When is final really final?

WHAT should one expect from an arbitration award? If the award is perfect and meets all criteria, there would obviously be no justification to petition the courts for a review and a possible vacatur. But that is not how life works. Even if the arbitrators considered all issues raised and decided all questions posed, and the award meets the test of fundamental rationality, there is no assurance that the losing party will not petition the court for a second bite at the apple.

Recently, someone inquired about the finality of arbitration awards in the US. A couple of years ago I wrote an article for this magazine that included reader contributions. One of the statements was that the greatest virtue of arbitration is its finality. It used to be that when a panel issued a final award, the case was over. In reality, it is still so for nearly all maritime cases, but in some instances, you will have a flurry of activity following the issuance of the award such as complaints by the losing party, motions to confirm or vacate, appeals and, on the rare occasion, an application to the Supreme Court.

Maritime arbitration in the US is governed by the Federal Arbitration Act of 1925 (FAA). It was enacted as Title 9 of the United States Code entitled Arbitration in 1947 with subsequent amendments. The statute, by design, included certain safeguards to protect the arbitral process with respect to arbitrator conduct and judicial review. Specifically (9 USC in Section 10) it was provided that an award may be vacated where it was procured by corruption, fraud or undue means, where there was evident partiality, where there was misconduct by the arbitrators with respect to procedural matters prejudicing the rights of either party, or where the arbitrators exceeded their powers or so imperfectly executed them so that a final and definite award was not made.

The FAA applies to any transaction for which the governing contract contains an arbitration clause. With that in mind, it is understandable that a great number of cases cited in the annotated version of Title 9 are not maritime arbitrations. With the increase in litigation and the resulting overcrowding of the dockets, more disputes involving non-commercial matters, as well as statutory issues, have been - and continue to be - referred to arbitration.

A line of court cases has confirmed that, traditionally, judges view their roles as very limited with respect to arbitration. As long as rational grounds for the arbitrators’ decision can be inferred, an arbitration award should be confirmed. Similarly, the courts have ruled that the erroneous application of rules of law, or the fact that an arbitrator erred on the facts, are not grounds for vacating an arbitrator’s award. In other words, the courts have taken the position that they should not retry matters already decided in arbitration.

Through the codification of the FAA, and particularly the inclusion of Section 10, Congress intended to provide not merely for any type of arbitration, but for an impartial one. Despite this desire to maintain an overseeing role, it should not result in upsetting the general advantages of arbitration - speedy, efficient and cost-effective proceedings. To this end, Section 10 has worked well in maritime cases; however, an elusive element has inserted itself i.e., “manifest disregard of the law.”

Over the years, this phrase has appeared in arguments and has been referred to in decisions. It seems that it had its origin in the 1874 US Supreme Court decision of US v Farragut. In its decision, the court held that an arbitration award could be vacated for “manifest mistake of the law” as well as other causes, such as fraud, misconduct or arbitrators exceeding their power. It is odd that this phrase was coined some fifty years before the FAA was passed and some 75 years before Title 9 was codified, without being considered when Section 10 of the act was written.

More time went by, and had it not been for the dictum in the Supreme Court decision in Wilko v Swan in 1953, manifest disregard of the law would probably never have received a wake-up call. Wilko was a securities case, and addressed the conflict between the FAA and the Securities Act. The specific language from the decision stated that “in unrestricted submissions, such as the present margin agreements envisage, the interpretations 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.”

The reference to manifest disregard had no bearing on the Wilko decision. The statement was gratuitous, but nevertheless became the seed for future arguments. In fact, it has taken on a life of its own and can be described as the quintessential example of a simple phrase in itself trying to become the law.

In 1989, the Supreme Court reversed Wilko in the case of Rodriguez v Shearson/American Express. The decision did not at all address the issue of manifest disregard of the law referred to in Wilko. The reversal of the earlier case should have placed Wilko, including the dictum, to rest. Unfortunately, that did not happen. The case keeps being cited.

