United States: ‘Manifest Disregard Of The Law': The Continuing Evolution Of An Historically Ambiguous Vacatur Standard

Introduction

Manifest disregard for the law – the judicial-born concept that some US courts have treated as an independent ground for vacating arbitral awards – is a topic much discussed, and often disfavoured, in international arbitration circles. The Supreme Court of the United States (the 'Supreme Court') seems only to have fuelled the debate over its validity and suitability by its opaque references to the concept since its origination in the 1953 case of Wilko v Swan and its indecision over whether the concept remains a valid, independent ground for annulment. The US Courts of Appeals, left to fend for themselves, have split into camps, each treating the concept with its own brand of judicial contempt or deference. Ultimately, the survival of the manifest disregard standard as an independent ground for vacatur seems of little consequence, as even those courts who have given it some degree of favour caution how difficult it is to satisfy.

'Manifest disregard for the law'

All arbitration participants and practitioners should be aware that section 10 of the Federal Arbitration Act (FAA) – the US legislation codifying the New York Convention (the 'New York Convention' or the 'Convention') and providing the framework for enforcement of arbitration agreements and awards in the US1 – provides very limited grounds on which an arbitral award rendered in the US may be vacated.2 Nowhere within the statutory text does the phrase 'manifest disregard for the law' appear. Yet, many US courts continue to adhere to the Supreme Court's prior opaque use of that phrase to infer the existence of a separate ground for vacatur not expressly included in the statute.

That now notorious phrase has its origins in the Supreme Court case of Wilko v Swan.3 Wilko involved the question of whether an agreement to arbitrate controversies between securities brokers and buyers constituted an invalid waiver of the buyer's right to select a judicial forum under the Securities Act of 1933.4 The Court of Appeals for the Second Circuit, in determining that the Securities Act did not prohibit the arbitration agreement in question (a position rejected by the Supreme Court),5 stated in dicta that a failure by 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.'6 In response, the Supreme Court remarked passively that any such 'failure would need to be made clearly to appear,' since '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'[emphasis author's own].7 To this day, it remains unclear what the Supreme Court intended by these cryptic remarks.8

Did the Court mean to prescribe a judicially created common law ground for vacatur in addition to those identified expressly in the FAA? Did it mean to refer summarily to those grounds listed in section 10 of the FAA or, perhaps, a specific ground, such as where the arbitrators are 'guilty of ... misbehavior by which the rights of any party have been prejudiced' (section 10(4)(3)) or have 'exceeded their powers' or 'so imperfectly executed them' (section 10(a)(4))?9 One can reasonably infer that the Court intended some meaning to be ascribed to this notion of 'manifest disregard' – at the very least, that so clearly disregarding the law that the arbitrator, by submission, was bound to apply (as opposed to misapplying or misinterpreting the law) would subject her award to some limited form of judicial review or correction and potentially vacatur.10 There is little textual support for such view in the statute – 'the court must grant [] an order [of confirmation] unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title' [emphasis author's own].11 Indeed, the FAA is clear and unambiguous: unless the award is vacated, modified or corrected as prescribed in sections 10 and 11 of the FAA (neither of which provides for recourse based on a manifest disregard of the law), a court is required to grant an order of confirmation. Still, the Supreme Court's obiter dicta is hard to ignore.12

It was not until more than 30 years after Wilko that the elusive phrase reappeared.13 In Thomas v Union Carbide Agricultural Products Co., a contingent of the Court stated – again in dicta and without elaboration – that the judicial review prescribed under a federal pesticide law 'encompasses the authority to invalidate an arbitrator's decision when that decision exceeds the arbitrator's authority or exhibits a manifest disregard for the governing law' [emphasis author's own].14 At first blush, Justice Brennan's use of the conjunction 'or' suggests that 'manifest disregard for the governing law' may constitute a ground for vacatur separate from that of an arbitrator having exceeded her authority.15 Justice Brennan's concluding remarks, however, refer only to the 'judicial review' requisite 'to ensur[ing] that the arbitrator's exercise of authority in any given case does not depart from the mandate of the delegation [of a lawmaking function to the arbitrator] ....'16 In considering the Court's statements together, it is reasonable to infer that the Court viewed the notion of manifest disregard as synonymous with, or a different way of viewing, an arbitrator's departure from his mandate or having overstepped his authority. The Court's citation to Steelworkers v Enterprise Wheel & Car Corp. supports such position.17 Still, that this case did not concern the FAA's vacatur standards and the lack of any elaboration or discussion concerning the manifest disregard principle makes any definitive assessment of the Court's views difficult.

