Source: http://rmfpc.com/arbitration-awards-not-vacated-for-manifest-disregard-of-evidence/
Timestamp: 2019-04-26 13:58:16+00:00

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Arbitration Awards: Not Vacated for Manifest Disregard of Evidence | Ruskin Moscou Faltischek, P.C.
The narrow window that had opened to permit vacating arbitration awards based on a review of the evidence is now officially shut.
The U.S. Court of Appeals for the Second Circuit made it abundantly clear in the recent case of Wallace v. Buttar that a party may no longer seek to vacate an arbitration award on the ground of manifest disregard of the evidence.
When the Federal Arbitration Act (FAA) was enacted in 1925, the law gave great deference to the determinations made by arbitrators. The statute set forth only four grounds for vacating an arbitration award, and these limited grounds deal only with an arbitrator maintaining a bias, failing to be impartial, exceeding his or her given powers, or if an award was procured by corruption, fraud or undue means. See 9 USC §10(a). When it came to applying legal doctrine and evaluating facts, the awards were immune from challenge.
However, over time, this led to circumstances in which the courts found themselves powerless to vacate an arbitration award when an arbitrator’s conduct was clearly egregious, but did not specifically fit into one of the four grounds set forth in the FAA. In an effort to address these situations, the U.S. Supreme Court in Wilko v. Swan introduced the doctrine of "manifest disregard of the law" as grounds for vacating an arbitration award. The Second Circuit subsequently followed and developed that doctrine. See, e.g., Carte Blanche (Singapore) Pte., Ltd. v. Carte Blanche Int’l, Ltd.; Merrill Lynch, Pierce, Fenner & Smith v. Bobker.
The doctrine holds that an arbitration award can be vacated if the following two-prong test is satisfied: (1) if the arbitrators knew of a governing legal principle yet refused to apply it or ignored it; and (2) the law ignored was well-defined, explicit and clearly applicable to the case. See, Bobker, supra. The Second Circuit strongly emphasized that the doctrine is only to be used in rare circumstances. See Gov’t of India v. Cargill Inc.
Wallace v. Buttar illustrates the limits on the manifest disregard of the law doctrine. Wallace held that as long as there is a colorable justification that can be inferred for the legal conclusion made by the arbitrators, the award must be upheld, even if the justification is based on an error in law or fact.
The doctrine does not apply if the arbitration panel simply misapplies the law or makes a decision that is in contradiction with the established law. See, Hoeft v. MVL Group, Inc. Rather, a showing must be made that the arbitrators were made aware of a law that is well defined, explicit and clearly applicable to the case, and either refused to apply it or ignored its existence. See, Wallace v. Buttar, supra. For example, when a party fails to properly make the arbitrators aware of a supposed well-defined, explicit and clearly applicable law, the arbitrators’ error in not applying the correct law will not warrant vacating an award. Id. As illustrated above, the applicability of this judicially created doctrine is severely limited.
What about the instance of a court vacating an award on the ground of manifest disregard of the evidence? The confusion with regard to this doctrine has been linked to the case of Halligan v. Piper Jaffray, Inc. In Halligan, the Second Circuit vacated an arbitration award in an employment discrimination case and, in so doing, evaluated the evidence from the arbitration hearing and concluded that "in view of the strong evidence that [Mr.] Halligan was fired because of his age . . . ," the arbitration panel’s determination that there was no discrimination " . . . ignored the law or the evidence or both."
Since the Halligan decision, many parties wishing to vacate arbitration awards have seized on this language and argued that arbitration awards that are contrary to "strong evidence" should be vacated. In fact, several district court decisions in New York, which relied on Halligan, vacated arbitration awards for "ignoring the law or the evidence or both." See, Hakala v. Deutsche Bank AG; Gwynn v. Clubine; Ono Pharmaceutical Co., Ltd., v. Cortech, Inc.; Tripi v. Prudential Securities, Inc.; Raiola v. Union Bank of Switzerland LLC; GFI Securities LLC v. Labandeira; McDaniel v. Bear Sterns & Co.
After witnessing the broadening of the scope and circumstances for vacating arbitration awards arising out of the language in the Halligan case, the Second Circuit made attempts to narrow the Halligan court’s holding. In GMS Group, LLC v. Benderson, the Second Circuit stated that Halligan dealt with certain due process issues that were unique to employment discrimination cases, and that since such concerns did not apply to a securities fraud claim, the manifest disregard of the evidence doctrine was inapplicable. Earlier, in Westerbeke Corp. v. Daihatsu Motor Co., Ltd., the Second Circuit characterized as dicta the language in Halligan that dealt with the doctrine of manifest disregard of the evidence.
Now, once and for all, the Second Circuit’s decision in Wallace v. Buttar appears to have closed the perceived opening that an arbitration award can be vacated due to a manifest disregard of the evidence. In Wallace, a party instituted an arbitration proceeding before the NASD, accusing his broker of fraud in connection with the investing and trading of stock. The party was successful in the arbitration and was awarded compensatory damages amounting to over $1 million. However, the district court vacated the award by holding that the arbitration panel violated both the doctrines of manifest disregard of the law and the evidence. See, Wallace v. Buttar.
In responding to the district court’s holding that the arbitration award violated the doctrine of manifest disregard of the evidence, the Second Circuit adopted the language used in Success Sys. Inc. v. Maddy Petroleum Equip., Inc., and squarely held that " . . . the Second Circuit does not recognize manifest disregard of the evidence as a proper ground for vacating an arbitrator’s award."
With this holding, there can no longer be any doubt as to whether the doctrine of manifest disregard of the evidence can be used to vacate an arbitration award in this circuit. In fact, the Second Circuit further held that the only circumstances in which a court is allowed to evaluate the evidentiary record is " . . . for the purpose of discerning whether a colorable basis exists for the [arbitration] panel’s award so as to assure that the award cannot be said to be the result of the panel’s manifest disregard of the law." Wallace v. Buttar, supra.
In the months since the Second Circuit’s decision in Wallace v. Buttar, the district courts in New York have closely followed its holding, confirming the death knell of the once viable doctrine of manifest disregard of the evidence as a basis for vacating an arbitration award. See Mooring-Brown v. Bear, Stearns & Co.; Small Family Limited Partnership v. RBC Dain Rauscher, Inc.; Paterson v. Lehman Brothers, Inc.; Ruei-Chan v. Pierce.
The firm’s Litigation Department can be reached at 516-663-6587.

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