Kentucky Court of Appeals Highlights Two Potential Issues with Arbitration Agreements

A recent Kentucky Court of Appeals decision provides two useful lessons regarding the importance of understanding and following the explicit terms of an arbitration agreement.  In Ambac Assur. Corp. v. Knox Hills LLC,[1] the court made two instructive observations: (1) If the parties intend for an arbitrator to decide threshold issues, they should include a delegation clause clearly delegating the authority to the arbitrator, and (2) If there are preconditions to the arbitration agreement vesting, the preconditions must be met before the arbitration agreement is binding on the parties.  The first observation relates to whether a judge or an arbitrator should decide threshold issues.  Possible threshold issues relate to enforceability and interpretation of an agreement to arbitrate.  A delegation provision must be clear and unmistakable if a party wishes the arbitrator instead of the court to make threshold determinations.[2]     

Arbitration agreements are matters of contract; thus, parties generally have the liberty to specify the future claims that they wish to arbitrate in the initial arbitration agreement.  They can also define the process of the dispute resolution; for example, they can generally require mediation of disputes before making arbitration available.  However, if the parties create certain preconditions for the arbitration agreement to vest, they must complete them in order for the agreement to become binding.  In Ambac Assur. Corp. v. Knox Hills LLC, the parties never established an advisor as required by the agreement.  This requirement was material to the formation of the agreement to arbitrate, and the failure to perform it caused the agreement to never vest.  The parties were therefore free to litigate the dispute.

The case law regarding arbitration agreements continues to evolve.  For example, the United States Supreme Court held this year that the National Labor Relations Act does not prevent employees and employers from waiving class action resolution of disputes in arbitration.[3]  The U.S. Supreme Court has also granted certiorari to decide if parties can delegate exclusive authority to an arbitrator to determine if the Federal Arbitration Act (FAA) does not apply to a particular contract under Section 1 of the FAA.[4]

Given the various challenges to arbitration agreements and the evolving case law, parties that have agreed to arbitrate future disputes should review the agreements to ensure that they are valid and enforceable and that the provisions relating to the scope of the agreement and the delegation of authority are clear.

If you have questions, feel free to contact the author or your usual Dinsmore attorney.