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Arbitration News: 4th Circuit Weighs In On “Manifest Disregard” Confusion

Consider the following hypothetical:

You are claims counsel for a large surety company who has spent the better part of last December preparing for and participating in eight days of arbitration hearings arising from the termination of your bonded principal in late 2010.  Back then, you had made the decision to contest liability under the performance bond on several grounds, not the least of which was the owner’s retention of a replacement general contractor without surety consent and otherwise in violation of the conditions precedent set forth in the AIA-A312 form of performance bond utilized on the project.  Your bonded principal is now in bankruptcy, and you were required to take a leading role in the arbitration proceeding as a result.

Your outside counsel is now on the phone, announcing that the Award of the Arbitrator has been issued.  Unfortunately, it’s not pretty.  The arbitrator has awarded the owner virtually the entire completion premium it had been seeking in the arbitration proceeding, minus a few adjustments here and there.  Adding insult to injury, the award is completely devoid of any reference to your A312 conditions precedent defense, which from day one you believed to be a winner, based on your interpretation of the prevailing legal authorities.

“That can’t be right,” you complain to your outside counsel.  “That’s clear error by the arbitrator.  Doesn’t the Federal Arbitration Act give me a right to challenge his obvious failure to apply the law?”

“Well,” outside counsel begins, “likely not.  Generally speaking, the FAA only permits a judge to vacate an arbitration award upon proof of gross misconduct by the arbitrator.  I’m talking about partiality or corruption, or misconduct in refusing to hear evidence pertinent to the dispute, that kind of stuff.  And frankly, proving any of those statutory grounds would be a steep uphill battle for us.”

“Okay, let’s put the FAA to the side for a moment,” you respond.  “If I’m right, and the arbitrator completely blew it on our A312 defenses, aren’t there cases out there that allow us to challenge this award if we can prove that it demonstrates a manifest disregard of the law by the arbitrator?”

Ah, manifest disregard of the law.  For over fifty years, this common law doctrine has  represented the last best hope for parties seeking to challenge the enforceability of an arbitration award.  But ever since the U.S. Supreme Court’s decision in Hall Street Associates v. Mattel, Inc. in 2008, there’s been a decided split in the federal courts — and therefore a tremendous amount of confusion — as to whether manifest disregard still exists.

Last week, the U.S. Court of Appeals for the Fourth Circuit, which handles appeals from the North Carolina’s federal trial courts (as well as from the federal trial courts in MD, VA, WV and SC), finally took its stance in the ongoing mess.  And at least in this jurisdiction, manifest disregard lives on.

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