No manifest disregard of the law by arbitrator

Sunoco v Texaco

THIS was a failed attempt by Sunoco in a US federal court to upset the award of a sole arbitrator mutually chosen by the parties.

An arbitration award is difficult to set aside in the US. There are very few grounds permitted under US statutes, and even fewer grounds by judge-made law. However, parties still sometimes try.

One argument in this case was that the arbitrator was in 'manifest disregard of the law'. That phrase arose from a side remark made in a case before the US Supreme Court in 1953, Wilko v Swan (346 US 427). The court used it to illustrate the finality of an arbitrator's findings, saying that awards could not be set aside for errors of law 'in contrast to manifest disregard'. The Wilko case was later overturned by the Supreme Court on other grounds, but no further comment was made on this point.

The several US courts of appeal are divided over whether this special phrase still has life. Many have refused to apply it, but the Second Circuit Court of Appeals in New York recently used the expression 'manifest disregard' to reverse an arbitration award and it was that case which apparently inspired Sun's attack.

The recent case, Halligan v Piper Jaffray, Inc (148 F 3d 197, 2d Cir 1998) involved age discrimination in employment which is governed by statute. The arbitrators had denied a strong age discrimination claim. Following practice in the employment field, they gave no reasons for their award. The court, after reviewing the evidence presented to the arbitrators, held that the award was in 'manifest disregard' of the law, saying 'we are inclined to hold that [the arbitrators] ignored the law or the evidence or both.'

The Sunoco/Texaco case involved a sales contract for purchase of 'spray oil'. The arbitrator's award held Sunoco in breach of contract. Sunoco's breach was failing to make a timely rejection of a vessel fixed 'on subjects' by Texaco to load at Sunoco's terminal when Sunoco could and should have known that its terminal would not accommodate this particular vessel. The wording of the contract was determinative. The court held that, in US law, there need only be 'colourable justification' for the arbitrator's ruling.

Relying upon second circuit authority established prior to the Halligan case, the judge said that 'manifest disregard' clearly means 'more than error or misunderstanding'. He quoted from an earlier case, saying, "When arbitrators explain their conclusions . . . in terms that offer even a barely colourable justification for the outcome reached, confirmation of the award cannot be prevented by litigants who merely argue, however persuasively, for a different result".

In this case, the court found a 'strong basis' for the arbitrator's decision and was 'mystified as to how Sun can ask us to rule that the arbitrator's interpretation of the term [details] was in manifest disregard of the law.' Disagreement with the arbitrator's calculation of damages in a separate award was likewise dismissed by the Court.

A further attack on the awards for alleged partiality of the arbitrator was also rejected. The court held that bias of an arbitrator must be 'direct and definite; mere speculation is not enough.' The Court said, 'The mere fact that the sole arbitrator's former law firm represents a company that participated in a joint venture with Texaco does not establish evident partiality.'
Arbitrator: R Glenn Bauer. Appearances: Christopher Keane, Keane & Marlowe, for Sun; Douglas R Burnett, Hill Rivkins, for Texaco. (US Dist Ct, SDNY) Sept 30, 1999 (98 Civ 8447, Conner, DJ)

Proceedings stayed pending arbitration

WHERE a plaintiff brought related claims against different defendants in the same proceedings, and one claim was subject to arbitration but the other was not, an Australian appellate court confirmed that the presence of the latter claim did not change the nature of the former claim from being "capable of settlement by arbitration". The court stayed the proceedings in connection with the arbitrable claim pending the outcome of arbitration. (Burlingram [Burlingham Underwood])

Exemption from liability

THE Dubai Court of Cassation has held that a carrier was not liable to pay for damages caused by a fire to goods on board a vessel, on the grounds that the fire was due to a collision with another vessel and was not the fault of the carrier or the carrier's employees. Therefore, failing the consignee being able to prove otherwise, the carrier was exempted from liability under the United Arab Emirates maritime code.

The court also held that, in a contractual relationship evidenced by a bill of lading, the consignee cannot rely on the provisions of the UAE maritime code unless the carrier has committed a crime, cheating or a gross negligence, otherwise the contractual relationship will prevail.