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Kentucky Supreme Court Makes Enforcement of Arbitration Provisions Easier

Posted on Fri, Jun 14, 2013 @ 08:15 AM

by Jack B. HarrisonJack B. Harrison

Historically, Kentucky courts have had difficulty enforcing arbitration provisions in contracts because of restrictions contained in Kentucky law.  Kentucky’s Uniform Arbitration Act limits the ability of Kentucky courts to enforce a contractual arbitration provision to those agreements that provide that the arbitration is to occur in Kentucky.  In a recent decision, MHC Kenworth-Knoxville/Nashville v. M & H Trucking, LLC, the Kentucky Supreme Court clarified the reach of this provision and made it somewhat easier for Kentucky courts to enforce contractual arbitration provisions.

In MHC Kenworth, M&H Trucking LLC purchased a truck from MHC Kenworth.  As part of the sales process, the parties executed a Customer Sales Order, which was signed by representatives of both parties.  Included within the Customer Sales Order was the following provision in all capital letters:  “THIS ORDER CONTAINS A BINDING ARBITRATION PROVISION, WHICH MAY BE ENFORCED BY THE PARTIES.”  The specific terms of the arbitration provision were further set forth in the Customer Sales Order, stating that “[a]ny controversy or claim arising out of or relating to this Order shall be decided by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules” and that the “place of arbitration shall be the American Arbitration Association’s office closest to the location of Dealer designated on the front side hereof.”  Additionally, the Customer Sales Order specifically stated that it involved a transaction occurring in the context of interstate commerce to which the Federal Arbitration Act should apply.

M&H Trucking was unhappy with the truck that was subsequently delivered to them by MHC Kenworth, alleging that the truck that was delivered was not the truck they had bargained for and ultimately ordered.  After attempts at extrajudicial resolution of the dispute failed, M&H Trucking filed suit in Kentucky state court against MHC Kenworth, alleging fraud and intentional misrepresentation in the sale.  MHC Kenworth immediately filed a motion to stay the court proceedings and asked the trial court to compel arbitration pursuant to the arbitration provision contained in the Customer Sales Order.  Under the terms of the arbitration provision, the arbitration would have taken place in Georgia, as that was the nearest American Arbitration Association office to the dealer.  Based on the Kentucky statute, the trial court denied the motion to stay and allowed the litigation to continue.

MHC Kenworth subsequently appealed the trial court’s decision to the Kentucky Court of Appeals.  The Court of Appeals affirmed the decision of the trial court, concluding that the issue was controlled by the 2009 decision of the Kentucky Supreme Court decision in Ally Cat, LLC v. Chauvin.  In Ally Cat, the Kentucky Supreme Court determined that, under the Kentucky Uniform Arbitration Act, Kentucky courts have no jurisdiction to enforce an arbitration agreement unless the agreement provides that the arbitration will occur in Kentucky.

MHC Kenworth then appealed the issue to the Kentucky Supreme Court.  The issue before the Kentucky Supreme Court in this case was defined as: “Can Kentucky’s courts enforce an arbitration agreement that fails to require the arbitration to be held in the state but states that the Federal Arbitration Act governs its interpretation and enforcement?”  The Kentucky Supreme Court answered this question in the affirmative and reversed the decision of both the Court of Appeals and the trial court.  The Kentucky Supreme Court concluded that its prior decision in Ally Cat did not apply to the current situation, where the agreement to arbitrate specifically stated that it was governed exclusively by the Federal Arbitration Act.  The Kentucky Supreme Court concluded that the specific language of the Customer Sales Order in this case removed the arbitration provision from the reach of the Kentucky Uniform Arbitration Act and, therefore, the trial court had jurisdiction to enforce the agreement to arbitrate based on federal law.

For those doing business in Kentucky, the Kentucky Supreme Court’s decision in MHC Kenworth carves out an important exception to Kentucky’s statutory rule that arbitration agreements that call for an arbitration to take place outside of Kentucky are not enforceable by Kentucky state courts.  Under the MHC Kenworth decision, those arbitration agreements or provisions that explicitly state that the transaction at issue involves interstate commerce and, thus, is subject to the Federal Arbitration Act should be enforceable in Kentucky courts, even where the arbitration is to occur outside Kentucky.  Prudent businesses who do business in Kentucky and who include arbitration provisions in their sales contracts should, therefore, review the terms of those provisions in light of the decision by the Kentucky Supreme Court in MHC Kenworth.

Tags: Arbitration Provisions