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Unlikelihood of Having an Arbitration Award Vacated

First appeared on the New York State Bar Association, Dispute Resolution Section, “Roundtable” April 22, 2013

Arbitrators naturally express anxiety about having an arbitration award vacated, but in reality it rarely happens. Awards are presumptively legitimate so long as arbitrators “manifest [no] infidelity” to their obligation to “interpret and apply” the parties’ agreement. Steelworkers v. the Enterprise Wheel and Car Corp., 363 U.S. 593, 597 (1960) (arbitrators bring to bear their “informed judgment … in order to reach a fair solution of a problem. This is especially true when it comes to formulating remedies.”) In addition to the four statutory grounds for vacatur provided in the Federal Arbitration Act, 9 U.S.C. § 10(a) – “(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators . . .; (3) where the arbitrators were guilty of misconduct; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made” – there is a non-statutory, common law fifth cause, namely “manifest disregard of the law.”

Courts are ambivalent about manifest disregard of the law after Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 586, 128 S.Ct. 1396 (2008). However, the Second Circuit made it clear in Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 548 F.3d 85, 94 (2nd Cir. 2008) that it agrees with other courts that think that “‘manifest disregard,’ reconceptualized as a judicial gloss on the specific grounds for vacatur enumerated in section 10 of the FAA, remains a valid ground for vacating arbitration awards.” The Supreme Court in its own later decision on the same case (although reversing the judgment) stated that “[w]e do not decide whether ‘manifest disregard’ survives our decision in Hall Street … as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10.” 130 S.Ct. 1758, 1768 n. 3 (2010). Whatever the state of the law on this issue, the Supreme Court and the Second Circuit agree that to succeed on this ground a petitioner “bears a ‘heavy burden’.”  T. Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 339 (2d Cir. 2010). An order vacating an award for “manifest disregard” may only be entered if “the arbitrator ignored or improperly applied clear and explicitly applicable law to the matter before it, leading to an erroneous outcome.” Id.

The heavy burden on petitioner is most recently illustrated in Ometto and Adriano Ometto Agricola LTDA v. ASA Bioenergy Holding A.G.,12-civ-1328 (SDNY, Jan. 9, 2013, Rakoff, J.). Petitioner has filed an appeal, but given the factual circumstances (to the extent they are disclosed in the decision) and Judge Rakoff’s analysis reversal appears unlikely. The standard for “manifest disregard” [he held] is “exceedingly difficult to satisfy.” Misapplying an ambiguous law does not do it. To succeed, a petitioner seeking to vacate an award must “demonstrate[] that the panel intentionally defied the law,” citing Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors’ Comm. of Bayou Group, LLC, No. 10-5049-cv, 2012 WL 2548927, at 1-2 (2d Cir. July 3, 2012) (Unpublished). The principle applies “[e]ven if a tribunal does ‘not explain the reason for [its] decision’ … if [the Court] can discern any valid ground for it.” Id. “Relief is rare.” Id.

Whether or not there has been “manifest disregard” of applicable law – Brazilian law in Ometto – depends on what the parties have submitted to the arbitrator: “In determining an arbitrator’s awareness of the law for purposes of a manifest disregard analysis, this Court must ‘impute only knowledge of governing law identified by the parties to the arbitration,” citing Duferco Intern. Steel Trading v. T. Klasxveness Shipping A/S, 333 F.3d 383, 390 (2d Cir. 2003). Since Ometto “did not adequately present its legal theory to the arbitrators, [his] proposition that the arbitrators ‘disregarded’ that law is without merit.”

Ometto presented two other claims that the arbitrator’s award was in “manifest disregard of the law.” The second claim related to the availability of prospective, rather than actual, damages under Brazilian law. That argument “fare[d] no better” because none of the case law submitted in support of vacatur was presented to the arbitrators. The Court held that:

As to the issue of prospective damages under Brazilian law, the majority of the tribunal, far from “disregarding” the law,  responded directly to Ometto‘s challenges when they rebutted the dissenting arbitrator’s position: “[t]he majority believes the damage occurred at closing by paying for a capacity that did not exist, not at a future time.”

The third claim concerned the wording of the award. Ometto asserted that “the awards were not ‘mutual, final, and definite,’ ‘because’ the Tribunal purportedly failed to address ‘a number of Ometto’s key defenses.” The Court found this to be “a non sequitur on its face.” The arbitrators expressly stated in their 200-page decision that they had fully “considered [and resolved] all issues put before them pursuant to their terms of reference” and “[a]ny contention not specifically mentioned in our analysis has been rejected or determined to be irrelevant to our determinations.”

One of the striking insights of Ometto (which I think goes to the heart of Judge Rakoff’s decision and informs it) is the respondent’s failure to educate the arbitrators. As a general rule, a party’s silence when it is expected to speak justifies an inference that it has nothing further to add to its argument. It is stuck with the record it creates!

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