Manifest disregard of the law - Non-statutory ground

Manifest disregard of the law

AS arbitration becomes more common in areas of the law traditionally left to the courts, such as employment and consumer law, US courts that have not previously had to deal with petitions to vacate awards under the Federal Arbitration Act have issued decisions regarding the non-statutory ground of "manifest disregard of the law."

New York is the traditional site of maritime arbitrations in the United States, and the United States District Court for the Southern District of New York is the court most likely to hear and decide a motion to vacate such an award. Some of the recent decisions from other courts involving other areas of law have caused maritime lawyers in New York to wonder whether these decisions, that arguably breathe some life into the doctrine, would cause judges in the Southern District of New York to be more inclined to vacate an award in a typical maritime, commercial dispute. The answer, so far, seems to be, "No." See, e.g., Page International Ltd v Adam Maritime Corp, 53 F Supp 2d 591 (SDNY 1999) (Judge Berman); Duferco, SA v Ocean Wide Shipping Corp, 2001 AMC 536 (SDNY 2000) (Judge Berman); Possehl v Shanghai Hai Xing Shipping, 2001 US Dist LEXIS 2169 (SDNY 2001) (Judge Sweet). The awards at issue were majority decisions over principled dissents. The court refused to vacate the majority awards in each case.

The judges reaffirmed existing case law that the court's role in deciding whether to vacate an award was quite limited "in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation." In particular, the non-statutory ground of "manifest disregard of the law" represents a "high hurdle" to overcome. There must be "something beyond and different from a mere error of law or failure on the part of arbitrators to understand and apply the law."

Accordingly, it remains extremely difficult to persuade a court to vacate a maritime arbitration award on the basis of "manifest disregard of the law." As a result, the decision of the arbitrators in any given dispute will most likely be the final word on the dispute.

Judge Sweet, in Possehl v Shanghai Hai Xing, addressed two procedural points that are of practical importance, but not often the subject of judicial opinion. The Federal Arbitration Act gives a party "three months" after the award is "filed or delivered" within which to move to vacate it. Judge Sweet found that "three months" meant ninety days and that the time period started from the day the moving party received the award, not the date of the award itself. He also found that service of the petition to vacate upon the other party's New York counsel in the arbitration proceeding was sufficient.

Limited good faith

THE House of Lords recently gave its long-awaited ruling in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd and Others. Among other things, the judgment means that, unless fraud is proven, claims may still have to be paid even when an assured has made misrepresentations and withheld relevant information at the claim stage.

The assured, Manifest Shipping, owned a ship called the Star Sea. A fire was accidentally started in the engine room, causing damage. The ship then suffered further damage and became a constructive total loss when the fire could not be extinguished. It was held as a matter of fact that the fire could not be extinguished because the vessel was unseaworthy in that the master did not know how to use a particular fire-extinguishing system properly, and because there were faults in the ship which meant that this extinguishing system would not work effectively.

Insurers argued that the assured had so-called blind-eye knowledge that the ship was unseaworthy, due to the pre-existence of reports showing that similar unseaworthiness had resulted in fires not being extinguished on two Star Sea sister ships. The House of Lords disagreed, saying that the fact that the assured ought to have known of the unseaworthiness was not enough to show that it suspected or realised the true position but refrained from making enquiries.

Insurers also argued that the assured was in breach of its duty of good faith because it had failed to disclose the above reports until the second day of the trial. The House of Lords held that the finding by Hirst J in the Litsion Pride (1985) 1 Lloyd's Report 437 - that the duty of good faith in the claims sphere extends to culpable misrepresentation or non- disclosure - should no longer be treated as a sound statement of the law. The assured's duty of good faith under Section 17 of the Marine Insurance Act was a duty of honesty limited to not committing fraud at the claims stage. It was held that the insurers had failed to prove fraud in the assured not disclosing the reports until very late in the day. The reports had properly been withheld as privileged under the rules of litigation until the privilege was waived. In any case, once litigation had started, its rules governed the behaviour of the parties.

This decision follows a trend of limiting the availability of avoiding a policy from inception and, more importantly, limiting the duty of continuing good faith. Insurers beware.

Last voyage orders

FOLLOWING the decision of the charterers of the Ambor to discontinue their appeal against the decision of Mr Peter Gross QC in owners' favour (Marimpex Mineraloel Handelsgesellschaft mbH & Co KB v Compagnie de Gestion et D'Exploitation Ltd - The Ambor and The Once - [2001] 1 All ER (Comm) 182 and [2001] CLC 138, the position concerning last voyage orders given in relation to the Shelltime 4 charter party is now confirmed.

The high court determined that the last voyage clause in the Shelltime 4 charter party was different to that in the Shelltime 3 charter party, such that charterers were obliged to give orders which would result in the redelivery of the vessel within the agreed charter period and that it did not allow them to give orders which would inevitably result in redelivery outside the agreed charter period (which is the position under Shelltime 3).

Charterers' main argument at the first instance hearing - and indeed as was to be raised at the Court of Appeal - was that consistency was required between fora and as between similar clauses. However, an arbitration tribunal recently reached the same decision as the court - as published in LMLN 4/01 - that the two clauses were different and so the decision of the Court of Appeal in World Symphony (Shelltime 3) had no effect, thus removing the central plank of charterers' case. This may have been a factor in their withdrawal.