Court of Appeals of Texas Finds No Evident Partiality or Gross Mistake and Affirms Confirmation of an Arbitration Award

The Court of Appeals for the First District of Texas at Houston did not find evident partiality or gross mistake and affirmed the district court’s confirmation of an arbitration award.

Background

In FCA Construction Company, LLC v. J & G Plumbing Services, LLC, No. 01-10-01034-CV (Tex. App.—Houston [1st Dist.] Mar. 8, 2012) a dispute arose between FCA Construction Company (“FCA”) and its plumbing subcontractor, J & G Plumbing Services (“J & G”) during the construction of a fitness center in Texas. FCA ultimately terminated J & G and hired a new plumbing subcontractor.

Pursuant to their contract, the parties submitted their dispute to final and binding arbitration. They selected William Andrews as their arbitrator. Prior to the arbitration, Andrews sent counsel for FCA and J & G a letter disclosing his existing relationship with counsel for J & G. After receiving the disclosure, FCA agreed to have the arbitration heard by Andrews. Ultimately, Andrews entered a final arbitration award in favor of J & G on its wrongful termination and breach of contract claims against FCA. The trial court confirmed the arbitration award.

Court of Appeals

FCA contended that the trial court should have vacated the arbitration award on grounds of (1) evident partiality under section 171.088 of the Texas Civil Practices and Remedies Code (“TCPRC”) and (2) gross mistake under Texas common law. The Court overruled both issues and affirmed the trial court’s judgment.

Section 171.088(a)(2)(A) of the TCPRC directs a trial court to vacate an arbitration award if the rights of a party were prejudiced by evident partiality by a neutral arbitrator. Following Texas Supreme Court precedence, the Court stated that the standard applied in determining whether a neutral arbitrator exhibited evident partiality is whether the arbitrator did not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality. Evident partiality is established by nondisclosure itself. FCA did not contend that Andrews failed to disclose any facts, but urged the Court to adopt a second standard adopted by the El Paso Court of Appeals in 2010.

The El Paso court looked to federal law to determine that evident partiality can be shown by actual bias in addition to nondisclosure. The “actual bias” test requires a party asserting actual bias to produce specific facts demonstrating that a reasonable person would have concluded that the arbitrator was partial to one party. FCA argued that the transcript of the arbitration showed that Andrews was anything but fair and impartial during the proceeding. FCA argued that Andrews assumed an adversarial role against FCA by questioning its witnesses more than J & G’s witnesses and voicing displeasure when FCA’s witnesses refused to recant their testimony.

Without addressing whether evident partiality can be established based on a showing of actual bias, the Court concluded that FCA had not met its burden of demonstrating actual bias under the test because FCA’s allegations did not rise to the level of producing specific facts from which a reasonable person would conclude that the arbitrator was partial to one party. Furthermore, the Court noted that FCA identified no Texas or federal authority for the proposition that bias may be inferred when an arbitrator questions one side’s witnesses more extensively than the other side’s witnesses. The Court overruled FCA’s first issue.

The Court recognized that Texas common law allows a trial court to set aside an award if the arbitrator’s decision is tainted by fraud, misconduct, or gross mistake as would imply bad faith and failure to exercise honest judgment, and gross mistake results in a decision that is arbitrary or capricious. However, an honest judgment made after due consideration given to conflicting claims is not arbitrary or capricious, even if the judgment is erroneous. The Court even noted that it may not vacate an award merely because it was based on a mistake of fact or law.

FCA argued that the contract language and undisputed facts established its right to recover on its claim and defeated J & G’s right to recover. Thus, Andrews committed gross mistake by concluding otherwise. Andrews concluded that J & G’s alleged breaches were not material. Instead, he decided the alleged breaches did not entitle FCA to breach of contract damages and did not justify FCA’s termination of J & G.

The Court did not determine the proper construction of the parties’ contract. Its review was limited to whether Andrews’s failure to adopt FCA’s interpretation of the contract constituted bad faith or a failure to exercise honest judgment. FCA’s complaints were arguments that Andrews erred in applying the law and in determining facts, but FCA failed to establish that Andrews acted in bad faith or failed to exercise honest judgment. The Court overruled FCA’s second issue.