The Second Circuit, in a Summary Order, reversed a decision of a district court in Connecticut which found an arbitral panel’s award in manifest disregard of a Connecticut statute. Sotheby’s Int’l Realty, Inc. v. Relocation Group. LLC, 2015 WL 64265 (2nd. Cir. Jan. 6, 2015). Applying the great deference given to arbitral awards, the Court stated, “[a] motion to vacate filed in federal court is not an occasion for a de novo review of an arbitral award.” The district court appeared to have done just that, engaging in an extensive analysis of the Connecticut statute, including reference to numerous unpublished opinions, which the Second Circuit found “problematic”.
In Sotheby’s, two real estate brokerage firms each claimed entitlement to a $400,000 commission due to the sale of a $16 million property in Greenwich Connecticut. (Sotheby’s Int’l Realty, Inc. v. Relocation Group, LLC, 987 F. Supp. 2nd 157 (D. Conn. 2013)). Pursuant to rules of the relevant real estate associations, the matter was referred to a three-member arbitration panel which awarded Relocation Group the commission it sought. The associations’ rules also mandated that the arbitral panel provide only the monetary amount of the award.
The district court, in a lengthy opinion, found that the arbitral panel had manifestly disregarded the law by improperly applying a Connecticut statute which requires real estate brokers to meet certain statutory conditions before commencing an action to recover a commission.
The Second Circuit reviewed the district court’s vacatur decision de novo, stating that, “Manifest disregard is a severely limited doctrine that imposes a heavy burden on the party seeking to vacate an arbitral award. ‘[I]t is a doctrine of last resort—its use is limited to those exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent’ “. The Second Circuit imposes three requirements in order to find that an award was in manifest disregard of the law. First, the court considers whether the law that was allegedly ignored was clear. Second, the court must find that the arbitrators erred in their application of the law and reached the wrong outcome. Third, the court must find that the arbitrators knew of the law’s existence and its applicability to the matter at hand.
The Second Circuit found that the district court failed to apply the test, instead opting for a detailed examination of the statute. Moreover, the district court did not find the statute to be ‘clear’ but found that construing the statute by its terms would be ‘definitively absurd’. The district court also failed to examine the record for any ‘barely colorable justification’ for the arbitral panel’s decision and failed to address alternative readings of the the statute that might have supported the panel’s decision.
While the Second Circuit maintains “manifest disregard’ as a viable basis for vacating arbitral awards under the FAA, since its decision in Stolt-Nielsen,according to a report of the New York City Bar Association, it has heard seventeen cases seeking to vacate awards on manifest disregard grounds but has not vacated a single award on that basis. The arbitral panel’s monetary award here was not one of the ‘exceedingly rare instances of some egregious impropriety.’