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Mandatory Arbitration: What if the Arbiter Gets it Wrong?

Your business finds itself involved in a dispute over a contract, and it turns out the terms of the contract call for mandatory arbitration. After completing the arbitration process, your business is left seriously damaged by a binding decision based on a serious error of fact or law. Are you stuck with the bad decision, unable to seek review from a competent court? In Texas, the answer is “not always”.

As a popular form of alternative dispute resolution (ADR), arbitration has been used for decades. It is often included in commercial contracts as a mandatory and final dispute resolution mechanism in an attempt to reduce litigation costs. The arbitration process is not the same as a trial within the state or federal court system. Perhaps not unsurprisingly, the courts have been openly skeptical and even hostile toward arbitration under the belief that it unfairly and illegally blocks or dilutes the enforcement of legally cognizable rights.

Over the course of decades, several judicial doctrines emerged that created carve-outs and exceptions to the reviewability and finality of arbitration decisions. In the U.S. Fifth Circuit Court of Appeals, where Texas sits, both the doctrine of “manifest disregard” and a public policy exception have been applied by the courts. Both are judicially-created law, with no basis in statute. The doctrine of manifest disregard allows a court to review and modify or vacate an arbitration decision when the arbitrator knew or should have known of a clear legal principle but failed to apply it.

In 2008, in an attempt to extinguish all judicially-created bases to review, modify, or vacate arbitration decisions—including the doctrine of manifest disregard—the United States Supreme Court declared the provisions of the Federal Arbitration Act (FAA) to be exclusive for parties seeking review of such decisions. In Hall Street v. Mattel, Inc., the Court held that the statutory grounds for vacating or modifying an arbitration award under the FAA are exclusive and cannot be supplemented by contract.

That last portion is of great significance to the arbitration process and its usefulness for ADR. The choice of arbitration springs from a contractual agreement between parties. Commercial parties normally provide for judicial review of awards within their agreement. The issue after the decision in Hall Street was whether and to what extent parties agreeing to arbitration can prescribe judicial review beyond the specific criteria listed in the FAA under the common law or a state arbitration act. The Texas Supreme Court resolved the issue in Nafta Traders, Inc. v. Quinn.

In that case, the Court held that the Texas General Arbitration Act (TAA) allows parties to contract for expanded judicial review of arbitration awards, and that this judicial finding is not preempted by the FAA or the ruling in Hall Street. The court distinguished Nafta Traders from Hall Street by explaining that the parties had simply denied the arbitrator certain powers and had not expanded the scope of review. The result is that the TAA does not limit judicial review of an arbitration award to the grounds specified in the TAA. Consequently, parties creating arbitration agreements subject to the TAA may preserve a right to judicial appeal by explicitly stating that any arbitration award must abide by traditional judicial standards of appellate review.

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