Frequent guest commenter Rick Freeman made an important point yesterday in a comment to our post on the Apache v. Texaco case. Rick said, commenting not only on the Apache case but also on our post about Sen. West’s proposal that information about arbitrations be compiled: Instead of a statute that says the decisions will be compiled, why not one that says that, in true arms length negotiated arbitration agreements, taxpayer financed Texas courts have NO jurisdiction to alter the arbitrator?s ruling. They only have jurisdiction to enforce it. This comment highlights the critical distinction between arbitrations of the sort Apache and Texaco had, and arbitrations of the sort which Sen. West wants to start tracking. The Apache v. Texaco case involved a sophisticated transaction between enormous corporate parties who wanted to jointly explore for oil under the Bohai Bay in China. One imagines fleets of lawyers poring over every detail of the contract over which Texaco eventually sued in arbitration. In contrast, Sen. West’s proposal would only require the tracking of arbitrations conducted in consumer and employment cases, and it excludes a large segment of consumer arbitration, that is claims by homeowners against builders. In other words, Sen. West only proposes that the State track arbitration which is conducted pursuant to “take it or leave it” arbitration agreements. By way of example, your credit card agreement has an arbitration clause in it. As a credit card consumer, your options are: 1) be subject to the arbitration agreement; or 2) do not use the credit card (or any credit card, as a practical matter). This is a “take it or leave it” agreement to arbitrate, and it is quite common in consumer transactions and employment relationships. When we talked about parties negotiating appellate review into arbitration agreements, therefore, we really meant in the context of sophisticated parties negotiating a commercial transactions. Consumers and employees do not negotiate the arbitration clauses in their lives; they take them or leave them. On the flip side, however, if those consumers and employees end up winning an arbitration, a well-developed body of case law tells them that their arbitral award ought to be easier and faster to uphold and enforce than a jury verdict. Large companies who impose arbitration on consumers and employees ought not to be able to later complain if the results in arbitration are not to their liking. Large companies dealing with other large companies, however, already have the ability to create some sort of right to complain at the front-end, when the agreement is being negotiated. Without intending to, we seem to have highlighted this important schism in the world of arbitration yesterday. In the future, when waxing about arbitration generally, we will try to be more careful in distinguishing between commercial, negotiated arbitration agreements and consumer/employment arbitration. Thanks, Rick, for your comments. Maybe we do in fact need separate bodies of arbitral law for commercial disputes and consumer disputes. Technorati Tags: arbitration, ADR, law

The ICM’s blog just reported that Texas Senator Royce West has proposed legislation that would require the disclosure of certain basic information about arbitrations taking place in Texas. It would allow for some basic tracking of numbers of disputes sent to arbitration and awards being made in consumer and employment cases, other than residential construction cases (John Fleming was quoted in the blog piece noting that the powerful construction industry would have blocked the bill’s passage had it been potentially subject to disclosure). A San Antonio lawyer decried the bill as a “way to collaterally attack the arbitration process,” but on first blush I cannot agree. Seems to me that providing folks with basic information about the sheer number of cases being sent to arbitration is a good idea. Given the profound judicial deference given to arbitration as a means of dispute resolution in this state (well documented herein), some transparency certainly seems appropriate. Technorati Tags: arbitration, ADR, law, politics

Yesterday, the Fifth Circuit handed down an opinion confirming an arbitral award in favor of Texaco (link is to .pdf file) in a contract dispute over some off-shore oil exploration in the Bohai Bay of China. The opinion confirms the award with discussion of two important points, one which has been discussed at length in the Circuit, and one which has not.The arbitrator in this case awarded Texaco more than $71M, some $20M of which was an award of consequential damages. The contract between the parties, however, contained a provision which read: Notwithstanding any other provision of the Agreement, neither party shall in any circumstance be liable to the other party under, arising out of or in any way connected with this Agreement or the Deed of Assignment for any consequential loss or damage whether arising in contract or tort (including negligence). In his arbitral award, the arbitrator found that the no-consequential-damages clause (the “exculpatory clause”) was unenforceable under New York law (the law that he applied pursuant to a different provision of the contract). Apache Bohai Corporation (“Apache”) argued that the arbitrator exceeded his powers in making this award of consequential damages, since the contract clearly seemed to preclude an award of consequential damages. An argument that an arbitrator has exceeded his or her powers is one of the few grounds on which a party can object to the confirmation of an arbitral award in the Fifth Circuit. In this case, Apache argued that since the “exculpatory clause” which, on its face, seems to suggest that consequential damages were not available to Texaco, begins with the language “notwithstanding any other provision of the Agreement,” and since the arbitration clause was in fact another provision of the Agreement, then the exculpatory clause trumped the arbitration clause and removed the issue of consequential damages from the arbitrator’s purview. In other words, argues Apache, the arbitrator did not have the authority to review the exculpatory clause at all. The Fifth Circuit was unmoved by this argument. In distinguishing the cases on which Apache relied, the opinion discusses the scenario in which such an argument can work, which is a scenario in which a contract gives the arbitrator jurisdiction over some, but not all, potential disputes between the contracting parties. In such a case, where some claims must be arbitrated but others litigated, the arbirator would exceed his authority by ruling on the claims not set aside for arbitration. In this case, however, the arbitration clause was broad and clearly intended for all disputes between the parties to be arbitrated. That being the case, says the Court, the arbitrator was within the scope of his authority when he ruled on the legal effect of the exculpatory clause. Apache also challenges the confirmation of the award on the basis that the arbitrator manifestly disregarded the law in the issuance of the award. Manifest disregard of the law is a non-statutory basis on which a party may object to the confirmation of an arbitral award (under FAA analysis, anyway), but as we’ve noted before, the burden is a steep one, and the Fifth Circuit did not make it any easier yesterday. Since the opinion does not forge any new ground on this point, we will not discuss Apache’s arguments under the manifest disregard theory in any detail, other than to note that yet another opinion now exists that lays out the elements of this potential challenge to an arbitration award and explains in detail why the party challenging the award is almost certain to lose. Finally, we would nod approvingly at a comment on the Texas Appellate Law Blog which reminds folks that parties are free to craft some sort of appellate review into their arbitration agreements if they want to reserve the right to appeal a future arbitral award. We wrote a CLE paper on this very subject back in Spring 2005; feel free to read it if you like (link is to .pdf file), but please remember that the case citations were current as of two years ago, and thus should not be relied upon without updates today (for example, Positive Software (the 2007 version) has made an entire section of the paper obsolete and actually wrong). Apache Bohai Corp. v. Texaco China BV, ___ F3d. ___ (5th Cir. 2007) (Cause No. 05-20413) Technorati Tags: arbitration, ADR, Fifth Circuit, law, international law

