TABLE OF CONTENTS

• INTRODUCTION
• THE FEDERAL ARBITRATION ACT
• THE TEXAS GENERAL ARBITRATION ACT
• RECENT CASES AND TRENDS IN ARBITRATION
  • A. Arbitrability
  • B. Federal Pre-Emption
  • C. Scope of Arbitration Provision
  • D. Privity Questions
  • E. Duty of an Arbitrator
  • F. Defenses to Arbitration
  • G. Agreement to Arbitrate
  • H. Waiver
  • I. Discovery
  • J. Binding v. Non-Binding
  • K. Jurisdictional Issues
  • L. Causes of Action
  • M. Substantive Issues v. Procedural Issues
• FOOTNOTES

INTRODUCTION

Arbitration and its impact on litigation continues to be a popular and important topic for consideration by the Bar. Both federal and state law strongly favor arbitration. The U.S. Supreme Court has made it clear that the Federal Arbitration Act expressly declares a policy favoring arbitration in disputes of all kinds. In Texas, since the Texas Supreme Court's 1992 decision in Anglin v. Tipps,⁽¹⁾ arbitration has been given new life and has become more and more popular with practitioners and their clients. With the growth in importance of arbitration, it is helpful to look at a brief history of the federal and state arbitration statutes and some of the recent arbitration decisions.

THE FEDERAL ARBITRATION ACT

The Federal Arbitration Act⁽²⁾ ("FAA") was codified in 1925 by the United States Congress, and it was reenacted and codified into its current form in 1947. From 1925 until 1965, the FAA was a sleeping giant. Its awakening resulted from a series of U.S. Supreme Court decisions beginning in 1965. One of the most recent, and perhaps the most significant, developments in this rejuvenation of the FAA was the Allied Bruce Terminix⁽³⁾ case decided in 1995. While prior Supreme Court decisions had read the FAA expansively and established a judicial policy favoring its application, Allied Bruce Terminix swept away the major remaining road block to using the FAA. The Supreme Court established that the FAA is applicable to any dispute based on a contract reached by the commerce clause of the Constitution. State laws restricting the application of arbitration, which had been one of the last major restrictions of the use of commercial arbitration, have been, for the most part, eliminated.

In the past, arbitration clauses were frequently unenforceable because most states had enacted statutes which eviscerated them thereby allowing a party to proceed with litigation. Often, these consisted of statutes which voided any agreement to arbitrate future controversies or which required special notice of arbitration provisions (such as size of the typeface and approval by an attorney) or which exempted certain transactions from arbitration (such as consumer sales contracts). In effect, most arbitration provisions were unenforceable if any party wanted out. Times have changed.

The FAA contains only 16 sections and most are brief to the point of being almost cryptic. It can best be understood perhaps in the context of the process of arbitration. The FAA principally functions in two areas: one, to fill the gaps where the parties have not provided details regarding the arbitration proceedings, and two, to provide judicial assistance in the form of compulsion where necessary. The FAA is very broad in its consideration of what constitutes an agreement to use arbitration and requires only a written provision to arbitrate. No specific language is required nor is there any requirement for a special typeface or for notice of arbitration provision, even in contracts of adhesion. The FAA does not have a particular provision dealing with stays of arbitration; however, stays are available under it by case law.

THE TEXAS GENERAL ARBITRATION ACT

The other statute with which we, practicing in Texas, are frequently called upon to deal is the Texas General Arbitration Act⁽⁴⁾ ("TGAA"). Arbitration in Texas is as old as the Republic. Article XVI of the Texas Constitution provided for arbitration of disputes. Beginning in 1846, statutes implemented the constitutional scheme of arbitration; therefore, there have been both statutory law and what has generally been termed "common law" arbitration in Texas since that time. The major significance of this history is the longstanding public policy favoring arbitration. This position in favor of arbitration has been continuously recognized since the earliest Texas court decisions dealing with arbitration.

Texas first enacted the TGAA, its version of the Uniform Arbitration Act, in 1965. In 1997, the Legislature recodified the TGAA by reorganizing it into a more usable code of laws. The TGAA is still with us despite the seeming unwavering support of the U.S. Supreme Court for the superiority of the FAA. It can be expected to continue to play a role in two situations:

(i) where the parties' arbitration agreement specifies the use of the TGAA, in which case it is treated as a set of arbitration rules similar to the rules of the American Arbitration Association; and

(ii) where the courts consider issues of state law relating to arbitration which most commonly arise in enforcement proceedings.

The TGAA contains two areas of limitation on arbitration agreements which are not contained in the FAA. One is a general unenforceability for "unconscionable" agreements to arbitrate. The second is a requirement for approval by an attorney in order for certain arbitration agreements involving individuals, as opposed to business, to be valid.

Texas also continues to recognize "common law" arbitration without resort to the TGAA.⁽⁵⁾

RECENT CASES AND TRENDS IN ARBITRATION

Arbitration clauses appear in more and more contracts. Attorneys now regularly see them in loan documents, purchase and sales contracts, franchise agreements, bank customer agreements, credit card agreements, construction contracts, employment contracts, employee benefit plans, title policies, attorney fee agreements and numerous other contracts. Not only are they appearing in more areas, but they are being enforced by the courts. For this reason, we should all expect to have to deal with arbitration and the federal and state arbitration statutes on a more and more frequent basis.

Both federal and state law strongly favor arbitration. In recent years, the U.S. Supreme Court reemphasized in the case of Mastrobuono v. Shearson-Lehman Hutton, Inc.⁽⁶⁾ that the FAA "declared a national policy favoring arbitration". Texas courts also recognize a presumption in favor of arbitration. If a party seeking to compel arbitration establishes that an agreement to arbitrate exists and that the claims raised are within the agreement's scope, the trial court must compel arbitration. Cantella & Co., Inc. v. Goodwin.⁽⁷⁾ With this increased use of arbitration and the court's policy in favor of it, it is helpful to look at some of the significant cases that have dealt with arbitration issues in recent years.

