In upholding the confirmation of an arbitral award issued in regard to a fraud claim, a Kentucky appellate court rejected several state constitutional arguments against enforcement of the underlying arbitration agreement.

In Dutschke v. Jim Russell Realtors, Inc., No. 2007-CA-001146-MR, 2008 WL 2942093, (Ky. Ct. App. Aug. 1, 2008), Sharon and Kenneth Dutschke purchased a home from Fred Faust through Jim Russell Realtors (Russell). After closing, the Dutschkes experienced many problems with the home. They filed suit alleging fraudulent inducement in the contract.

At the time, Kentucky law held that fraudulent inducement of an arbitration agreement did not have to be separately alleged. See Marks v. Bean, 57 S.W.3d 303, 307 (Ky. Ct. App. 2001) (fraud in the inducement determination "is more properly determined by those trained in the law"). Russell's motion to compel arbitration was never ruled on and a trial date was set.

Subsequently, Marks was overruled by the Kentucky Supreme Court, which reinterpreted Chapter 417 of the Kentucky Uniform Arbitration Act ("KUAA"). See Louisville Peterbilt, Inc. v. Cox, 132 S.W.3d 850, 856 (Ky. 2004). Louisville Peterbilt held that an arbitration agreement could only be avoided if the fraudulent inducement extended to the forming of the arbitration agreement. See Ky. Rev. Stat. § 417.050 (providing no exception for fraudulent inducement claims). Russell renewed its motion, which the trial court granted.

Arbitration ensued, and the arbitrator issued an award in favor of the Dutschkes, but in an amount much smaller than they requested. The Dutschkes filed a motion to vacate the arbitration award, claiming it was grossly inadequate.

Upon Russell's reply, the Dutschkes raised various state constitutional arguments against the KUAA. The trial court denied the Dutschkes' motion to vacate the award and instead confirmed it.

The Dustchkes' first argument on appeal was from the exact holding in Marks, that the allegations of fraudulent inducement of the entire contract should be enough to show fraudulent inducement of the arbitration agreement.

Although the Court acknowledged that they would not be able to overturn Louisville Peterbilt, it considered and rejected each of the Dutschkes' constitutional arguments.

The Dutschkes first argued that the KUAA violated the jural rights doctrine, which provides that the right to recover for personal injury, wrongful death, or negligence cannot be abolished. The claim here was for fraudulent inducement, which did not implicate any of these rights.

Further, the Dustchke's contended that the right to a jury trial is absolute under Section 7 of the Kentucky Constitution. This right is subject, however, to modifications authorized by the Constitution. See Ky. Const. § 7 (preserving the right to jury trial with modifications). Section 250 of the Constitution provides for an arbitration system. See Ky. Const. § 250 (giving power to the state legislature to fashion laws regarding arbitration). Moreover, the Kentucky Supreme Court had specifically held that arbitration provides a proper forum for claims of fraud. Louisville Peterbilt, 132 S.W.3d at 856.

The Dutschkes then alleged that the proper standard to be applied when considering the validity of an arbitration clause is whether it was demonstrated that "the contract was freely, knowingly, and voluntarily entered into."

The Court was not persuaded to apply this standard. Regardless, it noted that Louisville Peterbilt affirmed the current standard for proving acquiescence to an arbitration agreement, which puts the burden first on the party seeking arbitration to prove its existence, but then shifts the burden to the party against arbitration once a prima facie showing has been made.

Finally, the Court rejected the Dutschkes' argument that the KUAA does not provide for meaningful review as guaranteed by Section 2 of the Kentucky Constitution. See Ky. Const. § 2 (forbidding absolute power over lives and property). The KUAA allows for review of an arbitral award that is "consistent with the underlying purposes of arbitration, generally…and …is sufficient to comply with Section 2."

Accordingly, the Court affirmed the judgment of the trial court, upholding confirmation of the arbitral award.