'Manifest disregard of the law" are the words often heard in international arbitration conferences as part of the clarion call trumpeted by those seeking to undermine New York as a venue for the conduct of international arbitration. The argument is made that courts in New York (and elsewhere in the United States) use the manifest disregard doctrine as a basis for second-guessing the decisions of arbitrators, thereby undermining the arbitral process. The allegation raises the question, "truth or myth?"
As a factual matter, how often have New York courts (and U.S. courts) actually used the manifest disregard doctrine to vacate an international arbitration award? And, do the courts of other countries have their own ways of undoing arbitral awards that they regard as going beyond what the arbitrators should have done, yet do so under principles that they call something other than manifest disregard? In a recent report, the International Commercial Disputes Committee (ICDC) of the New York City Bar Association looked closely at these issues and made findings that are arresting. Coauthor David Zaslowsky is a member of the committee.
Evolution of the Standard
In Wilko v Swan, a 1953 decision, the U.S. Supreme Court stated:
In unrestricted submissions, such as the present margin agreements envisage, the interpretation of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation.
Succeeding generations of losing parties in arbitration have relied on Wilko's "manifest disregard" phrase in efforts to vacate arbitration awards. Although "manifest disregard" is not included in the Federal Arbitration Act (FAA) as one of the grounds for vacating an award, various circuit courts of appeal began to recognize manifest disregard of the law by the arbitrators as a ground for vacating awards.
The courts have made clear that the manifest disregard standard does not permit awards to be set aside for mere errors of law or because the arbitrators misconstrued the contract. Rather, the standard has been applied narrowly and generally requires that a court find "both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case."
In 2008, the Supreme Court decided Hall Street Associates v. Mattel, The issue there was whether parties had the right to agree by contract that an arbitral award could be challenged on grounds broader than those set forth in the FAA. The Supreme Court held that the FAA sets forth the "exclusive" grounds for vacating an arbitration award. Although the Supreme Court did not take a position on whether awards could be challenged on grounds of "manifest disregard," because that doctrine was often considered a judicially developed, extra-statutory basis for challenging an award, numerous commentators wrote that Hall Street sounded the death knell for "manifest disregard" challenges.
Since Hall Street, the courts have split on this issue. The U.S. Court of Appeals for the Fifth Circuit and the U.S. Court of Appeals for the First Circuit, for example, have held that manifest disregard is no longer a viable ground for challenging an arbitral award. The Second Circuit, which of course includes New York, held in the Stolt-Nielson case, that the manifest disregard standard applied in the rare instances in which the arbitrators knew the relevant legal principle, appreciated that the principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.
In the view of the Second Circuit, when these three things happened, the arbitrators "exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made," meaning that such an award could be challenged under Section 10(a)(4) of the FAA. In other words, despite the fact that the Second Circuit had earlier referred to "manifest disregard" as a ground for vacatur entirely separate from those enumerated in the FAA, the effect of its ruling in Stolt-Nielsen was that "manifest disregard" would henceforth be a way of describing a ground that is included in the FAA. Likewise, the U.S. Court of Appeals for the Ninth Circuit continues to apply manifest disregard.
As a result of the circuit split, there remains only a limited number of circuits in which manifest disregard can be relied on to challenge any arbitral award, much less an international one. Moreover, in the Second Circuit, where manifest disregard remains alive and well, the doctrine will not be applied to awards rendered in international arbitration cases conducted outside the United States, thus further limiting its application.
Furthermore, empirical analysis reveals how limited the application of the doctrine is. In a 2003 decision, the Second Circuit stated that, since adopting the doctrine in 1960, it had vacated arbitral awards in no more than four cases out of approximately 48. Five years later, the Second Circuit noted that it had heard an additional 18 cases involving manifest disregard challenges and vacated only one, while remanding two cases for clarification. Since then, the Second Circuit has heard 17 more cases seeking to vacate an award on manifest disregard grounds, but has not vacated a single award on that basis.