A. Arbitrability

In 1995, the U.S. Supreme Court, in First Options of Chicago, Inc. v. Kaplan,⁽⁸⁾ answered the question about who decides arbitrability in the absence of clear and unmistakable evidence that the parties agreed to submit the question of arbitrability to arbitration. In First Options, the Court explained that the law treats silence or ambiguity about the question of who should decide arbitrability different from the way it treats silence or ambiguity about the question of whether a particular dispute is within the scope of a valid arbitration agreement. With respect to the latter question, if there is a valid arbitration agreement, any doubts about what will be included in it will be resolved in favor of arbitration. As to the question about who should decide arbitrability, however, the Court reversed the presumption. Unless the parties, by their arbitration agreement, invest authority to determine the issue of arbitrability in the arbitrator, it is presumed that the parties intended the courts to decide that issue. The Court explained the reason for this is that failure to require clear and unmistakable evidence of arbitrability could too often force unwilling parties to arbitrate a matter they reasonably expected to have a judge, not an arbitrator, decide.

In deciding whether a dispute is arbitrable, the U.S. Supreme Court has held that if the arbitration agreement is covered by the FAA, a court must apply federal substantive law "to determine arbitrability". Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.⁽⁹⁾ Consistent with that, the Texas Supreme Court has ruled that in situations where the FAA applies, Texas courts must apply federal substantive law to determine whether a dispute is arbitrable. Prudential Sec., Inc. v. Marshall.⁽¹⁰⁾ Even though federal substantive law is applied in determining arbitrability, pursuant to the decision of the Texas Supreme Court in Anglin v. Tipps,⁽¹¹⁾ federal procedural rules are not applicable.

B. Federal Pre-Emption

The FAA, pursuant to its terms, covers written⁽¹²⁾ arbitration provisions contained in a contract evidencing a transaction involving commerce. Pre-emption of state law by the FAA began in U.S. Supreme Court decisions starting in mid-1960. The most recent and probably the most significant development in the expansion of the FAA was Allied Bruce Terminix Companies, Inc. and Terminix International Company v. Dobson.⁽¹³⁾ In that case, the U.S. Supreme Court enforced an arbitration provision in a residential termite treatment contract between a pest control company and an Alabama homeowner, overruling an Alabama statute voiding the arbitration clause. In reaching that result, the Court found the necessary interstate commerce connection in the fact that the chemicals used by the pest control company in the termite treatment were shipped from an out-of-state location to the local company in Alabama. The Court held that the FAA pre-empted the field in every case reached by the commerce clause. If the FAA is applicable, it pre-empts state laws to the extent that they are inconsistent with that Act. Doctor's Assocs., Inc. v. Casarotto.⁽¹⁴⁾

The Court's ruling in Allied Bruce Terminix swept away the major remaining roadblock in using the FAA. The Court explained the words "involving commerce" should be interpreted as broadly as the words "affecting commerce", which have been interpreted to mean a full exercise of constitutional power. The Court also interpreted the words evidencing a transaction to mean to have, in fact, involved interstate commerce rather than for interstate commerce to have been contemplated by the parties. The Court concluded that the FAA reached to the limits of Congress' commerce clause powers. In light of that standard, it is hard to imagine very many transactions that would not be covered by the FAA.

In Southland Corp. v. Keating,⁽¹⁵⁾ the U.S. Supreme Court first addressed the issue of whether a particular state law that governed arbitration agreements and conflicted with the FAA violated the supremacy clause of the U.S. Constitution. In that case, several California franchisees had filed state court actions even though their franchise agreements included arbitration provisions. The California Supreme Court, on the basis of California law, refused to compel arbitration of the claims. The U.S. Supreme Court reversed the California Supreme Court's holding, finding that California law was pre-empted by the FAA. In accord with earlier rulings, the Court found that in enacting Section 2 of the FAA, Congress declared a national policy favoring arbitrations and withdrew the power of states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration. A few years later, the U.S. Supreme Court, in Perry v. Thomas,⁽¹⁶⁾ concluded that the FAA pre-empted another California statute that authorized employees to maintain an action for wages despite the existence of an arbitration agreement between the employer and the employee. Most recently, in the Doctor's Associates case cited above, the Court concluded that the FAA pre-empted a Montana statute that conditioned enforceability of arbitration clauses on compliance with certain special notice requirements.

In light of the Allied Bruce Terminix case, the Texas courts have been construing the commerce clause language broadly. In the 1997 case, Palm Harbor Homes, Inc. v. McCoy,⁽¹⁷⁾ a husband and wife bought a mobile home manufactured by Palm Harbor. As part of the closing documents, the purchasers executed an agreement to arbitrate "any or all controversies" arising out of the purchase. Two years later, the purchasers sued Palm Harbor under DTPA, in contract and in tort, and Palm Harbor moved to compel arbitration. The purchasers raised, as a defense, that the arbitration was invalid due to fraud in the inducement and lack of mutual consideration. The trial court ultimately denied the motion to arbitrate. On appeal before the Fort Worth Court of Appeals, the purchaser's attorney argued that the FAA should not apply because the purchase did not involve commerce as required under the FAA. In support of that position, the purchasers pointed to the 1995 U.S. Supreme Court case of United States v. Lopez,⁽¹⁸⁾ in which the Court declared The Gun-Free School Zone Act of 1990 unconstitutional because Congress only had authority under the commerce clause in areas which "substantially affected interstate commerce". The Texas Court of Appeals rejected that argument on the grounds that no question of the constitutionality of the FAA had been raised. It concluded that the only issue regarding interstate commerce before it was whether the transaction involved interstate commerce. Finding that the Texas courts broadly interpret the term, the Court of Appeals held that Palm Harbor's numerous interstate activities subjected the transaction to the jurisdiction of the FAA.

The purchasers had also argued that they had been fraudulently induced into entering into the agreement. In dicta, the Court of Appeals noted that, if anything, that would be evidence of unconscionability rather than fraudulent inducement. Further, the Court of Appeals indicated that it would uphold the arbitration agreement and reject any claim of unconscionability. To do otherwise, said the Court, would be to "negate the public policy in favor of arbitration".

Even prior to the Allied Bruce Terminix case, Texas courts had been taking an expansive view of the interstate commerce question. See Belmont Constructors, Inc. v. Lyondell Petrochemical Company,⁽¹⁹⁾ which treated insurance by out-of-state companies as evidence of interstate commerce; BWI Cos., Inc. v. Beck,⁽²⁰⁾ holding that an arbitration agreement between an employer and employee related to interstate commerce, because the employer had facilities in Texas and in other states, even though the employee only worked and made delivery in Texas; and, Lost Creek Municipal Utility District v. Travis Indus. Painters, Inc.,⁽²¹⁾ holding that the amount of commerce involved in the contract need not be substantial in order to hold that the FAA was applicable where a surety bond was issued and the goods were made outside the State of Texas.

