First Health Group Corp. v. Ruddick

• Decision Date: 06 July 2009
• Docket Number: No. 1-08-3236.,1-08-3236.
• Citation: 911 N.E.2d 1201
• Parties: FIRST HEALTH GROUP CORP., a wholly owned subsidiary of Coventry Health Care, Inc., Plaintiff-Appellant, v. Richard E. RUDDICK, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

911 N.E.2d 1201

FIRST HEALTH GROUP CORP., a wholly owned subsidiary of Coventry Health Care, Inc., Plaintiff-Appellant, v. Richard E. RUDDICK, Defendant-Appellee.

No. 1-08-3236.

Appellate Court of Illinois, First District, First Division.

July 6, 2009.

Jeffrey C. Clark, Julie Ann Sullivan, McGuire Woods LLP, Chicago, IL, for Appellant.

Thomas Ging, Stephen Vernon, Hinshaw & Culbertson LLP, Chicago, IL, for Appellee.

Presiding Justice ROBERT E. GORDONdelivered the opinion of the court:

Defendant Richard E. Ruddick, a retired health insurance executive, provided consulting services to plaintiff First Health Group Corporation (First Health), a health benefits company located in Downers Grove, Illinois. After plaintiff sent him a termination letter, defendant filed a demand for arbitration with the American Arbitration Association, as required by their agreement for the settlement of disputes.

Defendant's demand sought reformation of the parties' written agreement claiming a mutual mistake, or alternatively, rescission of the written agreement and enforcement of the parties' earlier oral agreement. After a two-day hearing on May 15 and 16, 2007, the arbitrator issued a detailed 9-page award on July 13, 2007, ruling in defendant's favor. The arbitrator stated that he found "based on clear and convincing evidence that there was a mutual mistake of fact in the preparation and execution of the February 2004 [written] agreement and that the February 2004 agreement between Ruddick and First Health should therefore, be reformed, by deleting" the provisions permitting termination on 30-days notice, thereby leaving intact the provision terminating the contract on December 31, 2010.

Plaintiff moved to vacate the arbitration award in the circuit court of Cook County, and defendant moved to confirm the award. In an order dated June 23, 2008, the circuit court denied plaintiff's motion to vacate and granted defendant's motion to confirm the award. On appeal, plaintiff makes two claims: (1) that the arbitrator exceeded his authority by reforming the contract; and (2) that, in reforming the contract, the arbitrator committed gross errors of fact and law that are apparent from the face of the award. For the following reasons, we affirm the award.

BACKGROUND

There is no dispute that, in December 2000, plaintiff sought defendant's assistance in acquiring a new client, the Mail Handlers Benefit Plan (MHBP), which did, in fact, become a client of plaintiff in April 2002. There is also no dispute that, from 2000 through 2003, plaintiff paid defendant for his consulting services on the basis of a handshake and without a written agreement.

Defendant claims that, prompted by concerns about his health and protecting his wife in case of his death, he sought a written agreement. The written agreement was executed by the parties on February 16, 2004. Defendant claims that, as a result of a scrivener's error, the 2004 written agreement mistakenly contained a termination provision that was not intended by the parties and that permitted termination of the 2004 agreement upon 30-days notice. The 2004 agreement contains two paragraphs, both numbered "7B." The first 7B paragraph is entitled "Termination in the Event of Death" and provides that plaintiff will pay defendant's spouse if defendant dies. The second 7B paragraph and a 7C paragraph, also entitled "Termination," permit termination upon 30-days notice. There is no dispute between the parties concerning paragraph 7A which provides that the 2004 written agreement automatically terminates on December 31, 2010.

Documents

The 2004 written agreement was 7 pages long and contained 7 sections. The seventh section is the section in dispute. It is entitled "Term/Termination," and it states in full:

"7. TERM/TERMINATION

A. Term. This agreement will terminate on December 31, 2010.

B. Termination in the Event of Death. In the event of CONSULTANT'S death prior to termination of this Agreement, payments will be made to CONSULTANT'S spouse, Mary Francis, or, if CONSULTANT'S spouse predeceases CONSULTANT, then to CONSULTANT'S estate, in the same manner as provided herein, up to the date of termination.

B. Performance Default. If either Party materially fails to perform any of its duties or obligations under this Agreement (`Default') and the Default is not cured within (30) days after written notice is given to the Defaulting Party specifying the Default, the Party not in Default may terminate this Agreement by giving written notice to the Defaulting Party.

