Galasso v. KNS Companies

• Court: Appellate Court of Illinois
• Decided: March 9, 2006
• Docket: 1-05-0284 Rel
• Status: Published

Opinion

FOURTH DIVISION March 9, 2006

No. 1-05-0284

NICHOLAS W. GALASSO AND JEFFREY D. ) GALASSO, ) Appeal from the ) Circuit Court of Plaintiffs-Appellees, ) Cook County. ) v. ) ) KNS COMPANIES, INC., ) ) Defendant-Appellant. ) Honorable ) Thomas P. Quinn ) Judge Presiding. )

PRESIDING JUSTICE QUINN delivered the opinion of the court:

Defendant KNS Companies, Inc. (KNS), appeals from an order

of the circuit court of Cook County affirming an arbitration

award in favor of plaintiffs Nicholas W. Galasso (Nicholas) and

Jeffrey D. Galasso (Jeffrey). On appeal, defendant contends that

the arbitrator exceeded his authority by determining the

existence of employment contracts and awarding damages beyond

those provided for in the alleged contracts. Defendant also

contends that the circuit court should have modified the

arbitrator's determination where it contained evident

miscalculations of figures and mistakes in descriptions. For the 1-05-0284

following reasons, we affirm.

I. Background

KNS is a closely held Illinois corporation with 24

shareholders. KNS is in the business of producing interior

linings for steel drums and pails. KNS' board of directors

observed informal procedures. Nicholas and Jeffrey are father

and son, respectively, and were employed by KNS until 2002.

Nicholas was president and a director of KNS. Nicholas was

primarily responsible for the day-to-day operations of KNS, and

through informal relations with members of the board of directors

and shareholders, operated KNS with little or no supervision.

Jeffrey was employed by KNS and held the office of executive vice

president and treasurer. He was elected treasurer in an informal

action by the board of directors on December 5, 1999. Prior to

December 5, 1999, Jeffrey was not an officer of KNS. Jeffrey's

responsibilities included full charge of the plant, including

plant personnel, manufacturing, inventory, purchasing and lab

technical projects.

On April 26, 2002, KNS relieved Nicholas of his duties as

president of KNS. KNS's board of directors agreed to compensate

Nicholas as president emeritus of KNS from April 26, 2002,

through December 2002. After being named president emeritus, on

May 14, 2002, Nicholas was suspended by KNS from employment

pending an audit. Jeffrey was also suspended on the same date,

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pending an audit. In June 2002, pursuant to their employment

agreements, Nicholas and Jeffrey each filed a demand for

arbitration with the American Arbitration Association

(Association). Nicholas and Jeffrey alleged that KNS breached

their employment contracts by terminating their employment and

failing to pay wages and benefits due under their employment

contracts. KNS denied that Nicholas and Jeffrey had valid

employment contracts during the arbitration proceedings.

The record contains two documents entitled "Employment

Agreement" between KNS and Nicholas, and between KNS and Jeffrey.

These agreements also contain an arbitration clause, which

provides:

"Any controversy or claim arising out of, or relating

to, this Agreement or the breach thereof, shall be

settled by arbitration in accordance with the rules

then obtaining of the American Arbitration Association,

and judgment upon the award rendered may be entered in

any Court having jurisdiction thereof."

Following seven days of testimony, on July 14, 2004, the

arbitrator found in favor of Nicholas and Jeffrey and awarded

various monetary awards. The arbitrator specifically found that

Nicholas and Jeffrey each had an employment contract and

agreement with KNS, which expired in December 2002. The

arbitrator found that neither Nicholas nor Jeffrey breached any

of the terms or conditions of their employment contracts and

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agreements with KNS, and each of them devoted his best efforts to

the business interests of KNS. The arbitrator determined that

KNS was liable to Nicholas for the following amounts: $194,000

for unpaid compensation for the period May 1, 2002, through

December 7, 2002; $3,500 in business expenses; $2,666.74 for

medical insurance for the period from August 1 through December

8, 2002; and $3,263.55 for medical expenses from May 2002 through

December 8, 2002. The arbitrator determined that KNS was liable

to Jeffrey for the following amounts: $101,000 for unpaid

compensation for the period from May 1, 2002, to December 7,

2002, and $7,968.40 for medical expenses and insurance. The

arbitrator also determined that Nicholas and Jeffrey were

entitled to reasonable attorney fees in the amount of $80,000.

The arbitrator further determined that KNS was liable for the

administrative fees and expenses of the Association and the

arbitrator. Accordingly, the arbitrator directed KNS to pay

Nicholas and Jeffrey $24,900 for amounts previously advanced to

the Association.