The Houston Court of Appeals, however, in a recent case declined to the find the FAA applicable to an arbitration agreement contained in a title insurance contract. In Stewart Title Guaranty Company v. Mack,⁽²²⁾ the Court acknowledged that a party can show interstate commerce in the following ways:

1. Location of headquarters in another state;

2. Transportation of materials across state lines;

3. Manufacture of parts in a different state;

4. Billings prepared out-of-state;

5. Interstate mail; and

6. Phone calls in support of a contract.

The Court, however, in reliance on one of its own earlier decisions stated that when the only evidence of interstate commerce was that one of the parties in the suit was a corporation doing business in several states, interstate commerce was not affected and the arbitration agreement did not fall under the FAA. That statement appears to be dicta because the court indicated that the only evidence offered to support Stewart Title's claim of interstate commerce was the exclusionary language in the title policy and, apparently, the fact that Stewart Title is a multi-state entity was not asserted. Accordingly, it is not clear that this statement is a correct statement of law after Allied Bruce Terminix. Moreover, in the case, the party that was doing business in other states was a not a party to the arbitration agreement. Rather, the parties to the arbitration agreement were all Texas residents. Regardless of the Stewart Title decision, however, the U.S. Supreme Court, as well as Texas courts, have held that the FAA's reach extends to the limits of Congress' commerce clause powers.

C. Scope of Arbitration Provision

Recent Texas Court decisions have looked at arbitration clauses and addressed a long list of objections to them, from lack of bargaining power to lack of privity between the parties. The strong presumption in favor of arbitration clearly exists, but a relationship must exist and all conditions precedent must be met.

In American Employer's Ins. Co. v. Aiken,⁽²³⁾ Aiken entered into an agent agreement with American Employer's Insurance Company. Two years later, he was notified that American was terminating the agreement. He filed suit on several grounds, and argued that the arbitration clause contained in the agreement was unconscionable based on his lack of bargaining power. The Fort Worth Court of Appeals rejected his argument holding that there was nothing unconscionable about an arbitration contract. Specifically, in dicta, the court stated that "this is not a disparate bargaining power case in which the insurer had vast superior expertise and knowledge". Although the Court noted that Aiken could have taken his business elsewhere, it defended its decision by noting that it was not unfair to the contracting parties and that there is no evidence that the clause contained unusual or unique provisions. The Court left open to discussion situations where it is necessary to balance the public policy in favor of arbitration against situations where a court concludes that a party's superior bargaining power makes the imposition of an arbitration agreement unfair. Texas courts have held that a matter is subject to arbitration if there is a relationship between the facts asserted and the scope of coverage of the arbitration agreement, and the fact that a statute that may address the substantive rights of a party does not affect the arbitrability of the dispute.

In a 1997 case, United Parcel Service Inc. v. McFall,⁽²⁴⁾ an employee of UPS under a collective bargaining agreement was injured on the job and sought worker's compensation benefits. He was discharged by UPS and sued UPS for retaliatory discharge, libel and slander. Discovery proceeded and UPS sought a trial date. After several months, UPS moved the court to dismiss the suit and to compel arbitration; the trial court denied the motion. UPS petitioned the Court of Appeals for a mandamus. During oral arguments, UPS conceded that the claims of libel and slander were not covered by the arbitration agreement. Without any further comments, the court accepted the concession and addressed only the issues of retaliatory discharge. The employee alleged that the discrimination against him was controlled by statute, not by the terms of the employment contract, and therefore the discrimination could not be the subject of arbitration. The Court of Appeals rejected that argument, stating that the source of his complaint did not matter. Holding under Prudential Securities Inc. v. Marshall that the relationship between the parties asserted in a subject matter encompassed by the arbitration agreement controlled the question of arbitrability, the Court of Appeals ruled against the employee. See also Hou-Scape, Inc. v. Lloyd.⁽²⁵⁾

In Solis v. Evans,⁽²⁶⁾ the Court held that arbitration is a matter of contract and rules of privity will apply in determining whether arbitration controls the claims of one party against another. In the case, Solis was a bank employee and had signed an agreement with the bank that required arbitration of all disputes. Ultimately, because of suspected criminal activities which were investigated and of which Solis was cleared, Solis sued the bank and its president for slander. The bank made a demand for arbitration but, prior to an arbitration being conducted, the case settled. Subsequently, a second suit was filed against the president alone for slander, because of statements that he made about Solis following settlement. A motion to compel arbitration in the second suit was filed and granted by the trial court. Solis filed an application for writ of mandamus which was granted by the Court of Appeals. In the Court's decision, it noted that arbitration is a matter of contract, and a party cannot be required to submit to arbitration a dispute which they have not agreed to submit. The bank president was unable to produce a copy of the depository agreement under which it was alleged that the arbitration agreement arose. Accordingly, the Court of Appeals held that the trial court had no authority to order arbitration. Further, the Court of Appeals held that even had the agreement been produced, there was no relationship between the president's alleged actions and the actions controlled by the agreement.

Since the action was unrelated to Solis' rights and obligations to the bank, there was no binding agreement by which Solis could be compelled to arbitrate her claims against the bank president.

Similarly, in Weekley Homes, Inc. v. Jennings,⁽²⁷⁾ the Court of Appeals held that because arbitration is a right arising in contract, a claim for arbitration must include proper legal proof that all conditions precedent have been satisfied. In the Weekley Homes case, there was a contract for construction and sale of a new home which included an arbitration agreement. The agreement required, as a condition precedent, that any dispute which arose be submitted to mediation. A dispute arose, and the builder filed a motion to compel arbitration. At the hearing on the motion, the builder submitted a copy of the contract, but no evidence of whether a mediation had been conducted. The trial court denied the motion to compel arbitration and the builder appealed. Before the San Antonio Court of Appeals, the builder argued that the purchaser had the burden of proving that its claim was not subject to arbitration. The San Antonio Court of Appeals rejected that argument and noted that a breach of condition precedent affects the enforceability of the provision to which the condition is attached.

