Arbitration good?

The Supreme Court of Texas has made enforcing arbitration clauses super-easy. But what happens if the arbitration produces an outcome that may give the conservative Court pause — a $125 million award in favor of the claimant, for instance?

A case that the Court decided last week poses that lurking question. And regrettably their honors answered the question in the way you've probably come to expect. See here.

Question about an impression

Does the fact that an arbitrator has begged the lawyers who represent a party in arbitration for business but has gotten none make the arbitrator "evidently partial" to that party? The one whose lawyers have so far stiffed him on his requests for work? Such that a court must vacate the arbitration panel's award in favor of that party?

The Supreme Court of Texas said yes last week. In Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, No. 12-0789 (Tex. May 23, 2014), the 9-0 Court applied an easy-peasy test for unhappy losers to satisfy. They need show only that a non-disclosure "might have conveyed an impression [of the arbitrator's] partiality toward [the lawyers for the winning party] to a reasonable person." Id. at 13.

Did you get that? Might have conveyed an impression of partiality to a reasonable person. Not "would have conveyed" it. Only might have. Possibly could have. Perhaps maybe did. We have our suspicions. I don't like the look of that. We're going to need you to go ahead and come in on Saturday, um-kay.

What about waiver?

The airy-fairiness of that "might have conveyed" rule may or may not bother you. But what do you think about how the Court dealt with a waiver question?

The court of appeals had held that the losing party — Tenaska Energy — had waived any complaint because the business-hungry arbitrator had disclosed the fact that the lawyers for the winning party — Ponderosa Energy — had tapped him three times before to serve as an arbitrator and that he'd solicited business from their law firm. The court cited the fact that Tenaska also agreed, in writing, that it "knowingly waived any and all conflicts of interest and/or potential conflicts of interest relating to the designation of the members of the Panel in this Arbitration." Id. at 17.

The Court batted the waiver point away by noting that the same writing also represented that the arbitrators had "fully disclosed all conflicts of interest and potential conflicts of interest with respect to the designation of the members of the Panel in this Arbitration". Id. "Because the waiver clause was conditioned on a full disclosure that did not occur, Tenaska has not waived its partiality challenge." Id. at 18.

The Court didn't explain in what way the waiver "was conditioned on a full disclosure". The document didn't use any language that implied that the waiver depended on the accuracy of the "fully disclosed" statement. So it's okay for Tenaska to have fibbed that it "knowingly waived any and all conflicts of interest"?

The Court also put a lot of stress on the fact that the non-disclosing arbitrator solicited work from Ponderosa's lawyers not for himself but on behalf of an Indian firm that he partly owned and helped set up in the U.S. He disclosed that he'd hustled business for the Indian outfit from the law firm but hadn't gotten any.

But, in view of the fact that Ponderosa's lawyer chose him as an arbitrator — in the same way that Tenaska's lawyers chose another of the three arbitrators, and those two selected a chair person  – should Tenaska have some kind of obligation to ask questions to find out why Ponderosa thought so highly of him?

Why did they do it?

A Court that routinely rules unanimously in favor of defendants probably doesn't realize just what an echo chamber it has become. The members may beguile themselves with the thought that they would have ruled exactly the same way if the defendant had won the arbitration – thus saving claimant Ponderosa from having to take a $1.25 million award and getting a fresh shot at the $150+ million that it sought.

Blawgletter does wonder what to make of the fact the Court mentioned that the Ponderosa lawyers converted their fee arrangement from hourly to contingent. Id. at 4-5. What does that signify, if not discomfort with a claimant and its lawyers receiving a big award?

Bottom line

What results from all this? Texas courts go out of their way to compel arbitration, including by non-signatories of agreements that include arbitration clauses, but also go out of their way to vacate awards on grounds that other courts would reject.

We also wonder why the Court didn't mention the Fifth Circuit's en banc opinion on the very same issue. Positive Software Solutions, Inc. v. New Century Mortg. Corp., 476 F.3d 278 (5th Cir.2007) (en banc) (rejecting "mere appearance" of bias test). The Court would have had a very hard time explaining why the arbitrator who disclosed the fact that he'd tried to get business but had so far failed needed also to disclose more particulars about his unsuccessful efforts under the Fifth Circuit test. Maybe that's why.

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