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Valparaiso Univ. Law School

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Wednesday, March 4, 2009

Arbitration Agreements Must Specify Kentucky to Be Enforceable in Kentucky Courts

KyAlly Cat, LLC v. Chauvin, 2009 WL 160581, No. 2008-SC-00377-MR (Kentucky, Jan 22, 2009) involves a Home Owners Limited Warranty (HOLW) that provided for arbitration of disputes relating to a condominium unit. Dr. Stephanie Russell, the sole member of Ally Cat, LLC purchased a condo unit for use as a medical clinic, and she signed the HOLW. Her unit leaked, so she sued for fraud, concealment, tortious misconduct, negligence, breach of contract and professional negligence against various entities identified in the opinion as the Real Parties in Interest. The latter moved to compel arbitration, and that motion was granted at the trial level and affirmed on appeal. Ally Cat appealed to the Supreme Court of Kentucky, contending among other things that the trial court had no subject-matter jurisdiction to order the parties to arbitrate because the HOLW did not specify that arbitration must occur in Kentucky.

Kentucky courts had previously held that a provision of the Kentucky Arbitration Act, KRS 417.200, requires that arbitration clauses include language stating that the arbitration is to be held in Kentucky before a Kentucky court can enforce an arbitral award. They had done so only when asked to enforce such awards that had already been granted after out-of-state arbitrations. In this case, the arbitration had not yet taken place. Nonetheless, the Supreme Court of Kentucky held that "[s]ubject matter jurisdiction to enforce an agreement to arbitrate is conferred upon a Kentucky court only if the agreement provides for arbitration in this state." This ruling was based on the language of 417.200 which specifically relates to agreements "providing for arbitration in this state." The Court found that the phrase would be rendered meaningless if limited to cases, like those decided earlier, in which parties sought to enforce out-of-state arbitral awards. The Court declined to address what it would have done if the parties, despite the faulty HOLW, had actually arbitrated in Kentucky.

The Court also found that the HOLW was faulty in other, less interesting ways. For example, it was not signed by any of the Real Parties in Interest, and Dr. Russell signed only in her individual capacity and not on behalf of Ally Cat, LLC. In addition, the HOLW is phrased merely as an acknowledgment of receipt of certain policies, not as an assent to their terms. In short, faulty drafting prevented the HOLW from qualifying as "the making of an agreement" under KRS 417.050.

[Jeremy Telman]

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