Another 1996 case, Burlington Northern Railroad Co. v. Akpan,⁽²⁸⁾ raises an interesting issue. The holding in that case was that the absence of a signature to an employment contract will not exempt the application of the TGAA to an arbitration clause in the contract. The Fort Worth Court of Appeals in the case found that Akpan had admitted receiving an amendment to his employment agreement and that the absence of his signature on the written agreement was inconsequential. Specifically, the court said that the TGAA requires only that the terms of the agreement be written, it does not require that it be signed by either party.

Texas courts have been consistent in holding that where the facts alleged touch on matters covered by the agreement, the claim will be subject to arbitration. Hou-Scape, Inc. v. Lloyd; United Parcel Service, Inc. v. McFall. Further, courts have allowed arbitration to proceed in situations involving misrepresentation, fraud, negligence, gross negligence, defamation, tortuous interference, and intentional infliction of emotional distress.

D. Privity Questions

Recent cases attempting to require arbitration against non-parties to the clause or agreement have not generally been successful. In X.L. Insurance Co., Ltd. v. Hartford Accident & Indemnity Co.,⁽²⁹⁾ an insured filed suit against its insurer, Hartford. Hartford later filed a claim for indemnity or contribution against a co-insurer, X.L. The insured and X.L. had a contract requiring binding arbitration of all disputes, but there was no signed agreement between Hartford and X.L. Nevertheless, X.L. attempted to require Hartford to arbitrate all claims for contribution or indemnity. The Court of Appeals, in applying standard contract principles, found that these claims were statutory and independent of any third-party beneficiary, agency or assignee/subrogee relationship. The court denied the effort to compel arbitration.

The First Court of Appeals reviewed a decision denying arbitration under the FAA in Metropolitan Life Insurance Co. v. The Honorable Tony Lindsay.⁽³⁰⁾ The suit arose because of an employment dispute between employer and employee. While most of the employees of the company had executed an agreement that included an arbitration clause, three had not. The Court declined to stay the litigation brought by the three non-signatories, holding that they could not be compelled to arbitrate.

Lastly, in Southwest Health Plan Inc. v. Sparkman,⁽³¹⁾ a government employee sued an insurer for denial of benefits for a terminally ill child. The employee was a participant in a group health insurance plan that had been contracted for by the employer with the insurer. The employer and insurer had signed an agreement concerning such insurance coverage and the resulting health plan document contained an agreement to arbitrate. On appeal, the employee contended that he was not a signatory to the plan document and had never received a copy of the plan, only a summary of benefits which made no mention of arbitration. In response, the Fort Worth Court of Appeals held that the summary of benefits given to the employee specifically disavowed any status as a contract and specifically advised the employee to obtain a copy of the formal agreement for full details of coverage. The Court thus reversed the trial court's decision as to the abuse of discretion and ordered the dispute to arbitration.

E. Duty of an Arbitrator

The courts have long recognized the differences between arbitrators and judges. In Commonwealth Coatings Corp. v. Continental Casualty Co.,⁽³²⁾ Justice White commented that there are significant differences in the role of arbitrators and judges which mandate different, although similar, standards. The majority of problems that arise in arbitration, however, could be cured by timely disclosure. To paraphrase the real estate industry, the most important thing an arbitrator can do is disclose, disclose, disclose.

In TUCO, Inc. v. Burlington Northern Railroad Co.,⁽³³⁾ TUCO's contract with Burlington for transporting coal contained an arbitration agreement. A dispute arose and, pursuant to the arbitration agreement, each side picked a non-neutral arbitrator and the two arbitrators agreed on a third neutral arbitrator. Before an arbitration hearing on the merits, the neutral third party arbitrator was referred a substantial legal representation matter by the attorneys for Burlington. The referral was not disclosed to TUCO. The third arbitrator ultimately ruled for Burlington. In the arbitration award, TUCO's arbitrator wrote a dissent accusing the third arbitrator of bias. Suit was filed by TUCO to set aside the arbitration on grounds of evident partiality and that the arbitrators had exceeded their authority. The motion was overruled by the Court and an arbitration award was entered as a judgment of the court.

The Amarillo Court of Appeals held that the failure to disclose the referral was evident partiality under the TGAA,⁽³⁴⁾ reversed the trial court's entry of the arbitration award and remanded the case to the trial court for trial on the issue of evident partiality. The Supreme Court accepted writ and wrote a decision governing the scope of the standard of evident partiality in those cases in which parties select their arbitrators. The Court held that a neutral arbitrator selected by the parties or their representatives evidences evident partiality if he or she does not disclose facts which might, to an objective observer, create a reasonable impression of arbiter partiality. The Court emphasized that the evident partiality is established from the non-disclosure itself, regardless of whether the non-disclosed information necessarily establishes partiality or bias. Based on this rule, the court modified the judgment of the Court of Appeals to remand the case to the trial court with instructions to vacate the arbitration award and to refer the matter for further arbitration.

The Texas courts have also held that you cannot arbitrate your own case. In the 1997 case of BDO Seidman v. Miller,⁽³⁵⁾ a dispute between BDO Seidman (an accounting firm) and a former partner was to be arbitrated by a board of arbitrators made up of the firm's board of directors and partners. After a trial court ruled that the arbitration agreement was void, the accounting firm appealed. The arbitration was being conducted under the laws of another state and those laws specifically prohibited a party from appointing itself as an arbiter. In the case, the Austin Court of Appeals held that the accounting firm's appointment of members of its board of directors and partners as arbitrators invalidated the contract to arbitrate.

Bruce Hardwood Floors, a Division of Triangle Pacific Corporation v. UBC Southern Council of Industrial Workers, Local Union #2713⁽³⁶⁾ is a recent Fifth Circuit case that discussed the authority of an arbitrator. The ruling of that case was that while the court will give deference to an arbitrator's decision, the deference ends at the limit of the arbitrator's contractual authority. In its opinion, the Fifth Circuit noted that this arbitrator's authority came from a collective bargaining agreement and so long as the arbitrator was not fashioning his own brand of industrial justice, the Court would uphold it. However, in the case, the Court found that the terms of the collective bargaining agreement were specific in its terms and that the arbitrator had violated them. Accordingly, it set the award aside.

