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10/20/88 Donaldson, Lufkin & v. Edwin C. Barr Et Al. (the

October 20, 1988

DONALDSON, LUFKIN & JENRETTE FUTURES, INC., APPELLEE

v.

EDWIN C. BARR ET AL. (THE BOARD OF TRADE OF THE CITY OF CHICAGO, APPELLANT)



SUPREME COURT OF ILLINOIS

530 N.E.2d 439, 124 Ill. 2d 435, 125 Ill. Dec. 281 1988.IL.1552

Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. Benjamin S. Mackoff, Judge, presiding.

APPELLATE Judges:

JUSTICE RYAN delivered the opinion of the court. JUSTICE STAMOS took no part in the consideration or decision of this case. JUSTICE WARD, Dissenting.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE RYAN

This case involves the arbitrability of a dispute arising under a contract of employment between the plaintiff, Donaldson, Lufkin & Jenrette Futures, Inc. , a commodity futures broker, and defendant Edwin C. Barr. Following the cessation of his employment, Barr filed a demand upon DFI for certain payments and also filed a request for arbitration with the Chicago Board of Trade . DFI countered with a suit in the circuit court of Cook County to stay the arbitration proceedings and for declaratory judgment. The circuit court denied the request of DFI for a stay and directed that the arbitrator should determine whether the issue involved is arbitrable. The appellate court held that the trial court should initially determine the arbitrability question and remanded the case to the trial court for an evidentiary hearing on whether the compensation Barr claims stems from profits generated by trading on the CBOT. 151 Ill. App. 3d 597.

The plaintiff, DFI, maintained an office in Chicago during the relevant time period. In 1983, DFI hired defendant Edwin C. Barr as a senior member of the executive committee of its board of directors. Barr's responsibilities included the supervision of DFI managers, account executives, and managing DFI's operations (through floor managers) on the trading floors of the five commodity exchanges, of which the CBOT was one. In consideration, Barr was given a $90,000 salary, the use of a car, as well as certain percentages for generating new business and of the general profits of the business. DFI also provided Barr with a membership on the CBOT.

In 1985, Barr ceased working for DFI and sent a letter to DFI demanding more than $500,000 in additional employment compensation and expense reimbursement. When DFI did not comply with Barr's demand for payment, he sought arbitration before the CBOT. In Barr's demand for arbitration, he set forth four claims against DFI: (a) a $50,000 claim for severance pay; (b) a claim in excess of $419,000 for a bonus based on the operating income generated by the Chicago office from 1983 to 1985; (c) a $138,600 claim for bonuses arising from recruiting other officers and employees to DFI; and (d) a claim for approximately $1,100 for unpaid expense vouchers. The CBOT then set a date for the arbitration hearing in December 1985, pursuant to CBOT Rule 600.00. Rule 600.00 provides:

" Any controversy between parties who are members and which arises out of the Exchange business of such parties shall, at the request of any such party, be submitted to arbitration in accordance with regulations prescribed by the Board. Every member, by becoming such, agrees to arbitrate all such disputes with other members in accordance with this Rule and the regulations prescribed by the Board pursuant to this Rule, and further agrees and obligates himself to abide by and perform any awards made thereunder." (Emphasis added.)

In response, on December 12, 1985, DFI filed in the circuit court of Cook County an application for the stay of arbitration proceedings demanded by Barr. DFI asserted that it had not agreed to arbitrate any dispute in its employment agreement with Barr. Further, DFI claimed that Rule 600.00 was inapplicable to the claims in Barr's demand for arbitration because those claims arose out of Barr's employment relationship with DFI, and not out of business that Barr or DFI transacted at the CBOT.

DFI also filed a declaratory judgment action in the circuit court of Cook County, in which it alleged, as to each of Barr's claims: (a) Barr is entitled to no severance pay, because he resigned voluntarily; (b) Barr is not entitled to any additional compensation in commissions based on operating income, because, when all relevant expenses (including allocations for centralized services) are taken into consideration, the income from the office was not sufficient to generate commissions greater than the guaranteed payments of $320,000 actually made to Barr; (c) Barr is not entitled to recruitment bonuses both because he did not recruit the personnel claimed in the demand letter, and because the amount to which he would have been entitled if he had recruited them would not have exceeded his guaranteed payments; and (d) DFI is aware of no proper expense vouchers submitted by Barr which have not been paid.

