Disregarding Manifest Disregard – Again. And what to do if you worry about errors of law or erroneous factual finding.

In earlier articles, we’ve gone over cases in which courts still recognize manifest disregard of the law as a possible ground for overturning an arbitration award.  They sometimes do this even though the Supreme Court said the only grounds for overturning an arbitration award under the Federal Arbitration Act are those listed in sections 9 – 11 of the Act.  Hall Street Assocs. L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008). The listed grounds do not include manifest disregard of the law. See Medicine Shoppe International, Inc. v. Turner Investments, Inc., 614 F.3d 485, 489 (8th Cir. 2010). 

Some courts still apply manifest disregard

The Supreme Court noted in Hall Street that some courts may use the phrase as shorthand for the grounds that are listed in the FAA.  See Stolt-Nielsen v. Animalfeeds Intern. Corp. 548 F.3d 85, 94 (2d Cir. 2008).  But the standard is not one you would necessarily grasp just from reading the grounds in the FAA.  It rests on a finding that the arbitrator knew settled law and deliberately chose to disregard it.  E.g., id. 

Courts still applying manifest may rely on the “exceeding powers” ground for vacating an award under the FAA.  Parties submitting to arbitration, they reason, would not agree to allow arbitrators to deliberately ignore the law.  E.g., id.

But does it get anyone anywhere?

So, some courts refuse to apply the doctrine at all, while others still apply it.  But is it likely to do a party trying to overturn an award any good? 

Usually not.  See  Warfield v. ICON Advisors, Inc., 26 F.4th 666 (4th Cir. 2022).  There the court said, “[i]n this case, as in almost all manifest disregard cases, the sky-high standard of judicial review is the beginning and the end of our analysis.”  In other words, the standard of review is so high as to usually be impossible to meet.  Which brings us to another example.

A state law example

Adventure Motorsports Reinsurance, Ltd. Et Al. v. Interstate National Dealer Services, Inc., 313 Ga. 19 (2021) applied the manifest disregard standard under a Georgia’s state arbitration act.  Let’s take a look.  But first a word on state arbitration acts.

A quick digression regarding the FAA and state acts

You will recall that, in cases involving interstate commerce, the FAA preempts state law, including arbitration acts.  But sometimes parties agree to apply the state act.  And sometimes the parties and court apply a state act without analyzing FAA-preemption. 

Not all state arbitration acts are the same, even though they are often called the “Uniform Arbitration Act.”  Most are pretty close to mirroring the FAA’s grounds for vacating an award, but not always.  We’ll see that in a moment.

The case

Now, back to the Adventure Motorsports case. The case involved after-market vehicle services contracts.  The details need not concern us too much.  

In broad summary, after about five years, the claimant decided the respondent was improperly deducting certain expenses from payments to claimant.  The parties agreed to arbitrate.  The arbitrator decided in favor of the claimant, finding the challenged charges made by the respondent were not allowed under the parties’ agreements.

The claimant/winner moved to confirm the award.  The respondent/loser moved to vacate.  The trial court confirmed it.  The parties and court applied Georgia’s version of the Uniform Arbitration Act.  It is similar to the FAA, but also includes “manifest disregard of the law” as a ground for vacating the award. 

The respondent appealed.  The Georgia Court of Appeals reversed the order confirming the award.  The appellate court found that the arbitrator had disregarded specific contractual language that allowed the respondent to make the charges it did. That, it found, was manifest disregard of the law.  So, the trial court had erred by confirming the award. 

The Georgia Supreme Court rules

The Georgia Supreme Court reversed the Court of Appeals.  To prove a manifest disregard of the law, a party needs to show record evidence that not only was the correct law communicated to the arbitrator, but also that he or she intentionally chose to ignore it.  Simply interpreting the law incorrectly is not manifest disregard.  That’s just a legal mistake.

In short, “[h]owever imperfect the Court of Appeals may have judged the arbitrator’s understanding or application of the law to have been, such a failure by the arbitrator does not amount to concrete evidence of a deliberate decision not to apply the applicable law in making the arbitration award.”

Once again, manifest disregard was virtually impossible to prove.

What if you want to have a more stringent review of an arbitration award?

Manifest disregard is so difficult to prove it likely won’t be of much help in most cases. That’s true even if the arbitrator really blew it on applying the law.  Nor will it help if the arbitrator’s factual findings are way off.  So, what can you do if that worries you?

Perhaps you could agree in your arbitration clause that the award will be reviewable by a court using a standard similar to that for reviewing trial court decisions:  Material and prejudicial errors of law or clearly erroneous fact finding.  Sounds promising, right?

Not so fast.  At one time some courts were receptive to that sort of thing.  But the Supreme Court put the kibosh on that in Hall Street.  That’s the same case that put the kibosh on manifest disregard. It reasoned that it makes more sense to see the FAA’s provisions as “substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can render informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.”   

But the Court did say that a party-agreed standard of review might be used in cases governed by a state arbitration act instead of the FAA.  And the California Supreme court allowed parties to set a standard for vacating an award in a case governed by that state’s arbitration act.  Cable Connection, Inc. v. DIRECTTV, Inc., 190 P.3d 586 (Cal. 2008).  It depends on the state, though.  Don’t try it in Maine.  See HL 1, LLC v. Riverwalk, LLC, 15 A.3d 725 (Me. 2011).

If your case is governed by the FAA, though, relying on state arbitration acts won’t work.  And it is likely to be governed by the FAA.  Cases involving interstate commerce are governed by the FAA, even if they are venued in state court.

The remaining alternative is to provide for an arbitral appeal in your arbitration clause.  Major ADR providers have procedures for that.  The appeal is not in court, but before a group of arbitrators. For example, AAA applies a material and prejudicial error of law or clearly erroneous factual finding as grounds for an arbitration appeals panel to vacate an award.  But parties will only be able to have an arbitral appeal if they agreed to that in their arbitration agreement.  The winner isn’t likely to agree to an arbitral appeal after it has won.

And now?

Two summary thoughts.  First, in all but the most unusual case, forget about using manifest disregard as a ground for overturning an award. That standard is too high to meet in most – if not all – cases.

Second, if you are worried about the arbitrator going off the tracks and making an error of law or erroneous fact findings, consider putting an arbitral appeal in your arbitration clause.  If you plan to use AAA, AAA’s ClauseBuilder Tool  is a good place to start.  You can find that at adr.org.

But consider that carefully.  An appeal provision will add expense and delay a final determination  Delay and expense are what parties try to avoid by choosing arbitration.  Your efforts might be better spent carefully vetting and choosing a good arbitrator you can trust to get the award right.