On July 19, 2004, Nicholas and Jeffrey filed an action in

the circuit court to confirm the final award of the arbitrator.

KNS filed a motion to vacate or modify the arbitrator's award.

On December 21, 2004, the circuit court entered an order

affirming the arbitrator's final award and denying KNS's motion.

KNS appeals from that order.

II. Analysis

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A. KNS's Claim That the Arbitrator Lacked the Authority to

Determine the Existence of Employment Contracts

KNS first contends that the circuit court should have

vacated the arbitrator's award where the arbitrator exceeded his

authority. Relying on Kilianek v. Kim, 192 Ill. App. 3d 139

(1989), KNS argues that the arbitrator had no authority to

determine whether a contract existed in this case because it was

an issue of law determinable only by the courts.

However, our supreme court addressed this issue in Jensen v. Quik International, 213 Ill. 2d 119 (2004). In Jensen, the

plaintiff sought to rescind a franchise agreement with the

defendant on the grounds that the agreement violated the Franchise

Disclosure Act of 1987 (Franchise Act) (815 ILCS 705/5 (West

2002)), because the defendant franchisor was not registered with

the Attorney General's office at the time of sale. Jansen, 213

Ill. 2d at 120-21. The defendant sought to stay any litigation on

the agreement pending arbitration pursuant to an arbitration clause

contained therein; however, the circuit court denied the motion.

Jensen, 213 Ill. 2d at 121. The appellate court affirmed the

denial, holding that because compliance with the Franchise Act was

a condition precedent to an enforceable contract, the agreement and

the arbitration clause were not binding because the contract did

not exist if the Franchise Act had been violated. Jensen, 213 Ill.

2d at 121. Therefore, the appellate court found, the question of

whether the Franchise Act had been violated had to first be

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determined in a court of law prior to enforcement of the

arbitration clause. Jensen, 213 Ill. 2d at 121-22. Our supreme

court disagreed and reversed the trial and appellate courts.

In its decision, the supreme court concluded that registration

with the Attorney General's office was not a condition precedent to

an enforceable franchise agreement. The Franchise Act provides

that in the case of a violation of the statute, the available

remedies are rescission and damages. The Franchise Act does not

provide that agreements entered into in violation of the Act are

invalid and unenforceable. Jensen, 213 Ill. 2d at 127. Our

supreme court also noted that Illinois public policy favors

arbitration as a means of resolving disputes. Jensen, 213 Ill. 2d

at 128-29. It concluded that if a party where allowed to avoid

arbitration simply by alleging that no contract existed, it would

be undermining that policy, as "almost any plaintiff can find some

theory or claim upon which to allege that no contract existed,

thereby avoiding arbitration." Jensen, 213 Ill. 2d at 128-29.

Therefore, the supreme court found that the issue of whether the

statute was violated, thereby entitling the plaintiff to rescission

of the franchise agreement, was arbitrable under the arbitration

clause of the franchise agreement.

In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 156

L. Ed. 2d 414, 123 S. Ct. 2402 (2003), the United States Supreme

Court considered the petitioner's argument that the arbitration

clause in question precluded class arbitration. The Supreme

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Court noted that the parties agreed to arbitrate " 'all disputes,

claims or controversies arising from or relating to this contract

or the relationships which result from this contract.' " Bazzle,

539 U.S. at 451, 156 L. Ed. 2d at 422, 123 S. Ct. at 2407. The

Supreme Court determined that "the dispute about what the

arbitration contract in each case means" is a dispute "relating

to this contract" and the resulting "relationships." Bazzle, 539

U.S. at 451, 156 L. Ed. 2d at 422, 123 S. Ct. at 2407.

Therefore, the Court concluded that the parties seem to have

agreed that an arbitrator, not a judge, would answer the relevant

question and that if there is doubt about the scope of arbitrable

issues, the Court should resolve the doubt in favor of

arbitration. Bazzle, 539 U.S. at 451-52, 156 L. Ed. 2d at 422, 123 S. Ct. at 2407. Accordingly, where the arbitration agreement

contains sweeping language concerning the scope of the questions

committed to arbitration, as in the present case, matters

relating to the preliminary arbitrability questions should be for

the arbitrator, not the courts, to decide.

