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The Seventh Circuit Court of Appeals held that a disappointed party at arbitration could not challenge the authority of the arbitrator to decide a claim where the party failed to object to the arbitrator's jurisdiction during the arbitration proceedings.
In Environmental Barrier Co., LLC v. Slurry Systems, Inc., No. 06-3910, 2008 WL 3982997 (7th Cir. Aug. 29, 2008), Slurry Systems (SSI) subcontracted certain jobs to Geo-Con. The parties' subcontract contained an arbitration agreement. After the subcontract was concluded but before their accounts were settled, Geo-Con declared bankruptcy. Geo-Con's assets were purchased by and assigned to Environmental Barrier Company (EBC).
After EBC and SSI were unable to resolve their dispute regarding the payments due under the subcontract, EBC filed a demand for arbitration. SSI answered the demand, disputing the amount of the payments due and alleging that EBC lacked standing to enforce the arbitration agreement. SSI argued that it did not agree to the subcontract's assignment. At no time did SSI allege that the arbitrator lacked the authority to hear the dispute.
Discovery was conducted, and a two-day arbitration hearing was held. According to the hearing transcript, the only issues before the arbitrator were the amounts owed to each party, although the arbitrator did recognize and dispose of SSI's standing challenge. The arbitrator issued an award in favor of EBC. EBC moved to confirm the award. In opposing confirmation, SSI maintained that the arbitrator lacked the authority to compel SSI to arbitrate the claim. The district court confirmed the award.
The Court characterized SSI's standing argument as whether EBC was "a proper party to raise a particular claim in the arbitration," and observed that "courts have not hesitated to hold that standing is a matter for the arbitrator to resolve," because it is essentially a procedural issue. See, e.g., Chi. Typographical Union No. 16 v. Chi. Sun-Times, Inc., 860 F.2d 1420, 1424 (7th Cir. 1988) (holding the standing issue arbitrable when "the subject matter of the dispute is within the arbitration clause"). Because the subject matter of the dispute – the amount of payments due – was clearly within the scope of the agreement, the Court held that the arbitrator properly resolved the standing issue.
While the Court acknowledged that the existence of the arbitration agreement was a "harder question," it found that SSI had waived this ground for challenge by not raising the issue during arbitration and before the award was ultimately entered. "Not until [SSI] reached the district court," said the Court, "did it recast its prior argument about standing as a challenge to arbitrability." The Court found this tactic "terribly wasteful of the arbitrator's time, the parties' time, and the court's time."
According to the Court, SSI's reservation of this argument until an adverse award was issued was "keeping the arbitrability card close to the chest [and] would allow a party like SSI to take a wait-and-see approach," only springing the argument at confirmation proceedings if it was unhappy with the arbitration award.
Accordingly, the Court affirmed the award's confirmation, holding that the arbitrator properly decided whether the payment claim was arbitrable and that SSI had waived its right to object to the arbitrator's authority by not raising the issue at arbitration.
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