Arbitration Law Update. David Salton March 31, 2010
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1 Arbitration Law Update David Salton March 31, 2010
2 TOPICS JUDICIAL REVIEW OF ARBITRATION AWARDS WHEN CAN AN AWARD BE OVERTURNED? WAIVING YOUR RIGHT TO ARBITRATE FEDERAL ARBITRATION ACT v. TEXAS ARBITRATION ACT WHEN DOES EACH APPLY? PRE-JUDGMENT INTEREST CAN YOU GET IT? DO YOU HAVE TO PAY IT?
3 Judicial Review of Arbitration Awards Historically, courts set aside arbitration awards only in narrowly defined circumstances. ***Reason is that a submission agreement a document executed by both parties and presented to the arbitrators to outline the dispute and the desired procedures is viewed as a valid and enforceable contract. Setting aside awards: (1) for fraud or corruption; (2) for failing to decide all issues submitted; (3) when arbitrators exceed powers by deciding to many issues; or (4) where award is not certain, final and mutual. See Section 10 of Fed. Arb. Act. ***This is true even if arbitrators make an error in law or fact. Purpose of having limited review: finality make the arbitration the end of the litigation and not merely an introduction.
4 Judicial Review of Arbitration Awards What if the arbitrators manifestly disregard the law? ***Courts have also vacated awards when, in addition to the four statutory grounds shown on the previous slide, it is found that the arbitrators manifestly disregard the law. What is Manifest Disregard ***When the arbitrator recognizes and appreciates the existence of a clearly governing principle but decides to ignore or pay no attention to it. A new ground for review? Shorthand for authorization of vacatur when arbitrators are guilty of misconduct or exceed their powers (i.e., one of the four listed statutory grounds for overturning an award)? United States Supreme Court: NOT an independent ground. Hall Street Assoc., L.L.C. v. Mattel, Inc., 128 S. Ct (2008). ***The FAA sets forth the exclusive bases for vacatur and modification
5 Judicial Review of Arbitration Awards Why is this significant? For years, many federal courts considered manifest disregard as an independent ground for overturning an arbitration award. The Fifth Circuit (Texas), included. Citigroup Global Markets v. Bacon, 562 F.3d 349 (5th Cir. 2009) Issue: Does manifest disregard of the law remain valid, as an independent ground for vacatur? Citigroup: No. ***First Circuit agrees with Fifth Circuit. Other Circuits disagree: Second, Sixth, Ninth: Manifest disregard is not abolished. These circuits have found that manifest disregard is a subset, or shorthand, for the statutory grounds of vacatur (e.g., exceeding powers). But the Fifth Circuit controls, at least in Texas. ***The statutory provisions under the FAA are the exclusive grounds for vacatur. ***Courts must confirm the award unless one of those provisions is satisfied (corruption or fraud, failing to decide all issues, exceeding powers, or uncertain or non-final award) Federal and State courts in Texas agree on the standard. Allstyle Coil Co., L.P., v. Carreon, 295 S.W.3d 42 (Tex. App. Houston [1st Dist.] 2009 ***Workers Comp case for injuries resulting from coming into contact with concrete. ***Arbitrator awarded employee $200,000 in damages. ***Employer tried to overturn award based on manifest disregard of the law. ***Court recognized the U.S. Supreme Court and Fifth Circuit rulings and found that the only grounds for vacatur were those expressly listed in the FAA. Effect: Judicial review of arbitration awards, which has historically been limited, is even more restrictive.
6 Waiving Your Right to Arbitrate *** Just because you include an arbitration clause in the contract doesn t mean you will end up in arbitration. Nicholas v. KBR, 565 F.3d 904 (5th Cir. 2009). Jan. 17, 2007: Widow of deceased employee filed suit in state court to recover life insurance benefits. The complaint filed described the employment agreement but was silent on the arbitration clause. ***Case removed to federal court. May 2, 2007: Plaintiff amended complaint and, again, failed to mention the arbitration clause. June 19, 2007: Parties began discovery. ***Plaintiff responded to written discovery without raising arbitration; plaintiff was also sat for deposition. November 20, 2007: Plaintiff tried to compel arbitration January 2008: KBR argued that Plaintiff waived right to arbitration by substantially invoking the judicial process to the prejudice of KBR.
7 Waiving Your Right to Arbitrate What did the court say? ***Despite identifying a number of dates (January, May, June, November)... The court found that the act of a plaintiff filing suit without asserting an arbitration clause constitutes substantial invocation of the judicial process. That is waiver. The decision to file suit typically indicates a disinclination to arbitrate. ***The court concluded that, short of directly saying so in open court, it is difficult to see how a party could more clearly evince its desire to resolve a dispute through litigation rather than arbitration. Exceptions: Waiver does not occur every time suit is filed. ***Plaintiff might file suit to get a threshold determination on whether a valid arbitration agreement exists. ***Plaintiff might file suit to get some sort of injunctive relief while the arbitration is ongoing. Plaintiff s Excuse in Nicholas: She was not aware of the arbitration clause. ***Plaintiff said she did not have a copy of the arbitration agreement when she filed suit and that she sued KBR in ignorance of her right to arbitration. Court rejected this argument: How can you claim ignorance of an agreement that you are suing on? Similar Outcomes Petroleum Pipe v. Jindal Saw, 575 F.3d 476 (5th Cir. 2009): Defendant waived right to arbitration when waiting more than one year before filing motion to compel arbitration. Court found that in addition to substantially invoking the judicial process, a party seeking arbitration must also be prejudiced. Prejudice = inherent unfairness in terms of delay, expense or damage to a party s legal position. Lesson: Before you file suit, or after suit is filed against you read the contract to see if you belong in arbitration or court. ***Especially if you are filing suit, because if you file in court, that alone can result in waiver of the right to arbitrate.