C. Termination. Either party may terminate this Agreement at any time upon (30) days prior written notice. Both Parties are obligated to perform during the notice period until the termination date.

D. Amounts Owing. Upon expiration or termination of this Agreement, First Health will promptly pay CONSULTANT all amounts due under this Agreement. First Health will be liable only for payment of Consulting Services that were properly rendered up to the expiration or termination date at the rate(s) set forth in Section 5."

In a letter dated May 26, 2004, and addressed to Edward Wristen, the chief executive officer of First Health, defendant stated that he wanted to assign his "Consulting Contract, for estate purposes, to The Ruddick Family Trust." It does not appear from the record that this assignment occurred.

After being acquired by Coventry Health Care, Inc., plaintiff sought to terminate the 2004 written agreement upon 30-days notice. In a letter dated January 31, 2005, and addressed to defendant, James E. McGarry, the chief operating officer, of First Health stated:

"Pursuant to Section 7(C) of the Consulting Services Agreement (`Agreement') dated February 1, 2004, by and between yourself and First Health Group, Corp. (`FHGC'), this letter shall serve as formal notice of FHGC's termination of your services under the Agreement. Termination will be effective thirty (30) days from the date of this letter."

Arbitration Proceedings

Since the 2004 written agreement required any claims to be settled by arbitration, defendant filed an arbitration demand on April 27, 2006. The 2004 agreement contained a broad arbitration provision, requiring arbitration for any claim "relating to" the agreement:

"5S. Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association * * *."

Defendant's statement of claim had three counts. Count I sought reformation of the 2004 written agreement by eliminating paragraph 7C. Count II alleged breach of the 2004 written agreement, which provided that, even upon termination, plaintiff was liable for payment for consulting services that were already rendered. Count III alleged breach of the parties' earlier, oral contract. On March 20, 2007, defendant amended his statement of claim, but the amended statement alleged the same three counts.

In response to these three counts, plaintiff argued in its pre-hearing brief that (I) reformation of the 2004 written contract was not warranted, because defendant could not show, by clear and convincing evidence, that there was a mutual mistake by the parties; (II) plaintiff had complied with the terms of the 2004 written agreement; and (III) both the merger clause in the 2004 written agreement and the statute of frauds (740 ILCS 80/1(West 2006)) defeated any claims under the earlier, oral contract.

The arbitration hearing occurred on May 15 and 16, 2007. On July 13, 2007, the arbitrator entered an award, reforming the contract and granting defendant $1,035,416.42 in damages. In conclusion, the arbitrator stated:

"I find based on clear and convincing evidence that there was a mutual mistake of fact in the preparation and execution of the February 2004 agreement (Respondent's Exhibit 1) and that the February 2004 agreement between Ruddick and First Health should therefore, be reformed by deleting paragraph 7C and the second paragraph 7B. Therefore the following paragraph[s] 7B and 7C are hereby deleted from Responsdent's Exhibit 1 and the contract is reformed to be in full force and effect without these two deleted paragraphs * * *."

The above ruling left intact paragraph 7A, which provided that "[t]his agreement will terminate on December 31, 2010."

The arbitrator explained how he calculated the damages amount of the award, as follows. Under the contract, defendant was due a total of $1,210,416.39. The arbitrator explained that he calculated the total amount due, as follows: "$14, 583.33 per month x 83 months (February 1, 2004 to December 31, 2010) equals $1,210,416.39." February 1, 2004 was the date of the contract; and December 31, 2010 was the contract's stated date of termination. However, a number of payments had already been made by plaintiff and received by defendant, and the total amount of these payments had to be subtracted from the amount owed. The arbitrator explained that he calculated the payments as follows: "The payments from February 1, 2004 to January 2005 equal $174,999.97 ($12,500 in February 2004, $12,500 in March 2004, $4,166.67 in March 2004 and $14,583.33 per month for ten months from April 1, 2004 to January 3, 2005." The arbitrator then subtracted the payments from the amount owed to arrive at the award: "$1,210,416.39 minus $174,999.97 equals $1,035, 416.42." On appeal, neither party disputes the arbitrator's calculations or his means for calculating the award.

Circuit Court Proceedings

On October 3, 2007, plaintiff filed, in the circuit court of Cook County, a complaint and application to vacate the arbitrator's award. In its supporting memorandum, filed December 31, 2007, plaintiff asked the trial court to vacate the award because (1) the arbitrator exceeded the scope of his authority by reforming the contract; and (2) the arbitrator's award was based on gross errors of law. The two claimed errors of law were (a)...