Signing Agreement

In All Fairness: Illinois Appellate Court Finds That Arbitration Clause in a Residential Construction Contract Was Unconscionable and Unenforceable

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In Bain v. Airoom, LLC, No. 1-21-001, 2022 Ill. App. LEXIS 241, the Appellate Court of Illinois (Appellate Court) considered whether the lower court erred in enforcing an arbitration clause in a construction contract between the parties and, as a result, dismissing the plaintiff’s lawsuit. The Appellate Court found that even if the arbitration clause was enforceable, the appropriate action would have been for the court to stay the lawsuit, as opposed to dismissing the case entirely. The Appellate Court then considered the language of the arbitration clause and found that several provisions were substantively unconscionable, which rendered the entire arbitration clause unenforceable. The Appellate Court reversed the lower court’s decision compelling arbitration and reinstated the plaintiff’s complaint.

In 2018, the plaintiff, Ms. Bain, a disabled senior citizen, hired the defendant, Airoom, LLC (Airoom), to renovate her home. Airoom provided its “Cash Sales Contract,” which included a binding arbitration clause. The clause required that any dispute arising or relating to the contract be resolved by binding arbitration through the American Arbitration Association (AAA), using the Construction Industry Arbitration Rules and Mediation Procedures (Construction Industry Rules).

Ms. Bain eventually filed a lawsuit against Airoom, alleging that Airoom grossly overcharged her and failed to perform the renovation work properly and in a timely manner. Ms. Bain’s complaint alleged breach of contract, breach of the impliedly warranty of reasonable workmanship and materials, and violations of Illinois’ Consumer Fraud and Deceptive Business Practices Act. Ms. Bain alleged damages in excess of $180,000, and also sought punitive damages and attorney’s fees.

Airoom filed a motion to compel arbitration, arguing that the contract mandated binding arbitration through AAA. Ms. Bain opposed the motion on the grounds that the agreement was procedurally unconscionable because she had substantially less bargaining power than Airoom and was not given a reasonable opportunity to understand the agreement before signing it. She also claimed that Airloom’s representative bombarded her with several documents, including schedules and specifications, and required her to sign 48 pages, which overwhelmed her. Further, she claimed that the Airoom representative did not explain the arbitration agreement to her and did not mention that signing the contract would waive her right to a jury trial. In addition, Ms. Bain argued that the arbitration clause was substantively unconscionable because solely Airoom chose the forum and the arbitration provision precluded punitive damages, provided costs for the prevailing party, precluded an award for attorney’s fees, prohibited the arbitrator from reaching any finding contrary to the express terms of the contract, and contained a strict confidentiality clause. Ms. Bain also argued that the requirement to arbitrate with AAA using the Construction Industry Rules would be too costly for her to afford to seek arbitration. She estimated that it would cost her over $13,000 just for the opportunity to have her case heard.

Airoom argued that its arbitration agreement was a standard arbitration agreement found in contracts signed every day and that the clause complied with Illinois’ Home Repair and Remodeling Act. Airoom also argued that if the court found any portion of the agreement improper, that portion could be severed but the agreement itself would remain enforceable.

The lower court agreed with Ms. Bain that the provision waiving punitive damages was unenforceable under Illinois law. However, the court found the rest of the arbitration clause to be enforceable. The court found that under Illinois law, the plaintiff was required to show that the arbitration clause was both procedurally and substantively unconscionable and that Ms. Bain failed to do so. The lower court concluded that the arbitration clause was not procedurally unconscionable because the terms were clearly expressed, and Ms. Bain had the opportunity to object to the terms. The court was not persuaded by Ms. Bain’s claim that she lacked bargaining power or meaningful choice on whether to agree to the clause. The lower court granted the motion to compel arbitration. The court also dismissed the complaint entirely on grounds that all of Ms. Bain’s claims arose out of the contract. Ms. Bain filed an appeal with the Appellate Court.

The Appellate Court found that the lower court erred in requiring the plaintiff to show that the clause was both procedurally and substantively unconscionable. The Appellate Court explained that such approach was outdated and that the new standard was that the plaintiff need only show that the arbitration clause was either procedurally or substantively unconscionable, but not necessarily both. The court noted, however, that the procedural aspect of how a contract was entered can also be considered when determining if the contract is substantively unconscionable.

The Appellate Court focused primarily on the substantive provisions of the arbitration clause, finding several provisions to be unconscionable. In addition to the provision prohibiting punitive damages, the court found that the prohibition on attorney’s fees was improper because the Consumer Fraud Act allows for an award of attorney’s fees. Further, the court found the confidentiality provision to be unfair because while it applies to both parties, such a provision would put Airoom in an advantageous position since they would have knowledge and information from past proceedings that the individual homeowner would lack.

The Appellate Court also took issue with the provision requiring that the arbitration be conducted by the AAA under the Construction Industry Rules. The court found that those rules and procedures appeared to be designed for complex construction disputes and were quite costly to navigate. Also, the details of these rules were not disclosed in the contract, and the mere inclusion of AAA’s main website was insufficient. The court also noted that the fees and rates for AAA using the Construction Industry Rules are excessive for homeowners, particularly in light of the fact that the AAA has a different, cheaper set of rules, the Home Construction Arbitration Rules and Mediation Procedures (Home Construction Rules), designed to make the resolution of home remodeling disputes streamlined and affordable. The existence of the Home Construction Rules was not disclosed in Airoom’s contract.

The Appellate Court acknowledged that the contract included a severability clause, and that Illinois law allows a court to modify a contract so that it comports with the law, but ultimately found that there are too many unconscionable provisions in the arbitration clause to modify the clause. Thus, the Appellate Court found the entire clause to be unenforceable. The Appellate Court reversed the lower court’s decision and reinstated the insured’s lawsuit.

The Airoom case reminds us that Illinois provides protections against unconscionable arbitration provisions. If an arbitration agreement appears designed to make a claim expensive to bring, to bar full recovery and to prevent the public from learning of adverse findings against the drafter, then there is an argument that the arbitration clause is not enforceable. Subrogation professionals practicing in Illinois should consider this decision when reviewing arbitration clauses as there may be legitimate challenges to a seemingly unfair arbitration clause.

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