The Basics of Confirming, Vacating, Modifying and Correcting an Arbitration Award Under the Federal Arbitration Act and the Texas Arbitration Act

I. INTRODUCTION

This article is intended to provide the basics for confirmation of an arbitration award as well as the basics for vacating, modifying or correcting an arbitration award under the Federal Arbitration Act ("FAA") and the Texas Arbitration Act ("TAA"). The FAA is discussed in Section II, and because the TAA is substantially similar to the FAA, it is briefly discussed in Section III. The exceptions under the FAA to the enforcement of an arbitration award, along with recent case law, are discussed.[1] Differences between the two acts are noted in Section III within the discussion of the TAA.

II. FEDERAL ARBITRATION ACT

The FAA is comprised of Sections 1 through 16 of Title 9. [2] The FAA is applicable only if a maritime transaction or contract involves interstate or foreign commerce. [3] Under the Supremacy Clause of the United States Constitution, the FAA preempts all otherwise applicable state laws, including the Texas Arbitration Act ("TAA"). [4] While providing a scheme for the summary disposition of arbitration awards, courts have characterized the FAA as a supplement to the common law remedies available for the confirmation of arbitration awards. [5] For purposes of subject matter jurisdiction, the FAA does not create federal jurisdiction such that confirmation under Section 9 of the FAA requires an independent basis for jurisdiction, such as, for example, diversity jurisdiction. [6]

Sections 9 and 13 of the FAA provide the statutory scheme for confirming an arbitration award, while Sections 10, 11, 12 and 13 of the FAA provide the statutory scheme and basis for vacating, modifying or correcting an arbitration award. Section 16 of the FAA addresses the appeal of a decision of a court relating to arbitration awards, including the right to pursue an interlocutory appeal in some instances. This section of the article addresses the statutory schemes to confirm or to vacate, modify or correct an award.

A. Confirmation Under the Federal Arbitration Act

Section 9 of the FAA provides for the confirmation of arbitration awards. The FAA requires that a party seeking confirmation of an arbitration award must (1) provide in their agreement that a court may enter judgment; (2) apply to the court specified in the parties' agreement for the entry of a judgment on the award or, if no court is specified in the agreement, then apply to the district court within which the award was made or any district court for which venue is proper; [7] (3) file the request for confirmation within one year after the award is made; and (4) serve the adverse party with notice of the application for confirmation. [8]

A confirmation proceeding under Section 9 is intended to be summary: confirmation can only be denied if an award has been corrected, vacated or modified in accordance with the FAA. [9] The summary procedure used to confirm an award is modeled after federal motion practice. [10] A court's judgment confirming an arbitration award must reflect what would have happened had the parties immediately complied with the award instead of going to court. [11]

Section 13 of the FAA provides what must be filed when a party moves for an order confirming an award. [12] Section 13 provides:

The party moving for an order confirming . . . an award shall, at the time such order is filed with the clerk for the entry of judgment thereon, also file the following papers with the clerk:

1. The agreement; the selection or appointment, if any, of an additional arbitrator or umpire; and each written extension of the time, if any, within which to make the award.
2. 
   
3. The award.
4. 
   
5. Each notice, affidavit, or other paper used upon an application to confirm, modify, or correct the award, and a copy of each order of the court upon such an application. [13]

1. Requirement that the Parties' Agreement Provides for the Entry of Judgment by a Court

The Second Circuit, in Varley v. Tarrytown Assoc., Inc.,[14] held that the district court was without jurisdiction to confirm an award because the parties' agreement did not explicitly provide for the entry of an order by a court. [15] The agreement at issue in Varley had no explicit language that a judgment could be entered by the court and, while the arbitration clause was sufficient to incorporate the rules of the American Arbitration Association ("AAA"), [16] there was nothing in the applicable version of the AAA rules that indicated that the parties had thereby consented to the entry of judgment upon an award. Consequently, for a judgment to be effective, the parties had to agree that a judgment could be entered upon the entry of an award. [17]