8 Texas or Federal Law? General Rule: Unless the contract at issue specifically excludes the application of the FAA, the FAA applies, even if the TAA applies. Examples under Olshan Foundation, 277 S.W.3d 124 (Tex. App. Dallas 2009). Arbitration governed by the TAA. If contract specifically invokes the TAA, it is deemed to exclude the FAA. See also Atlas Gulf-Coast, Inc., v. Stanford, 299 S.W.3d 356 (Tex. App. Houston [14th Dist.] 2009). Arbitration governed by the law of the place where the Project is located. If contract contains a general choice-of-law provision, the FAA applies, as well as the law of the state where the project is located. Olshan Foundation, 277 S.W.3d 124 (Tex. App. Dallas 2009). Arbitration governed by the laws of Texas. Because the FAA is part of the substantive law of Texas, the FAA and the TAA apply. Arbitration governed by the FAA. If the contract clearly specifies arbitration under the FAA, the FAA applies. Palisades Acquisition XVI, LCC v. Chatman, cause no cv, (Tex. App. Houston [14th Dist.] June 16, 2009) This is true even if the contract in question has no impact on interstate commerce. Pham v. Letney, cause no cv (Tex. App. Houston [14th Dist.] March 4, 2010); In re: ReadyOne Industries, Inc., 294 S.W.3d 764 (Tex. App. El Paso 2009) ( If the parties expressly choose for their arbitration agreement to be governed by the FAA, the agreement should be enforced regardless of the parties nexus to interstate commerce ) But the TAA may still apply as well. ***Parties are free to structure their arbitration agreements as they see fit and may specify by contract the rules under which arbitration will be conducted.
9 Texas or Federal Law? What if contract is silent? ***Look at the substance of contract. If contract does not relate to interstate commerce (i.e. performed only in Texas) the Texas Arbitration Act applies. Chambers v. O Quinn, cause no cv, (Tex.App. Houston [1 st Dist.] Oct. 1, 2009) If the contract involves interstate commerce, the FAA applies, but so does the TAA. Palisades Acquisition XVI, LCC v. Chatman, cause no cv, (Tex. App. Houston [14th Dist.] June 16, 2009) FAA trumps the TAA only if the two conflict with each other. FAA trumps only if the TAA would refuse to enforce the arbitration agreement. What s the difference? TAA does not allow for the arbitration of personal injury claims except for in limited circumstances; FAA has no limitations. TAA does not allow for arbitration of claims involving the acquisition of services (i.e. constructing a residence) if the total amount paid is less than $50,000, except for in limited circumstances; FAA has no such limitations. Okorafor v. Uncle Same & Assoc., Inc., 295 S.W.3d 27 (Tex. App. Houston [1st Dist.] 2009). ***Lesson: If you only want Texas law to apply, you need to put it in the contract. If you only want Federal law to apply, you need to put it in the contract. Otherwise, both will likely apply (unless the transaction does not cross state lines)
10 Pre-Judgment Interest NOT AVAILABLE IN ARBITRATION: Fogal v. Stature Construc. Inc., 294 S.W.3d 708, 722 (Tex. App.-- Houston [1st Dist.] 2009) FACTS: Fogals purchased new-construction townhome with arbitration provision. Arbitration was under the FAA Lawsuit arose out of roof leak that caused mold Arbitrator awarded Fogals $40,000 Fogals filed a motion to vacate award in state court and claimed that they should be awarded pre- and post-judgment interest. The trial court confirmed the arbitration award, adding post-judgment interest. Fogals appealed judgment and claimed that arbitrator improperly failed to include pre-judgment interest in the award. LAW: Court stated that the Fogals are not entitled to pre-judgment interest under any applicable Texas statute. The FAA does not address pre- and post-judgment interest on an arbitrator s award, so the Fogals are not entitled to pre-judgment interest under the FAA. Nor are the Fogals entitled to pre-judgment interest under the Texas Finance Code. The Tex. Finance Code provides that monetary judgments for property damage earn pre-judgment interest, but that provision only applies to judgments rendered by courts, not to awards rendered by arbitrators. CONCLUSION: The court ruled that the trial court did not err by failing to modify the arbitrator s award to add post-judgment interest. SIGNIFICANCE: This case appears to say that there is no basis under Texas law to award pre-judgment interest on arbitration awards ***How would the appellate court have ruled if the trial court did include pre-judgment interest? ***How would the appellate court have ruled if the arbitrator included pre-judgment interest? The financial impact of this case could be hundreds to hundreds of thousands of dollars.
11 Pre-Judgment Interest AVAILABLE AFTER POST-AWARD BUT PRE-JUDGMENT: McVay v. Halliburton, 2009 U.S. Dist. LEXIS (N.D. Tex. 2009) FACTS At arbitration, Halliburton awarded injunctive relief, breach of contract damages, attorneys fees. Halliburton moved to confirm the award and requests pre- and post-judgment interest. LAW The federal court stated that under Texas law, a trial court must grant a prevailing party prejudgment interest on the arbitration award in all but exceptional circumstances. Such interest is payable beginning on the 30 th day after the date on which the amount is due and payable. CONCLUSION: Court determined that Halliburton was entitled to interest beginning on April 20, 2007, which was 30 days after the arbitrator rendered the award, to the date of the judgment confirming the award. Post-judgment interest would then accrue beginning on the date the judgment was entered confirming the award, running until the award was paid. SIGNIFICANCE: The court here appears to say that pre-judgment interest is allowed in arbitration, and that it runs 30 days after the date of the award up until the judgment is entered confirming the award. But, this is a federal case. Fogal v. Stature, a state case, might disagree and say that there is no pre-judgment interest allowed.
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