However, in Illinois, section 2 of the Uniform Arbitration

Act (Arbitration Act) (710 ILCS 5/2 (West 2002)) provides the

parties with an avenue to bring arbitrability questions before

the courts. Section 2 provides in pertinent part:

"Proceedings to compel or stay arbitration. (a) On application of a

party showing an agreement described in Section 1, and the opposing

party's refusal to arbitrate, the court shall order the parties to proceed with

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arbitration, but 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 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 2002).

This procedure allows a party to petition the circuit court to determine arbitrability

questions where the party challenges the existence of an arbitration agreement. Upon

such application, the court is charged with interpreting the parties' agreement and

determining whether the issue is arbitrable or one that it must address. Here, KNS did

not petition the circuit court pursuant to section 2 of the Arbitration Act to challenge the

existence of the arbitration agreement. Rather, KNS engaged in the arbitration and

argued the validity of the employment contracts before the arbitrator. In doing so, KNS

submitted the issue to the arbitrator's determination. Applying the Supreme Court's

analysis in Bazzle, we find that the preliminary arbitrability questions in this case (i.e.

the validity of the employment agreements), should be for the arbitrator, not the courts,

to decide.

B. KNS's Claim That the Arbitrator Exceeded His Authority in Awarding the Amount of

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Unpaid Compensation

KNS next contends that the circuit court should have vacated the arbitrator's

award where the arbitrator exceeded his authority by awarding Jeffrey and Nicholas

greater wages than those provided for in their contracts and awarding them attorney

fees.

Judicial review of an arbitration award is more limited than the review of a trial

court's decision. Equity Insurance Managers of Illinois, LLC v. McNichols, 324 Ill. App.

3d 830, 835 (2001). Because the parties have agreed to have their dispute settled by

an arbitrator, it is the arbitrator's view that the parties have agreed to accept, and the

court should not overrule an award simply because its interpretation differs from that of

the arbitrator. Everen Securities, Inc. v. A.G. Edwards & Sons, Inc., 308 Ill. App. 3d

268, 273 (1999). There is a presumption that the arbitrator did not exceed his authority

(Tim Huey Corp. v. Global Boiler & Mechanical Inc., 272 Ill. App. 3d 100, 106 (1995))

and a court must construe an award, if possible, so as to uphold its validity (Equity

Insurance, 324 Ill. App. 3d at 835). A court has no power to determine the merits of the

award simply because it strongly disagrees with the arbitrator's contract interpretation.

Herricane Graphics, Inc. v. Blinderman Construction Co., 354 Ill. App. 3d 151, 156

(2004). Also, a court cannot overturn an award on the ground that it is illogical or

inconsistent. Herricane Graphics, Inc., 354 Ill. App. 3d at 156. In fact, an arbitrator's

award will not even be set aside because of errors in judgment or a mistake of law or

fact. Herricane Graphics, Inc., 354 Ill. App. 3d at 156.

The limited circumstances under which this court may modify or vacate an

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arbitration award are set forth in the Arbitration Act (710 ILCS 5/1 et seq. (West 2002)).

Under section 12(a) of the Arbitration Act (710 ILCS 5/12(a) (West 2002)), a court can

vacate an award in the following circumstances: (1) the award was

obtained by corruption or fraud; (2) the arbitrator was partial;

(3) the arbitrator exceeded his powers; (4) the arbitrator

unreasonably refused to postpone the hearing or hear material

evidence; or (5) there was no arbitration agreement. Although a court cannot vacate an award due to errors in

judgment or mistakes of fact or law, a court can vacate an

arbitration award where a gross error of law or fact appears on

the award's face, or where the award fails to dispose of all

matters properly submitted to the arbitrator. Herricane Graphics, Inc., 354 Ill. App. 3d at 156. The burden is placed on

the challenger to prove by clear and convincing evidence that an

award was improper. Thomas v. Leyva, 276 Ill. App. 3d 652, 654

(1995).

Here, KNS disagrees with the arbitrator's determination of the amount of unpaid compensation awarded to Nicholas and

Jeffrey. KNS argues that the circuit court should have vacated

the arbitrator's award where he exceeded his powers, pursuant to

section 12(a)(3) of the Arbitration Act.

