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Ryan v. Kontrick

March 26, 1999


Appeal from the Circuit Court of Cook County No. 95 CH 04915 Honorable Dorothy Kirie Kinnaird, Judge Presiding.

The opinion of the court was delivered by: Justice Zwick

Petitioner, Robert A. Ryan, M.D., sought confirmation of an arbitrator's award

"in a contract dispute with respondent, Andrew J. Kontrick, M.D. The circuit court confirmed the arbitrator's award in its entirety and ordered that Kontrick pay prejudgment interest on the award. On appeal, respondent Kontrick challenges the rulings of the circuit court, contending (1) the arbitrator exceeded his authority in awarding punitive damages, (2) the arbitrator ignored Illinois law in awarding attorney fees without supporting evidence, and (3) the circuit court erred in awarding prejudgment interest."

The record demonstrates that in 1989, Kontrick joined Ryan as a partner in his plastic and cosmetic surgery practice and became a 50% shareholder in Ryan's service corporation. The business relationship between the parties was defined by a contract which provided that they would arbitrate all disputes arising out of the agreement. Specifically, the arbitration agreement stated as follows:

"All disagreements arising out of this Agreement shall be resolved by the American Arbitration Association in the City of Chicago, Illinois. *** The arbitrator shall assess the costs of such arbitration proceeding (including reasonable attorney's and accountant's fees) against the party at fault. All amounts due pursuant to the arbitration shall bear interest retroactive to their original due date at the floating prime rate of interest charged by the First National Bank of Chicago."

The contract also stated as follows:

"This Agreement shall be subject to and governed by the laws of the State of Illinois."

In October 1992, Ryan challenged certain of Kontrick's actions by initiating an arbitration before the American Arbitration Association. Ryan's claims sounded in contract, tort, and breach of fiduciary duty. The statement of claim brought by Ryan sought punitive as well as compensatory damages and costs and attorney fees. Kontrick counterclaimed for severance pay and other relief.

The arbitrator's award granted Ryan compensatory damages in the amount of $118,426.99, punitive damages of $150,000, and attorney fees and costs totaling $261,153, based upon his finding that Kontrick was "at fault" within the meaning of the arbitration agreement. However, the arbitrator also awarded Kontrick $10,255.84 on his counterclaim for severance pay against Ryan.

Kontrick requested that the arbitrator modify and correct the award, asserting that (1) in the absence of an express agreement of the parties, punitive damages were precluded by Illinois law under Edward Electric Co. v. Automation, Inc., 229 Ill. App. 3d 89, 593 N.E.2d 833 (1992), and (2) the award of attorney fees and costs was improper where it was clear from the face of the award that both parties were "at fault." The arbitrator denied Kontrick's request for modification of the award, finding that punitive damages were authorized under the Commercial Arbitration Rules of the American Arbitration Association, which governed the arbitration.

Ryan thereafter petitioned the circuit court for confirmation of the award and entry of judgment thereon. Kontrick cross-petitioned, seeking vacatur of both the punitive damage award and the grant of attorneys fees. The circuit court confirmed the arbitrator's decision in its entirety, denying Kontrick's petition to vacate, and entered judgment for post-award interest. Kontrick appeals.

We initially consider Kontrick's argument that the award of punitive damages must be vacated because the arbitrator exceeded the scope of his authority under the arbitration agreement.

Ryan asserts that this issue has been waived because Kontrick did not object when the issue of punitive damages was originally raised before the arbitrator. We find the issue was not waived. The record establishes that after entry of the award, Kontrick moved to modify the award, specifically asserting that the arbitrator lacked authority to grant punitive damages under the parties' agreement. The arbitrator denied the motion on the merits, ruling that the award of punitive damages was proper based upon Kontrick's conduct and was authorized by Commercial Arbitration Rule 43 of the American Arbitration Association, which empowers the arbitrator to "grant any remedy or relief that [he] deems just and equitable and within the scope of the agreement of the parties." Significantly, the arbitrator did not find that Kontrick's objection had been waived by his acquiescence in litigating the issue. We will not find waiver where the objection was raised during the arbitration proceedings and where the arbitrator considered and denied the objection on the merits. We must, therefore, consider Kontrick's argument that the grant of punitive damages exceeded the scope of the arbitrator's authority.

The issue of whether the arbitrator had the authority to award punitive damages in this case is a question of arbitrability. In Illinois, when the language of an arbitration clause is broad, and it is unclear whether the subject matter of the dispute falls within the scope of the arbitration agreement, "the question of substantive arbitrability should initially be decided by the arbitrator." Donaldson, Lufkin, & Jenrette Futures, Inc. v. Barr, 124 Ill. 2d 435, 447-48, 530 N.E.2d 439 (1988); Caudle v. Sears, Roebuck & Co., 245 Ill. App. 3d 959, 963, 614 N.E.2d 1312 (1993). However, the arbitrator's determination is subject to judicial review under the Uniform ...

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