Footnotes

1 The FAA governs 'foreign' or 'non-domestic' awards (Chapter 2, 9 U.S.C. §§ 201 et seq.) and 'domestic' awards (Chapter 1, 9 U.S.C. §§ 1 et seq.). An award will be considered 'foreign' or 'non-domestic' if it involves at least one non-US party or if it arises out of a legal relationship that 'involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relationship with one or more foreign states.' (9 U.S.C. § 202.) While the FAA therefore may affect arbitrations seated in the US and those with seats outside the US, parties may only seek vacatur of arbitral awards, including for a manifest disregard of the law, if such awards were rendered in the US (whether those awards are considered domestic or foreign/non-domestic). See n 3 below.

2 9 U.S.C.A. § 10. Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the 'New York Convention' or 'Convention'), a Convention award may be 'set aside or suspended' only 'by a competent authority of the country in which, or under the law of which, that award was made' (New York Convention, Arts. V(1)(e), VI). US courts have interpreted this language to mean that they may assume the power to vacate arbitral awards when the seat of the arbitration was in the US. Yusuf Ahmed Alghanim & Sons, W.L.L. v Toys 'R' Us, Inc., 126 F.3d 15, 21–23 (2d Cir. 1997) ('We read Article V(1)(e) of the Convention to allow a court in the country under whose law the arbitration was conducted to apply domestic arbitral law, in this case the FAA, to a motion to set aside or vacate that arbitral award.'). See also Victoria Orlowski, 'Chapter 22: FAA Section 10 Applications to Vacate an Award (Including "Manifest Disregard")' in Laurence Shore et al (eds), International Arbitration in the United States, (Kluwer L. Int'l, 2017) 503, 506 (insofar as the classic majority view is concerned, '[n] ational arbitration law at the place of arbitration (or under the law of which an award is made) establishe[s] the grounds for vacating awards. In the U.S., the law that contains the grounds for vacating international arbitration awards usually is the FAA, as the federal grounds for vacatur generally preempt state grounds unless the parties clearly provide otherwise in their agreements.').

3 Wilko v Swan, 346 U.S. 427 (1953).

4 Ibid.

5 Ibid., overruled by Rodriguez de Quijas v Shearson/American Express, Inc., 490 U.S. 477, 484 (1989).

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

7 Wilko, 346 U.S. at 436-37.

8 The Court cited a number of authorities, many preceding the enactment of the FAA, in support of its insinuation that manifestly disregarding the law the arbitrators are bound to apply may present a valid basis for vacatur. One in particular – the 1874 Supreme Court case of United States v Farragut – provides a thin window into the Court's conception of this distinctive phrase (89 U.S. 406 (1874)). In addressing whether the award of an arbitral tribunal appointed to tackle claims involving prizes of war was final as to all questions of law and fact involved, the Court determined – without citation – that the 'award was [] liable, like any other award, to be set aside in the court below, for such reasons as are sufficient in other courts,' including 'exceeding the power conferred by the submission, for manifest mistake of law, for fraud, and for all the reasons on which awards are set aside in courts of law or chancery'[emphasis author's own] Ibid. at 421. '[U]nless it can be shown that in making this award [the arbitrators] have acted upon a manifest mistake of law, the award must be upheld.' Ibid.; see also ibid. at 422 ('unless [the arbitrators] violated some principle of law in deciding [the matters before them], ... the award must be confirmed'). See also Burchell v Marsh, 58 U.S. 344, 349-50 (1854) (providing that, '[i]f the award is within the submission, and contains the honest decision of the arbitrators, after a full and fair hearing of the parties, a court of equity will not set it aside for error, either in law or fact,' but if there is 'more than an error of judgment, such as ... gross mistake,' such that 'had [the mistake] not happened, [the arbitrator] should have made a different award,' vacatur may be warranted).

