The Illinois Appellate Court recently ruled that, where a party raises a substantive arbitral issue in a motion to dismiss pursuant to Illinois Code of Civil Procedure § 2-619(a)(2), that party has submitted to the jurisdiction of the court and waives its right to compel arbitration.  Watkins v. Mellen, 2016 IL App (3d) 2016.

Albert and Rose Watkins executed a “Land Trust/Partnership Agreement” in 1977.  The Agreement provided that a trustee would take legal title to certain real estate for the benefit of the trust’s shareholders.  The Agreement further provided that “any controversy or claim arising out of or relating to this Agreement, or breach thereof, shall be settled by arbitration in accordance with the then existing rules of the American Arbitration Association.””

By 2012, the trust consisted of 26 shareholders.  Robert Watkins, as trustee, proposed a sale of the real estate comprising the corpus of the trust.  When three of the shareholders objected, Watkins brought a declaratory judgment action in the circuit court, seeking authority to sell the real estate.  The complaint named the three dissenting shareholders as defendants.

The defendants filed a § 2-619(a)(2) motion to dismiss Watkins’ complaint, arguing he lacked standing to sue in his capacity as trustee.  Specifically, the defendants argued that under the terms of the Agreement, the trustee could not take action to sell the trust’s real estate without prior unanimous consent of all shareholders.  After significant motion practice, including an evidentiary hearing, the circuit court denied the defendants’ motion.

Two months later, the defendants raised, for the first time, a claim that Watkins violated the Agreement’s arbitration clause by filing suit in the circuit court.  The defendants brought a motion to compel arbitration.  Watkins responded by arguing that the defendants waived enforcement of the arbitration clause by filing their motion to dismiss.  The circuit court rejected Watkins’ waiver argument, but nonetheless denied the defendants’ motion. 

The defendants appealed.  Significantly, the parties disagreed as to what issues were before the court on appeal.  The defendants argued that the trial court erred in determining, as a matter of fact, that the Agreement did not require Watkins to submit to arbitration.  Watkins, however, asserted that though the trial court’s holding was correct, it should have denied the motion to compel on the basis of waiver.   

The appellate court affirmed, despite finding the trial court’s rationale in denying the motion to compel “somewhat unclear.”  The appellate court agreed with Watkins that, by filing their motion to dismiss and litigating the merits of that motion, the defendants waived their right to file a subsequent motion to compel arbitration. 

The court explained that, when determining whether a party has waived its contractual right to arbitrate, the “crucial inquiry” is whether that party has acted inconsistently with its right to arbitrate.  Id. at ¶ 14.  Specifically, a party waives its right to arbitrate if it submits to the court issues that are “arbitral under the contract.”  Id.  The court noted previous occasions in which courts have held a party waived its right to arbitrate by filing:

  A motion for summary judgment;

  An answer that fails to assert the right to arbitrate; and

  A motion to dismiss without mentioning the arbitration clause.

On the other hand, a motion contesting venue, and an answer which included the affirmative defense of the arbitration agreement, did not constitute waiver. 

The “operative distinction” between filings that constitute waiver and those that do not, said the court, is whether the party seeking to compel arbitration “has placed substantive issues before the court.”  Id. at ¶ 15.  In other words, waiver is determined by the types of issues submitted to the court for resolution, not by the form of the documents in which those issues are raised.  Id.

The defendants’ motion to dismiss directly attacked Watkins’ standing under the terms of the agreement by arguing that the Agreement did not give the trustee the authority to take any action without prior unanimous consent from the shareholders.  The appellate court held this issue was “the very same substantive issue that would have been submitted to arbitration.” Id. at ¶ 17.  The trial court had already provided a “detailed analysis” as to why the terms of the Agreement did not require prior unanimous shareholder approval, and it was only when the trial court decided against the defendants that they raised the arbitration issue.  On these facts, the appellate court found it “abundantly clear” that the defendants waived their right to compel arbitration by filing and litigating their motion to dismiss.

This case serves as a reminder that, though arbitration “is a favored method of settling disputes in Illinois and a finding of waiver of arbitration rights is disfavored,”  id. at ¶ 13, parties should nevertheless assert their rights to arbitration at the earliest opportunity.  Courts will not permit parties to attempt to prevail on the merits of an issue before the court and, if they are unsuccessful, have a “second bite at the apple” before an arbitrator even if the contract in dispute explicitly grants that party a right to have an arbitrator decide the issue.