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March 2011 • Volume 99 • Number 3 • Page 144

Real Estate Law / Arbitration


Why Commercial Landlords Should Stop Worrying and Learn to Love Arbitration
By Shorge Sato

The Illinois Supreme Court's Carter decision holds that arbitration provisions could trump the statutory right to a jury trial
contained in the Forcible Entry and Detainer Act, this author argues. Skeptical landlords thus have even more reason to
consider the advantages of arbitration.

Perhaps too rare in the commercial leasing context, arbitration poses some undeniably attractive potential benefits for
commercial landlords. Commercial leases can be incredibly complex, in their use of formulas to calculate percentage rent
or square footage, the multiplicity of covenants, obligations and terms, their duration, their highly structured forms.

Commercial leases, it is fair to say, are completely different animals from your standard residential lease. Arbitration, at
least in theory, promises a more private, professional, and expeditious means of dispute resolution.

In practice, however, agreements to arbitrate are sometimes licenses to litigate the scope and enforceability of an
arbitration provision or arbitral award. Landlords are justifiably apprehensive about having to make their case twice - once
before an arbitrator and a second time before a judge.

One overarching question that commercial landlords may have is whether such an arbitrator even has the power to award
what the landlord really wants should a tenancy fall into default - an order of possession that the landlord can enforce. The
Forcible Entry and Detainer Act ("Forcible Act")1 provides that all tenants - even commercial tenants - have a right to a jury
trial.2 Lease provisions that purport to waive this right to a jury trial are unenforceable.3 An argument might be made that

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mandatory arbitration is unenforceable in the landlord-tenant context because of the statutory right to a jury trial under the
Forcible Act.

A recent Illinois Supreme Court case, however, should wipe that argument away. The high court upheld an order
compelling arbitration, notwithstanding a statutory provision mandating jury trial, as a matter of federal right. This decision
potentially clears the path for more widescale use of mandatory arbitration in the commercial leasing context in Illinois.

The impact of Carter

In Carter v SSC Odin Operating Co, LLC,4 the Illinois Supreme Court held that, as a matter of federal law, an arbitration
provision can "trump" (via the Supremacy Clause and the federal preemption doctrine) a right to a jury trial established by
state law. (For an extended discussion of Carter, see last month's issue of the IBJ.)5

In Carter, which involved alleged violations of the Illinois Nursing Home Care Act,6 the Illinois Supreme Court considered
whether a mandatory arbitration provision in the nursing home contract signed by the plaintiff upon her entry into the facility
was enforceable in light of section 3-607 of the Illinois Nursing Home Care Act. The Act provides that "[a]ny party to an
action brought under Sections 3-601 through 3-607 shall be entitled to a trial by jury and any waiver of the right to a trial by
a jury, whether oral or in writing, prior to the commencement of an action, shall be null and void, and without legal force or
effect."7

The Illinois Supreme Court held in Carter that the public policy in favor of a jury trial set forth in the Illinois Nursing Home
Act could not operate to void the arbitration agreement because the Federal Arbitration Act8 effectively preempted state
"anti-arbitration" laws. Citing to United States Supreme Court decisions Preston v Ferrer9 and Southland Corp v Keating,10
where state statutes requiring resolution of certain disputes in administrative or judicial forums were struck down, the Illinois
Supreme Court held that section 3-607 of the Illinois Nursing Home Care Act was "merely pro-judicial forum legislation that
is the 'functional equivalent' of antiarbitration legislation, which is preempted by the FAA and the holding in Southland."11

Obviously, the factual context of Carter is different than the commercial leasing context. However, there is "a national policy
favoring arbitration" that withdraws the power of states to "require a judicial forum for the resolution of claims that the
contracting parties agreed to resolve by arbitration."12

Also, section 3-607 of the Illinois Nursing Home Act is remarkably similar to section 9-108 of the Forcible Act, and thus a
clear analogy can be drawn. Because of the Federal Arbitration Act, where there is an enforceable agreement to arbitrate
and the lease affects interstate commerce, there is (or should be) no right to a jury trial in the commercial leasing context.

To be clear, the recently issued Carter decision has not yet been directly extended to eviction actions under the Forcible
Act, and there is an "historical reluctance of courts to enforce agreements to arbitrate."13 In other words, judges in municipal
landlord-tenant courts may be initially reluctant to confirm an award of possession granted by an arbitrator - especially
when it appears that the arbitrator did not insist upon strict compliance with all statutory procedures and safeguards.

However, Illinois courts should not be hostile to the use of arbitration in the commercial leasing context, at least in a limited
context of resolving factual disputes between landlord and tenant. As stated by the Illinois Supreme Court in 1979, "[t]his
court has long approved lease agreements to submit questions of valuation to appraisement or arbitration and has refused
to interfere with the arbitrator's valuation absent fraud or mistake…."14 The sole question is whether Illinois courts will go
beyond "question of valuation" and allow an entire Forcible Entry and Detainer proceeding - all the way to an order of
possession - to be submitted to an arbitrator.

