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Illinois Appellate Court Invalidates Arbitration Provision in Owner-Contractor Construction Contract

Posted: June 30, 2022

Case: Bain v. Airoom, LLC, 2022 IL App (1st) 211001

A recent Illinois appellate decision warns that overbroad form arbitration agreements in construction contracts may be unenforceable.

In Bain v. Airoom, LLC, 2022 IL App (1st) 211001, the First District Appellate Court unanimously reversed a lower court decision by finding a contractor’s form arbitration agreement unenforceable.

A homeowner sued Airoom, LLC (“Airoom”), a home remodeling company, for allegedly overcharging the homeowner for delayed and incomplete home renovation work. Plaintiff’s claims included, inter alia, breach of contract and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act).

The primary dispute quickly shifted to the arbitration agreement stated in the parties’ original contract. The agreement included the following terms:

  • An “Awards Provision” prohibiting awards of punitive damages or attorney’s fees and costs to the prevailing party;
  • A “Confidentiality Provision” requiring strict secrecy regarding the arbitration proceedings, unless both parties consented otherwise; and
  • A “Rules Provision” requiring all arbitration proceedings to be governed by the Construction Industry Arbitration Rules of the American Arbitration Association (“AAA”).

The Appellate Court held the entire arbitration agreement was unenforceable on the grounds that in the context of this contract each of the above provisions was substantively unconscionable.

The Awards Provision violated the Consumer Fraud Act by prohibiting awards of punitive damages and attorney’s fees. The Confidentiality Provision gave Airoom an unfair advantage to collect knowledge from its past arbitrations while withholding such data from future plaintiffs. The Rules Provision should have incorporated a less expensive set of arbitration rules that is tailored to home renovation disputes: the AAA’s Home Construction Arbitration Rules and Mediation Procedures.

This outcome is consistent with Illinois case law, which states a plaintiff must establish either procedural or substantive unconscionability (not both) to deem an arbitration agreement unenforceable.

Bain sends a clear message to contractors that arbitration agreements should state reasonably fair terms tailored to the particular contract. Arbitration agreements that overreach and contain even a few inequitable terms—like one-sided confidentiality clauses or bars on damages—may be found unenforceable. Although the contract in this case was with a consumer, the Appellate Court’s analysis is not limited to consumer transactions. In other words, overreaching in any arbitration agreement may force a contractor to forfeit the agreement entirely. In light of Bain, contractors should review their form arbitration agreements for overbroad terms and tailor them to remain effective.

With contributions by Megan Warshawsky.