Arbitration Agreements, Expanded Judicial Review, and Preemption - Hall Street Associates and NAFTA Traders, Inc. - a National Debate with International Implications

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I. INTRODUCTION

On May 13, 2011, the Texas Supreme Court, in construing the Texas Arbitration Act, rejected the U. S. Supreme Court's analysis in Hall Street Associates, L.L.C. v. Mattel, Inc} At issue was whether the parties may by agreement expand judicial review of an arbitration award beyond the specific grounds for vacatur or modification set forth in the Federal Arbitration Act. In NAFTA Traders, Inc. v. Quinn* 1 2 the Texas Supreme Court held that the Texas Arbitration Act does not preclude the parties from supplementing judicial review by contract. A discussion on the reasoning of the Texas Court and others that have addressed this issue, together with implications, is vital to moving forward with contractual arbitration domestically and internationally.

The Federal Arbitration Act ("FAA") of 19253 prescribes the grounds for confirmation, vacatur, or modification of an arbitration award. The statutory grounds are set forth in §§ 9, 10 and 11 of the FAA.4 In Hall Street Associates L.L.C. v. Mattel, Inc., the U. S. Supreme Court stated of these statutory grounds:

Sections 10 and 11, after all, address egregious departures from the parties' agreed-upon arbitration: "corruption," "fraud," "evident partiality," "misconduct," "misbehavior," "exceeding] . . . powers," "evident material miscalculation," "evident material mistake," "award[s] upon a matter not submitted;" the only ground with any softer focus is "imperfect[ions]," and a court may correct those only if they go to "[a] matter of form not affecting the merits."5

In addition, a non-statutory ground for vacating an arbitral award was developed in the courts as the doctrine of "manifest disregard." The doctrine arose in 1953 from language in Wilko v. Swan,6 where the Supreme Court stated, "the interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation."7 Generally, under the "manifest disregard" doctrine a court manifestly disregards the law when an arbitrator knows of a clear legal principle and refuses to apply it.8 In addition to "manifest disregard of the law," the Fifth Circuit Court of Appeals has recognized a non-statutory ground based on "public policy."9

In Hall Street the U.S. Supreme Court ostensibly abolished all nonstatutory grounds for judicial review, including "manifest disregard" and "public policy," and held that, "[t]he FAA's grounds for prompt vacatur and modification of awards are exclusive for parties seeking expedited review under the FAA."10 In reaching this conclusion, the Court suggested that '"manifest disregard' can be read as merely referring to the § 10 grounds collectively, rather than adding to them ... or as shorthand for the § 10 subsections authorizing vacatur when arbitrators were 'guilty of misconduct' or 'exceeded their powers.'"11

The Circuit courts were in conflict over the exclusiveness of the FAA provisions and the non-statutory doctrine of "manifest disregard" before Hall, and some still question whether "manifest disregard" survived the Hall Street decision.12 More importantly, the ruling in Hall Street is of great significance to arbitration as an ADR process. Arbitration is a matter of contract between the parties, and parties typically provide for judicial review of the arbitral award in their agreement. The Supreme Court's ruling in Hall Street precludes any such agreement, and now the statutory grounds for vacating or modifying an arbitration award under the FAA "are exclusive and cannot be supplemented by contract."13 The Court went on to say, however, that:

In holding that §§10 and 11 provide exclusive regimes for the review provided by the statute, we do not purport to say that they exclude more searching review based on authority outside the statute as well. The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable. …