Equistar Chemicals v. Hartford Steam Boiler Inspection and Insurance Company of Connecticut ( 2008 )

NO. 4-07-0478 Filed 3/3/08
IN THE APPELLATE COURT
OF ILLINOIS
FOURTH DISTRICT
EQUISTAR CHEMICALS, LP, ) Appeal from
Plaintiff-Appellant, ) Circuit Court of
v. ) Douglas County
HARTFORD STEAM BOILER INSPECTION AND ) No. 07L11
INSURANCE COMPANY OF CONNECTICUT, )
Defendant-Appellee. ) Honorable
) Michael G. Carroll,
) Judge Presiding.
_________________________________________________________________
JUSTICE COOK delivered the opinion of the court:
Appellant, Equistar Chemicals, LP (Equistar), appeals
the trial court's denial of its motion to stay arbitration (710
ILCS 5/2 (West 2006)), and raises two issues before this court on
interlocutory appeal:
(1) Whether an initial determination of
standing (i.e., whether a party agreed to
submit to arbitration) is a predicate ques-
tion to be resolved by the courts rather than
the arbitrators, or whether standing itself
is an arbitrable issue;
(2) Whether an insurer subrogee to a
party to an arbitration agreement has stand-
ing to invoke that agreement to compel arbi-
tration.
In denying Equistar's motion to stay arbitration, the trial court
found that, under the circumstances of this case, standing should
be decided by the arbitrators rather than by the court. The
trial court also found that even if it were the court's role to
determine standing, it would deny the motion to stay arbitration
because the insurer subrogee had standing to invoke the agreement
to arbitrate. We disagree with the trial court's ruling that it
is the arbitrators' role to determine standing in this instance,
but we affirm the trial court's denial of the motion to stay
arbitration.
I. BACKGROUND
This interlocutory appeal arises out of a negligence
claim raised by appellee, the Hartford Steam Boiler Inspection
and Insurance Company of Connecticut (Hartford), against Equistar
for damage to a turbine generator in the amount of $950,000.
Hartford's insured, Trigen-Cinergy Solutions of Tuscola, L.L.A.
(Trigen), owned the turbine generator, which was located at
Equistar's ethanol plant in Tuscola, Illinois. Allegedly, one of
Equistar's employees negligently "racked off" circuit breakers,
causing an arc of electricity that damaged Trigen's turbine
generator.
At all times relevant to this appeal, Trigen and
Equistar were parties to a contract entitled, "Amended and
Restated Energy, Water and Wastewater Services Agreement." The
agreement established a commercial relationship between Trigen
and Equistar, requiring Trigen to provide steam-water processing,
compressed air and electricity services, and water and waste
treatment at Equistar's plant. The agreement also contained an
arbitration clause that required Trigen and Equistar to resolve
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any disputes arising out of or relating to the agreement through
arbitration.
When Trigen's turbine generator broke, Hartford paid
Trigen $853,442 to repair the damages (the cost of the damages
minus Trigen's deductible), under a property-damage coverage.
Hartford then filed a demand for arbitration with the American
Arbitration Association (AAA), seeking to enter into arbitration
with Equistar by virtue of its subrogee status in relation to
Trigen and requested compensation in the amount of $853,442.
Equistar in turn filed an objection to claimant's standing, the
arbitrators' jurisdiction, and the arbitrability of claimant's
claim. Then, on April 23, 2007, Equistar filed a motion to stay
arbitration. 710 ILCS 5/2(b) (West 2006). Equistar requested
that arbitration be stayed until, in addition to other issues,
the question of Hartford's standing to invoke the agreement could
be resolved.
On May 14, 2007, the trial court denied the motion to
stay arbitration in a written order. The court identified the
sole issue to be whether Harford, as subrogee insurer to Trigen,
had standing to invoke the arbitration clause of the agreement.
The court identified the subissue to be whether standing is an
"arbitrable" issue that should be decided by the arbitrators
rather than by a court. A determination on the subissue was
relevant because, if the court found standing to be an arbitrable
issue, then the entire matter should be referred to arbitration
and the motion to stay arbitration should be directly denied.
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The trial court found standing to be an arbitrable issue.
