How Final is Arbitration? In Texas, You Decide.

Chris Hanslik

November 14, 2011

The arbitration process was designed to provide an efficient and economical forum for dispute resolution.  One of the important features of arbitration is a very limited right of appeal.  The Texas Supreme Court, however, has now taken the position that the Texas General Arbitration Act (TGAA) does not limit judicial review of an arbitration award to the grounds specified in the TGAA.  InNafta Traders, Inc. v. Quinn, the Texas Supreme Court also went one step further and stated that the Federal Arbitration Act (FAA) does not preempt expanded judicial review of an arbitration award under the TGAA.

At issue in Nafta Traders was an arbitration clause contained in an employee handbook which stated that “the 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 an award in favor of Quinn was issued, Nafta Traders appealed claiming that the parties’ agreement placed limits on the arbitrator’s authority which expanded the scope of review beyond the provisions in the FAA and TGAA.

While Nafta Traders was pending in the appeals process, the United States Supreme Court issued a ruling in Hall Street Assocs., L.L.C. v. Mattel, Inc. that the grounds specified in the FAA for vacating or modifying an arbitration award are exclusive and can not be expanded by agreement.  Breaking ranks with the U.S. Supreme Court, the Texas Supreme Court distinguished the situation inNafta Traders from Hall Street Associates by finding that the parties in Nafta Traders had not expanded the standard for review, but rather denied the arbitrator certain powers.  The court then noted that because one of the statutory grounds for vacating an arbitration award under the TGAA is that it exceeds the arbitrator’s powers, the award under the arbitration provision could therefore be reviewed for errors of law and to confirm that any relief granted was based on a cause of action or remedy authorized under existing federal or state law.  The court also held that the TGAA is not preempted by the FAA.

The result of the holding in Nafta Traders is that the TGAA does not limit judicial review of an arbitration award to the grounds specifically set forth in the TGAA.  Accordingly, parties whose agreement to arbitrate is subject to the TGAA may preserve their right to a traditional appeal by restricting the arbitrator’s powers to those typically possessed by a trial court judge or by expressly stating that the arbitration award will be subject to traditional judicial standards of appellate review.  Another important aspect to note is that under Nafta Traders the parties must make a verbatim record of the arbitration proceeding.

With this broad power in the hands of contracting parties arbitration under the TGAA may not be so binding after all.