Although admiralty law occupies a special niche in the overall body of contract law and is governed by underlying codes, conventions and, on occasion, idiosyncrasies, decisions involving statutory law are now encroaching on commercial and maritime arbitrations. We must expect that even in maritime cases principles of statutory law involving employment disputes (race, creed, age, etc), consumer claims or issues of public policy will be cited as precedents.

There is an ever-growing number of non-maritime cases, mostly securities and statutory law decisions, in which manifest disregard of the law has been argued and ruled on. In the context of these claims, the manifest disregard argument makes absolute sense because of that impact upon the public. By comparison, the list of maritime cases is relatively short, which in itself speaks for the quality of dispute resolution in this field.

• STAV VIKING [500 F 2d 424 (2d Cir 1974)]. The court upheld the arbitrators’ finding despite the fact that it considered the award to be based on a “clearly erroneous interpretation of the contract,” but not irrational and, therefore, it should not be a basis for upsetting the award. The Court of Appeals stated, “Whatever arbitrators’ mistakes of law may be corrected, simple misinterpretations of contracts do not appear one of them.” (SMA Award 783)
• KISSAVOS [579 F 2d 691, 704 (2d Cir 1978)]. The Court of Appeals confirmed the lower court decision and upheld that the arbitrators’ ruling will not be disturbed if there is “even a barely colourable justification for the outcome reached ... .” (SMA Award 1243)
• FEDERAL ST. LAURENT [80 Civ 0839 (SDNY September 1980) slip opinion, 1980 US Dist LEXIS 9347]. The court was close to finding manifest disregard of the law, but in the end, concluded that,

  Were the court convinced that, under the factual circumstances, the panel correctly had characterized Finagrain’s settlement letter as a binding waiver, then the majority’s further conclusion that upon Federal’s later offer of compromise . . . the waiver “ceased to be effective” might well merit a vacation of the award for “manifest disregard of the law.” For if there was a valid, binding waiver, it could not be thus rescinded.

  and that the arbitrators did not mean what they said. (SMA Award 1380)

• PEREGRINE X [02 Civ 1209 (BSJ) April 16, 2003]. The bareboat charterers filed a motion to modify or vacate a Partial Final Award and a Final Award on the basis of FAA Sections 10(a)(4) and 11(b), manifest disregard and misconduct, bias or partially of the arbitrators. The claimant failed on all points, including the manifest disregard issue on which the court commented that, “Charterers has put forth no cognizable evidence to show that the arbitrators were aware of a controlling doctrine and ignored or refused to apply it.” (SMA Award 3654 and 3709)
• ARISTIDIS [184 F.Supp 2d (SDNY 2002). In this case, the time-charterer who lost in a London proceeding against the owner, claimed for indemnity against the voyage charterer in a New York arbitration. The panel majority rejected voyage charterer’s arguments on the merit (not because it considered the matter foreclosed by the London result). The application was denied, with the judge concluding that the majority’s opinion did not constitute “manifest disregard of the law,” but rather expressed a “manifest disagreement with [the charterers].” The Court of Appeals confirmed the award. In doing so, the court stated that, “In any event, it is not our role to substitute our judgment for those of the arbitrators . . . this is why our standard for vacatur is so very high. We review only for a clear demonstration that the panel intentionally defied the law.” (Society of Maritime Arbitrators Award 3686)

  As my old friend Glenn Bauer stated in one of his articles, manifest disregard of the law is not a doctrine, it is not a principle, it did not originate in a textbook, it did not appear in any statute. It is a simple phrase which was unnecessary for the decision of Wilko.

  The limited provisions of Section 10 should be a reminder for the courts to scrutinise closely the appellant’s arguments with respect to the motivation and need to re-examine arbitration awards. The concept as such serves as an appropriate tool to encourage fairness and predictability in statutory arbitration cases, but, for maritime arbitration awards, arising out of private contracts, let a final award be final.