Reverse and Render : Texas Appellate Lawyer & Attorney : Cowles & Thompson Law Firm : Court of Appeals, Texas Supreme Court

Once upon a time, if there was doubt about whether an arbitration agreement was subject to the Federal Arbitration Act (FAA), a party complaining of a denial of a motion to compel arbitration had to file (1) an interlocutory appeal AND (2) a petition for writ of mandamus, then seek to consolidate the two separate proceedings.  The separate mandamus is not required since September of 2009, when Texas Civil Practice and Remedies Code Section 51.016 went into effect and allowed for an interlocutory appeal of agreements subject to the FAA.  (why this statute was not located with the other interlocutory appeal provisions is a mystery to me).

The El Paso Court of Appeals points out the implications of the adoption of Section 51.016 on mandamus practice in In re H.D. Vest Inc.  In short, the court denied a petition for writ of mandamus because the court concluded that the Relators have an adequate remedy by appeal under Section 51.016.  The court's opinion may be found here.

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The Houston (14th) Court of Appeals recently held that a fee agreement that included a mandatory arbitration agreement does not violate public policy.  In this case, the attorney had included an arbitration clause requiring arbitration in Harris County under the Federal Arbitration Act (FAA)according to American Arbitration Association rules.  When the client brought suit against the attorneys for malpractice, the attorneys moved to compel arbtiration under the fee agreement.  The client made four arguments in response.  The court first rejected the argument that the Texas Arbitration Act (TAA) should apply, instead of the FAA, because the agreement specified the FAA.  The court also held in dicta that even if the TAA did apply, the arbitration clause was not invalid because the client's malpractice claim was not a personal injury claim.  Further, the court rejected the argument that the clause was unconscionable based on the special relationship between attorney and client and opined that the matter was best left to the legislature.  In doing so, the court dismissed an opinion by the Texas Ethics Commission on the subject as "advisory."  Finally the court rejected the argument that including the clause in the fee agreement violated Disciplinary Rule 1.08(g) by "limiting the lawyer's liability to a client for malpractice."  The court stated that "an agreement to arbitrate does not, in fact, limit a party's liability; it merely denominates a procedure for determing that liability."  Accordingly, the court granted the writ of mandamus directing the trial court to grant the motion to compel arbitration.  The court's opinion in In re Pham can be found here.

In dissent, Justice Seymore would have affirmed the trial court because the client was unaware of the clause and her counsel failed to fully explain it.  The dissent would hold attorneys to a higher standard by requring counsel to fully explain the consequences of agreeing to arbitration or "offer the prospective client the opportunity to seek advice from another source before signing" the agreement.  The dissent can be found here.

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In a case of first impression the Texas Supreme Court  recently held that the issue of whether a party has the mental capacity to contract is an issue for courts, not arbitrators.  The Court traced the history of the so-called "separability" spawned by the United States Supreme Court's decision in Prima Paint Corp. v. Conklin Manufacturing Co., 388 U.S. 395, 404 (1967), that held that challenges to an entire contract should be decided by arbitrators and challenges to an arbitration agreement itself should be decided by courts.

The separability doctrine proved problematic in a third category of cases; those in which a party challenged the very existence of a contract in the first place, so-called "contract formation" issues.  Relying on dicta in Buckeye Check Cashing, Inc. v Cardegna, 546 U.S. 440, 444 n.1 (2006), and numerous other state and federal decisions, the Texas Supreme Court held that contract formation issues, specifically mental capacity, are for courts, not arbitrators.  Accordingly, the Court denied Morgan Stanley's attempt to compel arbitration by mandamus.  Justice Hecht dissented and would have treated lack of capacity as "closer to fraudulent inducement than to lack of signature."  The Court's opinion in In re Morgan Stanley & Co., Inc. can be found at this link.

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The United States Court of Appeals for the Fifth Circuit recently held that the United States Supreme Court's decision in Hall Street Associates v. Mattel  "restricts the grounds for vacatur" of an arbitration award and, thus, "manifest disregard for the law is no longer an indepdendent ground for vacating arbitration awards under the FAA."  Consequently, the only  bases for setting aside an arbitration award are (1) fraud or corruption in obtaining the award; (2) evident partiality by the arbitrator; (3) misconduct or misbehavior by the arbitrator; and (4) where the arbitrator exceeded its power.  See 9 U.S.C. sec. 10(a). 

In reaching its conclusion, the Fifth Circuit disagreed with decisions from the Sixth, Second, and Ninth Circuits holding that "manifest disregard" survived the Supreme Court's decision in Hall.  The Fifth Circuit noted the Supreme Court's "repeated statements [in Hall] that: 'We hold that the statutory grounds are exclusive.' "  As a result, the Fifth Circuit held that "manifest disregard of the law as an independent, nonstatutory ground for setting aside an award, must be abandoned and rejected."  The Court also expressly overruled any precedent to the contrary.  The Fifth Circuit's opinion in Citigroup Global Markets, Inc. v. Bacon is availble at this link.  

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The Dallas Court of Appeals recently held that a provision calling for application of the Texas General Arbitration Act necessarily excludes application of the Federal Arbitration Act.  First, the Court held that because the motion to abate was made under  the FAA, the Court had jurisdiction to review the trial court's order by mandamus.  Next, the Court acknowledged the Texas Supreme Court's test that a general choice of law clause will not be read to exclude federal law unless the clause "specifically excludes the application of federal law."  Third, the Court acknowledged that the FAA generally controls transactions involving interstate commerce.  Lastly, the Court held that the parties excluded application of federal law by agreeing that the Texas General Arbitration Act applied.  The Court noted that a general choice of law provision does not specifically exclude  federal law because "the FAA was part of the substantive law of Texas."  Nevertheless, by naming the Texas Act, the parties excluded the FAA.  The Court's opinion in In re Olshan Foundation Repair Co., L.L.C. can be found at this link.

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