Disregarding manifest disregard: Watts shifts standard for vacating arbitrators' decisions: the Seventh Circuit seems to have discarded the manifest disregard of the law doctrine, which has been used to overturn arbitrators' decisions.

• Author: Krause, Paul J.

ARBITRATION can offer advantages over traditional litigation, including speed, economy, finality, confidentiality, flexibility, arbitrator expertise and neutrality of forum. (1) In contrast, arbitration's disadvantages include procedural limitations, significantly restricted reviews, required confirmation of judgments, and the absence of any requirement that arbitrators cite the law or articulate the reasoning behind their decisions. As a result, when parties agree to arbitration, they place an implicit importance on the benefits of arbitration over the possibility that an arbitrator will err. (2)

ROLE OF THE ARBITRATOR

Arbitrators' authority, duties and responsibilities are contractual. (3) They derive their authority to resolve disputes from parties' contracts, their task is to interpret the contract, and their responsibilities are to the parties involved in the contract. In contrast, judges and courts derive their authority from the public and have a resultant duty to invoke public laws. Unlike courts and judges, arbitrator's have "no general authority to invoke public laws that conflict" with the parties' contract. (4) Therefore, "unless the contract expressly incorporates external law, an arbitrator has no reason to look outside that agreement to decide whether a statute or rule has been violated." (5)

Arbitrators' contractual authority, duties and responsibilities, as well as their limited legal or public obligations, result in many benefits, but in order to reap those benefits, arbitrators often base their decisions on common sense rather than legal knowledge. Moreover, arbitrators often lack legal training and the resources to interpret the law competently, (6) which has led some people to conclude that while arbitration is well suited for resolving contractual disputes, it is inappropriate for resolving statutory and constitutional issues. (7)

VACATING ARBITRATION AWARDS: MANIFEST DISREGARD OF LAW

The Federal Arbitration Act (FAA), 9 U.S.C. [sub sections] 1-14, "established a federal policy to eradicate the historical pattern of judicial disfavor toward arbitration agreements." (8) The FAA contains four procedural grounds for vacating arbitration awards on appeal: (1) corruption and fraud in the award; (2) arbitrators' evident partiality or corruption; (3) arbitrators' misconduct concerning evidence or postponement: and (4) arbitrators' misuse of power that results in a vague or inconclusive award, or an award that "cannot be traced to [the] parties' agreement to arbitrate." (9) In addition to the limited statutory grounds, there are various non-statutory ways (10) to overturn arbitrators' decisions, including party contracts to expand the scope of judicial review, fundamental fairness, public policy, and, most prominent, manifest disregard of the law. (11)

1. Manifest Disregard Tests

   In 1953, the Supreme Court introduced the manifest disregard doctrine in Wilko v. Swan, stating that arbitrators' decisions that do not manifestly disregard the law are not reviewable by federal courts for judicial error. (12) Since Wilko, each of the circuit courts of appeals has developed a slightly different interpretation and application of the manifest disregard standard.

   Despite the various interpretations, it is universally accepted that the standard requires "more than error or misunderstanding with respect to the law." In addition to this baseline, the Second Circuit created an often-cited three-part definition of manifest disregard in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Bobker:

   [First,] [t]he error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.... [Second,] the arbitrator [must have] appreciate[d] the existence of a clearly governing legal principle but decide[d] to ignore or pay no attention to it. [Finally,] [t]he governing law alleged to have been ignored by the arbitrators must [have been] well defined, explicit, and clearly applicable. (13) Twelve years alter Merrill Lynch, the Second Circuit in Halligan v. Piper Jaffray Inc. created a new standard that expanded judicial scrutiny of arbitrators' decisions to whether the arbitrator rejected "strong" or "overwhelming" evidence. (14) Under this liberal interpretation, the Second Circuit has used manifest disregard frequently. (15) In contrast, other jurisdictions, such as the 11th Circuit, have used the doctrine in only the rarest circumstances, endorsing the approach that a party must show that the "arbitrators knew the law and expressly disregarded it" before manifest disregard will apply. (16)

   Most circuits' definitions of manifest disregard require judges to distinguish between reviewable and non-reviewable mistakes of law based on differences in the kind of law and the degree of the arbitrator's disregard. To determine the degree of disregard, a judge must interpret an arbitrator's state of mind based on the arbitrator's reasoning contained in the record. Since it is arbitrators' choice whether to explain their reasoning, this method of review creates "an overwhelming disincentive [for arbitrators to offer] reasoned awards that reveal the manner in which [they] decide[d] disputed questions of fact, contract interpretation, and law." (17)

   In George Watts & Son Inc. v. Tiffany and Co., the Seventh Circuit apparently sought to eliminate this discretion. (18) Judge...