Friday, November 11, 2011

Arbitration “To Take Place in the Commonwealth of Kentucky”

Arbitration “To Take Place in the Commonwealth of Kentucky”
        The Kentucky Court of Appeals has addressed the requirements for an enforceable arbitration agreement where the arbitration is to take place under the Kentucky (as contrasted with the Federal) Arbitration Act.  Padgett v. Steinbrecher, No. 2010-CA-000647-MR (Ky. App. Nov. 4, 2011) (To Be Published).  It bears noting that the holding in this case was substantially based upon a prior ruling of the Kentucky Supreme Court, namely Ally Cat, LLC v. Schuvin, 274 S.W.3d 451 (2009).
        This dispute arose in the context of an LLC whose operating agreement provided, inter alia, that all disputes arising out of or in connection with the LLC or the operating agreement would be resolved by binding arbitration.  One member, Steinbrecher, filed suit against the managing member, Padgett, alleging claims including breach of fiduciary duty.  In response, the defendant filed a motion with the court seeking (somewhat inartfully) dismissal of the suit and referral to arbitration.  The Court of Appeals reports that the parties did not dispute either the validity of the arbitration clause or that, were it enforceable, that it would cover the plaintiff’s claims. 
        Reading between the lines, there were no interstate activities, so the enforcement of the arbitration clause arose exclusively under the Kentucky Arbitration Act, it being an enactment of the Uniform Arbitration Act.  KRS ch. 417. 
        In light of the federal and state policies in favor of arbitration, we would normally expect that this dispute would have been resolved by the staying of the case and the referral of the matter to arbitration.  That was, however, not the resolution because of an insufficiency in the arbitration clause in that operating agreement.
      Under KRS § 417.200, a Kentucky court has jurisdiction to enforce an arbitration agreement where the agreement provides “for arbitration in [Kentucky].”  While the agreement at issue in this case provided that the rules of the AAA as enforced in Kentucky would control, inter alia addressing the choice of law, the document was silent as to the choice of forum.  The Court rejected the argument that the agreement as to choice of law implied an agreement as to forum.  There having been, in the end, no contractual agreement that the arbitration would take place in Kentucky, the agreement fell outside the scope of those that may, pursuant to statute, be enforced by a court.  On that basis, the trial court’s denial of the motion to compel arbitration was affirmed.
      The moral of the story – if you are drafting an arbitration agreement that is to be, if ever applied, enforced in accordance with the Kentucky Arbitration Act, it is absolutely essential that the agreement contain the magic words “with the arbitration to take place in the Commonwealth of Kentucky.”  Fail to include these magic words or some similar provision as to the arbitration actually taking place in Kentucky and it may come to pass that disputes will be resolved in court and not in arbitration.
      No word yet as to any appeal is being sought. 

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