Two years have passed since the U.S. Supreme Court’s decision in Hall Street Associates v. Mattel Inc., in which the court denied parties the ability through their arbitration agreements to create a judicial right of review in circumstances other than those specifically set forth in the Federal Arbitration Act, or FAA.
At that time, a spate of articles appeared in the Legal considering the extent to which that opinion had similarly limited the ability of courts to review an arbitration decision based upon an allegation of an arbitrator’s manifest disregard of the law.
One would have thought that with the passage of time, this issue would have become resolved. We are now reminded by two recent opinions, however, that it still remains open.
That a court may review an arbitration decision for a manifest disregard of the law was first suggested in dicta by the 1934 Supreme Court opinion in Wilko v. Swan. Although Wilko was reversed on other grounds, federal courts generally accepted the judicial creation of a right of appellate review where there has been such a manifest disregard.
Following Hall Street, however, federal courts have differed as to whether and to what extent there is any remaining viability in the doctrine.
In its April 30 opinion, the 11th U.S. Circuit Court of Appeals commented upon these different approaches in Frazier v. CitiFinancial Corp. That case involved an arbitration between the Fraziers and CitiFinancial, which held a loan and mortgage against their property. After a hearing, the arbitrator awarded CitiFinancial an equitable lien against the Frazier’s home in the amount of $47,957.12. Patricia Frazier took an appeal under the FAA seeking vacation, modification or correction of the ruling of the arbitrator.
The FAA permits vacatur of arbitration awards under Section 10(a) in situations:
“Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.”
Modification or correction of awards is also allowed under Section 11, “where the arbitrators have awarded upon a matter not submitted to them…”; and “where the award is imperfect in matter of form … .”
The court noted in Frazier, without much discussion, that “none of the statutory bases for vacating an arbitrator’s award under the FAA applies in this case.”
What was of greater interest to the court, however, was Patricia Frazier’s contention that the award was arbitrary and capricious, in violation of public policy and made in manifest disregard for the law.
Faced with this claim, the court first noted that Hall Street addressed only limitations on the contractual expansion of the right of review beyond what is available under sections 10 and 11 of the FAA. It recognized, however, that federal courts have differed as to whether Hall Street also applies to a limitation on the courts themselves to review arbitration decisions based on the non-statutory grounds for vacatur noted above.
For example, the 2nd Circuit’s 2008 opinion in Stolt-Nielsen S.A. v. Animal Feeds International Corp. stated that “manifest disregard reconceptualized as a judicial gloss on the specific grounds for vacatur enumerated in section 10 of the FAA remains a valid ground for vacating arbitration awards.”
The court further stated that, “We view the ‘manifest disregard’ doctrine and the FAA itself as a mechanism to enforce the parties’ agreements to arbitrate rather than as judicial review of the arbitrators’ decision. We must therefore continue to bear the responsibility to vacate arbitration awards in the rare instances in which ‘the arbitrators knew of the relevant [legal principle], appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it. … At that point the parties have ‘failed to interpret the contract at all’… for parties do not agree in advance to submit to arbitration that is carried out in manifest disregard of the law. Put another way, the arbitrators have thereby ‘exceeded their powers, or so improperly executed them that a mutual, final and definite award upon the subject matter submitted was not made.’”
Similarly, the 2009 9th Circuit ruling in Comedy Club Inc. v. Improv West Associates Inc., following Stolt-Nielsen, concluded “that the manifest disregard ground for vacatur is shorthand for a statutory ground under the FAA, specifically 9 U.S.C. sec 10(a)(4), which states that the court may vacate ‘where the arbitrators exceed their powers.’”
Finally, in an unpublished 2008 opinion, Coffee Beanery Ltd. v. WW LLC, the 6th Circuit concluded that while Hall Street may have “significantly reduced the ability of federal courts to vacate arbitration awards for reasons other than those specified in section 9 U.S.C. sec 10, … it did not foreclose federal courts’ review for an arbitrator’s manifest disregard of the law;” it only prohibited private parties from supplementing by contract the FAA grounds for vacatur, but did not address whether these may be supplemented judicially.
As opposed to those decisions, the 5th Circuit concluded in the 2009 case CitiGroup Global Markets Inc. v. Bacon that reasoning of the courts in Stolt-Nielsen, Comedy Club Inc. and Coffee Beanery is flawed for the following reasons.
First, Hall Street clearly states that the statutory provisions in the FAA are the “exclusive” means of vacating an arbitration award and that the statutory language means what it says: “[C]ourts must [confirm the award] unless the award is vacated, modified or corrected as prescribed in sections 10 and 11 of this title … and there’s nothing malleable about ‘must.’ However, manifest disregard of the law is a non-statutory ground for vacatur and, accordingly, does not come within statutory means for vacating an arbitration award which the Supreme Court has stated are ‘exclusive.’”
The Citigroup opinion recognized that the 2nd Circuit in Stolt–Nielsen tried to avoid the fact that manifest disregard is non-statutory by characterizing the doctrine as a reconceptualized judicial gloss on the specific statutory grounds for vacatur enumerated in Section 10 of the FAA.
It noted, however, that even the language from Stolt-Nielsen allows for a very narrow interpretation. It would only apply where it can be shown that the arbitrator is fully aware of the controlling principle of law and, yet, does not apply it. In such case the arbitrator flouts the law in such a manner as to exceed the powers bestowed upon him. The court does not accept, however, that this scenario would include merely an erroneous application of that principle.
Accordingly, on April 23, the 11th Circuit in Frazier adopted the view of the 5th Circuit that “our judicially-created bases for vacatur are no longer valid in light of Hall Street. “
That these divergent views remain unresolved is best demonstrated by reference to later developments involving the Stolt-Nielsen case itself, because it reached the U.S. Supreme Court, and an opinion was issued only three days before the Frazier opinion, on April 27. In the Supreme Court opinion, the award of the arbitration was ultimately overturned, not on the basis of a manifest disregard of the law, but because the arbitrator had exceeded his statutory powers under Section 10(a)(4) by imposing class arbitration on parties that had not agreed to authorize such class arbitration.
More important for the discussion here, however, is that the court at footnote three specifically states that with respect to manifest disregard of the law:
“We do not decide whether ‘manifest disregard’ survives our decision in Hall Street Associates L.L.C. v Mattel Inc. 552 U.S. 576, 585 (2008) as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U. S.C. sec. 10.” Moreover, the court concludes that even if there were such a standard requiring an arbitrator’s knowledge of the relevant principle, appreciation that this principle controlled the outcome of the disputed issue, and a willful flouting of the governing law by refusing to apply it, that standard would have been satisfied in this case.
Will there be clarification of this issue in the near future? Apparently the question has been raised in other petitions for certiorari that have been filed including in the Coffee Beanery case, and these have been denied.
One other point might be mentioned. The arbitration agreement in Frazier actually provided for a de novo appeal from the arbitrator’s award to an arbitration panel of three. That provision could not be applied in the Frazier case, however, because it allowed for such appeals only in cases where the awards exceed $100,000, which did not occur here. But before the institution of an expanded appellate arbitration framework is considered, careful thought should be given to whether such procedures might not effectively undermine a procedure that is designed to provide relatively expeditious, cost-effective and final proceedings.
Abraham J. Gafni
is a mediator/arbitrator with ADR Options and a professor at Villanova University School of Law.