In Caterpillar, Inc. v. Century Indem. Co., et al., 2019 IL App (3d) 190032, the Illinois Appellate Court, Third District, issued an opinion that highlights the need for parties to carefully consider alternate dispute resolution (“ADR”) provisions in their contracts.

The case involved a dispute between Caterpillar and one of its insurers, Employers Insurance Company of Wausau (“Wausau”), regarding coverage for defense costs that Caterpillar had incurred in the defense of welding fume personal injury claims filed between 1995 and 2007. Wausau contended that a 1999 Settlement Agreement between it and Caterpillar applied to the dispute, which thus had to be resolved pursuant to the Agreement’s ADR provisions. Caterpillar disagreed and contended that, among other things, Wausau had waived the ADR provisions by participating in litigation and failing to follow the required procedure in a timely manner.

The ADR provisions in the Agreement set forth a four-step process:  (1) one party must notify the other in writing of the existence of a dispute regarding “any aspect of this Agreement”; (2) within 15 days of this notice, the parties must meet and confer in an effort to determine the nature of the dispute and whether it can be amicably resolved; (3) if the parties cannot resolve the dispute at the meeting, or subsequent meetings held upon agreement, they will attempt to resolve the dispute through non-binding mediation; (4) if a resolution is not achieved within 90 days of the selection of a mediator, a party may serve a written demand for arbitration on the other party. Caterpillar, 2019 IL App (3d) 190032, ¶ 5. The ADR provisions stated that the parties cannot mediate until they have met and conferred, and cannot arbitrate until they have mediated. Id. The provisions also stated that “any and all disputes under this Agreement shall be subject to a limitations period of two years from the date on which the dispute arose.” Id. at ¶ 6.

Caterpillar filed a complaint against Wausau on March 17, 2011. Id. at ¶ 7. Wausau responded in an April 27, 2011 letter in which it stated that a dispute existed regarding the application of the Settlement Agreement to the welding fume defense costs and requested a meeting within 15 days. Id. at ¶¶ 7-8. The parties met on July 15, 2011 but were unable to resolve the dispute. Between June and August 2011, Wausau filed answers and affirmative defenses to Caterpillar’s complaint that included requests to stay the litigation pending completion of the ADR process in the Settlement Agreement. Id. at ¶¶ 9-14. On March 30, 2012, Wausau filed a motion to stay the litigation and sent a letter to Caterpillar requesting submission of the dispute to mediation. Id. at ¶¶ 15, 17. On April 23, 2012, Caterpillar responded to the letter but did not agree to mediate. It apparently never responded to the motion to stay. Id. at ¶ 18.

Three years later, on April 14, 2015, Wausau filed a second motion to stay. On January 25, 2016, Wausau filed a supporting memorandum and a copy of the Agreement under seal. Id. Caterpillar filed an opposing memorandum on February 22, 2016, but Wausau did not file a reply until December 18, 2017. Id. at ¶ 20. The trial court had granted several extensions of time for the reply brief and in the interim (i.e., sometime between February 22, 2016 and December 18, 2017), the parties participated in an evidently unsuccessful mediation. Id. at ¶ 20 n.9. The trial court granted Wausau’s motion to stay and Caterpillar appealed.

Although Caterpillar made several arguments in support of its contention that Wausau had waived the Settlement Agreement’s ADR provisions, for our purposes we will focus on the period of time between the filing of the complaint in March 2011 and Wausau’s second motion to stay in April 2015. Caterpillar contended that Wausau failed to carry through with the ADR procedures during this time and thus waived them. The Appellate Court disagreed and found that Wausau had not waived its right to ADR. The court pointed out that the ADR provisions did not contain any time periods for completing any stage of the ADR process, and that each stage had to be completed before the next one could occur. Id. at ¶¶ 49, 59. The court noted that “the record does not clearly reflect the parties’ actions in the trial court during [the] 36½ month gap” and that Caterpillar did not file an objection to or otherwise oppose Wausau’s first motion to stay. Id. at ¶¶ 52-53. Caterpillar also did not immediately agree to Wausau’s March 30, 2012 request to mediate or object to the second motion to stay. Id. at ¶ 55. It appears that Caterpillar may have been distracted by a dispute with another one of its insurers, Century Indemnity Company. Id. The Appellate Court concluded that “the inaction of both parties allowed the pending motions and the dispute resolution procedures to stall in the trial court.” Id. at ¶ 56. Therefore, because both parties had contributed to the delay, Wausau did not waive its right to ADR. Id.

The Appellate Court also rejected Caterpillar’s argument that the two year limitations period in the Settlement Agreement barred Wausau’s right to arbitrate. The court found that Wausau had established the existence of a dispute on April 27, 2011 and then sought a stay of the litigation and requested mediation on March 30, 2012, within two years from when the dispute arose. Id. at ¶ 64. Given that Caterpillar disputed the propriety of mediation at that time, the court held that Wausau had timely invoked the Agreement’s ADR procedure. Id. We note that the provision does not state what a party must do, or what must be accomplished, within two years.

From the foregoing, we can see that a significant factor in the Appellate Court’s decision was the lack of deadlines and definite time periods in the Settlement Agreement’s ADR provisions. The lack of time constraints enabled the parties to allow the litigation to drift along for several years while they focused on other things. Similarly, the two year limitations period turned out to have little weight with the court. More tightly written provisions with firm deadlines could have helped focus the parties to engage in meaningful ADR much sooner.

ADR can be a useful way to resolve disputes without the need for costly and time consuming litigation, but a fundamental prerequisite is provisions that are properly worded. This in turn requires parties to think carefully about what they want to accomplish with ADR and the best procedures for doing so. Otherwise, inartfully drafted ADR provisions can just lead to more litigation.