The continued viability of the Varley case was called into doubt by the District Court for the Southern District of New York in Harris v. Brooklyn Dressing Corp. [18] The Harris court noted that, while Varley had not been expressly overruled, it had been distinguished to such an extent by two subsequent opinions of the Second Circuit that it could be regarded as "a dead letter." [19] Other circuits have likewise held that the entry of a judgment confirming an award was proper even though the arbitration provisions at issue did not explicitly provide that a court may enter a judgment. These courts noted confirmation was proper due to other factors (e.g., the active participation in the arbitration proceeding by the party opposing confirmation), which indicated that the complaining party implicitly consented to the entry of judgment. [20]

2. One-Year Statute of Limitations Under Section 9 of the Federal Arbitration Act

Several circuits have reached different conclusions as to whether the one-year limitation provided in Section 9 of the FAA is a bar to the confirmation of an arbitration award under the FAA when the action is filed more than a year after the award has been rendered. The Fourth Circuit, in Sverdrup Corp. v. WCH Constructors, Inc., [21] held that, because the language of Section 9 was permissive ("may apply") and mandatory language was present elsewhere in the FAA, the plaintiff's failure to file an action within one year after the award was rendered did not preclude recovery under the FAA. [22] In reaching its decision, the court noted that the FAA supplemented rather than extinguished any previously existing remedies at law or equity providing for the enforcement of arbitration awards. [23] The court also noted, "[b]ecause remedies do exist outside the FAA's framework to enforce Sverdrup's award, reading Section 9 as a strict statute of limitations would be an exercise in futility. . . . To obtain their awards, individuals who prevailed in arbitration and failed to confirm within the one-year time limit would simply resort to filing actions at law. Contrary to the purposes of the FAA, this would inevitably lead to inefficiency, delay and court congestion." [24]

The Second Circuit and District of Columbia have held that the one-year provision of Section 9 is a limitation for obtaining confirmation under the FAA, but the failure to file within one year is not otherwise a bar to recovering at law or in equity. The District of Columbia, in Consolidated Rail Corp. v. Delaware & Hudson Railway Co., [25] rejected the Sverdrup reasoning. The district court ruled that it was the intent of the statute and Congress for a party to use the Section 9 summary confirmation process only if it does so within one year after the arbitration, because Section 9 was meant to supplement and not preclude other remedies. Consequently, confirmation under Section 9 is not mandatory and a party is not prevented from using either state law or common law procedures to confirm an award. [26] In reaching its decision, the district court also considered the Second Circuit's decision in SeeTransport Wiking Trader Schiffarhtsesellschaft MBH & Co. v. Navimpex Centrala Navala, [27] in which the Second Circuit construed Section 207 of Title 9, a similar provision that governs international arbitrations. [28] The Second Circuit indicated that the time period provided by Section 207 was a statute of limitations despite the fact that it used the word "may."

Subsequent to its decision in SeeTransport, the Second Circuit specifically addressed the one-year limitation provision provided in Section 9 in Photopaint Technologies, LLC v. Smartlens Corp. [29] The Photopaint court ruled that the word "may" in Section 9 is "permissive, but only within the scope of the proceeding adverbial phrase: Ô[a]t any time within one year after the award is made.'" The Second Circuit then held that Section 9 of the FAA imposes a one-year statute of limitations on the filing of a motion to confirm an arbitration award under the FAA. [30] In reaching its decision, the Second Circuit pointed out its earlier decision in the SeeTransport case and noted that, while it was construing a different provision, the language of the two sections, Section 207, construed by the SeeTransport case, and the language of Section 9 were substantially similar such that SeeTransport could not be distinguished. [31]

B. Grounds for Vacating an Arbitration Award Under the Federal Arbitration Act

Section 10(a) of the FAA provides four grounds for vacating an arbitration award. These grounds are as follows:

1. Where the award was procured by corruption, fraud, or undue means;
2. 
   
3. Where there was evident partiality or corruption in the arbitrators, or either of them;
4. 
   
5. Where the arbitrators are guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or refusing to hear evidence pertinent and material to the controversy; or of any other behavior by which the rights of any party have been prejudiced; and
6. 
   
