Arbitration
Illinois Legislature may Restrict Arbitration as Option for Resolving Condo Association-Developer Disputes
Shawn M. Doorhy
May 5, 2014
Commonly used, cost-effective measures for resolving disputes between Illinois condominium developers and association boards may soon be declared void as against public policy. Two bills with similar language currently under consideration by the Illinois legislature will make significant changes to the Illinois Condominium Property Act ("the Act") with costly implications for developers and other construction professionals.
Proposed Changes to the Act
The Act requires a developer to record a declaration of condominium covenants and form a condominium association controlled by a board of elected unit owners. The declaration is like a constitution for the association, containing restrictions through which the developer defines the characteristics of the community. Within these declarations developers commonly include provisions requiring the board to obtain a specified number of unit owner votes before pursuing costly legal claims against the developer, and provisions mandating that such claims can only be resolved through mediation, then arbitration, not in a court of law. Both Senate Bill 2892 and House Bill 4783 would add language to the Act nullifying these types of provisions. Presently, neither bill contains any limitation preserving these provisions if they already exist in recorded condo declarations, meaning that the proposed legislation will open the door to litigation of disputes that developers and unit owners previously agreed would only be resolved through mediation or arbitration.
Impact on the Construction Industry
Disputes between developers and associations commonly arise from alleged construction defects. Association boards are often advised that members have a fiduciary obligation under the Act to sue the developer for any apparent defects, large or small, or face individual liability themselves. As a consequence, many developers and construction professionals are the targets of defect claims years after a project is completed. While some claims are meritorious and deserve attention, many are not. The cost of addressing them is enormous for all involved, including the association. A requirement in the declaration that such disputes are addressed through alternative dispute resolution (ADR), and that an adequate number of unit owners must authorize the claim, mitigates these costs. Illinois and federal courts have long supported ADR, recognizing it as a speedy, informal and relatively inexpensive procedure for resolving controversies. Numerous federal and state governments, including Illinois, agree. Consequently, if passed SB2892 or HB4783 may nonetheless be invalid to the extent they violate federal law (i.e. the Federal Arbitration Act) or are irreconcilable with other state law (i.e. the Illinois Arbitration Act).
In some circumstances Illinois law allows condo associations to directly sue construction professionals (roofers, electricians, carpenters, etc.) who performed allegedly defective work. As a result, these parties are likely to be named as defendants in an association's construction defect lawsuit too. And if those construction professionals are not brought into the case directly by the association, they are likely to be sued by a developer seeking a defense or indemnification against the association's claims. Currently, with well-drafted declarations and construction contracts, developers, associations and construction professionals are able to address all of these claims through cost-effective ADR after a sufficient number of unit owners have authorized expending the funds necessary to do so. The passage of SB2892 or HB4783, however, will eliminate these measures, resulting in costly litigation for all involved.
Although both bills allow an association's board to add these provisions into a declaration on their own with the approval of 75 percent of the unit owners, it is unlikely an association will get around to doing so until after claims arise, which may be too late. An association cannot force a developer to participate in ADR without its consent, which is not an issue if the developer includes such provisions in the declaration at the outset. Getting parties to agree on submitting disputes to mediation or arbitration before a claim arises is easy—getting them to agree after the claims are known is another thing entirely. As a result, condo associations may be forced to expend substantial dollars litigating before the parties reach a stage where ADR is agreed upon and employed. Even then, more time and money may be spent to reach agreement on the logistics and rules governing the alternative process. Those details are typically already addressed in the ADR procedures SB2892 and HB4783 aim to nullify.
Status of the Proposed Legislation
SB2892 was approved by the Illinois Senate on March 4, 2014, and is currently being considered by the House Rules Committee, while HB4783 was approved by the Illinois House on April 3 and is currently being considered by the Senate Judiciary Committee.
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SOURCE: www.lexology.com