This morning, the Texas Supreme Court issued three opinions. The Texas Appellate Law Blog has already posted short summaries of them all (not that we have any interest in a race to do such things, but I would note that I was at the courthouse all morning and not able to check this morning’s orders as promptly as I like to). One of the opinions is another arbitration opinion, so we will discuss it in just a bit of detail. In a per curiam opinion, the Supreme Court granted a petition for mandamus and compelled arbitration in a case where both the trial court and the Second Court of Appeals had declined to do so. Some quiet day I would like to count the number of times that has happened since we started keeping this blog. The case involved a company (J&S Air, Inc.) that sued Bank One for honoring a bunch of allegedly forged checks passed by a J&S employee. Bank One apparently did not answer the first suit, J&S got a default judgment, and then Bank One had the default set aside and filed a motion for new trial, which was granted. Eight inactive months after the motion for new trial was granted, Bank One moved to compel arbitration, on the basis of an agreement to arbitrate that was incorporated by reference on the account signature card J&S signed when it opened its account with Bank One. The trial court denied the motion to compel, and the Second Court of Appeals denied Bank One’s petition for mandamus on the issue. In compelling arbitration, the Supreme Court found that the signature card incorporation established a valid agreement to arbitrate, and that J&S’s claims were arising out of the agreement or the account. Finally, the Court rejected J&S’ argument that Bank One waived its right to arbitrate by participating in the pre-arbitration litigation. The Court cited, among others, the recent Vesta case, about which we have blogged in the past. At first blush, it seems that the non-waiver holding is consistent with recent Texas Supreme Court jurisprudence on this issue; in Vesta, for example, the parties litigated for two years and spent $200,000.00 before a party moved to compel arbitration, and the Court found no waiver. However, as suggested by a dissenting Beaumont Court justice a while back, perhaps one should consider the type of pre-arbitration litigation rather than just the bulk when evaluating waiver as a defense to arbitration. In this case, Bank One perhaps did not participate as much as the parties in Vesta did in terms of sheer volume, but Bank One’s participation was significant. Bank One filed a Motion for New Trial, which presumably requested that the Court assume jurisdiction. The substance of such a motion, one would think, is directly at odds with later asking the court to cede its jurisdiction to an arbitrator. I wonder if Bank One’s counsel couched its Motion for New Trial with all sorts of language to preserve the later right to ask to compel arbitration. I would think in our office we’d call it something like Motion for New Trial For the Sole Purpose of Compelling Arbitration. At any rate, it’s a fascinating question, and I’d love to read a copy of the Motion for New Trial. In re Bank One, ___ S.W.3d ___ (Tex. 2007) (Cause No. 06-0093) UPDATE: I have now skimmed the briefs, but I have not located a copy of the motion for new trial. In the brief filed by J&S, J&S asserts that the Motion for New Trial never mentions arbitration or the plan to compel arbitration, and that the Motion says at one point “[Relator] is ready to proceed with trial on the merits” and asks the Court to grant a new trial. This, according to the Supreme Court’s opinion, does not “substantially invoke the judicial process.” Between this case and Vesta, one must assume that unopposed commencement of trial would be required to make a showing of arbitral waiver in Texas. UPDATE 2: Commenter Rick Freeman rightly notes that about a year ago he blogged about an Eastland case that held that waiver of the right to arbitrate is only conceivable if the party seeking arbitration “actively tried, but failed, to achieve a satisfactory result in litigation before turning to arbitration” (and even then it’s only available as a defense to arbitration if you can also make the prejudice showing, a similarly onerous burden). In other words, it’s mighty hard to invoke the judicial process in this context – in the Eastland case, three years of active litigation (discovery, dispositive motions, trial settings and continuances) do not invoke the judicial process. Technorati Tags: arbitration, ADR, Texas Supreme Court, law