Fourth District Rules Standing to Sue Is Not an Arbitrable Issue, but Denies Stay of Arbitration

In a case that presented questions very interesting to our Chicago arbitration and mediation attorneys, the Fourth District Court of Appeal has ruled that standing to arbitrate is not an issue that should itself be submitted to arbitration. In Equistar Chemicals, LP v. Hartford Steam Boiler Inspection and Insurance Company of Connecticut, No. 4-07-0478 (Ill. 4th 2008), Hartford, an insurance company, sought to hold Equistar responsible for damage to a turbine generator owned by Hartford’s insured, Trigen-Cinergy Solutions of Tuscola. Trigen had signed a contract with Equistar that included an arbitration clause, and Hartford filed a demand for arbitration of its claim as a subrogee of Trigen. In court, Equistar moved to stay arbitration until Hartford’s standing to invoke arbitration could be determined. That court denied the stay, saying standing should be determined by arbitrators.

Equistar has an ethanol plant in Tuscola, Ill. It hired Trigen to provide energy, water and wastewater treatment at the plant, and their contract included an arbitration agreement. Later, an Equistar employee allegedly acted negligently with a circuit breaker, causing an electrical arc that damaged a turbine generator belonging to Trigen. Hartford, as the insurer to Trigen, paid $853,442 to repair the damage, then filed a demand for arbitration with the American Arbitration Association. It requested the $853,442 in damages from Equistar, by virtue of its subrogee relationship with Trigen. Equistar responded by objecting in Illinois trial court to Hartford’s standing, the jurisdiction of arbitrators and the arbitrability of the claim. It later filed a motion to stay arbitration until, among other things, standing could be determined. The trial court denied that motion, concluding that Hartford had standing as a subrogee, but that standing can be determined in arbitration.

Equistar filed this interlocutory appeal, arguing that the Illinois Uniform Arbitration Act requires the court, not private arbitrators, to decide questions of standing. It quoted at length from the Act: “…if the opposing party denies the existence of the agreement to arbitrate, the court shall proceed summarily to the determination of the issue so raised[.] … On application, the court may stay an arbitration proceeding commenced or threatened on a showing that there is no agreement to arbitrate. That issue, when in substantial and bona fide dispute, shall be forthwith and summarily tried and the stay ordered if found for the moving party.” Under this language, the Fourth said it’s clear that the Act requires courts to make the initial determination of whether parties have agreed to arbitrate. In this case, it added, there was no reason to delay things by sending the question to arbitration, since arbitrators would have no special skill in determining whether Hartford had standing to invoke arbitration.

In determining otherwise, the trial court had relied on language in the parties’ arbitration agreement saying “the decision of the arbitrators (including the decision that the dispute is arbitrable) shall be final and binding upon the parties[.]” The trial court had written that this language leads logically to the conclusion that arbitrators make determinations of arbitrability and the courts shall have no role. The Fourth disagreed, writing instead that this language only clarifies how much authority arbitrators should have; it does not expand their authority. Parties are free to give arbitrators that authority, the court wrote, but they can and should explicitly say so.

The Fourth next looked at the issue of Hartford’s standing as a subrogee — an issue of first impression in Illinois. Equistar argued that Hartford, as Trigen’s subrogee, cannot compel arbitration because it was not a party to the arbitration agreement. Their agreement did not explicitly include subrogees, assignees or other third parties, and in fact explicitly said the parties did not have the right to incur obligations to third parties on behalf of the other, or commit the other party to a contract. Hartford countered that its right to arbitration comes through subrogation law, not the contract, making this language irrelevant. Illinois caselaw in Ervin v. Nokia, Inc., 349 Ill. App. 3d 508, 512, 812 N.E.2d 534, 539 (2004) defines contract-based theories that can bind a nonsignatory to an arbitration agreement, but subrogation is not among them. Two cases from other states have come to different conclusions on the issue, the court noted. And Illinois subrogation law puts the subrogee (in this case, Hartford) directly into the shoes of the subroger (Trigen).

Ultimately, the Fourth decided that Hartford should have the same rights and obligations as Trigen. That means Hartford does not merely have a right to arbitrate, the court wrote — it is required to do so under Trigen’s contract. Thus, it upheld the trial court’s decision to deny the motion to stay arbitration. This meant affirming the decision as a whole, even though it noted that it disagreed with the trial court that arbitrators should determine standing.

Based in Oakbrook Terrace and Chicago, Lubin Austermuehle offers mediation and arbitration services to clients throughout Illinois and the Midwest.

If your business is involved in mediation or arbitration, or expects to be soon, Lubin Austermuehle can help. To learn more or set up a free consultation, please contact us online or call 630-333-0333 today.

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