Locke Lord QuickStudy: Texas Supreme Court Holds Texas Arbitration Act’s Enumerated Vacatur Grounds Are Exclusive

Locke Lord LLP
May 24, 2016

The U.S. Supreme Court in Hall Street Associates, L.L.C. v. Mattel, Inc. held that Sections 10 and 11 of the Federal Arbitration Act (FAA) provide the exclusive regimes for review of arbitration awards and that these regimes cannot be supplemented by contract.  128 S.Ct. 1396 (2008).

The arbitration provision at issue in Hall Street provided, in pertinent part:

The Court shall vacate, modify or correct any award: (i) where the arbitrator’s findings of facts are not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of law are erroneous.

Despite the Supreme Court’s pronouncement in Hall Street, the question lingers as to whether “manifest disregard for the law” constitutes a viable basis for vacatur of an arbitration award under the FAA.  The Second, Fourth, Sixth and Ninth Circuits continue to recognize “manifest disregard” as a basis for vacatur under the FAA, with the Second Circuit describing “manifest disregard” as “judicial gloss” on the enumerated grounds for vacatur.  See Schwartz v. Merrill Lynch & Co., 665 F.3d 444 (2d Cir. 2011).

Following Hall Street was the much-discussed Texas Supreme Court decision in Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84 (Tex. 2011).  In Nafta Traders, the arbitration provision provided 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.”  Id. at 88.

The Texas Supreme Court found this provision was a limitation on the arbitrator’s powers,  found no valid reason to foreclose the parties’ agreed limitations on that power and held the arbitration award was subject to judicial review for reversible error because the arbitrator exceeded his powers, an enumerated vacatur ground under the Texas Arbitration Act (TAA). Tex. Civ. Prac. & Rem. Code §171.088(a)(3)(A) (requiring vacatur of an arbitration award if the arbitrators “exceeded their powers”). 

On May 20, 2016, the Texas Supreme Court in Hoskins v. Colonel Clifton Hoskins and Hoskins, Inc. unequivocally dispelled the notion that extra-statutory, common-law vacatur grounds, such as “manifest disregard for law,” constitute a basis for vacatur under the TAA.  No. 15-0046, slip op. at 10.

Holding the TAA’s enumerated vacatur grounds are exclusive, the Texas Supreme Court noted that “[b]ecause manifest disregard is not included in section 171.088 and because the parties did not agree to limit the arbitrator’s authority so as to authorize vacatur on that basis, Leonard’s attempt to vacate the award on the basis of manifest disregard must fail.”  Id.  

What can be gleaned from the Texas Supreme Court’s holding is that in order to have an arbitrator’s legal rulings reviewed under the TAA, the arbitration provision must contain a limitation on the arbitrator’s powers.  In the absence of a limitation, legal rulings – no matter how erroneous – are not subject to review and cannot constitute a basis for vacatur.  Whether this same technique, of limiting an arbitrator’s powers, will afford review of an arbitrator’s legal rulings in a vacatur action under the FAA remains, however, an unresolved question.