However, the court proceeded to find that, even if standing were
not an arbitrable issue but rather a predicate question of law to
be resolved by the courts, Hartford had standing to compel
arbitration by virtue of its subrogee status.
Equistar filed a notice of interlocutory appeal from
the trial court's written order under Supreme Court Rule 307(a),
which states that a ruling on an injunction is subject to an
interlocutory appeal as of right. 188 Ill. 2d R. 307(a). A
motion to compel or stay arbitration is analogous to a motion for
injunctive relief and therefore is subject to an interlocutory
appeal. Royal Indemnity Co. v. Chicago Hospital Risk Pooling
Program, 372 Ill. App. 3d 104, 107, 865 N.E.2d 317, 321 (2007).
The two issues presented for review are as stated above.
II. ANALYSIS
A. Standing To Arbitrate Under Arbitration Clause
Should Be Decided by Court, Not Arbitrators
Equistar argues, and we agree, that the court and not
the arbitrators should resolve the issue of Hartford's standing.
The language of the statute governing whether the court should
stay arbitration--section 2 of the Uniform Arbitration Act--
supports that the court, and not the arbitrators, should deter-
mine the issue of standing, or whether the parties had an agree-
ment to arbitrate:
"Proceedings to compel or stay arbitra-
tion. (a) On application of a party showing
an agreement [to arbitrate], and the opposing
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party's refusal to arbitrate, the court shall
order the parties to proceed to arbitration,
but if the opposing party denies the exis-
tence of the agreement to arbitrate, the
court shall proceed summarily to the determi-
nation of the issue so raised and shall order
arbitration if found for the moving party,
otherwise, the application shall be denied.
(b) 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. If
found for the opposing party, the court shall
order the parties to proceed to arbitration."
710 ILCS 5/2(a), (b) (West 2006).
When a party to an arbitration agreement files a suit
in circuit court to stay arbitration proceedings, one concern is
the efficient and economical resolution of disputes. Accord-
ingly, "[w]here the language of the arbitration agreement is
clear, and it is apparent that the dispute *** falls within the
scope of the arbitration agreement, the court should decide the
arbitrability issue and compel arbitration." Donaldson, Lufkin &
Jenrette Futures, Inc. v. Barr, 124 Ill. 2d 435, 445, 530 N.E.2d
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439, 443 (1988). Likewise, where it is clear the dispute is
outside the agreement, the court should rule against arbitration.
The key here is the agreement, that is, what the parties have
agreed to submit to arbitration. Donaldson, 124 Ill. 2d at 445,
530 N.E.2d at 443. Where the question is unclear, however, it
"'is a question of contract application and interpretation for
the arbitrator, not the court, and the court should not deprive
the party seeking arbitration of the arbitrator's skilled judg-
ment by attempting to resolve the ambiguity.'" Donaldson, 124
Ill. 2d at 448, 530 N.E.2d at 445, quoting Gold Coast Mall, Inc.
v. Larmar Corp., 298 Md. 96, 107, 468 A.2d 91, 97 (1983). In
some cases, deferring to the arbitrator may slow down the pro-
cess, but a primary purpose of the Uniform Arbitration Act is to
enforce parties' agreements to arbitrate, even if the result is
piecemeal litigation. Donaldson, 124 Ill. 2d at 448-49, 530
N.E.2d at 445. Initially deferring to the arbitrators will not
preclude a court from later considering whether the arbitrators
exceeded their powers. Donaldson, 124 Ill. 2d at 450, 530 N.E.2d
at 445-46.
In Donaldson, a senior manager of a commodity futures
broker sued the broker for severance pay, unpaid expenses, a
bonus based on 15% of the income generated by his office, and an
amount equal to 5% of the commissions produced by recruits he
brought to the company. The manager filed a request for arbitra-
tion with the Chicago Board of Trade (CBOT). The broker sued in
circuit court to stay arbitration on the basis the claims arose
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out of the manager's employment relationship and not out of
business the manager or broker transacted at the CBOT. The
Illinois Supreme Court held the claims for severance pay and
unpaid expenses clearly arose out of his contract of employment
and clearly did not "arise out of Exchange business," as required
by the arbitration agreement. Donaldson, 124 Ill. 2d at 451, 530
N.E.2d at 446. The trial court should have denied arbitration on
those claims. However, the claims for a percentage of the income
generated by the office and produced by the recruits should be
determined by the arbitrator. "It is precisely because it is
unclear whether these claims arose out of the employment contract
or exchange business that the arbitrator must initially determine
the arbitrability issue." Donaldson, 124 Ill. 2d at 451, 530
N.E.2d at 446.
