In affirming a lower court order denying and dismissing a credit card company’s application to confirm an arbitration award, the Court held that once the credit card holder objected to arbitral jurisdiction, the credit card company was required to seek a court order compelling arbitration pursuant to section 4 of the Federal Arbitration Act (FAA). The Court’s holding in this case reduces to mere surplusage an Indiana statute that sets forth a procedure whereby the cardholder could have obtained a court order staying the arbitration.

In MBNA America Bank, N.A. v. Kay, 888 N.E.2d 288 (Ind. Ct. App. 2008), MBNA filed an arbitration claim with the National Arbitration Forum (FORUM), alleging that Kay had an unpaid balance on an MBNA credit card. In response, Kay filed a statement objecting to the arbitration and claiming that he never agreed to submit to the FORUM’s jurisdiction.

The arbitrator found that the parties had entered into a valid arbitration agreement and issued an award in favor of MBNA. MBNA filed an application to confirm the award. Kay opposed confirmation based upon his objection to arbitral jurisdiction. The trial court denied confirmation and dismissed MBNA’s application with prejudice.

On appeal, MBNA argued that the trial court erred in hearing Kay’s challenge because under Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395 (1967), arbitrators have exclusive authority to decide the validity of the underlying contract. The Court found that MBNA’s reliance on Prima Paint was misplaced since Kay’s challenge was directed at the validity of the arbitration agreement rather than the underlying contract.

According to the Court, once Kay objected to the arbitral jurisdiction, FAA procedure required MBNA to petition for a court order compelling arbitration. In imposing this duty on MBNA, the Court cited section 4 of the FAA, which provides that "[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition… for an order directing that such arbitration proceed in the manner provided for in such agreement." (Emphasis added.)

Based on its interpretation of the FAA, the Court held that the arbitration award was "improperly obtained" since Kay objected to arbitral jurisdiction and MBNA did not subsequently procure a court order compelling arbitration. Accordingly, the Court affirmed the dismissal of MBNA’s application to confirm the award.

The Court’s interpretation of the FAA – namely, that section 4 of the FAA required MBNA to seek an order compelling arbitration – is at odds with both (1) the language of the statute, which uses the permissive "may" rather than the mandatory "shall" and (2) federal case law construing section 4. See, e.g., Val-U Constr. Co. of S.D. v. Rosebud Sioux Tribe, 146 F.3d 573, 580 (8th Cir. 1998), and cases cited therein.

Moreover, the Indiana Uniform Arbitration Act sets forth a procedure whereby Kay could have obtained a court order staying the arbitration. See Ind. Code § 34-57-2-3(b) (authorizing court to stay an arbitration where the applicant shows that there is no arbitration agreement). The Court’s holding in this case reduces that statutory provision to mere surplusage because a party would have no occasion to seek an order staying an arbitration if the other party had a legal obligation to seek a court order compelling arbitration.