Significantly, none of the arbitral awards vacated in the Second Circuit on grounds of manifest disregard was an international award or an award under the New York Convention. Moreover, apart from the Second Circuit, according to the ICDC Report, no federal circuit court has ever rendered a decision vacating an international award on grounds of manifest disregard. And, perhaps even more surprising was the committee's finding that, at the district court level across the country, the committee's research uncovered only two cases, in the Eastern and Middle districts of Pennsylvania, in which an international award was vacated on manifest disregard grounds.
Standard in Other Countries
Among the most active advocates of their home venue as compared to New York have been the British. On the issue of comparing English law to manifest disregard, however, the English should tread lightly. Under Section 69 of the English Arbitration Act of 1996, English courts may vacate an arbitral award for any legal error caused by the arbitrator's misapprehension or misapplication of the applicable law—a standard much broader than manifest disregard. Although Section 69 may be waived, Section 68 may not be, and it considers numerous grounds on which awards can be overturned for "serious irregularity affecting the tribunal, the proceedings or the award," including "uncertainty or ambiguity as to the effect of the award" and "failure to comply with the requirements as to the form of the award."
As the ICDC Report notes, a number of cases in which awards have been vacated under Section 68 did so on grounds that sound very much like the manifest disregard standard. In one case, for example, the court observed that, for a tribunal's failure to apply the law in question to qualify as exceeding its powers under 68(2)(b), "a conscious disregard of the provisions of the chosen law is a necessary but not a sufficient requirement."
The grounds upon which an arbitral award may be challenged in Switzerland are limited and in line with the statutory grounds provided in other arbitration-friendly fora. Nevertheless, in one case, the Swiss Supreme Court found that a Court of Arbitration for Sport tribunal had wrongfully disregarded the material legal force of a binding decision of the Zurich Commercial Court, thus committing a breach of res judicata and therefore of procedural public policy.
In another case, the Swiss Federal Tribunal set aside an ad hoc international arbitral award rendered in Geneva after it found that the arbitral tribunal had disregarded the respondent's arguments on statute of limitations, basing its vacatur on the ground that the arbitral tribunal had failed to take the respondent's position into account in its decision, thereby depriving the respondent of its opportunity to be heard.
France, like Switzerland, has a reputation of giving great deference to arbitration awards. There, too, however, as the ICDC Report notes, awards have been vacated on grounds that, at bottom, appear to be the result of the court's believing that the arbitrators made a serious error. In one case, for example, the Cour de Cassation, France's highest civil court, recently held, in the context of a domestic award, that an award should be vacated because it was issued with no reference to equity where the arbitration agreement provided for the arbitrators to decide ex aequo et bono.
Most U.S. practitioners have understood intuitively that it was unjustified for those outside the United States to charge that the manifest disregard doctrine was all but equivalent to permitting courts to apply appellate review to international arbitral awards. The ICDC Report has now debunked that notion empirically. Not a single federal appellate court decision, and only two district court decisions, have ever vacated an international arbitral award on grounds of manifest disregard of the law.
Furthermore, the reality is that there will occasionally be arbitral awards that are so egregious that they deserved to be annulled. It appears that even countries that are considered to be arbitration-friendly have some safety valve mechanism to deal with such situations. Although it is not called "manifest disregard," it achieves the same purpose and, accordingly, it is inappropriate for others to attack U.S. courts on the basis of its safety valve.
New York City is one of the world's leading business and cultural centers. It has a welldeveloped and predictable commercial law and is home to a large number of professionals with unrivaled expertise in providing dispute resolution services. The city is home to numerous preeminent experts in international arbitration. New York law and courts enforce agreements to arbitrate and support the autonomy of the arbitral process, while also giving great deference to arbitral awards in the enforcement stage. For those who seek greater use of New York as an international arbitration venue, the ICDC Report will be useful to show that the oft-touted criticism of New York based on manifest disregard of the law fails the reality test.
This article was written by Lawrence W. Newman and David Zaslowsky of the New York office of Baker & McKenzie LLP. It was published originally in the January 24, 2013 New York Law Journal