The interplay between the Kentucky Arbitration Act, the Federal Arbitration Act and the enforcement of an award and judgment in either state or federal court creates certain procedural challenges. Kentucky’s latest court ruling resolved one open issue: can an arbitration award obtained and confirmed in a different state be enforced in a Kentucky state court when the contract’s arbitration clause is silent on both the location of an arbitration and the court that may confirm an award, the parties are from different states, and the contract involves interstate commerce,? Under the facts in Paducah Federal Credit Union v. Consultants & Builders, Inc., the answer is yes.
Paducah Federal Credit Union contracted with Consultants & Builders, Inc. (“CBI”) to build a branch office in Paducah, Kentucky. CBI was a Georgia corporation and submitted the lowest bid. The contract contained an arbitration clause but did not specify the location for the arbitration or any court venue for confirmation of any arbitration award. When a dispute arose over the cost of CBI’s design services, CBI filed arbitration in 2007 in Georgia seeking $57,000. The Credit Union filed suit and a motion in state court in July 2007 in Paducah, Kentucky attempting to prohibit CBI from arbitration. The trial court granted Paducah Credit’s motion; CBI appealed. The Kentucky appellate court reversed and compelled arbitration in an opinion issued in September 2008. Consultants & Builders, Inc. v. Paducah Federal Credit Union, 266 S.W.3d 837 (Ky. App. 2008).
CBI proceeded with arbitration in Georgia and was awarded $78,587.00. CBI filed suit to confirm the award in federal court in the Northern District of Georgia. The Credit Union declined to appear before the federal court and a default judgment confirming the arbitration award was entered.
Normally, CBI would then have filed the federal court judgment in Kentucky in order to execute against the Credit Union’s assets. However, the Credit Union returned to the Kentucky Circuit Court to enjoin CBI from enforcing its judgment in Kentucky. This time the trial court denied the Credit Union’s motion and ordered that CBI could enforce its out-of-state judgment. The Credit Union appealed.
The Credit Union relied on a 2009 Kentucky Supreme Court case which held that an arbitration agreement can only be enforced in Kentucky when the agreement specifically states that arbitration is to be held in Kentucky and Kentucky’s Arbitration Act applied. In Ally Cat, LLC v. Chauvin, 274 S.W.3d 451 (Ky. 2009), the parties were in-state residents and the Kentucky Arbitration Act would have applied if the parties’ contract had specified that arbitration was to occur in Kentucky. Kentucky’s Arbitration Act, at KRS 417.200, only allows enforcement of an arbitration award in Kentucky where the agreement specifically states that arbitration is to be held in Kentucky. The Court did not decide if a Kentucky court could enforce an arbitration award if the arbitration had already occurred in Kentucky.
In the Credit Union and CBI case, the Federal Arbitration Act (“FAA”) applied because both parties to the contract were commercial entities from different states with people and materials outside Kentucky required to complete the project. The contract involved inter-state commerce and, therefore, the FAA applied. The result in Ally Cat has no application to the FAA. Ernest & Young LLP v. Clark, 323 S.W. 3d 682 (Ky. 2010). Under the FAA, at 9 U.S. Code § 9, the parties by contract can specify the court in which an arbitration award will be confirmed. However, if no court is specified in the parties’ agreement, then application to confirm an award is to be made in the United States court in the district in which the arbitration award was made.
The agreement between the Credit Union and CBI failed to specify a court to enter judgment on any arbitration award, therefore allowing CBI to obtain confirmation and judgment in the district court where the award was made in Georgia. Kentucky’s appellate court concluded that the Georgia arbitration award was properly confirmed in the Georgia federal court and that the order of the Kentucky circuit court allowing CBI to enforce the judgment in Kentucky was correct.
Undoubtedly, CBI incurred substantial attorneys’ fees and delay as a result of Paducah Credit Union’s efforts to defeat arbitration followed by its second effort to defeat enforcement of CBI’s judgment confirming the arbitration award. Hopefully, the agreement between the Credit Union and CBI included a provision for the recovery of attorneys’ fees incurred by CBI in the enforcement of the contract requiring the parties resolve their dispute by arbitration.
The lessons learned are to include the physical location of the arbitration proceeding. Mere reference to the Kentucky Arbitration Act is insufficient to identify Kentucky as the location of the arbitration. Ally Cat LLC v. Chauvin and Kindred Nursing Centers Ltd. Partnership v. Lane, 2010 WL 5018522 (Ky. App. 2011). The parties should also identify in the parties’ agreement the court for confirmation of the arbitration. Parties can designate that the Kentucky Arbitration Act or the FAA as the choice of law. The FAA can apply even between in-state residents if interstate commerce is involved. Kindred Nursing v. Lane and Hathaway v. Eckerle, 2011 WL 1104079 (Ky. 2011). If the FAA applies, then the Kentucky court does not consider whether the agreement to arbitrate complies with Kentucky’s Arbitration Act. Hathaway v. Eckerle, supra.