September 23, 2011

Hall Street, Manifest Disregard, and the Worst of All Possible Worlds

By Paul Kirgis

We have now had enough time since the Supreme Court’s decision in Hall Street Assocs., LLC v. Mattel, Inc. to assess the “manifest disregard” standard for vacatur of an arbitral award, and it seems apparent that the results are not good. Effectively, the courts, including the Supreme Court, have left arbitration law with the worst of all worlds.

In Hall Street, the Supreme Court indulged in the worst kind of judicial obscurantism in addressing whether manifest disregard exists as a ground for vacatur. The case did not raise that issue, of course, so anything the Court said would have been dicta. But if the Court had stuck to its guns and declared that the express grounds in FAA §§ 10-11 are really and truly the only available grounds for vacatur, that probably would have been the death knell for manifest disregard. Instead, the Court declared that FAA §§ 10-11 are exclusive, but then intimated that manifest disregard might still play some role, which the Court declined to explain.

A number of lower courts have now tried to square that circle by positing that manifest disregard survives as a “judicial gloss” on FAA § 10. (Presumably this is different from what it was before, although the distinction seems elusive.) This is becoming the accepted interpretation in New York, as evidenced by Westminster Securities Corp. v. Petrocom Energy Ltd., a case from the Southern District: “While the future of the ‘manifest disregard’ standard is unsettled, . . . , in this circuit, ‘manifest disregard’ has been reconceptualized as ‘a judicial gloss’ on the FAA’s specific grounds for vacatur, and so interpreted, ‘remains a valid ground for vacating arbitration awards.’

Manifest disregard was never a useful legal doctrine. No one really knows what it means, so it cannot be applied consistently. More importantly, courts have routinely declared that it exists while in practice refusing to apply it except in idiosyncratic cases. So it sits there on the books inviting arbitral losers to ratchet up the cost of award enforcement by filing doomed but expensive motions to vacate.

I believe that we need greater judicial oversight of arbitration where an arbitration agreement appears in an adhesory contract. But manifest disregard is not effective for that purpose and creates problems in the commercial cases for which arbitration is best suited. The drafters of the new Restatement of the Law (Third), US Law of International Commercial Arbitration have done well to declare manifest disregard dead for arbitrations arising under the New York Convention. The courts need to follow suit for domestic arbitration.

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Comments

  • The Supreme Court in Hall Street failed to recognize the difference between “vacatur” (not unlike setting aside a judgment; see Section 68 English Arbitration Act of 1996) and “appeal” (from an award to the court, which under Section 69 of that same Act parties can agree to on issues of law, subject to obtaining leave from the court), the US Supreme Court could have limited the grounds for vacatur to strictly what is enumerated in Section 10(a) FAA (throwing out all non-statutory grounds including manifest disregard), and allow parties to agree to include the possibility of appeal in their agreement under the theory of contractual freedom. Back in 2003, I wrote:
    “If the United States Supreme Court were to decide to invalidate all non-statutory grounds pursuant to which one can currently challenge an arbitral award in the vast majority of the Circuits (and thereby confining the losing party to a possible challenge under the non-waivable provisions of §10(a) of the FAA), and at the same time were to recognize the contracting parties’ freedom to choose to include in their agreement arbitral appeal to the competent district court, such a decision would not only safeguard the integrity of the arbitral process but also give the parties the largest possible freedom in crafting what they believe to be the most desirable arbitral proceeding to fit the particular aspects of their contractual relationship. Such a decision would create a welcome end to the uncertainty surrounding these two issues, and undoubtedly prevent much unnecessary litigation and delay tactics.” See Reframing the Dilemma of Contractually Expanded Judicial Review: Arbitral Appeal vs. Vacatur, 3 Pepp.Disp.Res.L.J. 157, 217-218 (2003).

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