As cited above, when a party files suit to stay arbi-
tration proceedings, the Uniform Arbitration Act initially
confers jurisdiction on the courts to determine whether the
parties have agreed to arbitrate a dispute. 710 ILCS 5/2(a), (b)
(West 2006). The Donaldson court held that there are certain
situations where the court should defer its decision-making power
to the arbitrator, such as where whether the parties have agreed
to arbitrate the dispute is unascertainable, reasonably debat-
able, or "unclear." Donaldson, 124 Ill. 2d at 448, 530 N.E.2d at
445. Under the circumstances of this case, where the question of
whether the parties have agreed to arbitrate is currently before
the court, we see no reason to delay the arbitration process by
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removing the question from the court's jurisdiction and sending
the question to the arbitrators. Here, the issue of standing is
clear, and therefore the court should decide the issue. In this
particular case, the court must determine the status of Hart-
ford's standing by answering the question, "Does a subrogee
(Hartford) have a right to invoke an arbitration agreement signed
by the subrogor (Trigen) and a third party (Equistar)?" The
question of whether Hartford has standing by operation of
subrogation law is a question largely independent from the
language of the particular agreement at issue here. The arbitra-
tors would have no special skill at resolving this issue as
compared to the court.
The trial court relied on the language in the arbitra-
tion clause of the parties' agreement in deciding that the
arbitrators should resolve the issue of standing. The arbitra-
tion clause stated:
"Section 20.4. Arbitration. The parties
agree that any and all disputes, controver-
sies, or claims arising out of, involving or
relating to this Agreement shall be referred,
settled[,] and finally resolved by arbitra-
tion conducted in accordance with the Rules
of the American Arbitration Association
('AAA') ***. *** [T]he arbitrators shall
not have the power to amend or add to this
agreement. Subject to such limitation, the
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decision of the arbitrators (including the
decision that the dispute is arbitrable)
shall be final and binding upon the parties,
and shall be enforceable in a court of compe-
tent jurisdiction. The decision of the arbi-
trators shall include the determination of
cost allocation between the parties." (Em-
phasis added.)
We disagree with the trial court's finding that the language in
the arbitration clause that states, "the decision of the arbitra-
tors (including the decision that the dispute is arbitrable)
shall be final and binding upon the parties" (emphasis added),
leads to the logical deduction that (1) the arbitrators shall
make decisions concerning issues of arbitrability and (2) the
courts shall have no role. Instead, we read this statement to
mean that, provided the arbitrators were to decide an "unclear"
question of arbitrability, their decision would be binding. This
statement merely clarifies the degree of authority to be given to
the arbitrators' decision; it does not expand the arbitrators'
jurisdiction. Had the parties intended for all matters of
arbitrability to be decided by the arbitrators, the parties
should have put a short, declarative sentence in the arbitration
provision stating as much, such as the following: "All matters
of arbitrability are to be decided by the arbitrators." See,
e.g., Bahuriak v. Bill Kay Chrysler Plymouth, Inc., 337 Ill.
App. 3d 714, 719, 786 N.E.2d 1045, 1050 (2003) ("courts have
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recognized that parties are free to agree to submit the question
of arbitrability itself to the [arbitrator]").
As such, we disagree with the trial court's finding
that the question of whether Hartford has standing to compel
arbitration should be decided by the arbitrators. For the
reasons that follow, however, we nevertheless affirm the trial
court's denial of the motion to stay arbitration.
B. Hartford's Standing To Compel Arbitration
Based on Subrogee Status
Equistar argues that Hartford's status as Trigen's
subrogee did not give Hartford standing to compel Equistar to
arbitration under the authority and terms of Equistar's arbitra-
tion agreement with Trigen. Critical to our analysis, Equistar
concedes in its reply brief that it does not challenge Hartford's
right to pursue its subrogated claim; it merely contends that the
proper forum for Hartford's claim is a court of law, not an
arbitration panel.
