Author: Esther Loh*
| Jurisdictions: New York United States |
Topics: Procedure and Grounds for Setting Aside Jurisdiction and Powers of the Courts in Matters of Arbitration Generally |
In September 2019, the Second Circuit in Weiss v. Sallie Mae[1] reversed the trial court’s decision to vacate an award, on the basis that the arbitrator had not manifestly disregarded the law. Even so, the court reaffirmed the continued survival of the controversial doctrine of manifest disregard as a valid ground for vacating arbitral awards.[2] The decision further cements the divide between the federal circuits as to whether the doctrine survived the Supreme Court’s decision in Hall Street v. Mattel[3] as a valid ground for vacating awards.
BRINGING MANIFEST DISREGARD CHALLENGES DURING ENFORCEMENT PROCEEDINGS
Whether courts can legitimately vacate an award[4] because the arbitrator manifestly disregarded the law remains disputed, because this is not explicitly mentioned in Section 10 of the Federal Arbitration Act (the “FAA”).[5] Section 10 specifies four grounds for vacating awards: (i) where the evidence was procured by corruption, fraud or undue means; (ii) where there was evident partiality or corruption in an arbitrator; (iii) where the arbitrators were guilty of misconduct; or (iv) where the arbitrators exceeded their powers. If an award is vacated and the time for making the award has not expired, U.S. courts may direct a rehearing by the arbitrators.[6] The validity of manifest disregard as an independent judicially-created[7] ground for vacatur was questioned by the Supreme Court in Hall Street.[8] However, the court declined to rule definitively on the issue. Thus, following Hall Street, there emerged a circuit split as to whether the doctrine survived the court’s ruling.[9]
THE SECOND CIRCUIT IN WEISS
Weiss concerned a domestic arbitration where Weiss sued a lender who called her multiple times a day to collect outstanding debt. When proceedings started, a class action lawsuit against the lender had already settled on conditions precluding class members from recovering damages from the lender. Despite concluding that Weiss was a member of the class and thus bound by the settlement, the arbitrator awarded Weiss $108,500 in damages against the lender.
The court reiterated the “heavy burden”[10] that litigants challenging an award on manifest disregard challenges need to meet in order to succeed, as a mere error of law will not suffice. However, reaffirming that manifest disregard continues as a valid basis for challenging awards, the court also then remanded the case, instructing the arbitrator to “clarify whether he intended to deem the class notice sufficient and, if determined to be sufficient, to construe the general release in the first instance and vacate or modify the award as necessary”.[11] In essence, rather than simply upholding or vacating the award, the court directed the arbitrator to revisit the merits, clearly suggesting a “correct solution” to be arrived at. Such an approach can seriously undermine the finality of awards and allow courts to substitute the arbitrator’s judgment of the merits with their own.[12]
MANIFEST DISREGARD AND INTERNATIONAL ARBITRATION AWARDS RENDERED IN NEW YORK
Chapter 2 of the FAA incorporates the New York Convention[13] into U.S. law.[14] The court in which confirmation of the award is sought shall confirm the award unless one of the specified grounds for refusal under Article V of the New York Convention applies.[15] Article V(1)(e) of the Convention states that an award may be set aside “by a competent authority of the country in which, or under the law of which, that award was made”.[16] Awards issued in the U.S. are therefore subject to vacatur on the same grounds as domestic awards like Weiss.[17]
New York, an important hub for international arbitration, sits within the Second Circuit. Concerns have previously been raised about how the existence of manifest disregard challenges may affect the choice of New York as a forum for foreign arbitrations, due to the risk of awards being set aside.[18] Addressing whether these concerns are justified is outside the scope of this post, as it requires assessing and comparing the available grounds for review of awards in other international arbitration forums. However, it should be noted that there are no penalties for parties bringing enforcement challenges on trivial grounds in the Second Circuit. Without these additional procedural safeguards, it is possible that the mere availability of such challenges can allow parties to consistently raise challenges and force the award creditor to relitigate issues it had already won in the arbitration.[19]
CONCLUSION
Having grounds for review of awards assure parties that serious procedural defects will be addressed. However, Weiss and the ongoing disagreement among the federal circuits shows that the scope and content of those grounds are still subject to significant debate. In 2010, the Supreme Court again declined to rule on whether manifest disregard survived Hall Street.[20] Given the increasing circuit split on the issue, however, we might expect the court to clarify the doctrine in the near future.
[1] Weiss v. Sallie Mae, Inc., 939 F.3d 105 (2d Cir. 2019).
[2] Id. at 109.
[3] Hall Street Assoc.’s v. Mattel, Inc., 552 U.S. 576 (2008).
[4] See generally Victoria Orlowski, FAA Section 10 Applications to Vacate an Award (Including “Manifest Disregard”), in International Arbitration in the United States 503 (Laurence Shore et al. eds., 2017).
[5] Federal Arbitration Act, 9 U.S.C.A. § 10(a) (2002).
[6] Id. § 10(b).
[7] See generally Jack Coe, The Curious Case of Manifest Disregard [of the Law], Kluwer Arbitration Blog (May 17, 2020), http://arbitrationblog.kluwerarbitration.com/2010/05/17/the-curious-case-of-manifest-disregard-of-the-law/ (tracing the development of the doctrine and explaining its origin from a piece of dictum in Wilko v. Swan, 346 U.S. 427 (1953)).
[8] Supra note 3, at 583–85.
[9] See Liz Kramer and Bri’An Davis, Manifest Disregard: The Circuit Split Persists, American Bar Ass’n. (Jul. 6, 2015) (the Fifth, Eighth and Eleventh Circuits have held that manifest disregard did not survive, whilst the Second, Fourth, Seventh, Ninth and Tenth Circuits continue to allow manifest disregard challenges).
[10] Weiss v. Sallie Mae, Inc., 939 F.3d 105, 109 (2d Cir. 2019).
[11] Id. at 111.
[12] See J.P. Duffy IV & Philip Danziger, Is Manifest Disregard Alive and Well in the Second Circuit?: A Remand to Find Out, Kluwer Arbitration Blog (Nov. 12, 2019), http://arbitrationblog.kluwerarbitration.com/2019/11/12/is-manifest-disregard-alive-and-well-in-the-second-circuit-a-remand-to-find-out/ (explaining how the remand in Weiss undermines finality and the functus officio doctrine, which states that an arbitrator’s mandate is lost once the award is issued).
[13] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Jun. 6, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38 [hereinafter New York Convention].
[14] Federal Arbitration Act, 9 U.S.C.A. § 201 (1970).
[15] Id. § 207.
[16] New York Convention, supra note 13, art. V(1)(e).
[17] Orlowski, supra note 4 at 505–06.
[18] See Comm. on Int’l Com. Disp. of the Ass’n of the Bar of the City of New York, The “Manifest Disregard of the Law” Doctrine and International Arbitration in New York, 24 Am. Rev. Int’l Arb. 209 (2013).
[19] Duffy & Danziger, supra note 12.
[20] Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 670 (2010) (see footnote 3).
*J.D./LLB Dual Degree Candidate 2022, Columbia Law School and UCL.