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Freeport Constr. Co. v. Star Forge





APPEAL from the Circuit Court of Stephenson County; the Hon. JAMES B. VINCENT, Judge, presiding.


This appeal raises a preliminary question as to the jurisdiction of courts> to review a determination by the American Arbitration Association that an arbitrator should not be removed for alleged "evident partiality." (Ill. Rev. Stat. 1975, ch. 10, par. 112(a)(2.) There is the further question whether the award should be vacated or whether the cause should be remanded for the taking of further evidence.


• 1 The claim that one of the panel of three arbitrators was not impartial was made to the American Arbitration Association during the pendency of the hearing before the arbitrators. Freeport Construction Company suggests that the determination of the American Arbitration Association, after an investigation of the claim that there was no bias or partiality, is binding on the court. We conclude, however, that the trial court and on appeal the reviewing court have the power to decide whether the arbitrator was subject to removal for partiality or bias even though the American Arbitration Association has investigated the matter and reached a conclusion on the issue.

The submission to arbitration was made under the terms of a construction contract and involved generally a dispute between Freeport Construction Company, the general contractor (Freeport), and the owner, Star Forge, Inc., arising out of the building of a new manufacturing facility. The arbitration clause of the construction contract specifically incorporated the Construction Industry Arbitration Rules of the American Arbitration Association, which state in pertinent part:

"No person appointed as a neutral arbitrator shall serve if he has any financial or personal interest in the result of the arbitration, unless the parties, in writing, waive such disqualification.

A person appointed as a neutral arbitrator shall disclose any circumstances likely to create a presumption of bias or which might disqualify him as a neutral arbitrator. * * * Upon receipt of such information from any source, the AAA shall immediately communicate it to the parties. If a party challenges an arbitrator, he shall be replaced, unless the AAA determines that the circumstances do not disqualify the arbitrator from serving as a neutral." (American Arbitration Association, Construction Industry Arbitration Rules §§ 11 and 18 (1974).)

The rules themselves do not expressly provide that a determination of the association shall be binding. And the Uniform Arbitration Act authorizes resort to the court in the provision that:

"(a) Upon application of a party, the court shall vacate an award where:

(2) There was evident partiality by an arbitrator appointed as a neutral or corruption in any one of the arbitrators or misconduct prejudicing the rights of any party;" (Ill. Rev. Stat. 1975, ch. 10, par. 112(a)(2).)

We conclude that the determination of the association is not binding upon the court. See, e.g., McKinney Drilling Co. v. Mach I Ltd. Partnership, 32 Md. App. 205, 359 A.2d 100, 102 (1976); cf. St. Paul Insurance Companies v. Lusis, 6 Wn. App. 205, 492 P.2d 575, 581 (1971).


Our disposition of the remaining issues requires a review of the record which includes the complaint of Star Forge to vacate or modify the award of the arbitrators supported by various documents, and the responsive pleadings of Freeport Construction. In substance Star Forge alleges in count I of its complaint that the original contract price was $514,136 with undisputed extras totaling $26,878, resulting in an adjusted contract price of $541,014; that the contract stated that the work would be completed by November 15, 1975, with time stated to be of the essence; that although the deadline was extended to November 30, 1975, the work was still substantially incomplete on that date with the major problem being Freeport Construction's electrical subcontractor, Miller Engineering, which was not performing its work; that because of this on December 3, 1975, Star Forge removed both Freeport Construction and Miller Engineering from the project and employed another electrical contractor to complete the unfinished electrical work. The complaint further states that Freeport Construction responded by filing an arbitration demand with the American Arbitration Association pursuant to the construction contract. At the same time Miller Engineering filed a law suit against both Star Forge and Freeport Construction claiming a mechanic's lien against the real estate in the amount of $50,812 which remains pending awaiting trial; that a panel of three arbitrators was appointed by the arbitration association to hear the dispute and conducted five nonconsecutive days of hearings; that Star Forge has paid out $452,690.01 to Freeport Construction, its various subcontractors and suppliers and including $61,723.23 paid to the substituted electrical contractor; this, when added together with the amount of the arbitrators' award of $147,587.37, would put Star's total cost to obtain full performance of its contract at $600,277.38 which would be $59,263.38 in excess of the adjusted contract price; that this result is contrary to section 21 of the Illinois Mechanics' Lien Act which in substance provides that an owner shall not be compelled to pay a greater sum for the completion of the improvement than the price stipulated in the construction contract, with exceptions not applicable here. (Ill. Rev. Stat. 1975, ch. 82, par. 21.) Under count I Star Forge seeks an order modifying the award of the arbitrators by reducing the amount due Freeport Construction to $88,323.99.

As an alternative ground for setting aside the arbitration award count II in substance makes the further allegations that while the arbitration proceedings were pending Star Forge received a report that there were repeated business dealings between Miller Engineering (Miller) and one of the arbitrators, Robert R. Stenstrom, who is a local contractor; that Star Forge expressed concern about Stenstrom's neutrality to the American Arbitration Association; that after contacting Stenstrom, the American Arbitration Association wrote Star Forge that he "has no present dealing with [Miller] and there was never a joint venture," although Stenstrom had used Miller as a subcontractor "but not exclusively"; that Star Forge was requested to sign a waiver but did not do so and instead continued to investigate the relationship; that Star Forge discovered that on June 25, 1976, Stenstrom was issued a building permit to construct an electrically heated skating rink for Brick Investment Partnership on Stenstrom Road in Rockford; that five days later Miller received a building permit to do the electrical work on the project; that again Star Forge expressed its concern about Stenstrom's neutrality to the American Arbitration Association with no result; that the chairman of the arbitration panel at some point in the hearing indicated that he would rely heavily upon Stenstrom's expertise as a contractor during the panel's deliberations so that Stenstrom's influence upon the deliberations was disproportionate to that of the other arbitrators; that on August 17, 1976, the arbitrators made their decision and awarded Freeport Construction the amount of $147,587.37 with the provision that from this amount $71,520.85 due to Freeport Construction "shall be paid to Freeport in trust for payment to subcontractors in the amounts specified * * *"; that the amount specified for Miller was $56,800; that one day ...

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