According to the Kentucky Supreme Court, the court, not the arbitrator, should normally decide the issue of whether a party had waived its right to arbitrate.

In American General Home Equity, Inc. v. Kestel, No. 2006-SC-000830-DG, 2008 WL 2169405 (Ky. May 22, 2008), Kestel took out a mortgage on her home with American General. The mortgage contract contained an arbitration agreement. After Kestel defaulted on the loan, American General initiated foreclosure proceedings and filed them with the court. Kestel counterclaimed, alleging fraud and various statutory claims.

After several months, Kestel made her first discovery requests. American General responded by moving to compel arbitration. The trial court denied the motion without explanation. The intermediate court affirmed on the specific grounds that American General's delay and litigation conduct constituted a waiver of the right to arbitrate.

As a preliminary matter, the Court found that the issue of waiver was properly before it, rather than before an arbitrator. The Court acknowledged that some federal courts have applied United States Supreme Court dicta opining that waiver issues should usually be decided by the arbitrator. See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (recognizing a "presumption" that the arbitrator would decide waiver issues); see also Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) (stating that allegations of waiver should be settled by arbitration as a matter of federal law). However, the Court instead decided that the waiver issue should be decided by a court, citing courts' divergent holdings on the issue, their inherent power, and their familiarity with the "abuses" material to waiver determinations.

The Court then considered whether American General had waived the right to arbitrate by engaging in conduct inconsistent with that right. The Court refused to find waiver simply because American General filed a foreclosure action, noting that Kentucky is a judicial foreclosure state. While American General waited several months before actually moving to compel arbitration, it had given notice "early and often" that it was preserving its right to arbitrate.

The litigation activity by American General was characterized by the Court as defenses against Kestel's motions for partial summary judgment and to strike arbitration defenses, and was not for the purpose of gaining any tactical advantage. Because it found no evidence of inconsistent litigation conduct, the Court did not reach the issue of whether Kestel suffered prejudice.