7. Where the arbitrators exceed their powers, or so imperfectly executed them that a mutual, final, and definitive award upon the subject matter submitted was not made. [32]

The Fifth Circuit has also recognized several judicially created exceptions to the enforcement of an arbitration award. Vacating an award is proper when: (1) the award is contrary to public policy; (2) the award is arbitrary and capricious; (3) the award fails to draw its essence from the underlying contract; or (4) the award displays manifest disregard of the law. [33]

Notice of a motion to vacate an award must be served upon the adverse party or his attorney within three months after the award is filed or delivered. [34] If a motion to vacate is filed and served within three months of receipt of notice of the award, the motion is timely filed. [35] An amended motion to vacate filed after the three month limitation of Section 12 has expired may be considered timely if it relates back to the original motion because it arose out of the conduct, transaction or occurrence set forth in the original motion. [36] In addition, courts have been reluctant to create equitable exceptions or tolling rules for Section 12's three-month limitation period. [37]

Service of the motion to vacate shall be made as prescribed by law for service of notice of motions in an action in the same court, if the adverse party is a resident of the district within which the award was made. [38] If the adverse party is a non-resident, then the notice of the application shall be served by the marshal of any district within which the adverse party may be found in like manner as other process of the court. [39]

A court considering an arbitration award under the FAA applies a deferential standard of review. [40] Review of an award under the judicially created exceptions is necessarily narrow, limited to determining whether the arbitration proceeding was fundamentally unfair. [41] Courts have repeatedly stated that "severely limited" judicial review is an essential, and inherent, feature of contractually agreed binding arbitration, necessary to avoid undermining the "twin goals of arbitration . . . settling disputes efficiently and avoiding long and expensive litigation." [42]

A district court should "interpret the arbitrator's award and the contract broadly so as to uphold the award." [43] A district court must accept the arbitrator's factual findings and the arbitrator's interpretation of the contract even if it disagrees with the arbitrator's interpretation of the underlying contract, as long as the arbitrator's decision "draws its essence" from the contract. [44] A district court "must affirm the arbitrator's decision if it is rationally inferable from the letter or the purpose of the underlying agreement." [45] As long as the arbitrators are even arguably construing or applying the contract and acting within their scope of authority, the commission of serious error does not suffice to overturn their decision. [46] However, the parties to an arbitration agreement may agree to a broader judicial review of an arbitration award than what would normally be permitted under the FAA. [47] The party moving to vacate an arbitration award has the burden of proof. [48]

After a district court confirms an arbitration award, the appellate review of the district court's decision proceeds like a review of any other district court decision finding an agreement between the parties. That is, the court of appeals will accept findings of fact that are not clearly erroneous and decide questions of law de novo. [49]

1. Section 10(a)(1)–Corruption, Fraud, or Undue Means

Although "fraud" and "undue means" are not defined in Section 10(a) of the FAA, courts interpret them together. [50] Fraud requires a showing of bad faith during the arbitration proceedings, such as bribery, undisclosed bias of an arbitrator, or willfully destroying or withholding evidence. [51] Similarly, "undue means" connotes behavior that is "immoral if not illegal" or otherwise in bad faith. [52]

The complaining party must show a nexus between the alleged corruption, fraud or undue means and the panel's decision. [53] The party who alleges that an arbitration award was procured through fraud or undue means must demonstrate that the improper behavior was (1) not discoverable by due diligence before or during the arbitration hearing; (2) materially related to an issue in the arbitration; and (3) established by clear and convincing evidence. [54] In those situations in which a panel hears the alleged fraud, but rests its decision on grounds clearly independent of the issues connected with the alleged fraud, the statutory basis for vacatur is absent. [55]

