“Manifest Disregard” Dead in Texas: Texas Supreme Court Disapproves of Common-Law Grounds for Vacating Arbitration Awards

In an opinion handed down last Friday, the Texas Supreme Court held that, where an arbitration is governed by the Texas General Arbitration Act, or “TAA,” courts cannot vacate the arbitration award on the grounds that the arbitrator “manifestly disregarded the law.” Justice Debra Lerhmann, writing for a unanimous Court in Hoskins v. Hoskins, reasoned that the language of the TAA “could not be plainer” in requiring that a “trial court ‘shall confirm’ an award unless vacatur is required under one of the enumerated grounds” in the statute, “which do not include an arbitrator’s manifest disregard of the law.”

Both the TAA and its largely identical federal counterpart, the Federal Arbitration Act, or “FAA,” provide that an arbitrator’s ruling (called an “award”) is final, and the statute specifies only a few very narrow grounds on which the award can be vacated by a court, such as where a party’s rights were prejudiced by “corruption in an arbitrator” or where “the arbitrators exceeded their powers.” The grounds for vacatur of an award laid out in both the TAA and FAA do not include legal error by the arbitrator that such as those that would be grounds for appeal of a judge’s rulings.

Because this omission in the statute would appear to leave parties without recourse if the arbitrator simply ignores the law in making his rulings, both Texas and federal courts have recognized “manifest disregard of law” as an additional, common-law ground for vacating an arbitration award. Under the doctrine, courts could not review the legal decisions of arbitrators for error of law in the same way that an appellate court could review the decisions of a trial judge, but could vacate an award, as the federal Second Circuit put it, in “those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.”

In Hoskins, the Texas Supreme Court has ended this practice under the TAA. Now, an arbitration award governed by the TAA can only be vacated on grounds specifically enumerated in the TAA itself. Now, no matter how badly the arbitrator misapplies or ignores the law, the arbitrator’s decision cannot be set aside unless there is proof of “evident partiality,” corruption, misconduct, or one of the other grounds set forth in the TAA.

This case resolves a split in the Texas courts of appeals that mirrored a similar circuit split in federal court regarding the FAA after the U.S. Supreme Court’s 2008 decision in Hall Street Associates v. Mattel, Inc. In Hall Street, the U.S. Supreme Court held that the grounds set forth in the FAA for vacatur of an award were “exclusive” and could not be modified, even by contract. However, as Justice Don Willett pointed out in a concurring opinion in Hoskins, commentators and federal courts alike have held differing views as to whether Hall Street precludes vacatur on common-law grounds such as “manifest disregard,” and the U.S. Supreme Court itself recognized in a footnote in 2010’s Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. that it was not deciding in that case “whether manifest disregard survives our decision in Hall Street. After Hoskins, as Justice Willett states in his concurrence, “[n]o such uncertainty exists with regard to the exclusivity of the TAA’s vacatur grounds.”

The TAA and FAA are largely identical, but this is not the first time that federal courts’ interpretation of the FAA and Texas courts’ interpretation of the TAA have diverged. In Nafta Traders, Inc. v. Quinn, the Texas Supreme Court disagreed with the U.S. Supreme Court’s reasoning in Hall Street and held that an arbitration agreement can effectively expand the scope of judicial review under the TAA. The Nafta Traders court reasoned that the TAA, like the FAA, allows for vacatur if the “arbitrators . . . exceeded their powers,” and an arbitrator’s powers are defined by the arbitration agreement itself.

Many people may not realize how important arbitration cases Hoskins can be to them. Nearly everyone has signed at least one arbitration agreement at some point in their lives-they are often found in such commonplace contracts as credit card agreements, homebuilder contracts, and even in many employment agreements. By signing these agreements, a consumer effectively gives up the right under the U.S. and Texas Constitutions to have his or her civil disputes resolved by a judge and jury, and instead agrees to have the dispute decided by a private arbitrator whose rulings generally cannot be appealed. Now, after Hoskins, the same consumer cannot even complain to a court if the arbitrator refuses to follow the law.

If you or someone you know is involved in a civil dispute, contact an attorney at Abraham, Watkins, Nichols, Agosto, Aziz & Stogner, by calling at (713) 222-7211 or toll free at 713-222-7211 for a confidential consultation.