Thomas v. Prudential Services Inc.⁽³⁷⁾ also considered the extent of an arbiter's authority. It involved a suit by Thomas against Prudential over what he perceived as an ill-advised securities investment. The dispute was submitted to arbitration pursuant to a written agreement and, at the conclusion of an arbitration hearing, Thomas' claim was dismissed. Even though the arbitration agreement did not address questions involving attorney's fees and costs, the arbitrators awarded Prudential attorney's fees and expert witness fees. Thomas appealed the award.

The Austin Court of Appeals determined that the FAA governed the appeal because of the involvement of interstate commerce and recognized the provision of the FAA which authorizes vacating an award where arbitrators exceed their authority. In response to Thomas' argument that nothing in the agreement provided authority to award fees, the Court held that the New York rules under which the arbitration was conducted specifically authorized the award of attorney's fees to the prevailing party. The Court also reasoned that the arbitrators must have concluded that the investor acted in bad faith as a basis for rendering the fee awards and that the investor failed to meet the burden to show otherwise and upheld the award.

On March 12, 1998, the El Paso Court of Appeals in Lee, et al v. El Paso County⁽³⁸⁾ addressed common law grounds for vacating or modifying an arbitration award.

The case involved a collective bargaining agreement between the county and the county sheriff's department. In 1990, the collective bargaining agreement was changed to provide that terminated employees would be paid for accrued, unused sick leave. In 1995, a deputy retired and requested to be paid for unused sick leave back to 1977. The county agreed to pay for unused sick leave after 1990, but argued that to pay for unused sick leave before the change in the collective bargaining agreement would violate the Texas Constitution, Art. III, 53, because it would constitute payment of extra compensation after services were rendered. The dispute was submitted to binding arbitration pursuant to the collective bargaining agreement.

The arbitrator awarded the back pay for the period prior to 1990 and noted in the decision that the constitutionality of the collective bargaining agreement was a matter for the courts to decide. The county appealed the award to District Court on the grounds that the award was not supported by substantive evidence and that the arbitrator had exceeded his jurisdiction. The District Court granted a summary judgment in favor of the county.

The Court of Appeals, in its decision vacating the award, explained that an arbitration award may be vacated if it violates public policy or the law, or if an arbitrator exceeds the scope of his authority citing United Paperworks Int'l Union v. MISCO, Inc.⁽³⁹⁾ The Court pointed out that the state constitution specifically prohibits the type of payment that the arbitrator had awarded.

Attached is a copy of the American Bar Association, American Arbitration Association Joint Code of Ethics. Review of that code may be interesting and helpful for the practitioner whose practice does not normally include arbitration.

F. Defenses to Arbitration

One of the first things to consider in looking at defenses to arbitration is the scope of the arbitration rules. Those are set out in Section 2 of the FAA and in Section 171.001 of the TGAA.

Written arbitration agreements are valid, enforceable and irrevocable, save on such grounds as exist in law or equity for the revocation of any contract. Generally, therefore, applicable contractual defenses such as duress, fraud or unconscionability may be used to set aside arbiter's awards. See Doctor's Associates cited above. However, if the facts alleged touch on matters covered by the agreement itself, then it can be subject to arbitration. See the United Parcel v. McFall and Hou-Scape cases cited earlier.

What about a defense of unconscionability? You will recall that the provisions of the TGAA provide for the setting aside of agreements on the basis of unconscionability.⁽⁴⁰⁾ The question before the Fort Worth Court of Appeals in American Employer's Ins. Co. v. Apkan (cited earlier) was whether a dispute over American's compliance with an insurance statute was sufficient to trigger an arbitration agreement between the parties. The Court of Appeals held that the agreement was sufficient. In the case, the ultimate holding of the Court of Appeals was that there was nothing unconscionable, per se, about an arbitration contract.

G. Agreement to Arbitrate

In the last several years, the courts have also had occasion to review contracts containing agreements to arbitrate. In the 1996 case, Cantella & Co., Inc. v. Goodwin,⁽⁴¹⁾ the Court looked at an agreement which included an arbitration clause invoking the FAA. At the hearing on a motion to compel arbitration, the arbitration agreement was proved up and it was shown that the subject matter involved interstate commerce. Ultimately, the Texas Supreme Court was called upon to consider a denial of the motion to compel arbitration on a mandamus basis. The Court reiterated a presumption in favor of the availability of arbitration and brushed aside the plaintiff's contention that it should not be bound by what it described as a "hidden arbitration provision". Rather, relying on the nature of a document and the legal presumption that a party who signs a contract knows its contents, the Court ordered the parties to arbitrate.

In Emerald Texas, Inc. v. Peel,⁽⁴²⁾ the First Court of Appeals of Houston stressed the importance of reading a contract. This particular case involved a dispute between a homebuilder and a homebuyer as to the enforceability of an arbitration clause contained in an earnest money contract. The homeowner opposed arbitration, contending a lack of sophistication and business experience and lack of counsel as a basis. The trial court ruled in favor of the homeowner, including making a determination that the earnest money contract which contained the arbitration clause ceased to be in effect once a closing had occurred.

The Court of Appeals disagreed, reasoning that the arbitration clause is interpreted under general contract principles and that one who signs a contract is presumed to know its contents and further stating that there is nothing unconscionable, per se, about an arbitration contract.

H. Waiver

It is clear under the laws of the State of Texas that you cannot waive the right to arbitration by mere delay. EZ Pawn v. Mancias⁽⁴³⁾ is a 1996 Texas case which involved an arbitration provision in an employment agreement. An employee sued EZ Pawn for wrongful discharge and employment discrimination. EZ Pawn filed an answer, and over the next year, sent written discovery and noticed the employee for deposition. While preparing for the deposition, EZ Pawn discovered an arbitration agreement in its archives. After finding the arbitration agreement, EZ Pawn requested arbitration and offered to cancel the deposition. The employee refused and EZ Pawn moved to compel arbitration. The lower court denied the arbitration on the basis of waiver. The employee's argument to the Texas Supreme Court was, that because EZ Pawn did not timely request arbitration and knowingly participated in the lawsuit for more than a year, initiating discovery and agreeing to a trial setting, it had waived its right to compel arbitration. As to the waiver argument, the Texas Supreme Court interpreted the law under the FAA to not be favorable to waivers. The Court concluded that the employee failed to show that the events complained of caused a detriment or prejudice. The Court determined that a burden of proving waiver was heavy and declined to construe delay, standing alone as prejudicial. It reversed the lower court's decisions and ordered the parties to arbitrate. Likewise, in the Anglin case cited above, the Texas Supreme Court found the FAA pre-empted the Texas DTPA non-waiver provisions.