Arbitration in the real-estate setting: concerns and considerations

Public policy. For some, there is something slightly offputting about submitting questions of title or possession to a private
arbitral forum. This intuitive feeling reflects what other courts have noted is the "uniquely judicial" role to be played in
determinations of issues of title and possession.15

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An argument could be made that the resolution of disputes as to title to real estate - true in rem actions - require a type of
public, judicial forum that calls the entire world to account for any superior or adverse claims against a given res. Doing so
accords due process and confers an aura of legitimacy absent from a bilateral, private arbitral proceeding.16

This public policy concern does not immediately justify a judicial resolution of a lease dispute between a landlord and
tenant. Certainly, some property owners bring unlawful detainer actions against "unknown occupants" in situations where
the identity of the tenant has changed or is unknown, and such actions more closely resemble the type of in rem
proceeding that could be said to be "uniquely judicial" in nature.

The vast majority of commercial leasing relationships, however, do not involve unknown occupants or trespassers, but
rather two sophisticated contractual counterparties. In a leasehold situation, there is no question of title, only the right to
possession, which is for the most part a question of contract.

Judicial resolution: the devil we know. There is also a commonly held pragmatic concern that some landlords have
about arbitration: the judicial process, for all its flaws, is the devil we know. It is governed by state law, not federal, and for
the most part the legal issues are narrow and readily administrable. Take, for example, the view of one practitioner from the
State of California:

Arbitration is also of questionable value in connection with a landlord's efforts to recoup possession of its property after
unlawful detainer. It is likely to take longer than an unlawful detainer proceeding and to be more expensive….
[T]here can be delay…in forcing the other party to arbitration, in choosing an arbitrator, in disputes over the right to
discovery, in disputes over the right to summary judgment, and in the scheduling of an arbitration hearing, particularly one
with more than one arbitrator. As a result of the tenant's actions, the dispute would unquestionably be more costly than
litigation.17

To be fair to this practitioner, the eviction procedure in California is completely different from that in Illinois: in California,
tenants are required to answer within five days of the complaint and landlords are guaranteed a trial within 20 days after a
request to set the trial date.18 Thus, by comparison, arbitration may make less sense for landlords in California.

Proving the case twice? Still, the sentiment is not far from that held, perhaps with less conviction, by Illinois practitioners.
One concern is the fear that arbitration requires a landlord to prove its case twice: once before the arbitrator, and a second
time to justify the award to the trial court (to confirm the award and/or to oppose a motion to vacate the award).

Under the Federal Arbitration Act, Congress attempted to alleviate this concern by creating only limited judicial review of
arbitral awards pursuant to enumerated statutory grounds:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there is evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in
refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any
party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award
upon the subject matter submitted was not made.19

Courts have attempted to put a "judicial gloss" on these limited, enumerated grounds for judicial review of arbitral awards.20
For example, some decisions describe a "public policy" exception that allows a court to refuse to confirm an award entered
in violation of well-defined public policy.21 Other courts have refused to confirm an arbitral award where the arbitrator's
decision "manifestly disregarded the law"22 or where an arbitrator's decision was "arbitrary and capricious."23

These attempts to create judicial exceptions to the statutorily enumerated grounds for judicial review of arbitral awards
under the FAA appear to have been foreclosed by the United States Supreme Court in its 2008 decision, Hall Street

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Associates, LLC v Mattel, Inc,24 a case actually involving a dispute between a landlord and a tenant (but not an arbitration
provision in the lease).

In Hall, the parties agreed to submit a dispute over the tenant's duty to indemnify the landlord for environmental
contamination to binding arbitration, subject to a proviso of judicial review of pure questions of law.25 The Supreme Court
held that parties to an arbitration agreement could not contract for expanded judicial review beyond the FAA's specific and
limited enumerated grounds.26

The Court reasoned that the enumerated grounds were "exclusive" and even if the Court were to presume that those
grounds could be contractually supplemented, "it would stretch basic interpretive principles to expand their uniformly narrow
stated grounds to the point of legal review generally."27 The Supreme Court held that a strictly limited judicial review of
arbitral awards is necessary to prevent "the full-bore legal and evidentiary appeals that can 'rende[r] informal arbitration
merely a prelude to a more cumbersome and time-consuming judicial review process.'"28

The seventh circuit has noted as follows:

It is tempting to think that courts are engaged in judicial review of arbitration awards under the Federal Arbitration Act, but
they are not. When parties agree to arbitrate their disputes they opt out of the court system, and when one of them
challenges the resulting arbitration award he perforce does so not on the ground that the arbitrators made a mistake but
that they violated the agreement to arbitrate, as by corruption, evident partiality, exceeding their powers, etc. - conduct to
which the parties did not consent when they included an arbitration clause in their contract. That is why in the typical
arbitration…the issue for the court is not whether the contract interpretation is incorrect or even wacky, but whether the
arbitrators had failed to interpret the contract at all....for only then were they exceeding the authority granted to them by the
contract's arbitration clause. (Cites omitted).29

That said, the Supreme Court has not officially put the nail in the coffin of judicial review of "manifest" legal errors
committed by arbitrators. In an April 27, 2010, decision, the Court expressly declined to resolve whether "manifest disregard
for the law" survived Hall as either an independent ground for review or a "judicial gloss" on the enumerated, statutory
grounds for review.30

A whole new ballgame?

