Thomas R. Newman

The Federal Arbitration Act (FAA) §10(a) sets forth four statutory grounds for vacating an arbitration award: (1) the award was procured by corruption, fraud or undue means; (2) evident partiality or corruption of the arbitrators; (3) the arbitrators were guilty of prejudicial misconduct during the course of the hearing; and (4) 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. For a wholly intrastate arbitration in New York to which the FAA does not apply, similar grounds are stated in CPLR §7511(b). Such arbitrations will be few in number when sizable commercial transactions are involved because the Supreme Court has interpreted the FAA broadly to mean “that if the subject matter of an arbitration merely affected interstate commerce, the FAA would apply,” the transaction need not actually be “in commerce.” Citizens Bank v. Alafabco, 539 U.S. 52, 56 (2003); Wien & Malkin v. Helmsley-Spear, 6 N.Y.3d 471, 486 n. 8 (2006).

Neither the FAA nor the CPLR contains a provision allowing an arbitration award to be challenged for an error of law, such as the English Arbitration Act 1996, §69(1) permits unless otherwise agreed by the parties. However, a fifth ground for challenging an arbitration award, was created by the federal judiciary—“manifest disregard of the law.” This ground “originated in dicta in Wilko v. Swan, 346 U.S. 427, 436-37 (1953), where Justice Reed wrote, ‘the interpretations of the law by arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation.’” Wien & Malkin v. Helmsley-Spear, 6 N.Y.3d 471, 486 n. 10 (2006). This has been described as “a doctrine of last resort” because “its use is limited only to those exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent, but where none of the provisions of the FAA apply.” Duferco Int’l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 389 (2d Cir.2003). The doctrine “gives extreme deference to arbitrators” (Wallace v. Buttar, 378 F.3d 182, 189 (2d Cir. 2004)), and it “imposes a heavy burden on the party seeking to vacate an arbitral award.” Sotheby’s International Realty v. Relocation Group, 588 Fed. Appx. 64, 65 (2d Cir. 2015) (unpublished). “Manifest disregard of the law may be found … if the arbitrator ‘understood and correctly stated the law but proceeded to ignore it.’” Willemijn Houdstermaatschappij, BV v. Standard Microsystems, 103 F.3d 9, 12 (2d Cir. 1997).

The U.S. Court of Appeals for the Second Circuit has imposed three requirements in order to find that an award was issued in manifest disregard of the law: First, that the governing law that was allegedly ignored was “clear,” “well-defined” and “in fact explicitly applicable to the matter before the arbitrators,’ as ‘[a]n arbitrator obviously cannot be said to disregard a law that is unclear or not clearly applicable.’” T.Co Metals v. Dempsey Pipe & Supply, 592 F.3d 329, 339 (2d Cir. 2010); Merrill Lynch, Pierce, Fenner & Smith v. Bobker, 808 F.2d 930, 934 (2d Cir. 1986). Second, that “the arbitrators did in fact err in their application of the law, and that the outcome reached was erroneous.” Sotheby’s, 588 Fed. Appx. at 65; T.Co. Metals, 592 F.3d at 339. Third, “that the arbitrators knew of the law’s existence and its applicability to the problem before them.” Sotheby’s, 588 Fed. Appx. at 66; T.Co. Metals, 592 F.3d at 339.

As for the first requirement—that the allegedly ignored law was clear—that impropriety has been interpreted to mean “more than error or misunderstanding with respect to the law,” or an “arguable difference regarding the meaning or applicability of laws urged upon” an arbitrator. T.Co Metals, 592 F.3d at 339. The error must have been “obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.” Merrill Lynch, 808 F.2d at 933. The award “should be enforced, despite a court’s disagreement with it on the merits, if there is a barely colorable justification for the outcome reached.” Ibid.; GMS Group v. Benderson, 326 F.3d 75, 78 (2d Cir. 2003) (“If there is even a barely colorable justification for the outcome reached, the court must confirm the arbitration award”). The Second Circuit has said that “[w]ith respect to contract interpretation, this standard essentially bars review of whether an arbitrator misconstrued a contract.” T.Co Metals, 592 F.3d at 339.

