Binding Arbitration: Limited Appeal Rights - Finality is the Rule

Construction and Procurement Law News, Q2 2016

Firm Alert

Author(s)

One of the touted advantages of having a construction dispute resolved via binding arbitration is that the opportunity to appeal an adverse arbitration ruling is limited. The phrase often used is “finality is the rule rather than the exception.” This result has been hailed in the industry because it provides finality, to both parties.

Nevertheless, sometimes a party may consider challenging an award. Any ability to vacate an arbitration award is governed by the applicable statutes (including each state’s arbitration acts and the Federal Arbitration Act). These statutes were primarily written to allow courts to enforce arbitration agreements and to allow a winning party to go to court to convert awards into enforceable legal judgments. These statutes generally include provisions by which a court can vacate an award, but they are limited to specific grounds for reversal such as arbitrator fraud or a serious undisclosed arbitrator conflict of interest. In the past, some courts recognized narrow exceptions to these limited appeal rights, including arguments that an arbitration award was “in manifest disregard of the law” or “violated public policy.” However, in recent years, many state and federal courts have clamped down on these limited exceptions and ruled that the specific appeal rights set out in the arbitration statutes must be strictly construed without any exceptions.

The bottom line of these rulings is that, even if it is crystal clear that an arbitrator completely missed the boat, unless a losing party can prove fraud or a conflict of interest, that losing party is stuck with the award. A perfect example of this trend is a non-construction case decided by the Texas Supreme Court called Leonard K. Hoskins v. Colonel Clifford Hoskins and Hoskins, Inc. In this case, two siblings engaged in arbitration over the allegedly improper transfer of certain mineral rights from their father’s estate. Following the arbitration, one of the siblings asked a trial court to vacate the arbitrator’s decision, arguing that the arbitrator “manifestly disregarded the law” by disregarding clear, established Texas law, and that he conducted the hearing in a way that substantially prejudiced his rights. Following the national trend, but reversing some intermediate Texas appeal courts, the Texas Supreme Court refused to vacate the award, ruling that even if the arbitrator disregarded Texas law, because the sibling chose arbitration, what comes with arbitration is limited appeal rights. Further, as the Texas arbitration statute did not list “manifest disregard” as a basis for vacating an award, the sibling had no grounds for vacating the award.

There are multiple pros and cons of binding arbitration. A company should know these costs and benefits, and understand the limited appeal rights underlying any arbitration. Your lawyer can provide additional insight into the arbitration versus litigation decision. This decision should be considered carefully and should be consciously made in all of your contract negotiations.