2. Section 10(a)(2)–Evident Partiality or Corruption of the Arbitrator

A party asserting evident partiality has the burden of proof. The party must produce specific facts and the alleged partiality must be "Ôdirect, definite, and capable of demonstration rather than remote, uncertain, or speculative.'" [56] A divided United States Supreme Court in Commonwealth Coatings Corp. v. Continental Cas. Co., [57] addressed what constituted arbitrator partiality such that an arbitration award must be vacated pursuant to Section 10(a)(2) of the FAA. In Commonwealth, the arbitrator had failed to disclose that he had served as a consultant for a principal of the party that prevailed in the arbitration and had received approximately $12,000 in fees over a four or five year period from the principal of the prevailing party. The Court described the dealings between the prevailing party and the arbitrator as "sporadic," noting that the arbitrator's services were used only from time to time at irregular intervals and that there had been no dealings between them for about a year. [58] The Court also noted that some of the arbitrator's undisclosed services in the Commonwealth case were on the projects that were involved in the arbitration. The Supreme Court held that the arbitrator's failure to make this disclosure warranted setting aside the award for evident partiality. [59] Establishing the actual bias of the arbitrator existed was not necessary on the part of the complaining party. [60]

In Mantle v. Upper Deck, [61] the district court ruled that the standard announced in Morelite Construction v. New York City District Counsel Carpenter's Benefit Funds, [62] would be the appropriate standard of review for allegations of evident partiality alleged by the defendant. The Morelite court had held that the complaining party must show that "a reasonable person would have to conclude that the arbitrator was partial to one party." [63] The Mantle court noted that Section 10 of the FAA requires "evident partiality" and that to vacate an award upon the mere appearance of partiality would be contrary to the statutory language. [64] Courts are divided over whether an arbitrator violates his duty to disclose by failing to learn undisclosed facts. [65]

3. Section 10(a)(3)–Arbitrator Misconduct: Refusing to Postpone Hearing, Hear Pertinent and Material Evidence or Any Other Behavior Which Prejudices a Party's Rights

Section 10(a)(3) of the FAA permits an award to be vacated when the arbitrators are guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown by which the rights of any party have been prejudiced. A court's review of an arbitrator's refusal to grant a postponement is confined to determining whether the refusal to postpone was a result of misconduct. [66] Because the primary purpose of the federal policy favoring arbitration is to promote the expeditious resolution of disputes, a court's review of an arbitrator's decision to not postpone a hearing is limited. If there is any reasonable basis for the arbitrator's decision not to postpone a hearing, the court should not intervene. [67]

A court can also vacate an arbitration award pursuant to Section 10(a)(3) of the FAA when an evidentiary ruling deprives a party of a fair hearing. In Gulf Coast Industrial Workers Union v. Exxon Co., [68] the Fifth Circuit held that an award against an employer should be vacated because the arbitrator had refused to consider a test that showed that a substance found in the discharged employee's car was marijuana. [69] The court found that the panel had misled the employer's counsel so that he did not submit the testing evidence as a business record. [70] Similarly, the Second Circuit in Tempo Shain Corp. v. Bertek, Inc., [71] held that an arbitration award should be vacated because the panel refused to continue the proceeding to hear the testimony of a key witness who was temporarily unavailable. [72] The Second Circuit held that the panel's refusal to continue the arbitration hearing amounted to fundamental unfairness and misconduct under Section 10(a)(3) of the FAA. The Southern District of Texas noted in Lummus Global [73] that the teaching of the Tempo Shain decision is that an arbitration panel's understanding of the evidentiary question it must decide is not sufficient to uphold the panel's decision; the panel's answer to the question must find support in the record. [74]

