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Manifest Disregard – Alive if not Well?

January 2, 2014

Judicial review of arbitration awards in federal court is narrow and courts generally defer to arbitral tribunals. According to the US Supreme Court in Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), the limited grounds for vacating awards enumerated in the Federal Arbitration Act (FAA) are exclusive. Prior to Hall Street, most federal courts also recognized “manifest disregard of law” as a common law ground for vacatur, independent from the enumerated FAA grounds. The ruling in Hall Street cast doubt on the continued availability of the manifest disregard ground, without expressly eliminating it, and federal appellate courts remain divided in their application—and interpretation—of it.

Manifest disregard of the law is generally established when an arbitral tribunal recognizes the law applicable to a dispute but disregards it. A mere misinterpretation is insufficient, and the party challenging enforcement bears a heavy burden. Thus, vacatur on this ground is rare, even in circuits in which manifest disregard is seen as surviving Hall Street

In recent case law, the Fourth Circuit on October 28th and the District of Connecticut on December 5th vacated arbitral awards for manifest disregard of the law.

In Dewan v. Walia, 2013 U.S. App. LEXIS 21970; 2013 WL 5781207 (4th Cir. Oct. 28, 2013), an unpublished opinion without precedential value, the Fourth Circuit remanded with instructions that the district court vacate, holding that an arbitral award in favor of a former employee who had executed a release agreement with his former employer was the product of an arbitrator’s manifest disregard of the law. According to the court, “a manifest disregard of the law is established only where the arbitrator understands and correctly states the law, but proceeds to disregard the same,” [citation omitted] and “[m]erely misinterpreting contract language does not constitute a manifest disregard of the law.” Here, the appellate court emphasized that the former employee, Arun Walia, executed a release agreement releasing and discharging his former employers from all claims related to his employment in exchange for $7,000, regardless of forum, and that the arbitrator held the release valid and enforceable. In nevertheless making an award to Walia on claims arising out of his employment, the arbitrator manifestly disregarded the law.

Judge James A. Wynn, Jr. dissented, positing that the arbitrator did not “disregard or modify unambiguous contract provisions” because “the arbitrator reasonably interpreted the agreement to release suits in court but not disputes in arbitration” (emphasis added).

On December 13th, Walia filed a petition for certiorari with the U.S. Supreme Court, on the question “[w]hether and when the Federal Arbitration Act permits a court to vacate an arbitral award as the product of “manifest disregard of the law.”

In Sotheby's Intl Rlty, Inc v. Relocation Group LLC et al,, 2013 U.S. Dist. LEXIS 180040; 2013 WL 6704876 (D. Conn. Dec. 5, 2013), the District of Connecticut—which is in the Second Circuit—vacated an arbitral award issued in a property sale commission dispute, finding that the arbitral tribunal manifestly disregarded the law when it issued an award in favor of a party that had failed to meet the statutory preconditions for bringing an action to recover a real estate commission. Notable in this case is that the court was able to make this finding even without insight into the arbitrator’s legal analysis, as the award was not required to, and did not, provide reasons. Manifest disregard has been interpreted in the Second Circuit as applying to “those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent” [citation omitted]. According to the Second Circuit, manifest disregard does not exist upon “[a]n arbitrator’s mere commission of error in understanding the relevant law, or her reasonably disputed interpretation of the meaning and applicability of said law to the issues presented.” Here, the District of Connecticut found that the prevailing party in the arbitration “neither strictly nor substantially complied” with the applicable law, which made it “readily evident” that the arbitral panel was aware of, and  improperly applied, the law in making awarding award.   

 -  Cynthia Galvez, CPR Legal Intern

Note: Law Offices of Kathleen M. Scanlon, PLLC, whose principal also serves as Special Counsel to CPR, represented pro hac vice the plaintiff in Sotheby's Intl Rlty, Inc v. Relocation Group LLC et al.