Plaintiffs are residents of Park Ridge, Illinois, and defendants are residents of Michigan. On April 30, 1996, plaintiffs purchased a residence (108 South Merrill Street, Park Ridge) from defendants for the sum of $ 313, 750. Prior to closing, defendants had executed and delivered to plaintiffs a Residential Real Property Disclosure Report ("Disclosure Report") as required by the Disclosure Act. In that report, defendants indicated, inter alia, that they were not aware of any "flooding or recurring leakage problems in the crawlspace or basement" or of any "material defects in the basement or foundation," and that to their knowledge the property was not "located in a flood plain." On May 9, 1996, nine days after plaintiffs occupied the residence, the basement flooded from rainfall; subsequently, rainfall water "leaked, flooded, seeped and otherwise flowed into the basement" on a number of occasions, resulting (on some occasions) in standing water covering the foundation of the garage and driveway. As a consequence, plaintiffs were forced to make expenditures to prevent recurring flooding and to repair damage.
Plaintiffs allege that in the Disclosure Report, defendants "falsely and fraudulently" represented that the property did not leak or flood, thereby violating the Disclosure Act by, (1) failing to disclose a material defect, see 765 Ill. Comp. Stat. 77/25(b), and (2) knowingly disclosing false information in a Residential Real Property Disclosure Report, see 765 Ill. Comp. Stat. 77/55. Plaintiffs further allege that they relied on defendants' "false and untrue statements" in entering into the purchase contract, and suffered injury as a result.
Defendants have moved to stay this proceeding pursuant to a mediation provision in the contract between the parties, and pursuant to Section 3 of the FAA. Under that mediation clause, the parties agreed that "any and all disputes or claims . . . arising out of or relating to" the contract would be submitted to mediation. Plaintiffs argue that their complaint is based on the Disclosure Report and its alleged violation of the Disclosure Act, and that as such it arises from Illinois statutory law and not from the contract. Therefore, plaintiffs argue that the complaint is not within the scope of the mediation provision. Defendants argue that the complaint does arise from the contract and that it does fall within the scope of the mediation clause.
Before addressing the contentions of the parties, the court must first determine whether the FAA is applicable to this dispute. Section 2 of the FAA makes enforceable "only those arbitration agreements 'in any maritime transaction or a contract evidencing a transaction involving commerce.'" Snyder v. Smith, 736 F.2d 409, 417 (7th Cir. 1984) (quoting 9 U.S.C. § 2); see also United States Fidelity & Guar. Co. v. Bangor Area Joint Sch. Auth., 355 F. Supp. 913, 916 (E.D. Pa. 1973). Because there is no maritime transaction here, the court must decide whether the contract evidences a transaction involving commerce for purposes of the FAA. Because of the liberal federal policy favoring arbitration agreements, the requirement of "evidencing a transaction involving commerce" is to be construed very broadly. See Snyder, 736 F.2d at 417-18. For example, the Supreme Court has refused to limit the applicability of the FAA to contracts for the interstate shipment of goods. Id. (citing Prima Paint Corp. v. Flood & Conklin Mfg., 388 U.S. 395, 401 n.7, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967)). Further, it has been stated that "the slightest nexus of an agreement with interstate commerce will bring the agreement within the FAA." A.J. Taft Coal Co. v. Randolph, 602 So. 2d 395, 397 (Ala. 1992). Nevertheless, not every agreement evidences a transaction involving commerce.
In Mathews v. Fluor Corp., 312 S.C. 404, 440 S.E.2d 880, 881 (S.C. 1994), the purchasers of real estate alleged that the sellers had fraudulently misrepresented the condition of the property. The sellers moved to stay the proceedings and compel arbitration pursuant to the FAA. The property at issue was in South Carolina, the seller was a California entity and the buyer was a Pennsylvania partnership. In addition, transactions incident to the sale took place in jurisdictions outside South Carolina. Nevertheless, the Supreme Court of South Carolina held that the contract "did not involve interstate commerce as defined in the Federal Arbitration Act," and that it was therefore outside the scope of the FAA. 440 S.E.2d at 881-82. Mathews is similar to the instant case, but in Mathews there was arguably more justification for finding a transaction involving commerce. There, although the property itself was in South Carolina, both the purchaser and seller were in other, different states. In addition, transactions incident to the sale took place in jurisdictions outside South Carolina. In the instant case, only the seller is outside Illinois, and there is no evidence that transactions incident to the sale took place outside Illinois.
If there was no interstate commerce in Mathews, there certainly is none in the instant case. The court concludes that the contract for sale of real estate in the instant case does not evidence a transaction involving interstate commerce. The FAA therefore is inapplicable.
That does not end the inquiry, however. In such situations, courts have held that "a contract or agreement not predicated upon interstate commerce must be governed by state arbitration law." Shearson Hayden Stone, Inc. v. Liang, 493 F. Supp. 104, 106 (N.D. Ill. 1980); see also Howard Fields & Associates v. Grand Wailea Co., 848 F. Supp. 890, 893 (D. Haw. 1993). Because the contract was executed in Illinois, and plaintiff and the property are located in Illinois, the laws of that state would apply. See Dollar Properties, Inc. v. Myers Fin. Group, Inc., 719 F. Supp. 734, 735-36 (N.D. Ill. 1989). In Illinois, contractual arbitration provisions are construed in light of the Illinois Uniform Arbitration Act, 710 Ill. Comp. Stat. 5/1-23, which to a certain extent tracks the language of the FAA.
See J&K Cement Constr., Inc. v. Montalbano Builders, Inc., 119 Ill. App. 3d 663, 667, 75 Ill. Dec. 68, 456 N.E.2d 889 (2nd Dist. 1983). Section 5/1 of the IUAA provides in pertinent part:
A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable save upon such grounds as exist for the revocation of any contract . . . .