Parties seeking heightened judicial review of arbitration awards based on an incorrect application of the law cannot do so by arguing that the arbitrator exceeded their powers, according to the Texas Court of Appeals.

In Quinn v. Nafta Traders, Inc., No. 05-07-00340-CV, 2008 WL 2426665 (Tex. Ct. App. June 17, 2008), employee Quinn sued employer Nafta for statutory employment law violations. Quinn and Nafta were parties to an arbitration agreement encompassing Quinn's claims, and the trial court compelled the parties to arbitration.

The arbitration agreement between the parties provided that "[t]he arbitrator does not have authority . . . to render a decision which contains a reversible error of state or federal law." After the arbitrator issued an award in favor of Quinn, Nafta relied on this provision in moving for vacatur, arguing that the arbitrator exceeded his powers by making several errors of law. The trial court confirmed the award.

On appeal, the Court noted the U.S. Supreme Court's recent decision holding that for arbitration agreements governed by the Federal Arbitration Act (FAA), the statutory grounds for vacatur are exclusive, and accordingly, parties cannot obtain heightened judicial review by creating contractual grounds for vacatur. See Hall St. Assocs., L.L.C., v. Mattel, Inc., 128 S.Ct. 1396, 1400 (2008). In this case, the parties agreed that the Texas Arbitration Act (TAA) governed the dispute, but the Court was persuaded that the similarities between the TAA and FAA warranted holding that expanded judicial review was similarly unavailable under the TAA.

Nafta argued that the grounds for expanded review in the agreement were instances where the arbitrator exceeded his or her power, a statutory ground for vacatur. See Tex. Civ. Prac. & Rem. Code § 171.088. The Court disagreed, stating that Nafta "contend[ed] that the arbitrator decided the matters before him incorrectly," not that he decided a matter not before him. Without a showing of the latter, the Court found no basis for concluding that the arbitrator exceeded his powers.

The Supreme Court's decision in Hall Street does not compel the result reached in this case because the parties did not attempt to supplement the statutory grounds for vacatur. Instead, the parties relied on the statutory grounds for vacatur in their effort to guard against arbitrator error.

In a decision that was handed down while Hall Street was under advisement, Judge Posner, writing for the Seventh Circuit Court of Appeals, recognized the distinction between (1) "whether parties can alter the standard of judicial review of arbitral awards" and (2) "whether the arbitrator can be directed to apply specific substantive norms and held to the application." See, e.g., Edstrom Inds., Inc. v. Companion Life Ins. Co., 516 F.3d 546, 549-50 (7th Cir. 2008). As the Seventh Circuit concluded in that case, parties to an arbitration agreement may direct the arbitrator to apply a specific body of law, and that direction may be enforced through the operation of the statutory grounds for vacatur – specifically, section 10(a)(4) of the FAA, which authorizes courts to vacate an award where the arbitrator exceeds their powers.