This is the long way of saying that the deeply held fear that many have about arbitration serving as simply a warm-up act to
a prolonged court battle may soon be outdated in light of rapidly evolving federal and state law with regard to arbitration.
Courts are increasingly viewing arbitration as a whole new ballgame, and are as reluctant to review the merits of an arbitral
award as they would be if asked to review an umpire's calls of balls-and-strikes at Wrigley Field.

Perhaps it's time for commercial landlords to stop worrying and start to learn to love arbitration.

Shorge Sato <ssato@bupdlaw.com> is an attorney and construction and real estate litigator in the Chicago office of Brown,
Udell, Pomerantz & Delrahim, Ltd. The opinions expressed in this article are his alone.

1. 735 ILCS 5/9-101 et seq.

2. Twin-City Inn, Inc v Hahne Enterprises, Inc, 37 Ill 2d 133, 137, 225 NE2d 630, 633 (1968) (holding that even commercial
tenants have the right to a jury trial under the Forcible Act).

3. 735 ILCS 5/9-108 ("[E]ither party may demand trial by jury, notwithstanding any waiver of jury trial contained in any lease
or contract.").

4. Carter, 237 Ill 2d 30, 927 NE2d 1207 (2010).

5. W. Eugene Basanta and Suzanne J. Schmitz, Carter: a Victory for Consumer Arbitration in Illinois, 99 Ill Bar J 88
(February 2011).

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6. 210 ILCS 45/2-107.

7. 210 ILCS 45/3-607.

8. 9 USC § 1 et seq.

9. Preston, 552 US 346 (2008).

10. Southland, 465 US 1 (1984).

11. Carter, 2010 WL 1493626 at *9.

12. Southland, 465 US at 2.

13. Carter at 41, 927 NE2d at 1215.

14. Bailey v Timpone, 75 Ill 2d 539, 545, 389 NE2d 1193, 1196 (1979).

15. See Delta Funding Corp v Harris, 189 NJ 28, 47, 912 A2d 104, 115 (2006) ("[T]he foreclosure of mortgages is a
uniquely judicial process."). Compare BFP v Resolution Trust Corp, 511 US 531, 544 (1994) (describing the "security of the
titles to real estate" as an "essential state interest" that cuts to "the very nature of [state] government.").

16. See United Steelworkers of America v Warrior & Gulf Navigation Co, 363 US 574, 581 (1960) (noting that an arbitrator
is "not a public tribunal" and has "no general charter to administer justice for a community which transcends the parties" to
the arbitration agreement.).

17. Randall Block, Arbitration in Real Property Transactions: Efficient, Cost Effective, Fair or None of the Above? Sedwick,
Detert, Moran & Arnold LLP Real Estate Newsletter (Winter 2009), available at http://www.sdma.com/03-17-20091.

18. Id.

19. 9 USC § 10(a)(1)-(4).

20. See Stolt-Nielsen SA v AnimalFeeds Intl Corp, 548 F3d 85, 94-95 (2d Cir 2008) (construing the "manifest disregard" for
the law standard as "a judicial gloss on the specific grounds for vacatur enumerated in Section 10 of the FAA"), revd on
other grounds, 130 S Ct 1758 (2010) ("We do not decide whether 'manifest disregard' survives...as an independent ground
for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 USC § 10.") Id, 130 S Ct at 1768, FN3.

21. United Paperworkers Intl Union, AFL-CIO v Misco, Inc, 484 US 29, 43 (1987). (Court may decline to confirm an arbitral
award where enforcement "would violate 'some explicit public policy' that is 'well-defined and dominant,' and is to be
ascertained 'by reference to the laws and legal precedents and not from general considerations of supposed public
interests.'"). Id at 43, quoting Muschany v United States, 324 US 49, 66 (1945).

22. See, for example, Intl Telepassport Corp v USFI, Inc, 89 F3d 82 (2d Cir 1996) (vacatur allowed for error of law that was
obvious to any average arbitrator).

23. See, for example, Montes v Shearson Lehman Bros, Inc, 128 F3d 1456, 1458 (11th Cir 1997).

24. Hall, 552 US 576, 585 (2008).

25. Id at 579-580.

26. Id at 586.

27. Id at 577.

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28. Id at 588, quoting Kyocera Corp v Prudential-Bache Trade Services, Inc, 341 F3d 987, 998 (9th Cir 2003).

29. Wise v Wachovia Securities, LLC, 450 F3d 265, 269 (7th Cir 2006).

30. Stolt-Nielsen, 130 S Ct 1758, 1768 FN3 ("We do not decide whether 'manifest disregard' survives...as an independent
ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 USC § 10.").

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