One of the oft-heralded benefits of arbitration is its finality, suggesting that once the award is rendered any judicial review will be very limited.
Under the Federal Arbitration Act (FAA), as well as state arbitration acts, the grounds for review of arbitration awards are few and specifically delineated. The four grounds for vacating an award, well known to all who have even the slightest familiarly with arbitration, are: corruption or fraud; arbitrator partiality; arbitrator misconduct, such as refusal to postpone for good cause or refusal to hear pertinent and material evidence; exceeding powers or executing them imperfectly.
Similarly, the grounds for modification or correction are narrowly defined.
However, beginning with dictum in a 1953 U.S. Supreme Court decision, courts have at times recognized “manifest disregard of the law”—a topic on which I’ve previously written—as grounds to vacate an award. Essentially, the basis is that the arbitrator understood the law but chose to disregard it.
A 2008 Supreme Court decision, Hall Street Associates v Mattel, appeared to confirm the exclusivity of the FAA grounds for vacatur by ruling that parties could not expand the bases for review. Following that decision, many concluded that the manifest disregard of the law challenge had been extinguished once and for all.
Nonetheless, there continues a split in the federal circuits as to whether the manifest disregard test remains available. The Second Circuit has been one where it has survived, but with a very high threshold to succeed.
Not all agree that the manifest disregard test is non-statutory: some argue that it is a form of imperfect execution of powers under the statute. In the Second Circuit, however, the manifest disregard test is considered to be distinct from the statutory grounds. A leading 2004 case stated that “its use is limited only to those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent, but where none of the provisions of the FAA apply.” The court further stated that it must be determined that the arbitrator knew of the governing, well-defined and applicable legal principle but refused to apply it or ignored it altogether. Simply making the “wrong call” is not grounds for vacatur.
Other cases have stressed that great deference must be given the arbitrator’s award .
In early 2013, the U.S. Court of Appeals for the Second Circuit again ruled that that the manifest disregard challenge is “severely limited, ” subject to an “ exceedingly heavy burden” and to be applied only in “those exceedingly rare instances” of “egregious impropriety.” It must be more than “error of understanding with respect to law.”
Other courts across the country have frequently declined to set aside awards, concluding that under the manifest disregard test sometimes even “silly” or “wacky” awards must stand.
The latest development within the Second Circuit is a December 2013 Connecticut District Court decision, Southeby’s Int’l Realty v. Relocation Group, involving a claim for a real estate sales commission. The court, in that case, specifically recognized the Second Circuit position that manifest disregard is a severely limited “fifth avenue” of challenge in addition to the FAA grounds, that the review is not to be de novo and that the award is to be sustained if there is “even a barely colorable justification for the outcome reached.”
Nonetheless, the court conducted an extensive analysis of the bases for which the award could have been made, including whether or not there was substantial compliance with the statutory prerequisite for the commission claimed. The court ruled that the claim was predicated on compliance with that statutory prerequisite governing real estate listings and not on a cooperating brokerage agreement, which wasn’t subject to the “onerous “requirements of that statute.
Based upon its analysis, the court concluded that the position apparently embraced by the panel’s award “would produce a definitely absurd result. “
Even though the panel had not submitted a written rationale for the award revealing awareness of the prerequisite, the court noted from the record that panel was repeatedly advised of the governing legal principles involved. “Knowledge of the governing law on the part of the arbitrator is not to be assumed….the party seeking vacatur must communicate—either by written submission or orally—to the arbitrators that the [governing law] mandated…an award.”
Two stark warnings emerge from this case: First, for arbitrators: submitting a non-reasoned award or an award without written rationale will not necessarily insulate the decision from extensive judicial review if challenged. Second, for counsel seeking to establish that an arbitrator manifestly disregarded the law: it is essential to clearly present the governing majority position on an issue to the panel.
Unless it is demonstrated that the arbitrator, especially if not an attorney, was made aware of the controlling law and chose to disregard or ignore it, even a “whacky” or “absurd” award may be untouchable.•