The Illinois Appellate Court recently issued an opinion declining to enforce a standard form arbitration clause in a contractor’s agreement with a single-family homeowner.  While arbitration remains a viable dispute resolution mechanism, drafters of contracts which require arbitration should be mindful of the potential risks of utilizing a form contract with an unsophisticated consumer.

The Facts

In Bain v. Airoom, LLC, Mary Bain, a disabled senior citizen sued Airoom, a remodeling firm in the Chicago area, alleging Airoom overcharged her for incomplete and shoddy remodeling work at her home.[i]  According to plaintiff, one year after construction began, Airoom had failed to complete a single bathroom.  She had paid more than $180,000 for work appraised to be worth $40,000.[ii]  She asserted claims against Airoom for breach of contract, breach of implied warranty of reasonable workmanship and materials, and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (the “Consumer Fraud Act”) and sought compensatory and punitive damages, attorney fees and costs.[iii]

Airoom filed a motion to dismiss the complaint and compel arbitration based upon a “standard” binding arbitration clause in its contract with plaintiff.[iv]  Plaintiff objected to the motion arguing that the arbitration clause was unenforceable because it was procedurally and substantively unconscionable.[v]  The trial court disagreed with plaintiff and granted the motion finding she failed to establish both procedural and substantive unconscionability.[vi]

The First District Appellate Court began its analysis by recognizing Illinois public policy generally favors arbitration and the legislature had placed arbitration agreements on equal footing with other contractual promises when it adopted the Uniform Arbitration Act.[vii]  As a result, where there is a valid arbitration agreement and the parties’ dispute falls within the scope of the agreement, trial courts must compel arbitration.[viii]

However, the general rule in favor of enforcing arbitration agreements is not without exception.  One such exception is unconscionability.  The appellate court concluded the trial court applied an incorrect and outdated standard when it required plaintiff to establish both procedural and substantive unconscionability.[ix]  Rather, a finding of unconscionability may be predicated upon either procedural or substantive unconscionability or a combination of both.[x]

Procedural unconscionability consists of some impropriety during the process of contract formation that has deprived a party of a meaningful choice such as when a term is so difficult to find, read or understand that a plaintiff cannot fairly be said to have been aware that she was agreeing to it.[xi]  Courts will consider all of the circumstances surrounding the subject transaction, including whether each party had the opportunity to understand the terms of the contract, any disparity in bargaining power, and whether important terms were hidden in a maze of fine print.[xii]

Substantive unconscionability relates to the actual terms of the contract and focuses on the relative fairness of the obligations.[xiii]  Where the terms are so one-sided or there is a patent imbalance between the obligations and rights and obligations imposed by the contract, substantive unconscionability exists.[xiv]

To determine whether the arbitration clause was unconscionable, the court examined certain features of the clause in plaintiff’s contract.  First, the court analyzed the arbitration agreement’s prohibition on the recovery of attorneys’ fees and costs as well as the recovery of punitive damages.[xv]  The court determined that this prohibition violated Illinois law because the Consumer Fraud Act expressly permits the recovery of punitive damages, attorneys’ fees and costs.[xvi]  Indeed, the court observed, oftentimes in consumer fraud cases, the attorneys fee awards constitute the largest part of a plaintiff’s recovery such that a bar to recovering such damages might chill a consumer’s desire to bring a meritorious consumer fraud act claim.[xvii]  For these reasons, the court determined this portion of the arbitration clause contravened Illinois statutory law and was unconscionable.

Next, the court examined the confidentiality requirement in the arbitration provision which precluded plaintiff from disclosing “the existence, content, or results of any arbitration” without the “prior written consent of both parties.”[xviii]  The court, following the Illinois Supreme Court’s guidance in Kinkel, determined the confidentiality mandate was substantively unconscionable since “it ensures that none of [the defendant’s] potential opponents will have access to precedent while, at the same time, [the defendant] accumulates a wealth of knowledge.”[xix]

Similarly, the court determined the requirement that the binding arbitration be conducted pursuant to the Construction Industry Arbitration Rules of the American Arbitration Association was also unconscionable.[xx]  The court reasoned the contract failed to disclose the existence of a potentially less expensive alternative set of AAA rules specifically designed to address home construction disputes between a homeowner and a homebuilder known as the Home Construction Arbitration Rules and Mediation Procedures.[xxi] This set of rules was not easily found on AAA’s website and the contract failed to direct plaintiff to them.[xxii]  The cost effectiveness of the Home Construction Rules was especially important to someone in plaintiff’s situation since she could possibly have been responsible for both her share and Airoom’s share if she did not prevail.[xxiii]   For these reasons, the appellate court reversed the trial court’s order compelling arbitration and remanded it for further proceedings.

Takeaway

The Bain decision does not signal a departure from Illinois public policy encouraging arbitration, including in consumer contracts.  In fact, the court acknowledged the ubiquity of such contracts in today’s modern society.  Since arbitration can often be a more efficient and economical way to resolve a dispute, especially those involving construction, contractors and design professionals can still contractually require arbitration.  But you should know your client and draft an arbitration clause tailored to your client, if circumstances dictate.  A sophisticated owner or developer would likely not be able to avoid arbitration based on Bain where the court was particularly sensitive to plaintiff’s age, disability, and admitted unsophistication.  The court sympathized with plaintiff’s testimony she was required to sign or apply her initials 48 times in the presence of the Airoom sales representative.  He had her signing and initialing so many pages nonstop, it felt like her eyes started crossing and glazing over.[xxiv]

[i] Bain v. Airoom, LLC, 2022 IL App (1^st) 211001.

[ii] Id. at 5.

[iii] Id.

[iv] Id. at 7.

[v] Id. at 8, 9.

[vi] Id. at 13.

[vii] 710 ILCS 5/1 et seq.

[viii] Id. at 20.

[ix] Id. at 23.

[x] Id. (citing Kinkel v. Cingular Wireless LLC, 223 Ill.2d 1, 21 (2006)).

[xi] Bain at 24.

[xii] Id.

[xiii] Id. at 25.

[xiv] Id.

[xv] Id. at 32.

[xvi] Id. at 33.

[xvii] Id. at 36.

[xviii] Id. at 39.

[xix] Id.

[xx] Id. at 42.

[xxi] Id. at 42-43.

[xxii] Id. a t49-50.

[xxiii] Id. at 47.

[xxiv] Id. at 8.

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