Kentucky Supreme Court Reinforces Importance of Properly Incorporated Arbitration Provisions to Larger Agreements
The Kentucky Supreme Court recently held that an arbitration provision signed by a class of students upon their application and acceptance to a for-profit college was unenforceable because the enrollment agreement did not properly incorporate the arbitration provision. Facing unemployment and mounting student debt, the students in Dixon v. Daymar Colleges Group, LLC et al., 2012-SC-000687-DG (Ky. Apr. 2, 2015) (to be published) brought a host of claims against the school, including civil conspiracy, breach of contract, breach of implied contract, fraudulent inducement, and negligent misrepresentation. The students argued they were not bound by an arbitration provision printed on the enrollment agreement because they did not actually agree to the arbitration provision.
Daymar College is a for-profit institution offering degrees online and in person in specialized fields that, according to Daymar, promise high employment possibilities within a condensed schedule. During the admissions process, the students met with an enrollment counselor who provided them with an enrollment agreement to sign. The agreement was a single sheet, front and back, with a signature line on the front side of the sheet and, right above the signature line, a space to initial indicating the students had read the terms of the agreement. The arbitration provision in question was on the reverse side of the sheet and provided that “any dispute, controversy, or claim arising out of or relating to my enrollment at the College … be resolved by arbitration.” Relying on this provision, Daymar petitioned the trial court to dismiss the suit and compel arbitration. The students argued that the provision was procedurally and substantively unconscionable. The trial court agreed.
The Court of Appeals reversed the trial court’s findings, holding that the agreement was not procedurally or substantively unconscionable because the students had an opportunity to read the terms on the document and that the terms were conspicuous and comprehensible. The Court of Appeals also held that the arbitration provision was properly incorporated, focusing its analysis on the fact that the students’ signatures were found below the incorporating language. The Kentucky Supreme Court granted discretionary review and reversed the Court of Appeals.
Before the Kentucky Supreme Court, Daymar argued that (1) the trial court did not have jurisdiction because the arbitration provision expressly provided that the arbitrator was to decide the issue of arbitrability of claims and (2) the students’ claims fell within the scope of the arbitration provision. The students countered that the trial court properly exercised its jurisdiction because they challenged whether there was an actual agreement to arbitrate, not whether disputes themselves were arbitrable. The Court held that the delegation provision of the agreement did not govern the determination of whether the parties actually agreed to arbitrate, but rather it governed the determinations as to the scope of the agreement and the enforceability of its terms. It is for the trial court, not the arbitrator, to determine whether the parties actually assent to arbitration when one of the parties challenges the formation of the agreement.
The students also contended that the arbitration provision was not binding because it appeared after the signature line on the document and was not properly incorporated into the agreement. Daymar argued that the students were bound by the agreement whether or not they had signed it and that the enrollment agreement properly incorporated the arbitration provision.
First, the Court held that the arbitration agreement had to be signed by the students to be valid under the Statute of Frauds. The Court applied KRS 446.060, which provides that when required by law, such as the Statute of Frauds, writings are not deemed to be signed unless the signature is subscribed at the end or close of the writing. As the signature block appeared toward the bottom of the front page of the admissions agreement, and because the arbitration provision appeared on the back of the agreement, the arbitration provision was not deemed signed. Still, Daymar argued that through incorporation by reference, the students had agreed to the arbitration terms.
Second, the Court rejected Daymar’s argument that the provision was properly incorporated by reference and concluded that the incorporation language near the signature block was insufficient because it referred to “attached amendments,” which, the Court reasoned, did not apply to the arbitration provision as it was not an amendment. Daymar also argued that the arbitration provision was properly incorporated because the contract included a place for students to initial to indicate that they had read both sides of the agreement. The Court held that the arbitration provision was not incorporated, as the language indicated only that the students had read both sides of the enrollment agreement, not that they assented to be bound by the arbitration provision.
Within a larger agreement, arbitration provisions are sometimes given the same treatment as boilerplate language, even though the provisions can provide real cost-savings by precluding expensive and unpredictable litigation. Dixon reinforces the importance of giving alternative dispute resolution provisions the attention they deserve by drafting them clearly and conspicuously. As evidenced here, arbitration provisions should be able to stand by themselves, or else a court may look beyond the document to find persuasive reasons not to compel arbitration. Drafters should consider transforming such provisions into stand-alone agreements instead of incorporating them as a provision in a larger contract. Had Daymar done so, they would have been able to avoid litigating not only the validity of the arbitration provision but also the students’ claims.
NOTE: Patrick C. Walsh (Law Clerk-Louisville, Kentucky) assisted in researching and drafting this Alert.