The CBOT was granted leave to intervene as a party defendant by the circuit court, and asserted that the question of arbitrability in unclear cases should be delegated to the arbitrator for determination. The trial court held that a court should interfere only when it is clear that the matter is not arbitrable. The trial court concluded that in unclear cases the matter should be directed to arbitration for the arbitrator to determine his own jurisdiction. Accordingly, the trial court denied the stay of arbitration because it was not clear whether the controversy arose out of exchange business. DFI then filed a notice of interlocutory appeal from the denial of its application for a stay.

As noted above, the appellate court, with one Justice Dissenting, reversed the order of the trial court and remanded with instructions that the trial court hold an evidentiary hearing to determine whether the alleged profits could be directly traced to activities on the Chicago Board of Trade. (151 Ill. App. 3d 597.) The appellate court held that the plain language of section 2(b) of the Uniform Arbitration Act (Ill. Rev. Stat. 1985, ch. 10, par. 102(b)) requires the trial court to make the initial decision of arbitrability as a matter of law. Section 2(b) of the Illinois Uniform Arbitration Act provides:

"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." (Ill. Rev. Stat. 1985, ch. 10, par. 102(b).)

Our act substantially follows the uniform act promulgated by the National Conference on Uniform State Laws, adopted in 1955. Section 2(b) of our act is section 2(b) of that uniform act.

The appellate court noted that the majority view among the appellate court districts in this State is that the trial court should decide whether an agreement to arbitrate exists. (See, e.g., Board of Trustees of Community Colleges District 508 v. Cook County College Teachers Union, Local No. 1600 (1985), 139 Ill. App. 3d 617; Lester Witte & Co. v. Lundy (1981), 98 Ill. App. 3d 1100; but see School District No. 46 v. Del Bianco (1966), 68 Ill. App. 2d 145.) The panel similarly noted that the most recent cases in the collective-bargaining context, as well as the commercial context, require the courts to initially determine the arbitrator's jurisdiction. Finally, the appellate court noted that decisions by the Seventh Circuit Court of Appeals implicitly support the view that the judiciary makes this initial determination. (See, e.g., Gault v. Libbey-Owens-Ford Glass Co. (7th Cir. 1967), 376 F.2d 711.) The court concluded that Rule 600.00 covered business which is exchange related, but did not necessarily have to specifically be concerned with trading on the exchange, and remanded for an evidentiary hearing as indicated above.

The respondent, DFI, asserts that the appellate court's ruling is supported by the plain language of the statute. DFI contends that when there is a substantial dispute as to whether the parties agreed to arbitrate a particular claim, section 2(b) directs that the court "shall" hear the matter and render a decision, either for or against arbitration. (See Ill. Rev. Stat. 1985, ch. 10, par. 102(b); see also Grane v. Grane (1985), 130 Ill. App. 3d 332, 345.) DFI asserts that the use of the word "shall" is mandatory and requires a trial court to determine arbitrability without undue delay or unnecessary procedure. DFI notes that the majority of appellate court decisions considering the issue have held that the trial court should resolve the arbitrability question. See, e.g., J & K Cement Construction Co. v. Montalbano Builders, Inc. (1983), 119 Ill. App. 3d 663; Harrison F. Blades, Inc. v. Jarman Memorial Hospital Building Fund, Inc. (1969), 109 Ill. App. 2d 224.

