May 13, 2011

May 13, 2011:
Texas Supreme Court declines to follow Hall Street Associates, L.L.C. v. Mattel, Inc., holding that, under the TAA, courts must enforce an agreement that an arbitration award is reviewable for reversible error and, when such error is present, vacate the award on the ground that the arbitrator "exceeded [his/her] powers."  Nafta Traders, Inc. v. Quinn, 339 S.W.3d 84 (Tex. 2011).

In Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), the United States Supreme Court held that the grounds for vacatur provided in the FAA are exclusive and that an agreement that an arbitration award is reviewable in court for legal error is unenforceable.  In the wake of Hall Street, courts in five states, construing their own arbitration statutes, adopted the Hall Street holding.  Courts in three states rejected Hall Street, holding that under their state arbitration statutes, an agreement that an arbitration award is reviewable for legal error is enforceable.  In Nafta Traders, the Texas Supreme Court aligned Texas with the states that have rejected Hall Street.  The court held that when parties agree that an arbitrator does not have authority to render a decision that contains a reversible error of law, and the award does contain such an error, a court must vacate the award on the TAA vacatur ground that the arbitrator "exceeded [his/her] powers."  339 S.W.3d at 87, 96-97. On the issue of preemption, accepting the parties' agreement that both the FAA and TAA applied, the court held that the FAA does not preempt the TAA on this issue.  Id. at 87, 101.

As a result of Nafta Traders, arbitration agreements requiring review of an award for legal error are enforceable in Texas state courts.  It is unclear whether, on the facts of a particular case, a federal court in Texas would apply Nafta Traders (such agreements are enforceable under the TAA) or Hall Street (such agreements are not enforceable under the FAA).  Accordingly, one seeking to vacate a Texas arbitration award for legal error, relying on an agreement that calls for legal error review, should assert the TAA and, if possible, move to vacate in Texas state court rather than federal court.   

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