Chicago Business Litigation Lawyer Blog

As Chicago alternative dispute resolution attorneys, we were pleased to read a decision from the First District Court of Appeal on compelling arbitration in an oral contract related to a written contract. In Marks v. Bober, No. 1-09-1988 (Ill. 1st. March 12, 2010), Carol Marks contracted with Lawrence Bober, managing director of RSM McGladrey Inc., to do accounting for investments she held. That was a written contract including an arbitration clause. Marks alleges that she later entered a separate oral contract with Bober and RSM for investment advice. However, she was unhappy with the advice she received and later sued the defendants. The defendants sought to compel arbitration under the written contract, and the trial court denied this, saying there was no arbitration agreement for the oral contract. The First upheld that decision.

Marks originally retained RSM to monitor her investment accounts. For that work, she signed an “engagement letter” as a contract, which included two clauses of interest. One specifies that RSM will use its professional judgment in applying “rule applicable to this engagement.” The other is a binding arbitration clause requiring dispute resolution to go through the American Arbitration Association. Marks signed, but during the remainder of her first year with RSM, she alleges that RSM failed to provide the portfolio reporting services she expected and instead began to promote various investments to her. She further alleges that RSM charged her separately for those services and emphasized that they were separate, but no written contract was signed. The court also notes that Bober and RSM were not registered with the state of Illinois or the SEC as providers of investment services.

As a result of the solicitations, Marks put $500,000 into Lancelot Investors Fund II, which put the money into a hedge fund called Thousand Lakes. Marks alleges this was a Ponzi scheme that damaged her economically. She sued RSM and Bober, alleging that they breached their fiduciary duties and oral contract with her by failing to investigate Lancelot and that they negligently held themselves out as investment experts. She sought to void the oral contract and the Lancelot investment. In trial court, Bober and RSM moved to compel arbitration under the engagement letter. This was denied. On their motion for consideration, the defendants alleged that they provided no investment advice and did not recommend Lancelot; rather, Bober wrote that he saw from the accounting work that Marks could use such advice, so he introduced her to advisors who did recommend Lancelot. This motion too was denied, and defendants appealed, saying the dispute is covered by the arbitration agreement. They also argued that the Federal Arbitration Act supports this because it has a presumption of arbitrability.

The First was not impressed. Under the FAA, which it said was the governing law in this case, it was proper for the trial court rather than an arbitrator to decide arbitrability. Under that law and the Supreme Court’s decision in 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), parties cannot be compelled to arbitration unless they have agreed to do so in their contract.

Illinois caselaw seems to confirm this. The court cited Johnson v. Noble, 240 Ill. App. 3d 731, 732-33 (1992), which also concerned a case with one written contract and one oral contract. In that case, as in this one, the defendant sought to compel arbitration based on the written contract, but the plaintiff argued that the claims arose from the oral contract. The trial and appeals courts agreed, saying the dispute was not arbitrable because it arose from a separate oral contract. Similarly, in Board of Managers of Chestnut Hills Condominium Ass'n. v. Pasquinelli, Inc., 354 Ill. App. 3d 749 (2004), an appeals court upheld the plaintiff’s right to sue because the claims at issue were outside the scope of the arbitration agreement.

In this case, the court wrote, Marks and RSM had two separate agreements, one oral and one written. The dispute arose out of the oral contract, it said, so Marks was not required to conform to the terms of the written contract. In fact, the court said the language of the written contract indicates that the parties did not intend to extend the contract past “this engagement.” For those reasons, it upheld the trial court’s decision and remanded it to the trial court for further proceedings.