Arbitration Agreement Must Provide for Arbitration in Kentucky – Otherwise Not Enforceable.

   The Supreme Court has held that an arbitration agreement that does not provide for arbitration to occur in Kentucky cannot be enforced by a Kentucky court. Therefore, drafters of contracts providing for arbitration must be sure to recite that the arbitration must occur in Kentucky, or a Kentucky court will not enforce it, and the parties will be left to their traditional judicial remedies.

   In its decision a couple of weeks ago in Ally Cat LLC v. Chauvin [get opinion here], the Supreme Court returned to an issue that has proved troublesome to courts here – and elsewhere – and apparently to draftsmen as well.

   This is at least the third time Kentucky appellate courts have visited this issue in the last two decades. In the prior decisions in Tru Green Corp . v . Sampson, 802 S.W .2d 951, 952 (Ky. App. 1991) and Artrip v. Samons Construction, Inc., 54 S.W.3d 169, 171 (Ky. App. 2001) the Court of Appeals declared the basic jurisdiction rule now affirmed by the Supreme Court: That the Kentucky Arbitration Statute confers jurisdiction on Kentucky Courts to enforce arbitration agreements only if those agreements provided for the arbitration to occur in Kentucky.

    The Supreme Court has now affirmed the principle of those cases – that arbitration awards made outside of Kentucky cannot be enforced in Kentucky. That was the pattern in both of the prior cases, and the Supreme Court declared they “got in right.” But it went further, holding that arbitration cannot be compelled to take place in Kentucky because under the authority of Tru Green and Artrip such awards could not then be enforced.

   So, after Alley Cat, two things are now clear: 1. that where an arbitration occurs outside of Kentucky (even by agreement) the award cannot be enforced here; and 2. where the agreement does not specifically require arbitration here, arbitration cannot be compelled here.

   The only issue remaining, one the Supreme Court declined to anticipate, is what the Court would do if the agreement does not require arbitration in Kentucky but the parties agree to arbitration here and the issue of jurisdiction is raised for the first time in an action, or motion, to confirm a Kentucky-rendered award.

   But, if the Court is faithful to its decision in Alley Cat – that the statute is jurisdictional and any change must come from the legislature -- there seems little room to allow a court to enforce an award rendered in Kentucky if the agreement did not provide for arbitration here in the first place. The statute confers jurisdiction on a court to enforce the arbitration or to confirm an award only if the agreement provides for arbitration in Kentucky. And, since this is all jurisdictional, it cannot be waived. A Kentucky court has jurisdiction to enforce an award based on the “making of an agreement described [that is, one providing for arbitration here]” and if there is no such agreement, there is no jurisdiction.

   This language comes from the Uniform Arbitration Act and decisions in other states have reached similar conclusions.  Chicago Southshore /S Bd. v. N. Ind. Com. Transp., 703 NE.2d 7 (Ill. 1998) and Govern. E-Mgmt. v. American Arbitrat., 142 S.W.3d 857 (Mo. App. E.D. 2004) are a couple of these (but for a different perspective see Stancioff v. Hertz, 406 N.E.2d 1318 (Mass. 1980) -- concluding that where the parties select arbitration by the AAA, whose rules contain a mechanism for regulating venue, aribtration awards may be enforced by whatever jurisdiction is selected by the AAA).

   While uniformity of Uniform Acts may be desired, this is one area where legislative change might be called for. There is no reason a Kentucky court could not be given jurisdiction to enforce an arbitration award made elsewhere, or to compel arbitration here based on normal venue rules even if the contract does not require arbitration here.

   In fact, the Supreme Court has already suggested how it could do this, in a decision a few years ago under the current  jurisdictional statute.  In its decision in 2003 in Wilder v. Absorption Corp., 107 S.W.3d 181,  the Court refused to enforce a choice of venue provision in a contract calling for arbitration in the state of Washington.  That left the contract without a venue provision.  Nevertheless, the Court compelled arbitration in Kentucky, essentially reforming the contract.  In the face of an argument that if it did so an award would not be enforceable under the Tru Green-Artrip decisions, the opinion made clear the parties were required to arbitrate in Kentucky, apparently believing that directive would cure that absence of such language in the contract. 

   While that decision was probably wrong for all of the reason described in Justice Cooper's dissent ( I must disclose I represented the disappointed appellee in the case), it should stand for the proposition that a court -- by reformation or certainly the legislature by statutory change --  could provide for venue in Kentucky even in the absence of a specific provision in the  contract calling for arbitration here.

    The legislature might do well to consider a change to broaden the enforcement of arbitration agreements that do not specifically call for arbitration in Kentucky, consistent with the policy in favor of arbitration. In the meantime, drafters of such provisions can avoid this result by being aware of the problem and drafting around it.