Can an Arbitration Award Be Appealed or Vacated?

Why there is no appeal

An appeal is a review of the decision for error. Arbitration was designed to end that. When the parties agree to arbitrate they trade the right of appeal for finality, and both the Federal Arbitration Act and the Texas Arbitration Act hold them to the trade. A court asked to confirm an award must do so unless one of the listed grounds for vacating or modifying it is established; the lists do not include "the arbitrator was wrong." The Supreme Court in Hall Street Associates, L.L.C. v. Mattel, Inc. (U.S. 2008) described the FAA grounds as the exclusive grounds for expedited vacatur and modification and refused to read them as permitting general review for legal error.

The federal grounds: 9 U.S.C. § 10

A federal court may vacate an award where:

1. the award was procured by corruption, fraud or undue means;
2. there was evident partiality or corruption in the arbitrators;
3. the arbitrators were guilty of misconduct in refusing to postpone the hearing on sufficient cause, refusing to hear evidence pertinent and material to the controversy, or other misbehavior that prejudiced a party's rights; or
4. the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award was not made.

Each is about the integrity of the process, not the quality of the result. "Exceeded their powers" is the ground most often argued and most often rejected: it asks whether the arbitrators had authority to decide the issue under the agreement, not whether they decided it correctly. An arbitrator who awards a remedy the contract forbids, or decides a claim the clause does not cover, may have exceeded powers; an arbitrator who misreads a statute has not.

The Texas grounds: § 171.088

Tex. Civ. Prac. & Rem. Code § 171.088(a) requires a court to vacate an award if:

• it was obtained by corruption, fraud or other undue means;
• a party's rights were prejudiced by evident partiality of a neutral arbitrator, corruption in an arbitrator, or an arbitrator's misconduct or wilful misbehavior;
• the arbitrators exceeded their powers, refused to postpone the hearing after a showing of sufficient cause, refused to hear material evidence, or conducted the hearing contrary to the act's hearing provisions in a way that substantially prejudiced a party; or
• there was no agreement to arbitrate, the issue was not already decided by a court, and the party did not participate in the hearing without raising the objection.

Section 171.090 closes a door some parties try: the fact that the arbitrators granted relief a court could not or would not have granted is not a ground to vacate or refuse confirmation.

Modification is narrower still

Both acts let a court modify or correct an award without vacating it, but only for mechanical problems: an evident miscalculation of figures or mistake in describing a person, thing or property; an award on a matter not submitted, if it can be severed without affecting the merits; or a defect of form (9 U.S.C. § 11; Tex. Civ. Prac. & Rem. Code § 171.091). The arbitrators themselves can fix the same errors if asked within 20 days of delivery under § 171.054. Modification is for a transposed number, not a disagreement about damages.

Deadlines

These are strict, and they are shorter than most litigation deadlines.

• FAA. Under 9 U.S.C. § 12, notice of a motion to vacate, modify or correct must be served on the adverse party within three months after the award is filed or delivered.
• Texas act. Under § 171.088(b) the application to vacate must be made not later than the 90th day after delivery of a copy of the award, except that an application based on corruption, fraud or undue means is due within 90 days after the ground is known or should have been known. The same 90 days applies to a motion to modify under § 171.091(b).

A party who lets the window close cannot raise the vacatur grounds later as a defense when the other side moves to confirm. Under § 171.088(c), when an application to vacate is denied and no motion to modify is pending, the court confirms the award.

Can the contract add grounds for review?

Under the FAA, no. Hall Street held that parties cannot by agreement expand the statutory grounds so that a court reviews the award for legal error; §§ 10 and 11 are exclusive when a party seeks the FAA's expedited confirmation and vacatur. The Court left open whether other routes, such as state statutory or common law, might permit more. Some providers also offer an optional appellate arbitration procedure that the parties must adopt in the clause; it is a second arbitration, not a court appeal.

Example

Suppose a Dallas distributor loses a $900,000 AAA award to its former supplier. The distributor's counsel believes the arbitrator misapplied the Texas statute of limitations and misread the exclusivity clause. Neither is a ground to vacate: both are legal rulings within the arbitrator's authority. Counsel also learns the arbitrator failed to disclose that a partner at her firm represents the supplier's parent company in an unrelated matter. That is a potential evident-partiality ground. The distributor files its application to vacate on that ground within 90 days of receiving the award, and the court holds a hearing on the undisclosed relationship. Had the distributor waited four months to decide, the award would simply have been confirmed.

What happens if the award is vacated

Vacatur usually means a rehearing, not a win. Under § 171.089 the court may order a rehearing before new arbitrators, or, where the award was vacated for the arbitrators' procedural errors, before the same arbitrators. Only when the court finds there was no agreement to arbitrate does the dispute go to court instead. The rulings of the trial court in these proceedings are themselves appealable: § 171.098 allows an appeal from an order confirming, denying confirmation of, modifying or vacating an award, and 9 U.S.C. § 16 does the same in federal court. The appellate court then reviews the trial court's application of the vacatur standards, still not the arbitrator's merits.

What this means for you

If you lost, have counsel review the award and the record for process defects within days, not weeks, and calendar both the 90-day and the three-month dates from delivery. If you won, expect the other side to use those windows and be ready to move to confirm as soon as they close; the mechanics are in enforcing an arbitration award in Texas. If you have not yet agreed to arbitrate, understand that finality is part of the bargain, as laid out in arbitration vs. court for a business dispute, and that the appeal you would have had from a judgment, described in appealing a business case in Texas, does not exist here.

Tina Wysk represents businesses in applications to confirm and to vacate arbitration awards in Dallas state and federal courts.