Manifest Disregard: Challenging Arbitral Awards and Discovery in Arbitration - Part 3 Chapter 21 - The Practice of International Litigation - 2nd Edition
Lawrence W. Newman has been a partner in the New York office of Baker & McKenzie since 1971, when, together with the late Professor Henry deVries, he founded the litigation department in that office. He is the author/editor of 4 works on international litigation/arbitration.
Michael Burrows, Formerly, Of Counsel, Baker & McKenzie, New York.
The issue of whether the doctrine of manifest disregard of the law could be used as a basis for challenging an arbitration award under the New York Convention is discussed in a later chapter. As explained, some courts, including the U.S. Court of Appeals for the Second Circuit, applied the “manifest disregard” standard in international arbitration cases involving nondomestic awards rendered in the United States.
The reasoning was that, under Article V(1)(e) of the Convention, enforcement of an arbitral award may be refused when “the award . . . has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.” As such, an award rendered in the United States could be set aside under the Federal Arbitration Act (FAA), including the implied grounds that the courts have read into the FAA, such as manifest disregard of the law.
In 2008, the Supreme Court decided Hall Street Associates, LLC v. Mattel Inc. The issue there was whether parties had the right to agree by contract that an arbitral award could be challenged on grounds broader than those set forth in the FAA. The U.S. Supreme Court held that the FAA sets forth the “exclusive” grounds for vacating an arbitration award. Although the Supreme Court did not take a position on whether awards could be challenged on grounds of “manifest disregard,” because that doctrine was often considered a judicially developed, extra-statutory basis for challenging an award, numerous commentators wrote that Hall Street sounded the death knell for “manifest disregard” challenges.
Recently, the Second Circuit held in the Stolt-Nielsen case that “manifest disregard” is alive and well. The court pointed out that, in Hall Street, the Supreme Court noted the “vagueness” of the phrasing in the Wilko v. Swan case from which the doctrine emanates and speculated that the term “manifest disregard” might refer collectively to the grounds set forth in §10 of the FAA for vacatur, rather than to an additional ground outside the statute. Or, the Supreme Court also speculated, the term might be shorthand for §§10 (a)(3) or 10 (a)(4) of the FAA (the subsections authorizing vacatur when the arbitrators were “guilty of misconduct” or “exceeded their powers”).
The Second Circuit turned the Supreme Court’s speculation into the basis for its opinion. According to the court, the “manifest disregard” standard applied in the rare instances in which the arbitrators knew of the relevant legal principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.