellees need not show prejudice. I believe this argument is a non sequitur.
The question is whether under Illinois law prejudice is, as a general proposition, a factor in determining waiver of arbitration. The facts of Kostakos are utterly irrelevant to this question. There is nothing in Kostakos to suggest that the issue of prejudice is to be addressed only on facts similar to those in Kostakos. Moreover, nothing about the concept of prejudice is amenable to selective application. Either prejudice is to be considered or it is not.
As already noted, I believe Kostakos makes it is clear that prejudice is to be considered under Illinois law. See, also, Phenix Insurance Co. v. Stocks, 149 Ill. 319, 36 N.E. 408, 412 (1893); and Schwarz v. Buell, 137 Ill.App.3d 29, 91 Ill.Dec. 755, 758, 484 N.E.2d 314, 317 (5th Dist.1985) (citing with approval Midwest Window Systems, Inc. v. Amcor Industries, Inc., 630 F.2d 535 (7th Cir.1980), wherein the court held that “[t]he waiver of the right to arbitration cannot be determined by some inflexible rule. All of the circumstances, of which prejudice is one, must be considered in the context of the particular case.” Id. at 537. (emphasis supplied)). If prejudice is to be considered under Illinois law, I would hold that due to the absolute lack of prejudice, the extremely short duration of the state court proceedings, and the clear and repeated assertions by appellant that it was not waiving it right to arbitration as it sought emergency relief, no waiver of arbitration occurred.

ii. Appellant Did Not “Submit” Arbitrable Issues

After concluding that prejudice is not necessary to a finding of waiver, the majority holds that McGraw waived its right to arbitrate by acting “so inconsistent with the arbitration clause as to demonstrate an abandonment of that right.” TDE Ltd. v. Israel, 185 Ill.App.3d 1059, 133 Ill.Dec. 843, 848, 541 N.E.2d 1281, 1286 (1989). According to the majority, the key factor in determining whether a right to compel arbitration has been waived is the type of issue submitted to the court. If the party submits an arbitrable issue, under Illinois law, so the majority asserts, arbitration has been waived. The majority assumes, however, that the mere filing of a complaint constitutes submission of the issues raised in the complaint. I do not believe this has ever been the law of Illinois.
Under the rule announced by the majority, a party would be deemed to have waived arbitration if it filed a complaint containing arbitrable issues and then the following day, upon reconsideration, dismissed the matter pursuant to Fed.R.Civ.P. 41(a)(1). Such a result is clearly anomalous. The opposing party might not even have been served with the complaint. If this action constitutes submission of issues, waiver is clearly a technical question of form with little substantive content. It is difficult to reconcile such a technical and formalistic concept of waiver with the policy of Illinois courts “that arbitration is the favored method of settling disputes.” Brennan v. Kenwick, 97 Ill.App.3d 1040, 54 Ill.Dec. 574, 576, 425 N.E.2d 439, 441 (1981).
Obviously, no Illinois courts has, or would, find that such actions constitute a waiver. If the mere filing of a complaint followed by immediate dismissal does not constitute submission of issues, some line drawing must be done.
I conclude that in the context of waiver of arbitration, “submission of issues” under Illinois law means that the court is called on to decide the issue. Accordingly, the mere filing of a complaint would not constitute submission of an issue. A trial or dispositive motion would, on the other hand, constitute submission of an issue because the court (or jury) would be called on to decide an issue.
*484For example, in Brennan v. Kenwick, 97 Ill.App.3d 1040, 54 Ill.Dec. 574, 576, 425 N.E.2d 439, 441 (1981), the court noted that “waiver was found where the party requesting arbitration had imitated legal proceedings concerning arbitrable issues and had participated in a 6-day trial on the merits.” (emphasis supplied). On the other hand, in Kostakos, the court noted that “filing two complaints and two motions for preliminary injunctions does not constitute waiver; _” Kostakos, 96 Ill.Dec. at 865, 491 N.E.2d at 1325 (citation omitted). This apparent inconsistency is resolved by the definition of “submission” I have proposed. In the former case, the issues were submitted, in the latter case, they were not. I believe that in the case at bar the arbitra-ble issues were not submitted by the mere filing of a complaint or by the motion for emergency relief. Accordingly, I would hold that even if prejudice is not considered, there was no waiver of arbitration.
IV.
In conclusion, I would hold that federal law controls and that under federal law it is clear that appellant did not waive its right to arbitrate. Alternatively, I would hold that if Illinois law applies, Illinois recognizes prejudice as a factor and in light of the complete absence of prejudice, appellant did not waive its right arbitrate. Finally, even if Illinois law does not recognize prejudice, I would hold that appellant did not waive its right to arbitrate because the mere filing of a complaint and motion for emergency relief did not constitute “submission” of arbitrable issues.

. To the extent the choice of law clause is ambiguous, the ambiguity is one of scope: the question is whether the choice of law clause applies to disputes over waiver of arbitration.

. As I argue in Section III.B. of this opinion, I believe that even under Illinois law, there has been no waiver of arbitration.