GC: “Boss, I got bad news and worse news.”
CEO: “What the hell is it?”
GC: “The arbitrator issued an award against us of 20 million dollars”
CEO: “What? That’s preposterous, outrageous. Damn it to hell, we will appeal all the way to the supreme court if necessary”
GC: “Well, boss, about that appeal… “
Be careful what you wish for. Prompted by what some considered to be “runaway” jury verdicts, commercial transactions began to include in their standard documentation, an agreement to use arbitration to resolve any disputes that might arise. The thought was that reposing such decisions to an arbitrator or panel of arbitrators would take the emotion and uncertainty of a jury trial out of play leading to more predictable results. After all, there is enough risk in entrepreneurial endeavors without subjecting the success of the enterprise to the whimsical decisions of the masses. Legislatures began to fine tune the legal basis for arbitration and courts began to defer to this mechanism over a court system that had been in place for hundreds of years.
The adoption of this private mechanism of dispute resolution had one glaring defect; there was no forum to review the decisions. When things went terribly wrong, (see our series on Arbitration Horror Stories), the grieving party sought to invoke the jurisdiction of the appellate courts to right that wrong. But the courts were very stingy about lending their assistance to those who didn’t trust the system in the first place. Absent very rare circumstances the awards were left in place and enforceable.
While contracting for binding arbitration can spare one the uncertainty of a jury trial, it is by no means certain that the process or outcome will meet expectations. As an alternative dispute resolution technique, it can be a “you-bet-your-company” choice. An “excessive” jury verdict may form the basis of an appeal but an “excessive” arbitration decision generally will not.
As the court stated in Denver City Energy Associates, L.P., “An arbitration award has the same effect as a judgment of a court of last resort”.[i] The arbitrator’s decision cannot be vacated except under narrow statutory grounds,[ii] and cannot be modified by a court.[iii] The case law is replete with horror stories of arbitral surprises that remained undisturbed by appellate courts including; ruling on issues not submitted,[iv] miscalculations,[v] errors and mistakes of law,[vi] and awarding punitive damages where state law governing the parties underlying transaction did not permit an award of punitive damages. [vii]
Similarly, rulings on procedure and evidence are not subject to challenge or review. Nor do the constitutional protection of due process apply to arbitration. [viii] The rules applicable to arbitration typically contemplate a more informal approach to such issues and, therefore, can be quite unpredictable depending upon the arbitrators involved.[ix]
What was needed was a procedure that provided the realm of reasonableness and certainty that usually defined arbitration, with the right to seek redress from another authority when things got out of hand. In 1983, the Texas Legislature created just such a procedure. Enter Chapter 151 of the Texas Civil Practices and Remedies Code.
Probably the best-kept secret in Texas jurisprudence.
Arbitration Horror Story No. 127
An insurance company was tagged by an arbitration panel for $6 million where the policy limit was $900,000.00. The panel awarded $1.5 million in emotional distress and $4 million in punitive damages. The Ninth Circuit Court of Appeals held that the arbitrators did not exceed their powers under the Federal Arbitration Act. Lagstein, M.D. v Certain Underwriters At Lloyd’s, London 607 F.3d 634 (9 th Cir. 2010)
[i] 340 S.W.3d 538, 545 (Tex.App.-Amarillo 2011)
[ii] See Tex. Civ. Prac & Rem. Code Ann. Section 171.088; CVN Group, Inc. v. Delgado 95 S.W.3d 234 (Tex. 2002).
[iii] Kosty v. S.Shore Harbour Cmty Assoc., Inc. 226 S.W.3d 459,465 (Tex.App.-Houston [1st Dist.] 2006).
[iv] Denver City Energy Associates, L.P. v. Golden Spread Elec. Co-op, Inc. 340 S.W.3d 538 (Tex-App. Amarillo 2010).
[v] Apex Plumbing Supply, Inc. v. U.S. Supply Co. Inc. 142 F.3d 188 (4th Cir. 1998)
[vi] Centex/Vestal v. Friendship West Baptist Church, 314 S.W.3d 677 (Tex.-App.-Dallas 2010)
[vii] Davis v. Prudential-Bache Securities, Inc. 59 F.3d 1186 (11th Cir. 1995)
[ix] See American Arbitration Association Rules and Mediation Procedures (Including Procedures for Large, Complex Commercial Disputes) Amended and Effective July 1, 2013, R-34