However, we find that the circuit court did not have the

authority to vacate the arbitrator's award. In determining the

proper standard to be applied in construing section 12(a)(3) of

the Arbitration Act, the appellate courts have looked to the

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explanation of the chairman of the committee that drafted the

Arbitration Act:

" ' "[T]he question for the court is whether the

construction of the contract made by the arbitrator is

a reasonably possible one that can seriously be made in

the context in which the contract was made. Stated

affirmatively, if all fair and reasonable minds would

agree that the construction of the contract made by the

arbitrator was not possible under a fair interpretation

of the contract, then the court would be bound to

vacate or refuse to confirm the award." ' " Herricane Graphics, Inc., 354 Ill. App. 3d at 157, quoting Rauh

v. Rockford Products Corp., 143 Ill. 2d 377, 391-92

(1991), quoting M. Pirsig, Some Comments on Arbitration

Legislation and the Uniform Act, 10 Vand. L. Rev. 685,

706 (1957).

It is clear that the arbitrator heard the testimony,

assessed the credibility of the witnesses, and considered the

exhibits and evidence presented. The arbitrator found that KNS

agreed to pay Nicholas as president emeritus from April 26, 2002

through December 2002. The arbitrator also found that KNS

suspended Nicholas on May 14, 2002, and did not pay him after May

1, 2002. The arbitrator considered that Nicholas's compensation

for the year 2002 was $303,490. The arbitrator then determined

that KNS was liable to Nicholas, pursuant to his employment

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contract, in the amount of $194,000 for unpaid compensation for

the period of May 1, 2002, through December 7, 2002. The

arbitrator also found that Jeffrey had an employment contract

with KNS providing for wages through December 2002. The

arbitrator found that Jeffrey was terminated on May 14, 2002, and

that he was not terminated for cause. The arbitrator concluded

that KNS was liable to Jeffrey in the amount of $101,000 for

unpaid compensation for the period from May 1, 2002, to December

7, 2002. Here, there is no indication that the arbitrator acted

in bad faith, was guilty of fraud or chose not to follow the law.

Accordingly, the circuit court did not have the authority to

vacate the award where the arbitrator's calculation of unpaid

compensation due to Nicholas and Jeffrey was a reasonable

construction of the employment contracts.

C. KNS's Claim That the Arbitrator Exceeded His Authority By

Awarding Attorney Fees

KNS further argues that the arbitrator exceeded his

authority by awarding Nicholas and Jeffrey attorney fees, which

were not part of their employment agreements or permitted by

statute. Nicholas and Jeffrey argue that the arbitrator's award

was proper under the Attorneys Fees in Wage Actions Act (Attorney

Fees Act) (705 ILCS 225/0.01 et seq. (West 2002)), which provides that where an employee establishes by the decision of the court

or jury that he is owed wages, he is entitled to attorney fees.

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705 ILCS 225/1 (West 2002).

In his award, the arbitrator found that Nicholas and Jeffrey

were "employees under the Illinois Wage Payment and Collection

Act" (820 ILCS 115/1 et seq. (West 2002)). The arbitrator

subsequently determined that Nicholas and Jeffrey were entitled

to "reasonable attorney's fees as provided under Illinois law and

consistent with the applicable rules of the American Arbitration

Association."

KNS argues that the arbitrator exceeded his authority in

awarding attorney fees because the Attorney Fees Act is

inapplicable in this case. Section 1 of the Attorney Fees Act

provides, in relevant part:

"Whenever a mechanic, artisan, miner, laborer,

servant or employee brings an action for wages earned

and due and owing according to the terms of the

employment, and establishes by the decision of the

court or jury that the amount for which he or she has

brought the action is justly due and owing, and that a

demand was made in writing at least 3 days before the

action was brought, for a sum not exceeding the amount

so found due and owing, then the court shall allow to

the plaintiff a reasonable attorney fee of not less

than $10, in addition to the amount found due and owing

for wages, to be taxed as costs of the action."

(Emphasis added.) 705 ILCS 225/1 (West 2002).

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As previously discussed, section 2 of the Arbitration Act

allows a party to petition the circuit court to determine arbitrability questions. In this

case, KNS did not submit such application to the court to challenge the arbitration

agreement; nor did KNS raise an objection before the arbitrator challenging the

arbitrability of the attorney fees sought by Nicholas and Jeffrey in their demands for

arbitration. Rather, following the arbitrator's final award, KNS argued that the

arbitrator's determination awarding attorney fees was improper because the alleged

employment contracts did not provide for them and the Attorney Fees Act was

inapplicable to the plaintiffs as they were officers, not employees, of KNS.

In asking the circuit court to vacate the award, KNS also argued that the

arbitrator's award of attorney fees improperly included fees incurred in claimant's

wrongful discharge claim, as well as the breach of contract claims at issue in this case.

In doing so, KNS conceded that the arbitrator could decide the issue of attorney fees.