Equistar argues the question of forum is important
because different rights are afforded for each respective forum:
in forgoing the judicial process, the parties would be agreeing
to forgo the right to a jury, the rules of evidence, the right to
bring counterclaims, the right of contribution, and the right to
an appeal. See, for example, Melena v. Anheuser-Busch, Inc., 219
Ill. 2d 135, 150-51, 847 N.E.2d 99, 108-09 (2006). Like any
valid contract, a legitimate agreement to arbitrate requires an
offer, an acceptance, and consideration. See Melena, 219 Ill. 2d
at 151, 847 N.E.2d at 108. "[A] party to an agreement is charged
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with knowledge of and assent to the agreement signed." Melena,
219 Ill. 2d at 150, 847 N.E.2d at 108. A party cannot be forced
to arbitrate unless it has agreed to submit to arbitration.
Roubik v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 181 Ill.
2d 373, 382, 692 N.E.2d 1167, 1172 (1998).
Equistar argues that the only two parties that agreed
to arbitrate are Equistar and Trigen. Equistar notes that it
makes sense that Equistar and Trigen would want to arbitrate
claims; they have a long-standing and ongoing contractual rela-
tionship, they interact on a daily basis, and each knows the
resources of the other. The same cannot be said of the relation-
ship between Equistar and Hartford, with which Equistar contends
it never agreed to arbitrate. Equistar points to the language of
the agreement in support of its argument that the agreement only
contemplated arbitration between Equistar and Trigen, not Hart-
ford. The agreement defined its parties as Equistar and Trigen.
The definition did not include successors, assigns, insurers, or
subrogees. In fact, the agreement expressly limited Equistar's
and Trigen's ability to bring third parties under the authority
of the agreement:
"Section 14.1. Except as expressly pro-
vided in this Agreement, neither party shall
be the other's agent or fiduciary for any
purpose whatsoever and shall not be autho-
rized to act for, financially commit, speak
for or represent the other in any dealings
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with third parties. Except as expressly
provided in this Agreement, neither party
shall have the authority or right to incur
obligations of any kind in the name, or for
the account, of the other party, nor to com-
mit or bind the other party to any contract,
and except as expressly provided in this
Agreement, each party agrees that it neither
has nor will give the appearance or impres-
sions of possessing any legal authority to
bind or commit the other in any way."
Similarly, section 20.2 of the agreement, the arbitration clause,
forbids either party from assigning its rights under the agree-
ment without the consent of the other. Section 20.9 states that
the agreement can only be modified by a writing signed by both
parties.
Hartford argues that Equistar's above-noted references
to the language contained in the agreement that indicates the
agreement to arbitrate is exclusively between Trigen and Equistar
are irrelevant because Hartford does not contend that its right
to compel arbitration with Equistar was based in the agreement
itself. Rather, Hartford contends that its right to compel
Equistar to arbitration is conferred by operation of subrogation
law, not by the agreement.
As alluded to above, the right to compel arbitration
typically stems from contract and generally may not be invoked by
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a nonsignatory to the contract. Ervin v. Nokia, Inc., 349 Ill.
App. 3d 508, 512, 812 N.E.2d 534, 539 (2004). However, courts
have recognized several contract-based theories under which a
nonsig-natory to an agreement may be bound to the arbitration
agreements of others, such as (1) incorporation by reference, (2)
assumption, (3) agency, (4) veil-piercing or alter ego, (5)
estoppel, and (6) third-party-beneficiary status. Ervin, 349
Ill. App. 3d at 512, 812 N.E.2d at 539, referencing Caligiuri v.
First Colony Life Insurance Co., 318 Ill. App. 3d 793, 800, 742
N.E.2d 750, 756 (2000); Howells v. Hoffman, 209 Ill. App. 3d
1004, 1007-09, 568 N.E.2d 934, 936-37 (1991) (regarding third-
party-beneficiary status). Illinois courts have reasoned that,
if nonsignatories may be bound to arbitrate under these circum-
stances, then it would seem to follow as a corollary that the
same types of theories could afford a basis for a nonsignatory to
invoke an arbitration agreement signed by others. Ervin, 349
Ill. App. 3d at 512, 812 N.E.2d at 539. The parties in the
instant case debate whether the doctrine of subrogation is a
theory, in addition to those theories already listed in Ervin,
that affords a nonsignatory a basis to invoke an arbitration
agreement signed by others.
