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Aug 26, 2016

Texas Supreme Court Limits Grounds to Vacate Arbitration Awards

By: Chris Lindstrom

In an issue of first impression, the Texas Supreme Court, in Hoskins v. Hoskins, No. 15-0046, 2016 WL 2993929 (Tex., May 20, 2016), held that a party may avoid confirmation of an arbitration award only by demonstrating grounds expressly listed in the statute stating the grounds for vacating arbitration awards.   This holding overturned years of rulings by Texas appellate courts that permitted vacating awards on common-law grounds.

Arbitration has been recognized in Texas as far back as the Constitution of 1845.  In 1965, the state first adopted the Uniform Arbitration Act.  In 1997, substantial amendments were made, and the Texas Arbitration Act is now codified at Chapter 171 of the Civil Practice & Remedies Code.

Section 171.088(a)(2-3) lists a number of ways that an arbitration award can be vacated based on the action of the arbitrator: (1) evident partiality, corruption or misconduct by an arbitrator; (2) the arbitrators exceed their power; (3) the arbitrator refuse to postpone a hearing upon a showing of sufficient cause; or (4) the arbitrator refuse to hear material evidence or conduct the hearing “in a manner that substantially prejudiced the rights of a party.”  These grounds are all focused on the integrity and fairness of the arbitration process.  The statute states that a court “shall confirm” an award unless one of the delineated bases for vacatur is found.

In spite of that language, prior to Hoskins, Texas courts would overturn arbitration awards based on reasons outside the language of Section 171.088.  For example, in  Tanox, Inc. v. Akin, Gump, Strauss, Hauer & Feld, L.L.P., 105 S.W.3d 244 (Tex. App.—Houston [14th Dist.] 2003, pet. denied) and Home Owners Mgmt. Enters. Inc. v. Dean, 230 S.W.3d 766 (Tex. App.—Dallas 2007, no pet.), the appellate courts held that a “manifest disregard of the law” by an arbitrator was grounds to vacate an award.  As recently as 2010, the Texas Supreme Court declined to rule on whether an arbitration award could be vacated for a reason based in common law such as “manifest disregard for the law.”  See East Tex. Salt Water Disposal Co. v. Werline, 307 S.W.3d 267 (Tex. 2010).

The dispute in Hoskins involved the division of property in a trust following the death of the trustee.   When one of the companies owned by the trust filed for bankruptcy, the trust beneficiaries reached a settlement agreement over the division of proceeds and agreed to arbitrate any disputes over the settlement agreement.  A dispute did arise, and the parties went to arbitration under the Texas Arbitration Act.

After the arbitrator issued an award, one of the parties sought to have it overturned on both statutory and common law grounds.  The trial court denied that request, and the appeal was solely on the issue that the arbitrator disregarded well established Texas law.

The Texas Supreme Court explained that because Texas law favors arbitration, judicial review is “extraordinarily narrow.”   The Texas Arbitration Act states that courts “shall confirm” awards unless grounds listed in the statute are offered.   Based on that plain language and the public policy of the state, the Court held that there are no common law grounds to overturn an arbitration award.  As the Court stated, the Texas Arbitration Act “leaves no room for courts to expand on those grounds, which do not include an arbitrator’s manifest disregard of the law.”

The Court also explained that “manifest disregard for the law” is distinct from the complaint that an arbitrator exceeds their authority, which is specifically listed in the statute.  In  Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84 (Tex. 2011), the Court previously explained that an arbitrator “exceeds his power by deciding an issue the parties did not agree to submit to him, he does not exceed his power by deciding matters incorrectly.” 

Based on the holding in Hoskins, it will be more difficult for parties to arbitration agreements to overturn awards.   There is no appeal available to a party to arbitration if the arbitrator ignores the law.    However, Hoskins only deals with agreements to arbitrate under the Texas Arbitration Act.   If parties agree to arbitrate under the Federal Arbitration Act, there may still be a common law basis of vacating an award depending on the jurisdiction.  See e.g. Raymond James Fin. Servs., Inc. v. Fenyk, 780 F.3d 5 (1st Cir. 2015) (“Whether the manifest-disregard doctrine remains good law, however, is uncertain…”); Citigroup Glob. Mkts., Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009) (“manifest disregard of the law as an independent, non-statutory ground for setting aside an award must be abandoned and rejected...”).