Arbitration Agreements
Be Prepared to Accept the Award, Like It or Not
Summer 2006
In a recent Illinois appellate court case, the impact of arbitration awards on construction and business contracts and the right to judicial review was discussed. In National Wrecking Co. v. Sarang Corp., 2006 Ill. App. LEXIS 490 (1st Dist., June 6, 2006), the court analyzed the scope or review of an arbitration award stemming from a dispute regarding the formation of a joint venture between a corporation and a certified small business contractor under applicable provisions of the contracting requirements for set-aside jobs under the Small Business Administration (SBA).
In National Wrecking, Sarang Corporation (Sarang), a certified small business eligible for federal set-aside jobs, created a joint venture with National Wrecking Company (National), an otherwise ineligible business, which enabled National to obtain set-aside work under the Mentor-Protege Program. The Mentor-Protege Program allows small business set-aside contracts to go to larger businesses who qualify as a mentor if a joint venture is created with a qualifying small business contactor and the small business contractor does a certain percentage of the work.
Sarang and National entered into a joint venture agreement with the express purpose of obtaining part of a Navy Project for demolition of certain buildings and the removal of potentially contaminated soil. As part of the agreement, Sarang was to obtain bids for the work on the project; specifically, for any work not to be performed by National as part of Sarang’s obligation to do at least 15 percent of work under the SBA guidelines.
In the initial bidding process the Navy required bids for the removal of the soil. National, as part of the joint venture bidding, initially only submitted a per-ton basis for the soil removal due to the financial risk of not knowing how much tonnage of contaminated soil that may need removal. Subsequently, the Navy requested a supplemental bid with a lump-sum price.
National submitted a bid based on the estimated amount of contaminated soil to be removed, plus transport and disposal fees. This supplemental bid, according to National, was prepared with the intention that National would perform the soil removal work and that National would take the risk if its calculations were wrong in order to win the contract. Sarang denied that National was to do the work and believed that the contaminated soil removal was to be subcontracted at the discretion of Sarang.
The joint venture bid the soil removal at $511,180 with an option on five additional buildings at $518,000. The joint venture was then awarded the contract. After obtaining the contract for the work and partial performance a dispute arose between Sarang and National regarding the extent of work National was to perform and the amount of money each entity was to receive for the contaminated soil removal.
Once the demolition project commenced, none of the soil was found to be contaminated and, thus, none needed to be removed. Based on the potential windfall to National for the amount the Navy paid for the intended removal of contaminated soil that ultimately did not need to be done, Sarang informed National that the joint venture would not pay National any of the money for the bid price for removing the contaminated soil since that work was not done by National.
Because of the dispute Sarang demanded arbitration against National to determine the scope of the joint venture and, among other issues, the right to the money paid for the contaminated soil removal. The arbitrator held hearings and heard testimony over a four-month period and ruled that the joint venture should continue with some restrictions and that National be paid the $511,180, representing the price for the contaminated soil remediation and a portion of the option price for the additional 5 buildings.
After the arbitrator’s decision, National filed an application for confirmation of the arbitration award in the circuit court of Cook County. Sarang objected and sought to vacate and/or modify the award because (1) the arbitrator exceeded his power; (2) there was no arbitration agreement; (3) the award violated federal law; (4) the award violated public policy; (5) and the award failed to dispose of all the matters submitted at the arbitration. After a hearing, the circuit court denied Sarang’s application and granted National’s application.
On appeal, the court looked at the scope of review of an arbitration award. The court stated that unlike trial court decisions, arbitration awards are given great deference. This deference is based on the concept that the arbitration was the chosen path of the parties and should be encouraged as alternative dispute resolution. The court examined the allowable grounds to set aside an arbitration award both from the Illinois Uniform Arbitration Act and common law. Finding that the standard of review on appeal is much stricter when reviewing arbitration awards, the court ruled that unless there is gross error the award should stand. Finding no gross error, the appellate court upheld the circuit court’s decision in favor of the application to enforce the award.
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