Accordingly, we find that KNS forfeited its arguments that the arbitrator exceeded his

authority in awarding attorney fees. We need not decide in this case

whether the Attorney Fees Act, in referring to "establishe[d] by

the decision of the court or jury," encompasses arbitration

awards. As we noted in Heatherly v. Rodman & Enshaw, Inc., 287 Ill. App. 3d 372, 379 (1997), the determination of whether the

Attorney Fees Act applies to arbitration awards is best left to

the legislature. In Heatherly, the plaintiff argued that the

legislature could not have intended that attorney fee recovery in

arbitration proceedings be treated differently from the recovery

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available in court proceedings. However, this court explained

that "[b]ecause arbitration is considered to be easier, more

expeditious, and less expensive than litigation [citations],

recovery of attorney fees incurred therein could be deemed to be

less important than recovery of costs incurred in litigation.

That is a matter properly left to the General Assembly."

Heatherly, 287 Ill. App. 3d at 379. We also leave open the issue of

whether a circuit court may award attorney fees pursuant to the Attorney Fees Act,

where such fees are not provided for in the arbitration agreement, when a motion to

confirm an arbitration award is brought before the court.

D. KNS's Claim That the Circuit Court Should Have Modified the

Arbitrator's Award

KNS lastly contends that the circuit court should have

modified the arbitrator's award pursuant to section 13 of the

Arbitration Act. KNS argues that the court should have modified

the arbitrator's miscalculation of the unpaid compensation due

Nicholas and Jeffrey and the arbitrator's inaccurate description

of the dates of Jeffrey's employment contract and the dates he

incurred medical expenses.

Section 13(a) of the Arbitration Act (710 ILCS 5/13(a) (West

2002)) allows a court to modify or correct an award where: (1)

there was an evident miscalculation or an error in a description;

(2) the arbitrators ruled on a matter not submitted to them, and

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the court is able to correct the award without affecting the

merits of the decision upon the issues submitted; or (3) the

award is imperfect in form.

We find that KNS' alleged errors relating to the

compensation due to Nicholas and Jeffrey are not claims of error

in mathematical computations which appear on the face of the

award. Rather, KNS disagrees with the arbitrator's

interpretation of the evidence, construction of the employment

contracts, and ultimate assessment of damages. As previously

discussed, it is clear that the arbitrator heard the testimony,

assessed the credibility of the witnesses, and considered the

exhibits and evidence presented. The arbitrator determined that

Nicholas's total compensation for the year 2002 was $303,490, and

contract, in the amount of $194,000 for unpaid compensation for

arbitrator also found that Jeffrey had an employment contract

with KNS and that KNS was liable to Jeffrey in the amount of

$101,000 for unpaid compensation for the period from May 1, 2002,

to December 7, 2002. KNS disagrees with the arbitrator's

analysis and suggests mathematical computations that the

arbitrator should have followed to determine the award.

However, the arbitrator's award does not contain a mathematical

computation or specific accounting to indicate the manner in

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which he arrived at the awards of unpaid compensation for

Nicholas and Jeffrey. The award merely sets forth the evidence

that was considered and mentions only several figures that were

considered in arriving at the ultimate award. To accept KNS'

argument would interfere with the arbitrator's role of

interpreting the contracts and discretion in fashioning an

equitable award.

In its second issue, KNS argues that Jeffrey's employment

contract terminated on December 20, 2002, not December 7, 2002,

as indicated by the arbitrator's award. However, the award

determined that KNS was liable to Jeffrey for "unpaid

compensation" for the period from May 1, 2002, to December 7,

2002. The arbitrator's reference to December 7, 2002, was not

describing the date of termination of Jeffrey's employment

contract.

In its final issue, KNS notes that the arbitrator's award

referred to Jeffrey incurring "medical insurance charges of

$500.82 per month between June and December 2002." The

arbitrator then determined that KNS was liable to Jeffrey "for

$7,968.40 for medical expenses and insurance." KNS does not

dispute the arbitrator's award but argues that the testimony and

exhibits show that KNS paid Jeffrey's medical insurance premiums

through July 2002. KNS therefore argues that the circuit court

should have modified the arbitrator's award to reflect that

Jeffrey incurred medical insurance charges between "August and

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December 2002." Courts are limited in their ability to modify

and correct arbitration awards. We find that because this

alleged error was not evident on the face of the award, the

circuit court did not err in failing to modify the award on this

basis.

III. Conclusion

For the above reasons, we affirm the decision of the circuit

court of Cook County.

Affirmed.

CAMPBELL and GREIMAN, JJ., concur.

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