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January 19, 2012 Articles

Texas General Arbitration Act Allows for Expanded Judicial Review

By Gabrielle Jackson

Arbitration is a creature of contract except when the parties are seeking to expand the scope of review allowable under specific sections of the Federal Arbitration Act (FAA). In Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 578 (2008), the U.S. Supreme Court held that the grounds for vacating or modifying an arbitration award as enumerated in sections 10 and 11 of the FAA are exclusive and cannot be supplemented by agreement of the parties. Hall Street did not, however, address the issue of whether the FAA automatically precludes enforcement of an agreement for expanded judicial review permissible under a state arbitration statute when arbitrators exceed the scope of their delegated authority.

This was the issue faced by the Texas Supreme Court in Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84 (Tex. 2011). The court held that the Texas General Arbitration Act (TAA) allows parties to contract for expanded judicial review when an arbitrator exceeds the authority delegated by the parties and the FAA does not preempt enforcement of such an arbitration agreement.

Background and Arbitration
The dispute arose when petitioner Nafta Traders, Inc., terminated Margaret A. Quinn. Quinn sued Nafta in state court alleging sex discrimination in violation of the Texas Commission on Human Rights Act. Because the employee handbook included an enforceable arbitration provision, the lawsuit was dismissed and the parties were ordered to commence arbitration.

At the conclusion of the hearings, the arbitrator awarded Quinn back pay, damages arising from mental anguish, special damages, and attorney fees and costs. Quinn petitioned the court to confirm the award under the Texas Arbitration Act. Nafta sought vacatur of the award under the FAA, TAA, common law, and the arbitration provision, which stated that "the arbitrator does not have authority (i) to render a decision which contains 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." Nafta argued that the arbitration provision agreed to by the parties expanded the scope of judicial review to include review for reversible errors of law under the TAA. The arbitrator allegedly committed such errors when he misapplied federal law to a case involving a state law claim of sex discrimination and improperly awarded attorney fees and costs, special damages, and damages for mental anguish.

TAA and FAA Are to Be Similarly Construed
The district court issued a brief order confirming the arbitrator's award without addressing the issues raised by Nafta. Nafta appealed. Before the Texas Court of Appeals ruled, the U.S. Supreme Court rendered its decision in Hall Street. The Texas Court of Appeals, basing its decision on Hall Street, affirmed the district court's judgment concluding that the FAA and TAA are similar acts and should be construed in the same manner. Nafta appealed to the Supreme Court of Texas.

TAA Provides for Expanded Review
The Supreme Court of Texas reviewed the policies surrounding arbitration and passage of the FAA. The court recognized that "an arbitrator derives his power from the parties' agreement to submit to arbitration." Thus, the intentions manifested in the parties' agreement establish the level of authority vested in an arbitrator. The court also noted that Congress passed the FAA to ensure judicial enforcement of private arbitration agreements according to their terms.

Next, the court addressed the reasoning behind the Supreme Court's decision in Hall Street. Acknowledging that the sections of the FAA addressed by the Court do not authorize contracting parties to supplement the grounds for judicial review, the Texas Supreme Court noted that the Hall Street decision did not address section 10(a)(4) of the FAA—similar to section 171.088(a)(3)(A) of the TAA—which provides for vacatur "where the arbitrators exceeded their powers."

The court held that when an arbitration agreement, such as the one signed by the parties, limits the authority of the arbitrator in a specific manner and the arbitrator exceeds that grant of limited authority, judicial review is permissible under the TAA.

TAA Allows Judicial Review if Expressed in Contract
The court next addressed the issue of preemption. State law is clearly preempted by the FAA when the state law hinders enforcement of arbitration agreements. A state law that merely creates an impediment to arbitration, however, is not preempted by the FAA. As the U.S. Supreme Court noted in Hall Street, "the FAA is not the only way into court for parties wanting review of arbitration awards. . . . Expanded judicial review is available under state law or common law."

Noting that the states are already divided over whether their own statutes permit agreements for expanded judicial review of arbitration awards (with three saying "yes" and five saying "no"), the court held that the expanded judicial review permitted under the TAA is not preempted by the FAA.

The court stressed, however, that an arbitration award is not susceptible to full judicial review merely because the parties have agreed. "A court must have a sufficient record of the arbitral proceedings, and complaints must have been preserved, all as if the award were a court judgment on appeal." The parties in Nafta submitted a record of the arbitration proceeding, including a written transcript of the evidence offered. Nafta attacked the award on several legal grounds and challenged the sufficiency of the evidence. The majority of arbitrations, however, will not be conducted in a way that would create and preserve such a record for future court review. "If error cannot be demonstrated, an award must be presumed correct." In addition, the parties may not agree to a different standard of judicial review than the standard the court would employ in a judicial proceeding involving the same subject matter.

Keywords: arbitration, judicial review, Texas General Arbitration Act (TAA), Federal Arbitration Act (FAA), Texas Supreme Court