The Dallas Court of Appeals, in the case of McGrath v. FSI Holdings, Inc., __ S.W.3d ____, 2008 WL 499255 (Tex. App.—Dallas Feb 26, 2008, no pet h.), held that in order to vacate an American Arbitration Association (AAA) procedural error, there must be at the very least a showing that the AAA manifestly disregarded its own rules.

      In a controversy concerning an assignee of a stock purchase agreement (FSI) with minority shareholders (McGrath), the issue concerned whether disqualification of the initially chosen arbitrator was a violation of the original contract agreement which allowed each party to select one arbitrator. The two appointed arbitrators would then choose the third arbitrator. McGrath requested that the Texas court vacate the arbitration award on the grounds that the contract with FSI specifically allows each side to appoint an arbitrator, and the AAA overstepped its authority by disqualifying the appointed arbitrator based impartiality evidenced by ties between the appointed arbitrator and one of the attorneys for McGrath.

      In McGrath, the court acknowledged that the written agreement of the parties expressly allowed for an exclusive appointment of one arbitrator from each side. However, evidence was produced that showed the parties had orally agreed to select neutral arbitrators, per the rules of the AAA, prior to the arbitration. The court held that the fact that the parties’ agreement to follow the AAA’s rules regarding partiality was oral does not deprive it of its effect. Since the parties orally agreed to abide by the AAA rules, the court acknowledged that the reasons for disqualification of the initial arbitrator were not so irrational that it could substitute its judgment for that of the AAA. The court upheld that the decision of the AAA to disqualify the arbitrator under its "partiality or lack of independence" standard stating the AAA decision did not constit ute a manifest disregard for its own rules.