An interesting case dealing with the issue of waiver in a post-arbitration context is Holk v. Biard.⁽⁴⁴⁾ Ultimately, the Court in that case ruled that the seller had waived the right to complain about the results of an arbitration hearing because he participated in the arbitration proceedings without objecting to the arbitration agreement's validity on the grounds of fraudulent inducement.

Another case, Moore v. Morris,⁽⁴⁵⁾ dealt with a delay in initiating arbitration after agreeing to it. In 1993, an investor sued his brokerage firm. A year later, the parties submitted an agreed order to arbitrate. Subsequently, neither party took action to initiate arbitration. In mid-1995, the investor filed a motion to set aside the order to arbitrate because of the brokerage firm's failure to initiate arbitration proceedings and the trial court granted that motion. The brokerage firm challenged the order and the Court of Appeals dismissed it on the basis that mere delay would not waive the right of arbitration. The Court ruled that the burden of initiating the arbitration is controlled by language expressed in a party's written agreement. In this case, the Court found that the investor had the obligation based on the rules under which the matter would be arbitrated. The Court held, however, that even in the absence of the rules, it would impose on the party seeking relief the burden of initiating arbitration where the other party has properly asserted a right to arbitration. Similarly, in another termite company case, Bruce Terminix Co. v. Carroll,⁽⁴⁶⁾ a motion to abate a suit and compel arbitration was filed; however, no order was entered and no arbitration was initiated. Almost three years later, the trial court vacated the order on the grounds that the company requesting arbitration had waived its right. The Court held that the party seeking affirmative relief to arbitrate bears the burden to further the arbitration process whenever the other party seasonably asserts his right to contractual arbitration. The right to arbitrate can be waived by a party's affirmative resort to judicial process. In Turford v. Underwood,⁽⁴⁷⁾ the plaintiff filed a suit for declaratory judgment in Texas. Thereafter, the defendant filed suit seeking relief in Michigan. When the defendant filed a general denial in the Texas suit, it included a motion to compel to arbitrate. The Court of Appeals held that although there is a strong Texas presumption against the waiver of one's right to arbitrate, proof of a party acting inconsistently with an arbitration agreement and causing prejudice to the opposing party is sufficient to create a waiver. In this case, the plaintiff was able to demonstrate that filing suit in Michigan, coupled with the cost of defending that suit, waived the defendant's right to arbitration.

An arbitration award was overturned in Exxon Corp. v. Baton Rouge OCAW.⁽⁴⁸⁾ The case involved a collective bargaining agreement and an employee who was fired for drug use. The arbitrator determined that the agreement had been violated, but the employee was entitled only to back pay and not to reinstatement in view of his drug use. The Fifth Circuit reviewed the case and disagreed, holding that the arbitrator's award could not be enforced as it was contrary to public policy.

I. Discovery

Discovery is not available under the FAA. The TGAA, however, allows arbitrators to issue subpoenas for discovery pursuant to Section 1.71.007(b) of the Act. In Wallace v. Investment Advisors, Inc.,⁽⁴⁹⁾ a 1997 Texas case, the Court ruled that a party to an arbitration may not file suit, however, solely for the purpose of being able to obtain the right to discovery.

J. Binding v. Non-Binding

An interesting case for review is Porter & Clements, L.L.P. v. Stone.⁽⁵⁰⁾ In a malpractice suit by a client against Porter & Clements, the law firm sought an order compelling arbitration under the terms of its representation agreement. The client contended that the arbitration agreement did not call for binding arbitration and the trial court denied Porter & Clements' motion. The Houston Court of Appeals held that the FAA did not apply because there were no contacts with interstate commerce and, accordingly, applied only the provisions of the TGAA to the case. The client argued that under the provisions of the Texas Alternative Dispute Resolution Act (Section 154.027)⁽⁵¹⁾ the parties were not required to submit to binding arbitration. The Court stated that the reliance was misplaced and in a historical review of the issue held that when used in a contract, the term "arbitration" means "binding arbitration". The Houston Court of Appeals stated that the mere omission of the term "binding" from the arbitration agreement did not automatically transform it into a non-binding arbitration agreement.

K. Jurisdictional Issues

The 1996 case Gillman v. Davidson⁽⁵²⁾ involved a dispute which arose between two brothers over business dealings. The defendant filed a general denial which included no counterclaims but included a request to stay litigation and compel arbitration. The plaintiff sought to stay arbitration. The trial judge directed the parties to engage in informal dispute resolution and noted that the Court would reconsider the motion after the ADR process was completed. Thereafter, the plaintiff non-suited all claims and the case was dismissed without prejudice. On the basis of Defendant's motion for emergency clarification, the court reinstated the case and ordered the parties to arbitration. The plaintiff filed a petition for leave to file a writ of mandamus with the Court of Appeals, and the Appeals Court issued an order staying the lower court's order compelling the parties to arbitration. After a rehearing en banc of Plaintiff's motion for leave to file the petition for writ of mandamus, the majority of the Appeals Court concluded that leave to file was improvidently granted. The Court rescinded its previous order staying the lower court's order compelling arbitration. The effect of the ruling was to require the parties to arbitrate. At issue in the case was whether Defendant's motion to compel arbitration was a claim for affirmative relief which would defeat Plaintiff's attempt to non-suit the entire matter.

In Jamison & Harris v. National Loan Investors,⁽⁵³⁾ following an arbitration hearing, an award was entered and one of the parties filed a motion to vacate for refusal to hear evidence and for mistakes of substantive law. The Court of Appeals, in considering the trial court's entry of the arbitration award as a judgment of the Court, noted that Jamison & Harris failed to forward a record of the arbitration proceeding and that a mistake of fact or law is insufficient to set aside an arbitration award. The Court noted that the parties seeking relief failed to bring to the Court of Appeals any claim reviewable under the provisions of Section 171.014 of the TGAA.

