It is not often that “Highlights” focuses on one doctrine.  However, the Fifth Circuit’s abandonment of the “manifest disregard” standard for vacatur of awards under the FAA needs in-depth discussion, since it has a potentially large impact. Meanwhile, a case from the Southern District of New York shows that, at least for now, the judicially created doctrine remains alive.  Since every Circuit touches on “manifest disregard” in some way, the Fifth Circuit’s holding is important and deserves exploration.

Manifest disregard

The Federal Arbitration Act provides that a court may vacate an award where:           

1. The award was procured through corruption, fraud, or undue means;
2. There was evident partiality or corruption in the arbitrators, or either of them;
3. The arbitrators were guilty of misconduct certain enumerated ways; or
4. The arbitrators exceeded their powers, or “so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.”

Fifth Circuit abandons “manifest disregard”

Some courts, including some in the Fifth Circuit, had added what seems to be an additional, independent ground to the FAA’s panoply of vacatur tests  – “manifest disregard of the law,” but the status of the doctrine had fallen into question.  In a short, six-page opinion, the Fifth Circuit, Costa, J. writing for himself and Judges Higginbotham and Oldham, puts a stake into the principle’s faintly beating heart, Jones v. Michaels Stores, 2021 U.S. App. LEXIS 7484 (5^th Cir. Mar. 15, 2021).

The appeal arises from a District Court decision, Jones v. Michaels Stores, Inc., 2020 U.S. Dist. LEXIS 99956 (M.D. La. June 8, 2020), which confirmed an arbitrator’s decision (the “Pilie award”) that the award in a prior breach of contract arbitration (the “Patterson award”) between Jones and Michaels precluded Jones’ recovery on a Title VII claim under the doctrine of res judicata.  In the District Court and in this appeal, Jones claimed that the Patterson award was in “manifest disregard” of Louisiana law on the preclusive effect of the Pilie award. The lower court, Dick, J., questioned the status of the “manifest disregard” standard of review under the FAA, but held that, even if the doctrine was still alive, it failed to support Jones’ claim.  The Fifth Circuit affirms, making it clear that an award may not be vacated for reasons other than the four specifically referenced in the FAA.

The decision lays out the background of the doctrine and the reason for its death. In Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008), the U.S. Supreme Court held that a contract could not create additional grounds for vacatur beyond those set forth in the FAA.  In doing so, it rejected “manifest disregard” caselaw to the extent it provided “general support for nonstatutory vacatur grounds.”  The Fifth Circuit followed in Citigroup Global Markets, Inc. v. Bacon, 562 F. 3d 349 (5^th Cir. 2009), holding that “manifest disregard of the law as an independent, nonstatutory ground for setting aside an award must be abandoned and rejected.”  So far, so good.  However, the court opines, a year later, in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. 559 U.S. 662 (2010), “the Supreme Court refused to decide ‘whether “manifest disregard” survives’ Hall Street ‘as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth [in the FAA].’”  This hesitancy, in the minds of some courts, resurrected “manifest disregard.”  The panel in Jones focuses on SCOTUS’s failure to directly change the position it took in Hall Street. “Because we had . . . conclude[ed] that manifest disregard is no longer an independent vacatur ground [citing Citigroup Global], the Supreme Court’s later abstaining from deciding that issue cannot overrule our precedent.”  Accordingly, in the Fifth Circuit, any doubts about the viability of “manifest disregard” are resolved; the independent doctrine does not exist.

Two takeaways from the case.  First, look for it to be widely cited as litigators around the country resist “manifest disregard” challenges to arbitration awards.  Second, the panel makes it clear that arbitrators are not being given license to run amok.  While a challenge to an arbitrator’s award as contrary to applicable law may still be raised, it must be tied to the Federal Arbitration Act and qualify under one of its criteria for setting aside an award; it may not be a “freestanding ground for vacatur, untethered to the FAA’s four grounds for vacatur.”

Southern District of New York holds the doctrine is still alive

While Copragri S.A. v. Agribusiness United DMCC, 2021 U.S. Dist. LEXIS 48206 (S.D.N.Y Mar. 15, 2021), does not rely solely upon the “manifest disregard” standard, it affirms the doctrine’s continued viability in the Second Circuit.  The case arises out of the transport of a shipload of grain, which Copragri purchased from Agribusiness and for which Agribusiness was to arrange transportation by sea.  The contract between those two parties provided for arbitration under the rules of the Grain and Free Trade Association (“GAFTA”), governed by English law.  Agribusiness, in turn, chartered a vessel from Vitosha. Vitosha issued bills of lading to Agribusiness; significantly for the result of the case, Copragri was not a party to those bills.  The rear of the bills provided for arbitration of claims under the rules of the Society of Maritime Arbitrators (“SMA”).  Vitosha submitted demurrage claims to Agribusiness, which, in turn, tendered them to Copragri. When Copragri refused to pay the claim, Agribusiness demanded arbitration.  However, it did so by filing with the SMA, not with GAFTA.

Copragri sent objections to the SMA panel, asserting that they had no jurisdiction and raising five specific objections to the proceeding.  However, in Copragi’s absence the tribunal issued an award in favor of Agribusiness in the amount of $208,300.

Copragri brought this action to vacate the award.  Judge Schofield holds that the panel was not empowered to hear the matter, as Copragri was not a party to the bill of lading which included the SMA venued arbitration agreement; rather, the relevant contract for resolutions of disputes between Agribusiness and Copragri was their Sales Agreement, which invoked the GAFTA.  Therefore, she vacates the award under Section 10 of the FAA, which provides that the court may set aside the award “where the arbitrators exceeded their powers. . . .”  She, then, utilizes the “manifest disregard” standard to vacate the award on additional grounds, based on the panel’s failure to address any of Copragri’s five objections, including written notice to the panel that it was without jurisdiction and that the claim was filed well beyond the one-year limit set established by GAFTA rules.  By acting in disregard of those objections, without even addressing them in the award, the panel, she opines, demonstrated that it “knew of the relevant [legal] principal, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless flouted the governing law by refusing to apply it,” thus satisfying the Second Circuit’s test for “manifest disregard.”   In a footnote, Judge Schofield addresses the Second Circuit’s view on the  issue which the Fifth Circuit resolves in Jones:

The Second Circuit has explained that ”it is somewhat unclear whether the ‘manifest disregard’ paradigm constitutes an independent framework for judicial review. . . or a ‘judicial gloss’ on the FAA’s enumerated grounds in Section 10(a) . . . But because [the Second Circuit] has concluded that manifest disregard remains a valid ground for vacating arbitration awards” it does not matter whether it is “applied as judicial gloss or as an independent basis.” quoting Weiss v. Sallie Mae, Inc., 939 F.3d 105, 109 (2^nd Cir. 2019).

So, what difference does it make whether “manifest disregard” survives?  The answer to that question depends on the law in each Circuit as to the meaning of Section 10 of the FAA. Do the precedents on “manifest disregard” track those addressing whether an award is “imperfectly executed?”  If not, does the latter test make it easier or harder to vacate an award than does the former? We will have to wait to see how this change spins out.

Because today’s edition has a single-issue focus, Highlights will address other cases that came down in the last couple days either in an extra edition or on Friday.

David A. Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com