The Kroger Company expanded a grocery store in Lexington, Kentucky and hired E.H. Construction, LLC as the general contractor for the expansion project. E.H. Construction subcontracted with Alpha Concrete Construction for the cement floor and Alpha subcontracted with W.T. Congleton Co. and others for material and labor. Congleton later sued Alpha and Kroger and others for breach of contract and unjust enrichment. Alpha brought in E.H. Construction as a third party defendant. E.H. Construction filed a motion to stay the litigation and compel arbitration. E.H. Construction relied on Article 15, entitled Dispute Resolution, which provided that all claims or disputes arising out of or related to the subcontract between E.H. and Alpha be decided by arbitration in accordance with the Construction Industry Arbitration rules of the American Arbitration Association, except for claims waived by the making or acceptance of final payment.
Alpha contended arbitration was inapplicable because it had already terminated the contract under Article 17 entitled “Termination by Subcontractor.” Article 17 allowed Alpha to terminate if work had stopped for more than 30 days due to lack of progress payments followed by seven calendar days written notice and the failure to cure. After the termination, the subcontractor was to recover payment for all subcontract work satisfactorily performed, including reasonable overhead and profit not to exceed 15%.
The trial court agreed with the subcontractor, concluding that the arbitration clause did not survive termination of the contract by the subcontractor. Once the contract was terminated, it was “nonexistent” and therefore the other provisions, including arbitration, did not apply.
On appeal, the Court of Appeals noted that the Federal Arbitration Act and the Kentucky Uniform Arbitration Act similarities negated the need to determine whether state or federal law applied as the outcome would be the same. The Appellate court then looked to federal case law for guidance on the issue of whether termination of a contract negated the ability to arbitrate.
The Court of Appeals outlined a number of United States Supreme Court cases concluding that arbitration clauses survive contract termination where the post-termination dispute “arises under the contract.” Further, once E.H. Construction provided evidence showing the existence of an arbitration agreement, the presumption of arbitration applied and the burden shifted to Alpha to rebut the presumption. Alpha attempted rebuttal by relying on its unilateral termination of the contract under Article 17. The appellate court was not persuaded that Alpha sustained its burden. The agreement did not limit arbitration to pre-termination disputes even if Alpha followed the procedures outlined in the Article 17 termination by the subcontractor. Nothing in the contract supported an interpretation that Article 17 nullified the arbitration clause. Thus, even if Alpha properly terminated the contract, it remained obligated to arbitrate its disputes if the disputes arose out of the contractual relationship with E.H. Construction. As Alpha’s complaint against E.H. Construction alleged improper withholding of payments for work performed, clearly the contractual relationship applied. The trial court’s order denying E.H. Construction’s motion to compel arbitration and stay litigation was reversed and remanded to compel arbitration.