Wednesday, March 20, 2013

Arbitration Agreement that elected to be Governed by FAA Enforced

Arbitration Agreement that Provided it is Governed
by the Federal Arbitration Act Held Enforceable

      A recent decision of the Kentucky Supreme Court has returned to the oft-litigated question as to whether or not a particular arbitration agreement would be struck down as unenforceable under Kentucky’s requirement as to arbitration agreements or, rather, upheld as being subject to the Federal Arbitration Act.  In this instance, the agreement at issue, it providing that it is to be governed by the Federal Arbitration Act, was held to be enforceable.  MHC Kenworth-Knoxville/Nashville v. M & H Trucking, LLC, ___ S.W.3d ___, 2013 WL 646250 (Ky. Feb. 21, 2013). 
      M & H Trucking, LCC (“M & H”) purchased a truck from MHC Kenworth-Knoxville/Nashville (“Kenworth”).  Believing that the truck delivered did not meet the specifications of that ordered, and after negotiations failed to bring about a resolution, M & H brought suit against Kenworth.  In response, Kenworth sought to enforce the arbitration agreement set forth in the purchase agreement.  Under Ally Cat, LLC v. Chauvin, 274 S.W.3d 451 (Ky. 2009), an arbitration agreement governed by the Kentucky Arbitration Act will not be enforced unless it provides that the arbitration will take place in Kentucky.  No such stipulation existed in this agreement.  It did provide, however, that:
The parties acknowledge and agree that this Order evidences a transaction involving interstate commerce.  Accordingly, the United States Arbitration Act (Title 9 of the United States Code) shall govern the interpretation, enforcement and proceedings pursuant to the arbitration provisions of this Order.
      Notwithstanding this language, both the trial court and the Court of Appeals refused to uphold the arbitration agreement, citing Ally Cat.  As formulated by the Supreme Court:
This case presents a simple issue:  Can Kentucky’s courts enforce an arbitration agreement that fails to require the arbitration be held in this state but states that the Federal Arbitration Act governs its interpretation and enforcement?
      Disposing of the question on an almost summary basis, the Court stated definitively that where an arbitration agreement provides that it is governed by the Federal Arbitration Act, the Kentucky Arbitration Act and its limitation on enforcement of agreements to those that provide that the arbitration take place in Kentucky are inapplicable:
M & H Trucking’s brief, like the Court of Appeals below, failed to recognize our recent line of cases holding that “we need not consider Kentucky’s Uniform Arbitration Act” when “the agreement[ ]explicitly require[s] that the dispute be governed by the Federal Arbitration Act.”  Instead, when the agreement “includes a ‘choice of law’” provision selecting the Federal Arbitration Act as the law governing any dispute between the parties … the Federal Arbitration Act governs the arbitration clause.”  We have gone so far as to state expressly that “Ally Cat has no applicability to an arbitration agreement governed exclusively by the Federal Arbitration Act.”  (citations omitted, brackets in the original). 

This is an interesting decision for at least a pair of reasons.  Initially, it provides clear guidance as to how one can draft an arbitration agreement that will avoid the application of Kentucky’s atypical Ally Cat rule.  Second, the ability to apply the Federal Arbitration Act is not indicated as being dependent upon the existence of interstate commerce with respect to the subject transaction.  Ergo, it would appear that a purely intra-state transaction, by a choice of law provision such as that discussed in this case, could elect to be governed by the Federal Arbitration Act.

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