The TGAA does not permit an interlocutory appeal of an order compelling arbitration. Elm Creek Villa Homeowners Ass'n, Inc. v. Beldon Roofing & Remodeling Co.⁽⁵⁴⁾; Lipshy Motor Cars, Inc. v. Sovereign Associates, Inc.⁽⁵⁵⁾ The Act does, however, permit an appeal of an interlocutory order denying a motion to compel arbitration. Further, there is not an entitlement based on the TGAA to bring mandamus proceedings on an order compelling arbitration. McMullen v. Yates.⁽⁵⁶⁾ If the state court grants a motion to compel arbitration based on the FAA, parties cannot maintain an interlocutory appeal of that ruling. In Gathe v. Cigna Healthplan of Texas, Inc.,⁽⁵⁷⁾ the Court explained that even though the arbitration request is based on the FAA, Texas procedure still controls.

There is some split among the courts of appeal. In 1997, in the Solis⁽⁵⁸⁾ case, the Corpus Christi Court of Appeals allowed a party to bring a mandamus proceeding when the order to compel arbitration was based on the FAA. The holding in Solis seems to be in conflict with the earlier McMullen case.

In federal court, a denial of a motion to compel arbitration allows the party to pursue interlocutory appeals pursuant to Section 15 of the FAA. If the motion to compel is granted, however, it is appealable only in the event it is a final order. An interlocutory order is not appealable. FC Schaffer & Assoc., Inc. v. Demech Contractors, Ltd.⁽⁵⁹⁾; Altman Nursing, Inc. v. Clay Capital Corp.⁽⁶⁰⁾

L. Causes of Action

Two recent Fifth Circuit cases have considered whether there are limitations on the right to arbitrate certain statutory causes of actions. Understandably, it found that there were none.

In Rojas v. TK Communications, Inc.,⁽⁶¹⁾ the plaintiff filed an employment discrimination lawsuit under Title VII. In that case, there was a signed employment agreement with the employer that specifically provided for arbitration. In this case, the Fifth Circuit confronted for the first time the impact of the exclusionary language contained in Section 1 of the FAA which excludes coverage of "contracts of employment of seaman, railroad employees, or any other class of workers engaged in foreign or interstate commerce." The justices concluded that the exclusionary clause should be narrowly construed to apply to employment contracts of the class of workers actually engaged in the movement of goods in interstate commerce in the same way that seaman and railroad workers are. Therefore, the FAA applied to the contract in question and the Court enforced the employer's right to arbitrate the dispute.

The question which was addressed in Kramer v. Smith Barney⁽⁶²⁾ involved the arbitrability of ERISA claims. A doctor, as a participant in and as trustee of a qualified plan, sued a brokerage firm for losses he determined to be unsuitable investments. The doctor had signed a standard agreement which called for arbitration of any applicable disputes in accordance with the rules of the stock exchange. The specific rules of the Exchange impose a limitation on arbitration requiring any arbitration to commence not more than six years after the event giving rise to the dispute, irrespective of any concealment or discovery rule. The arbitration proceeding was initiated within two years after the decline in value was discovered, but more than six years after the investment had been made. The trial court granted the motion and stayed arbitration of the claims.

The doctor then filed suit in state court with respect to his claim. The case was removed to the federal court by the brokerage house. On appeal, the issue of limitations arose and the Fifth Circuit determined that Congress did not intend to exempt statutory ERISA claims from the dictates of the FAA and held that the ERISA claims should be arbitrated.

Another Fifth Circuit case, Matter of National Gypsum Company,⁽⁶³⁾ addressed the arbitrability of contractual disputes in bankruptcy. In that case, an insurer advanced monies to National Gypsum for payment of certain claims. Thereafter, National Gypsum sought federal bankruptcy protection in order to reorganize its debts. The insurance company sought to recover its money under the terms of an arbitration agreement between the parties; however, by then the ownership of National Gypsum had been transferred to a settlement trust that opposed the arbitration under the bankruptcy code. The bankruptcy court denied the demand for arbitration on the basis that the bankruptcy court was the most efficient forum to determine the issues. The insurer appealed to federal district court which affirmed the bankruptcy court's ruling on the grounds that the issues in dispute were "core" bankruptcy issues and thus not arbitrable.

The Fifth Circuit upheld the district court's decision although not on the core bankruptcy issue distinction. Instead, the Court held that actions which are "derived from the Debtor" should be arbitrated and that actions created by the bankruptcy code for the benefit of creditors of the bankrupt estate should be litigated in bankruptcy court. While, as determined by the Fifth Circuit, the bankruptcy court has the discretion to determine which issues fall within which categories, that does not mean it should always do so.

M. Substantive Issues v. Procedural Issues

A 1996 case also discussed the difference between substantive arbitrable issues and procedural arbitrability issues. In the case of City of Lubbock v. Hancock,⁽⁶⁴⁾ the Court of Appeals noted that substantive arbitrability addresses whether the issue in dispute is encompassed by the agreement to arbitrate, while procedural arbitrability addresses issues including whether a party has satisfied the conditions precedent to an obligation to arbitrate. The Court of Appeals, in City of Lubbock, held that the arbitration panel is the appropriate forum to determine whether conditions precedent to the right to arbitrate have been satisfied. In making its ruling, however, the Court rejected the apparent contrary holdings of City of Alamo v. Garcia⁽⁶⁵⁾ and Belmont v. Lyondell, cited earlier, on the grounds that the cases "did not cite any authority discussing arbitration in support of their holdings and did not discuss or attempt to distinguish any of the body of law cited that holds that such questions are the province of the arbitrators."

FOOTNOTES

1. Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (Tex. 1992)

2. 9 U.S.C. 1, et seq.

3. Allied Bruce Terminix Companies, Inc. and Terminix International Company v. Dobson, 115 S. Ct. 834 (1995)

4. Tex. Civ. Prac. & Rem. Code, 171.001, et seq.

5. L.H. Lacy Co. v. City of Lubbock, 559 S.W.2d 348 (Tex. 1977)

6. Mastrobuono v. Shearson-Lehman Hutton, Inc., Inc., 514 U.S. 52 (1995)

7. Cantella Co., Inc. v. Goodwin, 924 S.W.2d 943 (Tex. 1996)

8. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)

9. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985)

