Vacating Arbitration Awards

By John H. Binning and Robert L. Nefsky

[John H. Binning is Of Counsel with Rembolt Ludtke & Berger LLP, in Lincoln, Nebraska. He is an ARIAS-US certified arbitrator, on the ARIAS-

US umpire list, listed on American Arbitration Association Panel of Neutrals and National Umpire Roster for Insurance and Reinsurance Industry, a former insurance company chief executive officer, a director and former Chairman of the Federation of Insurance Counsel, and a former Director of Insurance for Nebraska. Robert L. Nefsky is a partner of Rembolt Ludtke & Berger LLP, in Lincoln, Nebraska, specializing in business organizations (including insurance organizations), acquisitions, dispositions, securities, banking and finance.]

This article addresses vacation of arbitration awards under the Federal Arbitration Act only where the arbitrators are found to have evidenced a manifest disregard of the law. Court decisions vacating domestic arbitration awards due to manifest disregard of the law are based on the general standard for vacation, i.e. "[w]here the arbitrators exceeded their powers."

Federal Arbitration Act, 9 U.S.C.

10(a)(4). Current holdings of all circuits are cited and decisions reaching different conclusions are compared.

The Manifest Disregard Of The Law Standard

Section 10 of the Federal Arbitration Act ("FAA"), 9 U.S.C. ǧ 1 et seq., limits the basis for vacating an arbitration award.1 Until the decision of the Supreme Court in Wilko v. Swan, 346 U.S. 427 (1953), the Court had not specifically addressed the general subject. Wilko involved a case for damages under Section 12(2) of the Securities Act of 1933, 15 U.S.C. ǧ 77 et seq. In order to pursue arbitration, respondents moved to stay the action and to refer the action to arbitration pursuant to Section 3 of the FAA. The District Court denied that motion. In reversing the District Court, thereby permitting the arbitration to proceed, the Second Circuit addressed the FAA, and raised the "manifest disregard" standard:

[T]he agreement in the case at bar is "subject to"

the 1933 Act; consequently the arbitrators are bound to decide in accordance with the provisions of section 12(2). Failure to do so would, in our opinion, constitute grounds for vacating the award pursuant to section 10 of the Federal Arbitration Act, 9 U.S.C.A. 10.

Wilko v. Swan, 201 F.2d 439, 444-45 (2d Cir. 1953).

The Supreme Court granted certiorari, held that security law actions should not be referred to arbitration and reversed the Second Circuit. Wilko v. Swan, 346 U.S. 427 (1953) In its opinion, the Court set the standard for vacating arbitrators' awards:

Power to vacate an award is limited. While it may be true, as the Court of Appeals thought, that a failure of the arbitrators to decide in accordance with the provisions of the Securities Act would "constitute grounds for vacating the award pursuant to section 10 of the Federal Arbitration Act,"

that failure would need to be made clearly to appear. In unrestricted submissions, such as present margin agreements envisage, the interpretations of law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation.

Id. at 436-37 (emphasis added).

The dissenting opinion by Justice Frankfurter, which Justice Minton joined, stated in regard to this issue:

Arbitrators may not disregard the law. Specifically they are, as Chief Judge Swan pointed out, "bound to decide in accordance with the provisions of section 12(2)."

On this we are all agreed. It is suggested, however, that there is no effective way of assuring obedience by the arbitrators to the governing law. But since their failure to observe this law "would . . . constitute grounds for vacating an award pursuant to section 10 of the Federal Arbitration Act,"

201 F.2d 439, 445, appropriate means for judicial scrutiny must be implied, in the form of some record or opinion, however informal, whereby such compliance will appear, or want of it will upset the award.

Id. at 440.

Thirty-six years later the Supreme Court overruled Wilko v. Swan by holding that the provisions of an arbitration agreement in a securities case were enforceable, but did not discuss the issue of manifest disregard of the law. Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989).

The Supreme Court revisited the "manifest disregard"

issue in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) and in its discussion of arbitration procedures stated:

The party can still ask a court to review the arbitrator's decision, but the court will set that decision aside only in very unusual circumstances. See, e.g., 9 U.S.C. 10 (award procured by corruption, fraud, or undue means; arbitrator exceeded his powers); Wilko v. Swan, 346 U.S. 427, 436-437 (1953) (parties bound by arbitrators decision not in "manifest disregard"

of the law), overruled on other grounds, Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989).

Id. at 942.

The Supreme Court in Wilko and First Option considered the issue of manifest disregard of the law as a basis for vacating the award of an arbitration panel and clearly stated its position, albeit in dictum, that manifest disregard of the law is a basis for vacating an arbitration award. The following cases set forth the current holdings of each of the circuits after Wilko and First Option which considered setting aside arbitration awards for manifest disregard of the law.

First Circuit

In Bull H N Information Systems, Inc.,229 F.3d 321 (1st Cir. 2000), the First Circuit confirmed an award which had been vacated by the District Court. In regard to the standards for setting aside awards, the Court held:

Beyond the specific grounds enumerated in Section 10, courts "retain a very limited power to review arbitration awards"

. Essentially, arbitration awards are subject to review "where an award is contrary to the plain language of the [contract]"

and "instances where it is clear from the record that the arbitrator recognized the applicable law - and then ignored it"

. (Citations omitted.) In the parlance of this and other circuits, a reviewing court may vacate an arbitration award if it was made in "manifest disregard"

of the law.

Id. at 331 (quoting Advest, Inc. v. McCarthy, 914 F.2d 6, 9 (1st Cir. 1990)).

Second Circuit

The Second Circuit was initially consistent with the other circuits following Wilko and First Options in Merrill Lynch v. Bobker, 808 F.2d 930 (2d Cir. 1986) and Willemijn Houdstermaatschappij, BV...