A federal district court in Texas ruled that parties cannot circumvent the rule against arbitration agreements calling for expanded judicial review – as set forth in the United States Supreme Court’s recent Hall Street decision – by characterizing erroneous fact finding as an excess of arbitral powers.

In Wood v. Penntex Resources LP, No. H-06-2198, 2008 WL 2609319 (S.D. Tex. June 27, 2008), ERG and its president, Wood, were engaged in litigation over oil-producing properties with Tsar. Later, ERG was acquired by Penntex through a stock purchase contract. The contract addressed potential liability stemming from the Tsar litigation and contained an arbitration agreement encompassing any claims arising from the purchase.

Penntex provided Wood with a full release from liability executed by Tsar and Penntex. The release required Wood to discontinue his claims against Tsar. Wood refused. Wood sought a declaratory judgment with the Court that he was not required to arbitrate the claim that he must dismiss his claims against Tsar as part of the purchase contract. The court denied Wood’s claim and the matter proceeded to arbitration.

An arbitration panel eventually awarded damages to both Wood and Penntex. Wood then moved to vacate the award, arguing that the arbitrators had exceeded their powers by making "clearly erroneous findings of fact" during arbitration. Because the arbitration agreement expressly disallowed an arbitrator’s authority "to render any decision that is based on erroneous findings of fact," Wood argued that the award should be vacated on the ground that the arbitrators exceeded their powers. In opposition, Penntex moved to correct the award by offsetting the amounts due to each party from the other, confirm the corrected award, and assess sanctions against Wood for a frivolous appeal.

The Court held that it did not have the authority to vacate the award on the grounds urged by Wood. The Court characterized the agreement’s denial of arbitral authority in circumstances where the arbitrator made clearly erroneous findings of fact as "clearly an effort by the parties to contract for a different basis for judicial review and vacatur than the FAA provides." See Hall St. Assocs., LLC v. Mattel, Inc., 128 S.Ct. 1396, 1404-05 (2008) (holding that the statutory bases for vacatur are exclusive and cannot be modified by contract).

Wood argued that erroneous fact finding was an excess of arbitral authority under the parties’ agreement and thus warranted vacatur under the Federal Arbitration Act (FAA). According to the Court, "[a]dopting Wood’s reading of Hall Street would result in precisely the full-bore legal and evidentiary appeals that the [Supreme] Court held the FAA precluded."

Furthermore, the Court observed that a plain reading of the agreement did not indicate an intent that the arbitrator be denied authority where erroneous findings of fact were made, but "only refer[red] to the circumstances under which the arbitrator’s award will not be enforced by a court." This reading, according to the Court, did not clearly classify erroneous fact finding as an excess of powers that would fall within the FAA’s statutory grounds for vacatur.

The Court ultimately granted Penntex’s motion to correct and confirm the award; it held that offsetting the parties’ awards against each other into one aggregate award did not actually "modify" the award and was only a ministerial correction. Finally, the Court denied Penntex’s motion to sanction Wood, finding Wood’s arguments not so frivolous that they would merit sanctions.