Whether the doctrine of subrogation confers the right
to a subrogee (i.e., Hartford) that is a nonsignatory to an
arbitration agreement between the subrogor (i.e., Trigen) and a
third party (i.e., Equistar) to compel the third party to arbi-
trate pursuant to the terms of the arbitration agreement is a
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matter of first impression for Illinois courts. Nationally, no
case has yet held that a subrogee may invoke an arbitration
agreement signed by others. Only one case, Valley Casework, Inc.
v. Comfort Construction, Inc., 76 Cal. App. 4th 1013, 1023, 90
Cal. Rptr. 2d 779, 786 (1999), has directly addressed the issue.
The Valley court held that a nonsignatory's insurer-subrogee
status was not an exception to the general rule that a nonsig-
natory to an arbitration agreement cannot invoke the agreement.
Valley, 76 Cal. App. 4th at 1024, 90 Cal. Rptr. 2d at 786.
However, in Solomon v. Consolidated Resistance Co. of America,
Inc., 97 A.D.2d 791, 468 N.Y.S.2d 532 (1983), the court addressed
the question of whether a nonsignatory's insurer-subrogee status
bound the insurer-subrogee to the arbitration agreement and
answered in the affirmative. The Solomon court stated that if
the named plaintiffs (subrogors) would be required to submit the
dispute to arbitration, then the insurer, as subrogee, would be
similarly bound. Solomon, 97 A.D.2d at 792, 468 N.Y.S.2d at 533.
We are not jurisdictionally bound by either the Valley or the
Solomon decision. And, given Illinois's aforementioned policy
that theories sufficient to bind nonsignatories to arbitration
agreements signed by others are generally sufficient to afford
nonsignatories a basis to invoke arbitration agreements signed by
others, we do not find Valley more persuasive than Solomon simply
because it, like the instant case, dealt with invoking an arbi-
tration agreement rather than being bound to an arbitration
agreement. Instead, we look to the general issue raised in both
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Valley and Solomon as to whether the doctrine of subrogation
allows a nonsignatory subrogee to "stand in the shoes" of its
subrogor as to the arbitration agreement with respect to the
claim being pursued.
Subrogation is governed by principles of equity. Dix
Mutual Insurance Co. v. LaFramboise, 149 Ill. 2d 314, 319, 597
N.E.2d 622, 624 (1992). It allows one who had involuntarily paid
a debt or claim of another to succeed to the rights of the other
with respect to the claim or debt so paid. Dix, 149 Ill. 2d at
319, 597 N.E.2d at 624. A party "who asserts a right of
subrogation must step into the shoes of, or be substituted for,
the one whose claim or debt [it] has paid and can only enforce
those rights the latter could enforce." Dix, 149 Ill. 2d at 319,
597 N.E.2d at 624. In cases dealing with insurance, an insurer's
right to subrogation allows it to be put in the position of the
insured to pursue recovery from third parties responsible to the
insured for the loss that the insurer both insured and paid.
See, for example, Valley, 76 Cal. App. 4th at 1023, 90 Cal. Rptr.
2d at 786.
Though case law on the subject is extremely sparse, it
does seem as though case law and policy favor requiring a
subrogee's claim against a third party to be tried within the
limitations agreed to by the subrogor and the third party. In
Sompo Japan Insurance, Inc. v. Alarm Detection Systems, Inc., No.
03-C-2322 (N.D. Ill. August 6, 2003) (2003 WL 21877615), which
involved a contract governed by Illinois law, the court held that
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the contract's forum-selection clause obligated a subrogee to
litigate its claim in the forum named in the contract between the
subrogor and defendant.
We agree with the rationale expressed in Solomon.
