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In upholding an arbitration award entered in a commercial dispute, a Texas appellate court held that the “fundamental rationality” test is not an independent basis for vacatur but is instead an inquiry into whether the arbitrators exceeded their powers.
In Myer v. Americo Life, Inc., No. 05-06-01013-CV, 2007 WL 2447237 (Tex. App.-Dallas Aug. 30, 2007), Myer entered into a consulting agreement with Americo in connection with Myer’s sale of insurance-related companies to Americo. The consulting agreement contained an arbitration clause and non-compete provision.
Americo filed an arbitration claim alleging that Myer violated the non-compete agreement. The arbitration panel issued an award in Americo’s favor. Myer filed a motion to vacate the award, arguing several grounds for vacatur. The trial court denied the motion and confirmed the award.
On appeal, Myer again argued several grounds for vacatur. Most notably, Myers argued that the award did not meet the “fundamental rationality” test. As the Court noted, the “fundamental rationality” test is a non-statutory, common law basis for vacatur that is recognized by some circuit courts but not the Fifth Circuit Court of Appeal.
Specifically, Myer argued that the Court should apply the “fundamental rationality” test as articulated by the Third Circuit. Under this formulation, an award may be vacated if it “does not draw its essence from the agreement.” The Court construed this formulation as a restatement of the “essence test.”
According to the Court, the “essence test” is simply an inquiry into whether the arbitrators exceeded their powers and, as such, is not an independent basis for vacatur. Having already determined that the arbitrators did not exceed their powers, the Court held that neither the “fundamental rationality” test nor the “essence test” was a basis for vacatur. Accordingly, the Court upheld the award.
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