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Sixth Division

JUSTICE ZWICK delivered the opinion of the court:

Petitioner, Robert A. Ryan, M.D., sought confirmation of an arbitrator's award in a contract dispute with respondent, Andrew J. Kontrick, M.D. The circuit court confirmed the arbitrator's award in its entirety and ordered that Kontrick pay prejudgment interest on the award. On appeal, respondent Kontrick challenges the rulings of the circuit court, contending (1) the arbitrator exceeded his authority in awarding punitive damages, (2) the arbitrator ignored Illinois law in awarding attorney fees without supporting evidence, and (3) the circuit court erred in awarding prejudgment interest.

The record demonstrates that in 1989, Kontrick joined Ryan as a partner in his plastic and cosmetic surgery practice and became a 50% shareholder in Ryan's service corporation. The business relationship between the parties was defined by a contract which provided that they would arbitrate all disputes arising out of the agreement. Specifically, the arbitration agreement stated as follows:

"All disagreements arising out of this Agreement shall be resolved by the American Arbitration Association in the City of Chicago, Illinois. *** The arbitrator shall assess the costs of such arbitration proceeding (including reasonable attorney's and accountant's fees) against the party at fault. All amounts due pursuant to the arbitration shall bear interest retroactive to their original due date at the floating prime rate of interest charged by the First National Bank of Chicago."

The contract also stated as follows:

"This Agreement shall be subject to and governed by the laws of the State of Illinois."

In October 1992, Ryan challenged certain of Kontrick's actions by initiating an arbitration before the American Arbitration Association. Ryan's claims sounded in contract, tort, and breach of fiduciary duty. The statement of claim brought by Ryan sought punitive as well as compensatory damages and costs and attorney fees. Kontrick counterclaimed for severance pay and other relief.

The arbitrator's award granted Ryan compensatory damages in the amount of $118,426.99, punitive damages of $150,000, and attorney fees and costs totaling $261,153, based upon his finding that Kontrick was "at fault" within the meaning of the arbitration agreement. However, the arbitrator also awarded Kontrick $10,255.84 on his counterclaim for severance pay against Ryan.

Kontrick requested that the arbitrator modify and correct the award, asserting that (1) in the absence of an express agreement of the parties, punitive damages were precluded by Illinois law under Edward Electric Co. v. Automation, Inc., 229 Ill. App. 3d 89, 593 N.E.2d 833 (1992), and (2) the award of attorney fees and costs was improper where it was clear from the face of the award that both parties were "at fault." The arbitrator denied Kontrick's request for modification of the award, finding that punitive damages were authorized under the Commercial Arbitration Rules of the American Arbitration Association, which governed the arbitration.

Ryan thereafter petitioned the circuit court for confirmation of the award and entry of judgment thereon. Kontrick cross-petitioned, seeking vacatur of both the punitive damage award and the grant of attorneys fees. The circuit court confirmed the arbitrator's decision in its entirety, denying Kontrick's petition to vacate, and entered judgment for post-award interest. Kontrick appeals.

We initially consider Kontrick's argument that the award of punitive damages must be vacated because the arbitrator exceeded the scope of his authority under the arbitration agreement.

Ryan asserts that this issue has been waived because Kontrick did not object when the issue of punitive damages was originally raised before the arbitrator. We find the issue was not waived. The record establishes that after entry of the award, Kontrick moved to modify the award, specifically asserting that the arbitrator lacked authority to grant punitive damages under the parties' agreement. The arbitrator denied the motion on the merits, ruling that the award of punitive damages was proper based upon Kontrick's conduct and was authorized by Commercial Arbitration Rule 43 of the American Arbitration Association, which empowers the arbitrator to "grant any remedy or relief that [he] deems just and equitable and within the scope of the agreement of the parties." Significantly, the arbitrator did not find that Kontrick's objection had been waived by his acquiescence in litigating the issue. We will not find waiver where the objection was raised during the arbitration proceedings and where the arbitrator considered and denied the objection on the merits. We must, therefore, consider Kontrick's argument that the grant of punitive damages exceeded the scope of the arbitrator's authority.