10. Prudential Sec., Inc. v. Marshall, 909 S.W.2d 896 (Tex. 1995)

11. See n. 1

12. 29 U.S.C. 2

13. See n. 3

14. Doctor's Assocs., Inc. v. Casarotto, 116 S. Ct. 1652 (1996)

15. Southland Corp. v. Keating, 465 U.S. 1 (1984)

16. Perry v. Thomas, 482 U.S. 483 (1987)

17. Palm Harbor Homes, Inc. v. McCoy, 944 S.W.2d 716 (Tex.App.--Ft. Worth 1997, no writ)

18. United States v. Lopez, 514 U.S. 549 (1995)

19. Belmont Constructors, Inc. v. Lyondell Petrochemical Co., 896 S.W.2d 352 (Tex.App.--Houston [1st Dist.] 1995, no writ)

20. BWI Cos., Inc. v. Beck, 910 S.W.2d 620, 622 (Tex.App.--Austin 1995, orig. proceeding [leave denied])

21. Lost Creek Mun. Util. Dist. v. Travis Indus. Painters, Inc., 827 S.W.2d 103, 105 (Tex.App.--Austin 1992, writ denied)

22. Stewart Title Guar. Co. v. Mack, 945 S.W.2d 330, 333 (Tex.App.--Houston [1st Dist.] 1997, n.w.h.)

23. American Employer's Ins. Co. v. Aiken, 942 S.W.2d 156 (Tex.App.--Ft. Worth 1997, no writ)

24. United Parcel Service, Inc. v. McFall, 940 S.W.2d 716 (Tex.App.--Amarillo 1997, no writ)

25. Hou-Scape, Inc. v. Lloyd, 945 S.W.2d 202 (Tex.App.--Houston [1st Dist.] 1997, no writ)

26. Solis v. Evans, 951 S.W.2d 44 (Tex.App.--Corpus Christi 1997, no writ)

27. Weekley Homes, Inc. v. Jennings, 986 S.W.2d 16 (Tex.App.--San Antonio 1996, writ denied)

28. Burlington Northern Railroad Co. v. Akpan, 943 S.W.2d 48 (Tex.App.--Ft. Worth 1996, no writ)

29. X.L. Insurance Co., Ltd. v. Hartford Accident & Indemnity Co., 918 S.W.2d 687 (Tex.App.--Beaumont 1996, no writ)

30. Metropolitan Life Ins. Co. v. Lindsay, 920 S.W.2d 720 (Tex.App.--Houston [1st Dist.] 1996, no writ)

31. Southwest Health Plan, Inc. v. Sparkman, 921 S.W.2d 355 (Tex.App.--Ft. Worth 1996, no writ)

32. Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968)

33. Burlington Northern Railroad Co. v. TUCO, Inc., 912 S.W.2d 311 (Tex.App.--Amarillo 1995)

34. Tex. Civ. Prac. & Rem. Code, 171.014(a)(2)

35. BDO Seidman v. Miller, 949 S.W.2d 858 (Tex.App.--Austin 1997, writ dism'd w.o.j.)

36. Bruce Hardwood Floors, Div. of Triangle Pacific Corp. v. UBC, So. Council of Indus. Workers, Local Union No. 2713, 103 F.3d 449 (5th Cir. 1997)

37. Thomas v. Prudential Services, Inc., 921 S.W.2d 847 (Tex.App.--Austin 1996, no writ)

38. Lee, et al v. El Paso County, El Paso Court of Appeals No. 08-96-00415CV, 3-12-98

39. United Paperworks Int'l Union v. MISCO, Inc., 484 U.S. 29 (1987)

40. Tex. Civ. Prac. & Rem. Code, 171.001

41. Cantella & Co., Inc. v. Goodwin, 924 S.W.2d 943 (Tex. 1996)

42. Emerald Texas, Inc. v. Peel, 920 S.W.2d 389 (Tex.App.--Houston [1st Dist.] 1996)

43. EZ Pawn Corp. v. Mancias, 934 S.W.2d 87 (Tex. 1996)

44. Holk v. Biard, 920 S.W.2d 803 (Tex.App.--Texarkana 1996, mand. motion overruled)

45. Moore v. Morris, 931 S.W.2d 726 (Tex.App.--Austin 1996, no writ)

46. Bruce Terminix Co. v. Carroll, 953 S.W.2d 537 (Tex.App.--Waco 1997, no writ)

47. Turford v. Underwood, 952 S.W.2d 641 (Tex.App.--Beaumont 1997, no writ)

48. Exxon Corp. v. Baton Rouge OCAW, 77 F.3d 850 (5th Cir. 1996)

49. Wallace v. Investment Advisors, Inc., 1997 WL 755159 (Tex.App.--Texarkana) (No order of the court has been issued as of the date of this paper releasing this decision for publication.)

50. Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217 (Tex.App.--Houston [1st Dist.] 1996, no writ)

51. Tex. Civ. Prac. & Rem. Code, 154.027

52. Gillman v. Davidson, 934 S.W.2d 803 (Tex.App.--Houston [1st Dist.] 1996, mand. motion overruled)

53. Jamison & Harris v. National Loan Investors, 939 S.W.2d 735 (Tex.App.--Houston [14th Dist.] 1997, writ denied)

54. Elm Creek Villa Homeowners Ass'n, Inc. v. Beldon Roofing & Remodeling Co., 940 S.W.2d 150 (Tex.App.--San Antonio 1997, no writ)

55. Lipshy Motor Cars, Inc. v. Sovereign Assoc., Inc., 944 S.W.2d 68, 70 (Tex.App.--Dallas 1997, no writ)

56. McMullen v. Yates, 697 S.W.2d 500 (Tex.App.--San Antonio 1985, no writ)

57. Gathe v. Cigna Healthplan of Texas, Inc., 879 S.W.2d 360 (Tex.App.--Houston [14th Dist.] 1994, writ denied)

58. See n. 26

59. FC Schaffer & Assoc., Inc. v. Demech Contractors, Ltd., 101 F.3d 40 (5th Cir. 1996)

60. Altman Nursing, Inc. v. Clay Capital Corp., 84 F.3d 769 (5th Cir. 1996)

61. Rojas v. TK Communications, Inc., 87 F.3d 745 (5th Cir. 1996)

62. Kramer v. Smith Barney, 80 F.3d 1080 (5th Cir. 1996)

63. Matter of National Gypsum Company, 118 F.3d 1056 (5th Cir. 1997)

64. City of Lubbock v. Hancock, 940 S.W.2d 123 (Tex.App.--Amarillo 1996, no writ)

65. City of Alamo v. Garcia, 878 S.W.2d 664 (Tex.App.--Corpus Christi 1994, no writ)