4. Section 10(a)(4)–Arbitrators Exceed Their Powers or Award Is Not Final or Definitive

Section 10(a)(4) of the FAA, which permits an award to be vacated due to the arbitrators exceeding their authority, is designed to enable the district court to vacate an arbitral award that clearly goes beyond the substantive issues submitted by the parties. [75] In deciding whether an arbitration panel exceeded its authority, the district court resolves all doubts in favor of arbitration. [76] In reviewing an award, the court is not limited to the panel's explanation of the award. A district court will look only to the result reached, and the single question is whether the award, however arrived at, is rationally inferable from the contract. [77] When an arbitrator exceeds his contractual authority, vacating or modifying the award is an appropriate remedy. [78] The Fifth Circuit in American Eagle upheld the district court's decision to vacate an arbitration award because the arbitrators acted beyond their authority in crafting a remedy not provided by the agreement of the parties. [79] The collective bargaining agreement at issue required the employer to have just cause before it could terminate the employee. The court determined that the arbitrators acted beyond their jurisdiction when they fashioned an alternative remedy requiring a suspension of the employee with reinstatement because, once the arbitrators had determined that the employee's conduct constituted just cause for terminating, the arbitrators were without jurisdiction to craft a remedy. [80]

In addition, when the parties to an arbitration agreement determine the method for appointing arbitrators, the FAA expressly requires that the method for appointment be followed. [81] A court can vacate an arbitration award if the method provided by the parties' agreement for selecting arbitrators is not followed because the award would have been made by arbitrators not appointed in accordance with the method provided by the parties' contract. [82] However, a trivial departure from the parties' agreement may not bar enforcement of the award. [83]

In Lummus Global, the court vacated a portion of an arbitration award on the grounds that it was not final or definite as required by Section 10(a)(4). [84] A portion of the arbitration award prescribed a method for determining the amount of taxes owed relating to remedial work to cure defective performance and attorney's fees and expenses that had not yet been incurred. The court held that the award failed to state a sum certain as to taxes and that the formula provided in the award would lead to disputes such that further proceedings would likely be required. [85]

5. Judicially Created Exceptions to the Enforcement of Arbitration Awards

1. Public Policy

The Fifth Circuit, following the Supreme Court's lead, recognized some circumstances in which a court may refuse to enforce an arbitration award that is contrary to public policy. [86] The public policy exception is a specific application of the more general doctrine, rooted in the common law, that a court may refuse to enforce contracts that violate law or public policy. [87] The Supreme Court noted that a court may not enforce a collective-bargaining agreement that is contrary to public policy and that the question of public policy is ultimately one for resolution by the courts. [88] The Supreme Court has also made clear that only an "explicit," "well-defined," and "dominant" [89] public policy can be the basis for vacating an award. In addition, the public policy must be ascertained by reference to laws and legal precedent and not from general considerations of proposed public interests. [90]

2. Arbitrary and Capricious

An award is "arbitrary and capricious" only if a ground for the arbitrator's decision cannot be inferred from the facts of the case. [91]

3. Award Fails to Draw Its Essence From the Underlying Contract

An award must be sustained if the arbitrator's decision draws its essence from the agreement. [92] The Fifth Circuit has stated that an award fails the "essence" test only when it is "Ôso unfounded in reason and in fact, so unconnected with the wording and purpose of the [agreement] as to Ômanifest an infidelity to the obligation of an arbitrator.'" [93]

4. Manifest Disregard of the Law

The United States Supreme Court in First Options of Chicago, Inc. v. Kaplan, [94] stated that a court may set aside an arbitration award only in very unusual circumstances and that the parties are bound by an arbitrator's decision so long as it is not in manifest disregard of the law. [95] The Fifth Circuit in the Williams case described the Supreme Court's decision in First Options as the Court's "clear approval of the Ômanifest disregard' of the law standard in the review of arbitration awards under the FAA." [96] Based on First Options and the fact the Supreme Court has not defined the concept, the Fifth Circuit articulated a two-step test in determining whether an award can be vacated because the arbitrators had a manifest disregard of applicable law. First, when on the basis of the information available to the court, it is not manifest that the arbitrators acted contrary to the applicable law, the award should be upheld. Second, when on the basis of the information available to the court it is manifest that the arbitrators acted contrary to the applicable law, the award should be upheld unless it would result in significant injustice, taking into account all of the circumstances of the case, including the powers of the arbitrators to judge norms appropriate to the relations between the parties. [97] The Second Circuit has said, in order to modify or vacate an award based on a manifest disregard for the law, a court must find both that: (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether; and (2) the law ignored by the arbitrators was well-defined, explicit, and clearly applicable to the case. [98]

An award does not result from manifest disregard of the law merely because of error in understanding or applying the law. An award may not be vacated on this basis, unless the arbitrators manifestly acted contrary to the applicable law, resulting in significant injustice. [99] As noted by the Fifth Circuit in decisions subsequent to the Williams case, the manifest disregard of the law standard for vacating an arbitration award is an extremely narrow, judicially created rule with limited applicability. [100]

C. Modification or Correction of Award under the Federal Arbitration Act

Section 11 of the FFA provides district courts the following authority to modify an arbitration award:

1. Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.
2. 
   
3. Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.
4. 
   
5. Where the award is imperfect in matter or form not affecting the merits of the controversy.
   
   The order may modify and correct the award, so as to affect the intent thereof and promote justice between the parties. [101]

Notice of a motion to modify or correct an award must be served upon the adverse party or his attorney within three months after the award is filed or delivered. [102] The procedure for filing and serving the notice is the same as for a motion to vacate, discussed above in Section II. B.

In Lummus Global, the court determined that it could modify an arbitration award to incorporate an offset amount the parties stipulated as being not in dispute, but which was submitted to the arbitrators after the final award had been issued. [103] The party seeking the modification to the award claimed that the inclusion of the stipulated offset was proper under Section 11(c) of the FAA, which permits modification of an award that is "imperfect in a matter of form not affecting the merits of the controversy," and under the general provision of Section 11, which provides that "the order may modify and correct the award, so as to affect the intent thereof and promote justice between the parties." The court determined that all that it was required to do to incorporate the stipulated offset into a modified award and final judgment was a mathematical calculation that did not affect the merits of the dispute. The court also noted that the sections relied upon by the party requesting modification, Section 11(c) and the general provision at the end of Section 11, provided the basis for the modification. [104]

III. TEXAS ARBITRATION ACT

When the transaction at issue does not involve interstate or foreign commerce, then Texas law may govern the arbitration. Under Texas law, arbitration may be conducted in accordance with the common law or chapter 171 of the Texas Civil Practice and Remedies Code (also known as the Texas Arbitration Act). [105] The TAA provides that a trial court shall confirm an arbitrator's award unless, on application of a party, grounds are offered for vacating, modifying, or correcting an award under Section 171.088 or 171.091 of the Texas Civil Practice and Remedies Code. [106] However, unlike the FAA, the TAA does not have a one-year limitation provision in which to confirm an arbitration award. [107]

The grounds for vacating, modifying or correcting an award under the TAA are substantially similar to the grounds available under the FAA. [108] One notable difference is that the federal courts have developed several judicially-created exceptions in addition to the grounds set forth in the FAA. [109] The Texas Supreme Court has not definitively stated whether the common law exceptions to enforcing awards are available when an award is governed by the TAA. [110] Regardless of the exceptions available, both federal and Texas case law demonstrate a great reluctance to vacating arbitration awards, and usually only in extreme circumstances is an award vacated.

Sections 171.088 and 171.091 require a party seeking to vacate, modify or correct an arbitration award to make its applications no later than the 90th day after delivery of a copy of the award to the applicant. [111] If the award was obtained by corruption, fraud, or other undue means, the application must be made no later than the 90th day after the date the grounds for the application are known or should have been known to that party. [112] In contrast, the FAA provides a party "three months" in which to move to vacate, modify or correct an award after the award is filed or delivered. [113]

FOOTNOTES

If the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration, and shall specify the court, then at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and thereupon the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title. If no court is specified in the agreement of the parties, then such application may be made to the United States court in and for the district within which such award was made. Notice of the application shall be served upon the adverse party, and thereupon the court shall have jurisdiction of such party as though he had appeared generally in the proceeding. If the adverse party is a resident of the district within which the award was made, such service shall be made upon the adverse party or his attorney as prescribed by law for service of notice of motion in an action in the same court. If the adverse party shall be a nonresident, then the notice of the application shall be served by the marshal of any district within which the adverse party may be found in like manner as other process of the court.