Arbitration clauses appear in all types of domestic energy contracts.  One of the most common reasons parties cite in choosing arbitration is a belief that an arbitration panel will bring a level of expertise and professional detachment to weighing the issues and thus may be less likely to reach what could be viewed as an arbitrary decision than a jury.  But the losing party in arbitration rarely thinks that its panel wisely reached the correct solution.  And, unlike with a jury trial where there is almost always an appellate court to which the losing party can turn, the Federal Arbitration Act (FAA) severely limits the right of a party to seek review of a panel’s decision.  Because of this, in recent years, parties utilizing arbitration clauses have attempted contractually to broaden their rights to seek appellate review.

In 2008, the U.S. Supreme Court addressed whether such agreements were permissible, and held that they were not.  In Hall Street Assocs. L.L.C. v. Mattel, Inc., the Court held that the FAA set out the exclusive grounds on which a court could vacate or modify an arbitration award.  These parameters, found in sections 9-11 of the FAA, allow vacatur of a panel’s award only in situations involving misconduct, corruption, or where an arbitrator exceeds his power; and modification of an award only for a material miscalculation or mistake. 

In Hall Street, the parties’ arbitration agreement allowed for vacatur or modification if the arbitrator’s findings of fact were unsupported or if his conclusions of law were erroneous.  After a lengthy textual analysis of the FAA, the Court held that the Act establishes exclusive grounds for vacatur and/or modification, and that parties cannot contract for additional grounds for judicial intervention.

The Court did, however, limit its analysis to the FAA, leaving the door open for state courts to reach a different conclusion based on their individual arbitration acts.  And in May of this year, the Texas Supreme Court did just that.  In Nafta Traders, Inc. v. Quinn, the parties’ arbitration clause included the following provision: “The arbitrator does not have authority (i) to render a decision which contains a reversible error of state or federal law, or (ii) to apply a cause of action or remedy not expressly provided for under existing state or federal law.”  Although the arbitration clause did not specify that it was to be interpreted under the Texas Arbitration Act (TAA), neither party objected to the court of appeals application of the TAA.  The court of appeals, relying heavily on Hall Street, rejected Nafta’s argument that the arbitrator had exceeded his power (grounds for vacatur under both the FAA and TAA) by rendering a decision that contained reversible error.

In a unanimous opinion, the Texas Supreme Court reversed, reasoning that contracting parties are fully capable of limiting an arbitrator’s authority, and thus indirectly expanding the very judicial review that Hall Street found impermissible.  In its analysis, the Texas Supreme Court focused on what it considered the essential virtue of arbitration—the parties’ ability to contract.

What lessons can we take from Hall Street and Nafta Traders?  First, it is important for contracting parties to prioritize what they seek when agreeing to arbitrate.  If seeking efficiency and finality, Hall Street would suggest the FAA may be more favorable.  On the other hand, should parties want the efficiency of arbitration, but not the risk of a non-appealable award, the TAA (and possibly other state laws) would give the parties an arbitral forum, while still allowing the parties to contract for an expanded judicial review. 

Of course, parties must be careful when drafting their arbitration agreements so as to make clear which act governs.  Without clearly invoking the TAA, for example, a Texas court may choose to apply the FAA to arbitration clauses, since the FAA is applicable to any contract evidencing a transaction involving interstate commerce.  This principle covers a wide majority of energy transactions since courts have made clear that they will take a very expansive view of what constitutes interstate commerce.  And, for those limited energy transactions that do not invoke interstate commerce, parties can still contract for the use of the FAA.  Texas courts have held that they will apply the federal act even where the transaction does not involve interstate commerce, so long as the parties agreed to arbitrate under the FAA.  See e.g. In re Kellogg Brown & Root, 80 S.W.3d 611, 617 (Tex. App.—Houston [1st Dist.] 2002). 

This expansive jurisdictional view is consistent with the idea that parties should be able to contract for how their disputes will be governed.  Because Texas courts have consistently held that parties may designate which arbitration act will control, it appears that even parties with a limited connection to Texas may in fact contract for their disputes to be governed by the TAA.  And, since § 171.081 of the Texas Civil Practices and Remedies Code gives a Texas court jurisdiction over any arbitration agreement that calls for an arbitration in Texas according to the TAA, it appears that even those arbitrations which relate to non-Texas based energy transactions could be open to broader judicial review as long as the parties agree to arbitrate in Texas in accordance with the TAA.