Texas Supreme Court Clarifies Appeals Under the Texas Arbitration Act

The Texas Supreme Court held that the Texas General Arbitration Act (TAA) allows an appeal from a trial court’s order that denies confirmation of an arbitration award and instead, vacates the award and directs that the dispute be arbitrated anew.

Justice Hecht delivered the opinion of the court, in which Justice O’Neill, Justice Wainwright, Justice Johnson, Justice Willett, and Justice Guzman joined. Justice Willett filed a concurring opinion. Chief Justice Jefferson filed a dissenting opinion, in which Justice Medina and Justice Green joined.

I. Background

In East Texas Salt Water Disposal Co. v. Richard Leon Werline, No. 07-0135 (Tex. Mar. 12, 2010) East Texas Salt Water Disposal Company (the “Company”), an oilfield service business, employed Richard Leon Werline (Werline), an experienced petroleum engineer, as its Operations Manager. Under Werline’s Employment Agreement, if the Company materially breached the Agreement, Werline had the right to terminate and receive two years’ salary as severance pay.

A little over halfway into the Agreement’s five-year term, Werline gave notice of termination and demanded severance pay, claiming that “the Company had changed his position and stripped him of his duties.” The Company denied that it had breached the Agreement and contended that Werline had quit. Pursuant to their Agreement, the dispute was submitted to arbitration. The American Arbitration Association (AAA) arbitrator, after a three-day hearing, found for Werline and awarded him severance pay ($244,080.00), stipulated attorney fees ($28,272.50), expenses ($11,116.76), and costs ($9,535.73).

II. The District Court Opinion

The Company asked the district court to vacate, modify, or correct the award claiming that “the award was so contrary to the evidence that it was arbitrary and capricious and therefore the arbitrator must have been biased.” The district court agreed holding that “the material factual findings in the Award are so against the evidence . . . that they manifest gross mistakes in fact and law.” The judgment also ordered that the matter be “re-submitted to arbitration by a new arbitrator with the sole issue before that Arbitrator being whether or not there was a material breach of the Employment Agreement by ETSWD [the Company] consistent with the findings in this Judgment.” Those findings were as follow:

• “There is no evidence to support a finding of a material breach of any provision of the Employment Agreement”;

• “[A]n assignment of new and/or additional duties for Werline . . . was . . . not a material breach of the Employment Agreement”;

• “The change in Werline’s title . . . was not a material breach of the Employment Agreement”;

• “There is no evidence to support a finding that . . . a material breach was committed by the Board of Directors, officers, or representatives of ETSWD with regard to Werline and the Employment Agreement”; and

• “Werline voluntarily resigned his employment with ETSWD”.

III. The Court of Appeals Opinion

Werline appealed. The court of appeals held that it had jurisdiction to consider the appeal, that there was evidence to support the award, and that “[t]he arbitrator did not err so egregiously as to imply bad faith or a failure to exercise honest judgment.” Accordingly, the court reversed the trial court’s judgment and confirmed the award.

IV. The Texas Supreme Court – Majority Opinion

Now the Company petitions the Texas Supreme Court for review on the ground that the court of appeals had no jurisdiction over the appeal under section 171.098(a) of the TAA. The court begin by saying that Section 171.098(a) states:

A party may appeal a judgment or decree entered under this chapter or an order:

(1) denying an application to compel arbitration . . . ;

(2) granting an application to stay arbitration . . . ;

(3) confirming or denying confirmation of an award;

(4) modifying or correcting an award; or

(5) vacating an award without directing a rehearing.

Because the district court denied confirmation of the award, the Texas Supreme Court noted that Werline had the right to appeal under subsection (3). However, the Company argued that subsection (5) implies (though it does not state) that a court order vacating an award and directing a rehearing is not appealable.

The Texas Supreme Court was not persuaded by the Company’s argument and clarified that: “[t]he proper construction of section 171.098(a) gives full, literal effect to subsections (3) and (5) both. An order denying confirmation can be appealed, just as subsection (3) provides, including a denial of confirmation in the form of a vacatur with rehearing; and an order vacating an arbitration award without directing rehearing can be appealed, just as subsection (5) provides. “

V. The Texas Supreme Court – Dissenting Opinion

Chief Justice Jefferson filed a dissenting opinion. In this opinion, Justice Jefferson argues that: (1) The trial court’s interlocutory order lacks finality under the TAA; (2) The Court’s holding conflicts with the majority of courts to examine the issue; (3) Precedent and statutory interpretation instruct us to treat an order vacating an award and directing a rehearing as the functional equivalent of an order granting a new trial; (4) The concurrence observes that the Court’s result “mirrors what the result would be under federal law” but ignores the substantive differences between the FAA and the TAA, and (5) Section 171.098(a)(5) is uniformly interpreted to prohibit appeals when a rehearing is granted.

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