Reinsurance Focus

The principal basis for seeking vacation of an arbitration award, other than the grounds contained in the Federal Arbitration Act (“FAA”) (9 U.S.C. section 10), is that the award was made in manifest disregard of law. Five of the United States Circuit Courts of Appeal have issued opinions dealing with this principle in recent months, with three of the opinions being issued in a ten day span during early August. All of these opinions hold that vacating an arbitration award on this basis is an extraordinary occurrence.

• The Eleventh Circuit issued a very strong statement as to the finality of arbitration awards, holding that to prove manifest disregard of law, one must submit clear evidence that an arbitrator was conscious of the law and deliberately disregarded it. B. L. Harbert Internatiuonal, LLC v. Hercules Steel Co., Case No. 05-11153 (11th Cir. Feb. 29, 2006). The Court strongly cautioned the bar against appealing arbitration awards on the basis that the result was unacceptable.
• The Seventh Circuit held that manifest disregard of the law is limited to situations in which arbitrators “direct the parties to violate the law ….” Wise v. Wachovia Securities, Case No. 05-2640 (7th Cir. June 7, 2006). The Seventh Circuit concluded that due to the extraordinarily narrow grounds for vacating an arbitration award, the FAA really does not provide for the “judicial review” of arbitration awards.
• The D.C. Circuit held that the manifest disregard of law standard requires proof that the arbitration panel ignored well defined, explicit law that was clarly applicable, emphasizing that decisions based upon debatable points of law and disputed issues of fact did not meet this standard. Kurke v. Oscar Gruss and Son, Inc., Case No. 05-7018 (D.C. Cir. July 18, 2006).
• The Ninth Circuit recently held that a decision on choice of law did not meet the manifest disregard of law standard since it was not “completely irrational.” Parsons v. Polen, 2006 WL 1082820, Case No. 04-35654 (9th Cir. April 25, 2006) (unreported opinion).
• In the only opinion that vacated an arbitration award, the Fourth Circuit vacated an arbitration award, where an arbitrator implied a one year statute of limitation into an agreement that was silent as to the time for making a claim, and the law of the applicable state provided for either a three or a six year limitation period. Patten v. Signator Insurance Agency, Inc., Case No. 05-1148 (4th Cir. March 13, 2006).

These opinions demonstrate two principles of interest: (1) it is very difficult to convince a Court to vacate an arbitration award under the FAA; and (2) courts are becoming increasingly annoyed with what they view as frivolous motions to vacate awards under the FAA. The mere fact that five of the federal Circuit Courts of Appeal have addressed this issue recently illustrates the importance that the Courts attach to this issue.

The Seventh Circuit was correct in stating that the FAA simply does not provide for what is considered to be “judicial review” in a litigation context. Awards simply will not be vacated based upon alternative interpretations of evidence, sufficiency of evidence, or issues of law that are fairly debatable. Even if one can anticipate that an adverse award is likely, it is very difficult to establish a record that will support vacating an award under the FAA. Finally, if your arbitration occurs in the Eleventh Circuit, it is clear that motions to vacate awards and appeals of the denial of motions to vacate awards may be met with the imposition of sanctions unless there is a clearly arguable basis under the FAA to vacate the award.