The Texas Supreme Court Upholds Appellate Review of Arbitration Award for Reversible Error Under the Texas Arbitration Act

Recently, the Texas Supreme Court upheld under the Texas Arbitration Act an arbitration agreement provision that expressly restricts an arbitrator's power to make an award that contains reversible error.

Texas Supreme Court Judicial Review Case

In Nafta Traders, Inc. v. Quinn, __ S.W.3d __ (May 13, 2011 slip op.), the Texas Supreme Court held that under the Texas General Arbitration Act parties may include in their arbitration agreements provisions that contractually limit an arbitrator's power such that judicial review of awards for errors that would be reversible based on existing law is possible.

Nafta Traders arose from an employment agreement between an international trading company and it Vice President Of Operations. That agreement contained an arbitration clause, which provided that "The arbitrator does not have the authority (1) 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 law." After being terminated, the employee sued, claiming sexual discrimination under The Texas Commission on Human Rights Act. The employer moved to compel arbitration, which the employee did not oppose. After the arbitrator found for the employee, the employer sought to vacate the award based on various purported errors of law. The trial court confirmed the award. Relying on the U.S. Supreme Court's holding in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008) that the Federal Arbitration Act (FAA) prohibits parties from contractually expanding the scope of judicial review of arbitration awards beyond the grounds listed in 9 U.S.C. §§ 9, 10, the court of appeals affirmed.

A unanimous Texas Supreme Court reversed and remanded the case to the court of appeals to determine the merits of the employer's appeal. The Supreme Court's holding is based on these points: (1) arbitration is foremost a creature of contract between the parties; (2) parties are free to agree to issues that will be arbitrated, who will decide those issues, and procedures to be followed; (3) the parties agreed that their arbitrator lacked the power to render a decision that contains a reversible error of law or that applies a cause of action or remedy not provided for under existing law; (4) this agreement is a limitation on arbitrator power instead of an expansion of grounds for judicial review; (5) Hall Street is both distinguishable and contemplates possible different results under state arbitration statutes; (6) FAA preemption does not bar this result because (a) the TAA and the FAA can both apply to an arbitration agreement and (b) the Court's construction of the TAA enforces an arbitration agreement instead of hindering an arbitration agreement. A fundamental premise underlying Nafta Traders is Texas' strong tradition of parties' freedom to contract, which enables them to agree that an arbitrator has no more power than does a judge.

Nafta Traders recognizes a split among state supreme courts regarding this issue and joins Alabama, California, Connecticut, and New Jersey, which have reached the same conclusion. See Raymond James Fin. Servs., Inc. v. Honea, 55 So. 3d 1161, 1170 (Ala. 2010); Cable Connection, Inc. v. DIRECTV, Inc., 190 P.3d 586, 606 (Cal. 2008); Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 640 A.2d 788, 793 (N.J. 1994); see also HH East Parcel, LLC v. Handy & Harman, Inc., 947 A.2d 916, 926 n.16 (Conn. 2008). Conversely, Georgia, Maine, North Dakota, Tennessee, and Washington have reached opposite results. See Brookfield Country Club, Inc. v. St. James-Brookfield, LLC, 696 S.E.2d 663, 667 (Ga. 2010); HL 1, LLC v. Riverwalk, LLC, 15 A.3d 725, 736 (Me. 2011); John T. Jones Constr. Co. v. City of Grand Forks, 665 N.W.2d 698, 704 (N.D. 2003); Pugh's Lawn Landscape Co. v. Jaycon Dev. Corp., 320 S.W.3d 252, 261 (Tenn. 2010).

Nafta Traders permits parties greater freedom to obtain the benefits of arbitration while preserving certain benefits of the judicial system. Given the TAA's broad application, Nafta Traders will apply to a broad range of potential disputes and can be attractive in complex commercial, real estate, and construction contracts; intellectual property licensing agreements; employment contracts; and pre-marital and property division agreements among others.

To achieve the results Nafta Traders permits, however, parties must draft arbitration agreements that call for limited arbitrator power or expanded judicial review. And, at a minimum, the agreements should expressly invoke the TAA (or a similar statute in a jurisdiction that reaches the same result) and contain other provisions that would assist in making the Nafta Traders holding applicable to the dispute. The parties must also preserve an adequate record for judicial review.

Although Nafta Traders arose from a domestic arbitration, similar results may occur in an international commercial arbitration in Texas and to which the TAA applies. The Texas Arbitration and Conciliation of International Commercial Disputes statute covers a broad range of commercial activities including, for example, distribution and joint venture agreements, construction, insurance, licensing, leasing, consulting, engineering, financing, banking, intellectual property, and technology transfers.

As a result of the Nafta Traders decision, careful drafting of your arbitration agreement can lead to additional protections afforded by the appellate courts. Please contact any member of our Arbitration Team if you have particular questions about your policies and procedures in this regard. We value your time and appreciate your input.