Case Watch: For Arbitrators
‘Manifest Disregard’ Still Alive as a Basis for Challenging Awards
On July 3, 2012, the Second Circuit Court of Appeals issued a summary order denying a petition to vacate an arbitration award based on a “manifest disregard of the law” challenge. The decision in and of itself is not unusual; most arbitration awards are confirmed and not vacated, and further, manifest disregard of the law is not a challenge most courts are willing to consider under the Federal Arbitration Act as a basis for setting aside a arbitration award.
Nonetheless the underlying case has drawn a lot of attention because the size of the award – $20,580,514.52 – and because it was awarded against Goldman Sachs Execution & Clearing, LP. The case is Goldman Sachs Execution & Clearing L.P. v. The Official Unsecured Creditors; Committee of Bayou Group, LLC, et al. 10-5049-cv (2nd Cir. 2012).
After a May 2008 bankruptcy filing by Bayou Fund LLC, a hedge fund for which Goldman had been the sole clearing broker and prime broker, the Creditors’ Committee was authorized by the bankruptcy court to pursue any claims against Goldman. Under an arbitration agreement, the Committee filed a claim against Goldman in accordance with FINRA (Financial Industry Regulatory Authority) rules. The arbitration panel rendered an award on June 24, 2010. Goldman timely filed a petition to vacate the award and the Committee filed a cross petition to affirm. The District Court confirmed the award, and Goldman appealed, asserting primarily that the award should be vacated because it was made “in manifest disregard of the law.”
Many of us thought under federal law (not Georgia law) that “manifest disregard of the law” was a dead challenge after the U.S. Supreme Court decision in Hall Street Associates, L.L.C. v. Mattel, Inc. 552 U.S. 576 (2008) [Statutory provisions for vacatur are exclusive under Section 10 of the FAA]. Some federal circuits, including the Second, however, have not fully set aside manifest disregard. T.C. Metlas, LLC v. Dempsey Pipe & Supply, Inc. 592 F. 3d 329 (2nd Cir. 2010) [“manifest disregard remains a valid ground for vacating arbitration awards.”]
Still, in its summary order the Second Circuit court stated that manifest disregard required a very high standard to be met in order for the arbitration award to be vacated:
In applying the manifest disregard standard, we consider “first, ‘whether the governing
law alleged to have been ignored by the arbitrators was well defined, explicit, and clearly
applicable,’ and, second, whether the arbitrator knew about ‘the existence of a clearly governing legal principle but decided to ignore it or pay no attention to it.’” (Goldman p. 4)
Noting that misapplication of an ambiguous law is not manifest disregard, the Court also said, “Where, as here, an arbitration panel does ‘not explain the reason for [its] decision, we will uphold it if we can discern any valid ground for it.’”
Possibly it was this sort of time consuming and complex “manifest disregard” analysis that the Mattel court was concerned about when it rendered its decision on the exclusivity of statutory vacatur provisions. Or it might have been the issue of unnecessary judicial intervention in the contracting and arbitration process agreed upon by the parties and considered to be enforceable under federal arbitration policy. See AT&T v. Concepcion, 137 S. Ct. 1740 (2011). We don’t know as yet.
We also don’t know why the summary order in Goldman took 10 pages to draft while referencing the legal applications for manifest disregard in cases as far back as 1959. Nor do we know why the summary order took two years to issue from the date of the appeal. Nor do we know whether the 2010 position of the Second Circuit may have encouraged parties to pursue the appeals based on that circuit’s continuing commitment to vacate awards based on manifest disregard of the law. Does this order provide any better guidance to arbitrators for future hearings?
What we do know is that the Second Circuit concluded that manifest disregard of the law requires an “extraordinary demanding showing” and that vacatur is rare. Does this process of appeal further the federal policy on arbitration as expedient and more cost effective?
Is this appellate process necessary for arbitration to be considered “transparent enough” for everyone? Interesting questions all and helpful to the on-going discussions on why we have alternatives to litigation as a means of dispute resolution.