The issue of whether the arbitrator had the authority to award punitive damages in this case is a question of arbitrability. In Illinois, when the language of an arbitration clause is broad, and it is unclear whether the subject matter of the dispute falls within the scope of the arbitration agreement, "the question of substantive arbitrability should initially be decided by the arbitrator." Donaldson, Lufkin, & Jenrette Futures, Inc. v. Barr, 124 Ill. 2d 435, 447-48, 530 N.E.2d 439 (1988); Caudle v. Sears, Roebuck & Co., 245 Ill. App. 3d 959, 963, 614 N.E.2d 1312 (1993). However, the arbitrator's determination is subject to judicial review under the Uniform Arbitration Act (the Act). Donaldson, Lufkin, & Jenrette Futures, Inc., 124 Ill. 2d at 450-51; TDE Ltd. v. Israel, 185 Ill. App. 3d 1059, 1063, 541 N.E.2d 1281 (1989).

Section 12(a)(3) of the Act specifically provides that an arbitration award is subject to vacatur if the arbitrator has exceeded his authority. See 710 ILCS 5/12(a)(3) (West 1996). The court is bound to vacate or refuse to confirm the award if all fair and reasonable minds would agree that the construction of the contract made by the arbitrator was not possible under a fair interpretation of the agreement. See Rauh v. Rockford Products Corp., 143 Ill. 2d 377, 391-92, 574 N.E.2d 636 (1991), citing Pirsig, Some Comments on Arbitration Legislation and the Uniform Act,10 Vand. L. Rev. 685, 706 (1957). See also Garver v. Ferguson, 76 Ill. 2d 1, 9-10, 389 N.E.2d 1181 (1979).

Although the Act sets forth the grounds and procedures for vacatur of arbitration awards, it does not control the matters which are subject to arbitration. Rauh, 143 Ill. 2d at 387. Arbitration is a matter of contract, and the parties to an agreement are obligated to arbitrate only those issues which by clear language they have agreed to arbitrate. AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 648, 89 L. Ed. 2d 648, 655, 106 S. Ct. 1415, 1418 (1986). Thus, the language of the arbitration agreement governs which issues the parties have agreed to submit to arbitration, and arbitration agreements cannot be extended by construction or implication. Rauh, 143 Ill. 2d at 387; Flood, 41 Ill. 2d at 94.

Under Illinois law, punitive damages may be awarded by an arbitrator only where there is an express provision authorizing such relief in the arbitration agreement. Edward Electric Co. v. Automation, Inc., 229 Ill. App. 3d 89, 104, 593 N.E.2d 833 (1992).

In the instant case, the agreement between the parties stated the following:

"All disagreements arising out of this Agreement shall be resolved by the American Arbitration Association in the City of Chicago, Illinois.

***

This agreement shall be subject to and governed by the laws of the State of Illinois."

It is undisputed that the agreement did not contain an express provision authorizing the award of punitive damages by an arbitrator. Therefore, the subject of punitive damages was not among the issues which the parties had agreed to arbitrate, and their contract cannot be extended by construction or implication. Rauh, 143 Ill. 2d at 387; Flood, 41 Ill. 2d at 94; Edward Electric, 229 Ill. App. 3d at 104.

In denying Kontrick's request for modification, the arbitrator stated the following:

"[t]he arbitration proceeded, by agreement, under the Commercial Arbitration Rules of the American Arbitration Association. Rule 43 empowers the arbitrator to 'grant any remedy or relief that [he] deems just and equitable and within the scope of the agreement of the parties.' By contracting to apply both Illinois law and the rules of the American Arbitration Association, the parties have expressly agreed to authorize an award of punitive damages."

We note that the arbitrator demonstrated obvious confusion over the meaning of the word "expressly." It is undeniable that the contract between Ryan and Kontrick did not expressly state that punitive damages would be subject to arbitration since the words "punitive damages" never appeared in that contract. Rather, the agreement stated only that "[a]ll disputes would be resolved by the American Arbitration Association." At best, this language incorporated by reference the Commercial Arbitration Rules of the American Arbitration Association. Even so, we find that an implicit agreement to arbitrate punitive damages under Rule 43, which itself did not expressly authorize punitive damages, is wholly insufficient to satisfy the requirement of an express provision in the arbitration agreement as mandated by Edward Electric.

Moreover, we reject Ryan's argument that the arbitrator's award must be affirmed because the scope of the arbitrator's authority is a question of arbitrability and is governed by federal law, which permits the award of punitive damages.

Specifically, Ryan contends that the agreement between the parties "involved commerce" and, therefore, fell within the confines of the Federal Arbitration Act (FAA), which applies to written contracts "evidencing a transaction involving commerce." See 9 U.S.C.