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SPECIAL FOCUS: manifest disregard of law

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The principal basis for seeking vacation of an arbitration award, other than the grounds contained in the Federal Arbitration Act (“FAA”) (9 U.S.C. section 10), is that the award was made in manifest disregard of law. Five of the United States Circuit Courts of Appeal have issued opinions dealing with this principle in recent months, with three of the opinions being issued in a ten day span during early August. All of these opinions hold that vacating an arbitration award on this basis is an extraordinary occurrence.

  • The Eleventh Circuit issued a very strong statement as to the finality of arbitration awards, holding that to prove manifest disregard of law, one must submit clear evidence that an arbitrator was conscious of the law and deliberately disregarded it. B. L. Harbert Internatiuonal, LLC v. Hercules Steel Co., Case No. 05-11153 (11th Cir. Feb. 29, 2006). The Court strongly cautioned the bar against appealing arbitration awards on the basis that the result was unacceptable.
  • The Seventh Circuit held that manifest disregard of the law is limited to situations in which arbitrators “direct the parties to violate the law ….” Wise v. Wachovia Securities, Case No. 05-2640 (7th Cir. June 7, 2006). The Seventh Circuit concluded that due to the extraordinarily narrow grounds for vacating an arbitration award, the FAA really does not provide for the “judicial review” of arbitration awards.
  • The D.C. Circuit held that the manifest disregard of law standard requires proof that the arbitration panel ignored well defined, explicit law that was clarly applicable, emphasizing that decisions based upon debatable points of law and disputed issues of fact did not meet this standard. Kurke v. Oscar Gruss and Son, Inc., Case No. 05-7018 (D.C. Cir. July 18, 2006).
  • The Ninth Circuit recently held that a decision on choice of law did not meet the manifest disregard of law standard since it was not “completely irrational.” Parsons v. Polen, 2006 WL 1082820, Case No. 04-35654 (9th Cir. April 25, 2006) (unreported opinion).
  • In the only opinion that vacated an arbitration award, the Fourth Circuit vacated an arbitration award, where an arbitrator implied a one year statute of limitation into an agreement that was silent as to the time for making a claim, and the law of the applicable state provided for either a three or a six year limitation period. Patten v. Signator Insurance Agency, Inc., Case No. 05-1148 (4th Cir. March 13, 2006).

These opinions demonstrate two principles of interest: (1) it is very difficult to convince a Court to vacate an arbitration award under the FAA; and (2) courts are becoming increasingly annoyed with what they view as frivolous motions to vacate awards under the FAA. The mere fact that five of the federal Circuit Courts of Appeal have addressed this issue recently illustrates the importance that the Courts attach to this issue.

The Seventh Circuit was correct in stating that the FAA simply does not provide for what is considered to be “judicial review” in a litigation context. Awards simply will not be vacated based upon alternative interpretations of evidence, sufficiency of evidence, or issues of law that are fairly debatable. Even if one can anticipate that an adverse award is likely, it is very difficult to establish a record that will support vacating an award under the FAA. Finally, if your arbitration occurs in the Eleventh Circuit, it is clear that motions to vacate awards and appeals of the denial of motions to vacate awards may be met with the imposition of sanctions unless there is a clearly arguable basis under the FAA to vacate the award.

Court of Appeal affirms summary judgment in favor of Lloyd’s against Name

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The United States Court of Appeals for the District of Columbia Circuit has affirmed a summary judgment in favor of the Society of Lloyd's, enforcing an English judgment against a Lloyd's Name who refused to sign on with and pay reinsurance premium to Equitas. Society of Lloyd's v. Siemon-Netto, Case no. 04-7214 (D.C. Cir. August 8, 2006). At oral argument, the Names made it clear that “the underlying basis of their defense is their belief that the English courts have a 'bias and prejudice in favor of Lloyd's under circumstances which make it impossible for a Name to win.'” Under the Uniform Foreign Money Judgments Recognition Act, a foreign judgment may not be enforced if it was “rendered under a system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law.” The Names did not go so far as to seek the application of this principle, but the Court noted that if they had attempted to do so, they would have failed. The only evidence of “bias and prejudice” was that other Names who had advanced the same position as Appellants had lost their cases, and the mere fact that they had lost did not establish improper partiality. Indeed, the Court noted that “the fact that Names have lost similar (albeit not identical) cases in eight United States Courts of Appeals … would require us to reach the same conclusion regarding American courts.” With that closing statement, the Court affirmed the District Court's ruling. Carlton Fields represented the Society of Lloyd's in this case.

Court of Appeal affirms summary judgment in favor of Lloyd's against Name

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The United States Court of Appeals for the District of Columbia Circuit has affirmed a summary judgment in favor of the Society of Lloyd's, enforcing an English judgment against a Lloyd's Name who refused to sign on with and pay reinsurance premium to Equitas. Society of Lloyd's v. Siemon-Netto, Case no. 04-7214 (D.C. Cir. August 8, 2006). At oral argument, the Names made it clear that “the underlying basis of their defense is their belief that the English courts have a 'bias and prejudice in favor of Lloyd's under circumstances which make it impossible for a Name to win.'” Under the Uniform Foreign Money Judgments Recognition Act, a foreign judgment may not be enforced if it was “rendered under a system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law.” The Names did not go so far as to seek the application of this principle, but the Court noted that if they had attempted to do so, they would have failed. The only evidence of “bias and prejudice” was that other Names who had advanced the same position as Appellants had lost their cases, and the mere fact that they had lost did not establish improper partiality. Indeed, the Court noted that “the fact that Names have lost similar (albeit not identical) cases in eight United States Courts of Appeals … would require us to reach the same conclusion regarding American courts.” With that closing statement, the Court affirmed the District Court's ruling. Carlton Fields represented the Society of Lloyd's in this case.

Wisconsin Supreme Court vacates arbitration award

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Construing the Wisconsin arbitration statute, the Wisconsin Supreme Court vacated an arbitration award in a dispute between Allstate Insurance Company and a policyholder on the basis that a party-appointed arbitrator demonstrated evident partiality. Borst v. Allstate Insurance Co., Case No. 2004 AP 2004 (Wisc. June 13, 2006). The arbitrator appointed by Allstate was an attorney who had a “substantial, ongoing attorney/client relationship with Allstate.” Even though the relationship was disclosed, and all parties were aware of the relationship going into the arbitration hearing, the Court found that disclosure and knowledge did not avoid the prohibition of such a relationship under Wisconsin law. The Court also strictly limited the permissible discovery depositions to those permitted by the Wisconsin statute.

Eleventh Circuit strongly endorses finality of arbitration

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The United States Court of Appeals for the Eleventh Circuit, in B. L. Harbert International, LLC v. Hercules Steel Co., Case No. 05-11153 (11th Cir. Feb. 28, 2006), in a non-reinsurance case, strongly endorsed the finality of arbitration under the Federal Arbitration Act, by affirming the confirmation of an arbitration award (and the denial of a motion to vacate the award). The Court obviously believed that the Appellant appealed merely because it disagreed with the arbitration decision. The Appellant contended that the arbitration award reflected a manifest disregard for the law, which the Court held was an exceptional circumstance requiring clear evidence that an arbitrator was conscious of the law and deliberately disregarded it. Concluding that the proof did not come close to satisfying this standard, the Court considered imposing sanctions on Appellant for the appeal, voicing a strong disapproval for continuing arbitration proceedings through post-award court challenges.