Solomon, 97 A.D.2d 791, 468 N.Y.S.2d 532. If Trigen would have
been required to arbitrate the negligence action against
Equistar, then Hartford should be similarly bound. Distinguish-
ing between whether Hartford has a "right" or an "obligation" to
arbitrate is merely a matter of semantics where Hartford is
required to arbitrate. Valley is not persuasive. The Valley
court's rationale seemed to be based on a simple reluctance to
expand the established list of exceptions to the rule preventing
nonsignatories from invoking arbitration agreements where there
was no precedent for doing so. Valley, 76 Cal. App. 4th at 1024,
90 Cal. Rptr. 2d at 786.
Equistar argues that there is no mutuality of agreement
between Hartford and Equistar. In other words, Equistar asserts
that while the trial court allowed Hartford to compel Equistar to
arbitrate, Equistar would not have been allowed to compel Hart-
ford to arbitrate. Equistar cites no case law for the proposi-
tion that it would not have been allowed to compel arbitration
against Hartford. In fact, Solomon, which found that the insurer
subrogee was obligated to arbitrate with the defendant under the
authority of the arbitration agreement governing the relationship
between the subrogor and the defendant, seems to hold the oppo-
site. Solomon, 97 A.D.2d 791, 468 N.Y.S.2d 532.
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Equistar also argues that arbitration between Equistar
and Hartford would not be proper under the circumstances because
issues of equitable apportionment and multiforum litigation risks
may be present. Equistar believes it may have a third-party-
contribution claim against the company responsible for the
control on the turbine generator, which should have shut down the
generator's engine before the alleged damage occurred. Equistar
would not be able to compel these third parties to arbitrate
(Board of Managers of the Courtyards at the Woodlands Condominium
Ass'n v. IKO Chicago, Inc., 183 Ill. 2d 66, 78, 697 N.E.2d 727,
733 (1998)); hence, the multiparty conflict could be forced to
proceed in different forums.
Despite the fact that there is a general policy sup-
porting joinder and the resolution of multiparty conflicts in a
single forum, once a trial court determines that a valid arbitra-
tion agreement exists, the court must compel arbitration, even if
litigation between two parties who are not signatories to the
agreement to arbitrate must proceed in a different forum. IKO
Chicago, 183 Ill. 2d at 74, 697 N.E.2d at 731. In that case, the
trial court could either stay the litigation pending arbitration
(or vice versa), or if the issue is severable, the court could
stay the litigation for that issue only. IKO Chicago, 183 Ill.
2d at 74-75, 697 N.E.2d at 731-32.
Finally, Equistar argues that Hartford's negligence
claim does not relate to or arise out of the agreement between
Equistar and Trigen. In other words, regardless of whether a
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nonsignatory subrogee may invoke an arbitration agreement signed
by other parties, Equistar and Trigen did not agree to arbitrate
the particular issue of negligence or gross negligence (and
therefore Hartford cannot arbitrate the claim). This is a pure
question of "arbitrability." Roubik, 181 Ill. 2d at 382, 692
N.E.2d at 1172 ("arbitrability" speaks to whether the parties to
an agreement agreed to arbitrate the specific issue).
As stated above, where it is clear whether the issue
falls under the scope of the arbitration agreement, the court
should make the initial arbitrability determination. Bahuriak,
337 Ill. App. 3d at 718, 786 N.E.2d at 1049. However, where it
is unclear whether the issue falls under the scope of the arbi-
tration agreement, or where the arbitration agreement expressly
provides that the arbitrator should decide the arbitrability of
the claims, the arbitrator should make the decision. Bahuriak,
337 Ill. App. 3d at 718-19, 786 N.E.2d at 1049-50.
The agreement between Trigen and Equistar stated that
Trigen would provide power to Equistar's ethanol plant through
the use of its turbine generator. The turbine generator would be
located at Equistar's plant and Equistar employees would neces-
sarily work with it. Hence, it is at least arguable that a
negligence action arising out of Equistar's treatment of Trigen's
turbine generator "related to" the agreement between Equistar and
Trigen. As such, the trial court correctly referred the question
of whether the negligence claim was "arbitrable" to the arbitra-
tors.
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Because Hartford's subrogee status gave it standing to
invoke the arbitration clause, the trial court did not err in
denying Equistar's motion to stay arbitration.
III. CONCLUSION
For the aforementioned reasons, we affirm the trial
court's judgment.
Affirmed.
McCULLOUGH and STEIGMANN, JJ., concur.
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