Additionally, DFI asserts that the purpose of arbitration, efficient and economical resolution of disputes, would be defeated if in a section 2(b) proceeding the trial court initially deferred to the arbitrator on the arbitrability issue. (See, e.g., Board of Trustees of Junior College District No. 508 v. Cook County College Teachers Union, Local 1600 (1980), 87 Ill. App. 3d 246, 252.) According to DFI, deferral of the arbitrability question could lead to the absurd result of three separate determinations. First, the section 2 motion to compel or stay arbitration; second, the arbitrator's determination of the arbitrability issue; and third, the section 12 (Ill. Rev. Stat. 1985, ch. 10, par. 112) motion to vacate the award of the arbitrator. (See also Kalevitch, Arbitrability: The Uniform Arbitration Act in Illinois, 4 Loy. U. Chi. L.J. 23, 33 (1973).) Section 12 of the Act provides grounds for vacating awards of arbitrators. Sections 12(a)(3) and (a)(5) (Ill. Rev. Stat. 1985, ch. 10, pars. 112(a)(3), (a)(5)) will be referred to later in this opinion. Finally, DFI asserts that none of Barr's claims arose out of the "Exchange business" between Barr and DFI but out of the contract of employment and, therefore, a remand for hearing is not necessary.

The CBOT, as petitioner, urges this court to follow the rationale of the Dissenting Justice in the appellate court, who concluded that if a reasonable doubt exists as to whether the matter is arbitrable, the court should defer the issue of arbitrability to the arbitrator initially, because a contrary ruling would render section 12 (regarding circumstances where the court should vacate awards by arbitrators) meaningless. (151 Ill. App. 3d at 606-07 (Jiganti, J., Dissenting); see also Roosevelt University v. Mayfair Construction Co. (1975), 28 Ill. App. 3d 1045.) The petitioner further maintains that the appellate court's reasoning is contrary to the public policy favoring arbitration because the trial court would have to conduct a full-blown trial to determine whether a dispute is arbitrable.

Finally, the CBOT asserts that although pre-existing expertise has never been a prerequisite for arbitrators, the relationship between commodity trading and Barr's compensation formula could cause the expertise of the arbitrator to be crucial. Similarly, the petitioner contends that the CBOT arbitrators are uniquely qualified to make initial determinations of whether the instant claims fall within the scope of "Exchange business." Accordingly, the petitioner asserts, the trial court would benefit because it would have the record from arbitration and, therefore, could dispose of the issue of the arbitrability issue more speedily.

As noted, the Illinois Uniform Arbitration Act, enacted in 1961 (Ill. Rev. Stat. 1985, ch. 10, par. 101 et seq.), is substantially the Uniform Arbitration Act promulgated by the National Conference of Commissioners on Uniform State Laws in 1955. (Flood v. Country Mutual Insurance Co. (1968), 41 Ill. 2d 91, 93.) The Act embodies a legislative policy favoring enforcement of agreements to arbitrate future disputes. (Ill. Rev. Stat. 1985, ch. 10, par. 101; see also Pirsig, Some Comments on Arbitration Legislation and the Uniform Act, 10 Vand. L. Rev. 685, 691 (1957) (hereinafter cited as Comments on the Uniform Act).) Accordingly, it empowers courts, upon application of a party, to compel or stay arbitration, or to stay court action pending arbitration. (Ill. Rev. Stat. 1985, ch. 10, par. 102.) In such a proceeding the court is confronted with the issue of whether there is an agreement to arbitrate the subject matter of a particular dispute. (Lester Witte & Co. v. Lundy (1981), 98 Ill. App. 3d 1100, 1104.) Inseparable from this issue is the question of who decides arbitrability-the court or the arbitrator.

Both the appellate court and DFI have suggested that the majority of decisions in the appellate court in this State have held that the courts must determine, in the first instance, whether a particular controversy is arbitrable under the agreement. The cases relied upon do not lend themselves to such simple categorizing. In some cases, the arbitration agreements were very specific and the courts simply decided there was or was not an agreement to arbitrate the particular question. In other cases, the arbitration agreements were more general in nature, and in still other cases, the arbitration agreements were extremely broad. The broader arbitration agreements have been referred to in the cases and in literature as being "generic" arbitration agreements. In some of the cases involving the broader agreements, the courts simply borrowed language from cases involving more specific issues, in which the courts had asserted the court's authority to declare what was and what was not arbitrable. Therefore, a resolution of the issues before us involves more than a simple headcount of judicial decisions in which the courts have declared whether a particular issue was arbitrable within the arbitration agreement involved. In fact, as ...


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