In our last column, we analyzed the most recent court decisions from the U.S. Supreme Court, the Federal Circuit Courts of Appeal and the State of California regarding the enforceability of consumer and employment arbitration agreements. Texas jurisprudence on arbitration law is robust and independent. Here, we list five things that you should know about Texas arbitration law in case you find yourself negotiating an arbitration clause with a Texas choice of law provision.
1. Have your cake and eat it too
The Texas Supreme Court in Nafta Traders, Inc. v. Quinn held that the Texas Arbitration Act (TAA) permits parties to contract for expanded judicial review of arbitration awards. The court declined to follow U.S. Supreme Court precedent holding that the Federal Arbitration Act (FAA) prohibits parties from contracting for expanded judicial review of arbitration awards.
The parties in Nafta Traders attempted to contract around the statutory limitations in the FAA and the TAA—which preclude vacating arbitration awards for errors of law or fact—and agreed that “[t]he arbitrator does not have authority (i) to render a decision which contains a reversible error of state or federal law, or (ii) to apply a cause of action or remedy not expressly provided for under existing state or federal law.”
After the district court confirmed an arbitration award in Quinn’s favor, the U.S. Supreme Court issued an opinion holding that the FAA’s grounds for vacating an arbitration award “are exclusive” and may not be “supplemented by contract.” See Hall Street Associates, L.L.C. v. Mattel, Inc. The Texas Supreme Court distinguished Hall Street on the basis that it was not applying the FAA, but rather the TAA. After critiquing the Hall Street analysis, the Texas Supreme Court held that the TAA permits parties to agree to expanded judicial review of arbitration awards, and the FAA does not preempt state law permitting such expanded review.
Nafta Traders allows parties contemplating arbitration agreements to have their cake and eat it too. Instead of choosing between the risk of a wrong—and unreviewable—arbitration award or potentially cumbersome litigation in court, Texas now recognizes a hybrid option—arbitration with an expanded scope of judicial review.
2. To the victor go the spoils
The winning party in arbitration has appeal rights should the trial court vacate the award. The Texas Supreme Court in East Texas Salt Water Disposal Co. Inc. v. Werline considered whether a party could appeal a trial court decision that denied confirmation of an award in its favor, vacated the award and directed that a new arbitration be conducted.
After Werline won the underlying arbitration, East Texas Salt petitioned the district court to vacate, modify or correct the award. Werline counterclaimed to confirm the award. The trial court denied confirmation, vacated the award, made certain fact findings and ordered a new arbitration consistent with its findings. As expected, Werline appealed. East Texas Salt argued on appeal that the appellate court lacked jurisdiction because the trial court had vacated the award and ordered a rehearing. TAA Section 171.098(a) subsection (3) (confirming or denying confirmation of an award) was at issue. Much to the chagrin of East Texas Salt, the appellate court reversed and rendered judgment confirming the award. The Texas Supreme Court affirmed, holding that the trial court’s judgment was appealable because it fit under subsection (3). The court recognized that the right to appeal assures that a trial court does not exceed its authority in reviewing an arbitration award and further noted that the TAA’s purpose would be skirted if a trial court’s order for rehearing could not be appealed immediately. This opinion protects the parties’ rights to contract when they have agreed to “final and binding” arbitration of their disputes: a good thing if you are the prevailing party—not so much if you are not.
3. In Texas, arbitration trumps related litigation and serves as a pause button to that litigation
When an issue is pending in both arbitration and litigation, Texas recognizes that the Federal Arbitration Act generally requires the arbitration to first proceed. In In re Merrill Lynch & Co, Inc., two subsidiaries of the same company launched identical claims against an investment company. One had an arbitration agreement while the other did not. The Texas Supreme Court abated the litigation to ensure that the arbitration agreement had priority over collateral litigation.
4. Unconditional commitments are not unconscionable
The Texas Supreme Court in In re Odyssey Healthcare, Inc. refused to uphold a lower court finding that a contractual arbitration provision was unconscionable. The court found that, an arbitration clause is not illusory, as a defense to its enforcement, unless one party can avoid its promise to arbitrate by amending the provision or terminating it altogether. The arbitration agreement at issue contained limitations as to Odyssey’s right to amend or terminate the agreement and thus, the Texas Supreme Court found that it did not contain an illusory promise by Odyssey.
5. When all else fails, it pays to know who your adversary knows
Without expanded judicial review, challenging an arbitration award based on arbitrator bias is the most effective remedy of the losing party. How is this done? Through thorough investigative work in the trenches. In Karlseng v. Cooke, the parties agreed to arbitrate a partnership dispute under a former federal magistrate. The arbitrator had a prior social and business relationship with the counsel of one of the parties, but failed to disclose it. In fact, the arbitrator and counsel presented themselves as complete strangers when they introduced themselves at the start of the arbitration. The arbitrator then awarded $22 million in favor of that party. The trial court denied a motion by opposing counsel to investigate what appeared to be evident partiality, which the Dallas Court of Appeals later ruled was an abuse of discretion. The court pointed to the fact that an arbitrator’s duty to disclose is predicated upon the enormous power, responsibility, and discretion vested in the arbitrator and limited judicial review of the arbitrator’s decisions.
The Houston Court of Appeals for the 14th District also condemned arbitrator bias in Amoco Co. v. Occidental Petroleum Corp . Undisclosed relationships between members of the arbitration panel and the plaintiff caused the court to vacate the arbitration panel’s award.
We’ve covered plenty of ground in our last few columns that we hope provides guidance on arbitration strategies in different jurisdictions. In our next couple of posts, we will provide a checklist of things to consider when thinking about whether to implement or modify your arbitration practices.