Nafta Traders, Inc. v. Margaret A. Quinn, No. 08-0613 (DB).
This is the long-awaited decision about whether the rule the U.S. Supreme Court announced in Hall Street — which held that parties to an arbitration agreement could not themselves agree to have a federal appellate court review the award because courts were prohibited by the Federal Arbitration Act (FAA) from second-guessing most of the substantive aspects of an arbitration decision — also applied under the Texas Arbitration Act (TAA).
Today, the Texas Supreme Court declined to adopt the same reading of its own statute, holding that parties had the freedom to design a hybrid system that had an arbitration panel make an initial award and later review by a (real) appellate panel. Justice Hecht wrote the opinion for a unanimous Court.
The heart of the decision is a detailed examination of the U.S. Supreme Court’s reasoning of Hall Street. The Texas Supreme Court noted that the question could be framed in two different ways: whether judicial authority can be expanded (as Hall Street asked) or what Justice Hecht calls “the flip-side” of the same question — whether parties can by their agreement choose to limit the power of their arbitrators.
Adopting that second framing, the Texas Supreme Court was somewhat critical of the U.S. Supreme Court’s reasoning. The problem was a section of the FAA that seems to suggest that the parties can agree to limit the power of arbitrators and, in turn, that courts can review whether arbitrators exceeded that limit:
[T]he Supreme Court, in holding that under the FAA the grounds for vacating, modifying, or correcting an arbitration award cannot be expanded beyond those listed in sections 10 and 11, did not discuss section 10(a)(4), which like section 171.088(a)(3)(A) of the TAA, provides for vacatur “where the arbitrators exceeded their powers”. The omission appears to us to undercut the [U.S.] Supreme Court’s textual analysis.
In the end, the Texas Supreme Court was not persuaded by the reasoning of Hall Street and thus declined to adopt the same reading of the Texas statute. As the opinion sums things up:
The problem comes down to this. Under the TAA (and the FAA), an arbitration award must be vacated if the arbitrator exceeds his powers. Generally, an arbitrator’s powers are determined by agreement of the parties. Can the parties agree that an arbitrator has no more power than a judge, so that his decision is subject to review, the same as a judicial decision? Hall Street answers no, based on an analysis of the FAA’s text that ignores the provision that raises the problem, and a policy that may be at odds with the national policy favoring arbitration. With great respect, we are unable to conclude that Hall Street‘s analysis of the FAA provides a persuasive basis for construing the TAA the same way.
Chief Justice Jefferson wrote a concurrence, joined by Justice Wainwright and Justice Lehrmann, with some bigger-picture thoughts about what it means when litigants opt for arbitration instead of using the courts:
I write only to observe that our system is failing if parties are compelled to arbitrate because they believe our courts do not adequately serve their needs. If litigation is leaving because lawsuits are too expensive, the bench and the bar must rethink the crippling burdens oppressive discovery imposes. If courts have yet to embrace modern case-management practices, the Legislature should ensure that the justice system has resources to improve technology and to hire qualified personnel—two sure ways to improve efficiency. …
As the Court does, I would affirm that right. Nevertheless, we must, in the future, address those aspects of our justice system that compel litigants to circumvent the courts and opt for private adjudication.
In a nutshell: The Court interpreted the Texas Arbitration Act to diverge from Hall Street. So if your arbitration agreement is governed by federal law (and thus Hall Street), you cannot agree to have judicial appellate review of the award. But if your agreement is governed by Texas law (and thus Nafta Traders), you do have this added measure of flexibility. With those stakes, attorneys drafting arbitration agreements have extra incentive to determine at the outset whether the agreement falls solely under Texas law or whether federal law applies.