9 The Wilko Court also cited cases appearing to accept that, if a 'manifest disregard of the law'-type principle were to exist, it would fall under the FAA's 'excess of power' ground. The Hartbridge N. of Eng. S.S. Co. v Munson S.S. Line, 62 F.2d 72, 73 (2d Cir. 1932) (considering appellant's 'excess of power' argument tantamount to a 'perverse misconstruction' of the law, which, if 'plainly established,' may constitute grounds for set aside under the FAA). Incidentally, it was suggested at a session of the Working Group on International Contract Practices – the group entrusted by UNCITRAL to prepare the initial draft of what ultimately became the Model Law on International Commercial Arbitration – that 'manifest injustice' be one of the grounds pursuant to which an award could be vacated, in addition to those grounds contained in the New York Convention for denial of recognition or enforcement of an award. That proposal ultimately was rejected, being considered 'too vague and too broad,' and, in most cases, already covered by other grounds. UNCITRAL Seventeenth Session, Report of the Working Group on International Contract Practices on the Work of its Sixth Session (1983) A/CN.9/245, para 151, p 35; see also Holtzmann and Neuhaus, UNCITRAL Model Law, Chapter VII, Article 34 ['Application for setting aside as exclusive recourse against arbitral award'], A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (Kluwer L. Int'l 1989) 910, 913.

10 There is no doubt some difficulty in ascertaining the difference between reviewing the arbitrator's award for misinterpretations of law versus a manifest disregard thereof. Note, 'Judicial Review of Arbitration Awards on the Merits' (1950) 63 Harv L. Rev 681, 685 ('Award Based on Erroneous Rule') (positing that one cannot easily define the 'blurred border between nonreversible error and reversible unreason.'). Though, these same authors did recommend that, 'unless the arbitrator has made his decision capriciously, as by the toss of a coin – which would be in itself a failure to exercise judgment as to the rule he should apply – a court should hesitate to place his action on the wrong side of that border.' Ibid. at 686. This notion of capriciousness – action dominated by impulsivity or unreason – may well have served as a prelude of sorts to the manifest disregard principle.

11 9 U.S.C. § 9. See also Hall Street Assocs., L.L.C. v Mattel, Inc. (2008) 552 U.S. 576, 582, 587 ('Under the terms of § 9, a court 'must' confirm an arbitration award 'unless' it is vacated, modified, or corrected 'as prescribed' in §§ 10 and 11. ... There is nothing malleable about 'must grant,' which unequivocally tells courts to grant confirmation in all cases, except when one of the 'prescribed' exceptions applies.').

12 But cf., eg, Baravati v Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 706 (7th Cir. 1994) ('We can understand neither the need for the [manifest disregard] formula nor the role that it plays in judicial review of arbitration (we suspect none – that it is just words). If it is meant to smuggle review for clear error in by the back door, it is inconsistent with the entire modern law of arbitration. If it is intended to be synonymous with the statutory formula that it most nearly resembles – whether the arbitrators' 'exceeded their powers' – it is superfluous and confusing.').

13 Thomas v Union Carbide Agric. Prods. Co., 473 U.S. 568, 601 (1985).

14 Ibid. at 601. The statute in question made the arbitrator's decision subject to judicial review 'only for "fraud, misrepresentation, or other misconduct".' Ibid. at 573-74.

15 It should be noted that this case did not involve, and the court was not called upon to decide, any issues regarding the specific standards for vacatur under the FAA.

16 Ibid. at 602.

17 363 U.S. 593, 597 (1960) ('[A]n arbitrator is confined to interpretation and application of the collective bargaining agreement; he does not sit to dispense his own brand of industrial justice. He may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the [] agreement. When the arbitrator's words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award.' [emphasis added]).

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