As for the second requirement, once it is determined that the law is clear and plainly applicable, the court “must find that the law was in fact improperly applied, leading to an erroneous outcome. [Courts] will, of course, not vacate an arbitral award for an erroneous application of the law if a proper application of law would have yielded the same result. In the same vein, where an arbitral award contains more than one plausible reading, manifest disregard cannot be found if at least one of the readings yields a legally correct justification for the outcome.” Duferco International Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 390 (2d Cir. 2003). Courts “are not at liberty to set aside an arbitration panel’s award because of an arguable difference regarding the meaning or applicability of laws urged upon it.” Merrill Lynch, 808 F.2d at 934. The Second Circuit has noted that “[w]hen approaching this analysis, we assume that, with regard to the applicable law, the panel of arbitrators is ‘a blank slate unless educated in the law by the parties.’” GMS Group v. Benderson, 326 F.3d 75, 81 (2d Cir. 2003). Therefore, it is up to counsel to bring to the arbitrators’ attention what they contend to be the applicable law.

This standard becomes almost impossible to meet when the arbitrators do not issue a reasoned award, as they are not obliged to do in the absence of a specific requirement in the agreement to arbitrate, and where numerous legal theories were presented to the panel any one of which might have been the basis for the award. In such cases, how is a court to be made aware of the erring conduct of the arbitrators? The answer that courts have given is that “[w]hen arbitrators decline to provide an explanation for their decision, a reviewing court can only infer from the facts of the case whether ‘the arbitrator[s] appreciate[d] the existence of a clearly governing legal principle but decide[d] to ignore or pay no attention to it.’” Willemijn Houdstermaatschappij, 103 F.3d at 12-13. Where an explanation for an award is deficient or even non-existent, the court will confirm it “if a justifiable ground for the decision can be inferred from the facts of the case.” Duferco Intern. Steel Trading v. T. Klaveness Ship. A/S, 333 F.3d 383, 390 (2d Cir. 2003). “This is so even if the ground for their decision is based on an error of fact or an error of law.” Willemijn Houdstermaatschappij, 103 F.3d at 12–13 (citations omitted); T.Co. Metals, 592 F.3d.at 339.

As for the third requirement—intentional disregard of the law—here the court looks to “a subjective element, that is, the knowledge actually possessed by the arbitrators. In order to intentionally disregard the law, the arbitrator must have known of its existence, and its applicability to the problem before him.’ T.Co. Metals, 592 F3d at 339, quoting Duferco, 333 F.3d at 390. The term “disregard” implies that “the arbitrator appreciates the existence of a clearly governing legal principle but decides to ignore or pay no attention to it.” Merrill Lynch, 808 F.2d at 933. The Second Circuit has said, as a general rule, that “we will not find manifest disregard of the law where an arbitral award rests on the ‘application of ‘an unclear rule of law to a complex factual situation.’” GMS Group, 326 F.3d at 82.

Finally, although it should be clear from the name of this ground for vacating an award—manifest disregard of the law—the Second Circuit has expressly pointed out that it “does not recognize manifest disregard of the evidence as proper ground for vacating an arbitrator’s award.” Wallace v. Buttar, 378 F3d 182, 193 (2d Cir. 2004) (emphasis added). “To the extent that a federal court may look upon the evidentiary record of an arbitration proceeding at all, it may do so only for the purpose of discerning whether a colorable basis exists for the panel’s award so as to assure that the award cannot be said to be the result of the panel’s manifest disregard of the law. A federal court may not conduct a reassessment of the evidentiary record … Instead, whatever the weight of the evidence considered as a whole, ‘[i]f a ground for the arbitrator’s decision can be inferred from the facts of the case, the award should be confirmed.’” Ibid.

Thomas R. Newman is of counsel to Duane Morris and author of “New York Appellate Practice” (Matthew Bender). Steven J. Ahmuty Jr. is a partner at Shaub, Ahmuty, Citrin & Spratt. They are members of the American Academy of Appellate Lawyers.

Reprinted with permission from New York Law Journal, © ALM Media Properties LLC. All rights reserved.