East Texas Salt Water Disposal Co. v. Werline

• Decision Date: 12 March 2010
• Docket Number: No. 07-0135.,07-0135.
• Parties: EAST TEXAS SALT WATER DISPOSAL COMPANY, INC., Petitioner, v. Richard Leon WERLINE, Respondent.
• Court: Texas Supreme Court

307 S.W.3d 267

EAST TEXAS SALT WATER DISPOSAL COMPANY, INC., Petitioner, v. Richard Leon WERLINE, Respondent.

No. 07-0135.

Supreme Court of Texas.

Argued January 16, 2008.

Decided March 12, 2010.

Rehearing Denied May 7, 2010.

Gregory D. Smith, Deleith Duke Gossett, Ramey & Flock, P.C., Tyler, Jerry S. Harris, Harbour Smith Harris & Merritt, Longview, for Petitioner.

Gregory Jordan Wright, Law Office of Gregory J. Wright, Jason Andrew Holt, Bunt & Wright, P.L.L.C., Longview, for Respondent.

Justice HECHT delivered the opinion of the Court, in which Justice O'NEILL, Justice WAINWRIGHT, Justice JOHNSON, Justice WILLETT, and Justice GUZMAN joined.

The issue in this case is whether the Texas General Arbitration Act (TAA)¹ 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. We hold that it does and accordingly affirm the judgment of the court of appeals.²

I

Petitioner East Texas Salt Water Disposal Company, an oilfield service business, employed respondent Richard Leon Werline, an experienced petroleum engineer, as its Operations Manager under a written 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 simply quit. As required by the Agreement, Werline and the Company submitted their dispute to "final and binding" arbitration. They selected an AAA arbitrator, who, after a three-day hearing, found for Werline and awarded him severance pay ($244,080.00), stipulated attorney fees ($28,272.50) and expenses ($11,116.76), and costs ($9,535.73).

The Company petitioned the district court to vacate, modify, or correct the award, and Werline counterclaimed for confirmation. The Company did not assert in its petition, and made no effort to establish, any of the grounds for vacating, modifying, or correcting an arbitration award under the TAA.³ Rather, the Company argued that the award was so contrary to the evidence that it was arbitrary and capricious and therefore the arbitrator must have been biased. Although Werline objected that these were not statutory grounds for vacating an arbitration award, he and the Company submitted the verbatim record of the arbitration hearing to the court and proceeded to argue their dispute all over again.

The court's judgment denied confirmation and vacated the arbitration award, holding that "the material factual findings in the Award are so against the evidence... that they manifest gross mistakes in fact and law".⁴ 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:

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

• "An 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".

Thus, the do-over the court ordered was to be one in which every material fact, and even the result itself, were already conclusively established against Werline.

Werline appealed. The court of appeals held that it had jurisdiction to consider the appeal,⁵ that there was evidence to support the award,⁶ and that "the arbitrator did not err so egregiously as to imply bad faith or a failure to exercise honest judgment".⁷ Accordingly, the court reversed the trial court's judgment and rendered judgment confirming the award.⁸

The Company petitions for review on one ground only: that the court of appeals had no jurisdiction over the appeal under section 171.098(a) of the TAA.

II

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.

The district court's judgment expressly denied confirmation of Werline's arbitration award and was thus appealable under subsection (3).

But the Company argues that the statute cannot be read so simply or so literally. Rather, the Company contends, subsection (5) implies (though it does not state) that a court order vacating an award and directing a rehearing is not appealable, and that implication creates an exception to subsection (3), so that an order denying confirmation and therefore appealable under subsection (3) is rendered not appealable by subsection (5) if it also vacates the award and directs a rehearing. For several reasons, we disagree.

First: The court's judgment denying confirmation of the arbitration award fits squarely under subsection (3). The judgment is not insulated from appellate review expressly conferred under subsection (3) merely because the trial court also vacated the award and directed a rehearing. In denying Werline's request for confirmation of the award, the district court made clear that it rejected the award and all bases on which it rested. The court went so far as to hold that the material facts the parties had vigorously disputed in the first arbitration should all be established against Werline in the second arbitration.

When an arbitration award is unclear or incomplete or contains an obvious error, a limited rehearing to correct the problem is but a preface to determining confirmation, not a decision on the issue. If, for example, the arbitrator's award required clarification or interpretation,⁹ a rehearing for that limited purpose would not necessarily be a denial of confirmation of the award, but merely a deferral of final ruling until the arbitration was complete. When rehearing is necessary for the issue of confirmation to be fully presented, vacatur pending rehearing is not appealable, not because the order falls outside subsection (5), but because it falls outside subsection (3) and the rest of section 171.098(a).

Second: The Company's argument requires that subsection (5) operate as an exception to subsection (3), even though it provides a separate basis for appeal. In essence, the Company reads subsection (3) to allow an appeal from an order denying confirmation unless it also vacates the award and directs rehearing. But section 171.098(a) is a disjunctive list of orders that can be appealed; it does not list orders that cannot be appealed. The five subsections are connected by "or". To equate

"denying confirmation ... or ... vacating an award without directing a rehearing"

with

denying confirmation ... but not if ... vacating an award and directing a rehearing

is a strange reading of the word "or". Instead of two separate categories of appealable orders, the Company argues there should be but one smaller category. The 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.

Third: Because Texas law favors arbitration,¹⁰ judicial review of an arbitration award is extraordinarily narrow.¹¹ The right of appeal provided by section 171.098(a) assures that a trial court does not exceed the limitations on its authority to review an arbitration award. Those limitations would be circumvented if re-arbitration could be ordered for reasons that would not justify denying confirmation, and appeal thereby delayed. As the United States Court of Appeals for the Fifth Circuit has observed: "Such a result would disserve the policies that promote arbitration and restrict judicial review of awards."¹² And where, as here, the parties have agreed to "final and binding" arbitration only for the Company to be given a Mulligan, their right to contract is also subverted.

The Company argues that the district court's order should not be appealable because it was like granting a motion for new trial in a case, which is not appealable. But the analogy does not fit. A new trial occurs in the court that granted the motion; the rehearing here is not before the trial court but a separate tribunal, a new arbitrator. The district court's order is more like remanding an administrative decision to the agency for further proceedings, which is ordinarily appealable.¹³ A still closer analogy would be to Texas appellate procedure. An appellate court may direct a trial court to take corrective action while the appeal remains pending to allow proper presentation of the appeal,¹⁴ and that directive is not appealable. But an appellate court judgment remanding a case to the trial court for a new trial is certainly appealable. Similarly, an order vacating an arbitration award and directing rehearing for the limited purpose of correcting, clarifying, or completing the arbitration to allow proper presentation of issues relating to confirmation is not appealable, while an order requiring a new arbitration is as final a...