At issue in Overland Bond & Inv. Corp. v. Calhoun, 2023 IL App (1st) 221804 (Nov. 27, 2023) was whether a lender can invoke an arbitration provision in a loan agreement after commencing legal proceedings arising from the borrowers’ default under that agreement. The First District Appellate Court held that based on the language of the arbitration provision which allowed the lender to chose to litigate or arbitrate disputes, its election to sue meant it could not invoke the arbitration provision for counterclaims. Had it been drafted differently, the lender could have compelled arbitration of the counterclaims.
The case involved a borrowers’ default under an automobile sale and a separate retail installment contract for the purchase of automobiles. Both contracts contained an identical arbitration provision. Section 2 of the provision set forth that “[a]ny and all arbitrable claims and counterclaims, except as provided below in Section 3 of this Arbitration Provision, relating to any aspect of this Contract *** shall be resolved by final and binding arbitration.” Section 3, an exclusion provision, preserved to the lender the right to choose “between arbitration and other legal or equitable proceedings (such as an action commenced in a court of law) for the resolution of their disputes arising out of this Contract and buyer’s default thereunder, including collection of any amounts due thereunder.”
The lender filed legal proceedings against its borrowers seeking judgment for the unpaid balances under the contracts. They also asserted counterclaims on their behalf and on behalf of a class contending that the lender had unlawfully constructively repossessed their vehicles. The lender moved to compel arbitration of the counterclaims and class claims under the arbitration provision. The borrowers responded that by choosing to sue them in court, the lender “expressly waived” any right to resolve the counterclaims through arbitration. The trial court agreed and denied the lenders’ motion to compel arbitration.
The appellate court affirmed. It determined that the arbitration provision uses broad language to mandate arbitration of “any and all” claims and counterclaims “relating to any aspect of” the contracts, except as provided in Section 3. In other words, any “claims and counterclaims” relating to the contracts will be subject to arbitration, unless such claims or counterclaim fall within the scope of Section 3. “Notably, whereas section 2 explicitly refers to ‘claims and counterclaims,’ section 3 refers to ‘disputes.’” Thus, under the arbitration provision, the lender had the choice to select litigation or arbitration for any given “dispute” with defendants. Thus, when it sued defendants, the lender invoked its contractual right to litigate its “disputes”, which encompassed both its affirmative claims and the counterclaims.
The Court rejected the lender’s reading that under Section 2, all counterclaims were subject to arbitration regardless of any choice the lender made under Section 3. Lender asserted that there was nothing in the arbitration provision to suggest that, once it chose to sue defendants in court, it was bound to litigate “the entire dispute between the parties.” The Court found that argument implicitly assumed that Section 3 that the lender’s right to choose arbitration for resolution of “their disputes” arising out of a car buyer’s default applied only to affirmative claims for non-payment. But the contract did not define “dispute” and the Court found that the lender’s reading improperly implied an intent to apply a narrower meaning of “dispute” than is commonly understood. “Dispute” ordinarily encompasses the entire controversy, including the claims of all parties.
Importantly, the Court noted that Section 3 could have been drafted more carefully to explicitly state that the lender’s option to litigate applied only to its affirmative claims for relief arising from non-payment, but that its choice to litigate would not extend to any counterclaims asserted in response. It noted that Section 2 specifically referred to both “claims and counterclaims” but the contract did not delineate in Section 3 whether both “claims” and “counterclaims” are included in a “dispute.” Had the contract been drafted this way, the lender would have had a much stronger argument that its election to litigate its affirmative claims for nonpayment had no effect on the arbitrability of the counterclaims.
Thus, having invoked its contractual right to select litigation for the entire dispute at issue, the lender could not change course once the counterclaims were filed.
Author
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Jim is a founding partner of Noonan & Lieberman. Jim has more than 25 years of experience in civil litigation on behalf of creditors, servicers, business and real estate owners.
