Georgia General Assembly Adopts `manifest Disregard' as a Ground for Vacating Arbitration Awards: How Will Georgia Courts Treat the New Standard?

• Publication year: 2004
• Pages: 0001

Georgia Bar Journal Volume 9.

GSB Vol. 9, No. 4, Pg. 1. Georgia General Assembly Adopts `Manifest Disregard' as a Ground for Vacating Arbitration Awards: How Will Georgia Courts Treat the New Standard?

Georgia State Bar Journal
Vol. 9, No. 4, February 2004

"Georgia General Assembly Adopts "Manifest Disregard" as a Ground for Vacating Arbitration Awards How Will Georgia Courts Treat the New Standard?"

By John W. Hinchey and Thomas V. Burch

Arbitration offers attractive alternatives to litigation in terms of speed, lower costs, flexibility of process and business-oriented decisions. However, these advantages can come at the price of a legally incorrect decision - a result that is significantly at odds with the judicial process. Over the last decade, state and federal courts have struggled to find an acceptable balance between these competing interests of arbitration and litigation, and their efforts have raised an important question: To what extent should courts respect the decisions of arbitrators

Generally, courts may only set aside arbitration awards on the grounds listed in the Federal Arbitration Act1 or the applicable state arbitration code. However, all federal circuit courts2 and a few state courts3 have adopted a non-statutory exception that allows a court to overturn an arbitrator's decision if the arbitrator has exemplified a "manifest disregard" of the law.4

The manifest disregard standard for vacating arbitration awards originated from the U.S. Supreme Court's decision in Wilko v. Swan,5 and one court has since defined it as an arbitrator's "willful inattentiveness to the governing law."6 However, in the fifty years following Wilko, only two federal courts have vacated an arbitration award based on the manifest disregard standard.7 This may be attributed to problems associated with distinguishing "manifest disregard" from "ordinary legal error."8 The Wilko court was the first to make this distinction, but it did not give explicit guidelines for when or how lower courts should do the same. As a result, most courts have taken different approaches to, and have reached different results after implementing the manifest disregard standard.9

In 2002, after several years of tentative lower court decisions, the Georgia Supreme Court, in Progressive Data Systems v. Jefferson Holding Corporation, held that manifest disregard is not a proper ground for vacatur in Georgia.10 The court emphasized that Georgia's Arbitration Code does not implicitly contain the manifest disregard standard, and that Georgia courts should not liberally interpret the Code in a vain attempt to find it.11 In 2003, however, the Georgia General Assembly amended the Georgia Arbitration Code to specifically include manifest disregard as a ground for vacating arbitration awards.12 Governor Sonny Perdue signed the act in June of 2003 effectively nullifying the Georgia Supreme Court's decision in Progressive Data Systems, and thereby making Georgia the first state in the country to statutorily adopt the manifest disregard standard.13 Nevertheless, because the new act does not instruct courts regarding how to apply manifest disregard, it is uncertain whether Georgia courts will adopt a broad or narrow interpretation of the doctrine.

ARBITRAL DISCRETION AND THE DOCTRINE OF "MANIFEST DISREGARD"

As the time and expenses involved in litigating a case have risen in recent years, public policy has dictated an increasing emphasis on more efficient alternatives, including arbitration. Arbitration agreements commit parties to accept the decisions of a neutral arbitrator on questions of fact, contract, and law that may arise during the course of a business relationship.14 Win or lose, an arbitration agreement is an enforceable contractual commitment specifically entered into, among other reasons, to avoid the more expensive option of litigation.15

In the interest of speed and economic efficiency, courts have historically given broad deference to arbitrators' decisions. Arbitrators are not required to provide a record of their rationale,16 and courts may not review an arbitrator's award solely on its merits.17 This arbitral discretion is not entirely unfettered, however; arbitrators are still bound to follow the law.18 Accordingly, judicial review of arbitration awards must be stringent enough to enforce arbitrators' compliance with the applicable laws, while respecting the strong federal policy in favor of deference to arbitration.19

Courts that allow application of the manifest disregard standard generally follow a two-part test in determining whether to vacate an award under this standard. First, a court must look to whether the arbitrator knew the applicable law and refused to apply it. Second, the court attempts to determine whether the law was explicit and clearly applicable to the case.20 Thus, this standard requires more than a mere error or misunderstanding of the law. Instead, the arbitrator must have made a conscious decision to ignore known and applicable legal principles.21 As one court explained, "'[A]s long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority,' a court's conviction that the arbitrator made a serious mistake or committed grievous error will not furnish a satisfactory basis for undoing the decision."22

Further, determining whether an arbitrator manifestly disregarded the law can be a very difficult task because arbitrators do not have to disclose the reasons behind their awards. When an arbitrator fails to explain an award, a reviewing court can only infer from the record whether the arbitrator knew about the governing legal principle but decided to ignore it.23 In such a case, the court must confirm the arbitration award even if the ground for the decision is...