The Arbitrator Blew It! Now What?
| Publication year | 2003 |
| Citation | Vol. 2003 No. 06 |
June 2003 - #11. The Arbitrator Blew It! Now What?
I own that I am a great friend to arbitrations; I believe to be frequently productive of real advantage, and they are not to be hastily or inconsiderately set aside. . . . [b]ut where any corruption, misbehavior or plain mistake of law or fact appears, courts of justice are bound to set them aside. . . .
If exceptions of this kind were not to be admitted, and these evils corrected . . . awards would indeed . . . prove arbitrary."1 (Written in 1792)
Vermont, as does virtually every jurisdiction in the United States, "has a strong tradition of upholding arbitration awards whenever possible. . . . This Court has long recognized the importance of arbitration as an alternative to litigation for the efficient resolution of disputes. . . . If the courts were permitted to broadly question the determinations of an arbitrator, then arbitration would become merely 'another expensive and time consuming layer to the already, complex litigation process.'"2
Given this hornbook principle, there is (or was) a popular myth that short of transgressing the four "no-nos" in the Federal Arbitration Act, 9 U.S.C. Sec. 10, and the Uniform Arbitration Act, codified by 12 V.S.A. Secs. 5651, 5677,3 arbitrators can do what they like. 1 Moore v. Ewing and Bowen, Ex'rs., 1 N.J.L. 167 (N.J. S. Ct. 1792) (emphasis added). 2 Roy v. Springfield School Directors, 167 Vt. 180, 183-84 (1997). 3 Awards may be vacated when procured by: (1) corruption, fraud, or undue means; (2) evident partiality or corruption in the arbitrators; (3) misconduct (i.e., refusing to postpone a hearing where sufficient cause shown, refusal to hear pertinent and material evidence, or other similar misbehavior); or (4) the arbitrators exceeded or so imperfectly exercised their powers that a final and definite award was not made.
These criteria parallel Sec. 12 of the Uniform Arbitration Act, 7 U.L.A. 6 (1997) adopted in fortyseven states. The first three bases address egregiously improper conduct by the parties, the lawyers, or the arbitrators, and are considered to be procedural in nature; they do not involve directly the factual or legal validity of the award itself. The fourth basis is contract based - what powers were granted to the arbitrator by the contracting parties.
However, what happens when an arbitrator demonstrably has blown it? Have parties consenting to this forum irrevocably bargained for such a result, without recourse. This writer believes they have, but there is a growing trend to vacate awards which reflect a "manifest disregard of the law."4
Consider the following scenarios, chosen almost at random, where losing parties have sought to vacate awards because of the panel's allegedly manifest disregard of the law.
1.
Claimant had sold equity investments to institutions for twenty years; he was making $500,000 per year, fifth out of twenty-five salespersons in production. He allegedly was fired because of age discrimination. Despite what the 2d Circuit regarded as "overwhelming evidence that [respondent's] conduct . . . was motivated by age discrimination," an arbitration panel found for the respondent in an award that set forth the parties' contentions, but no explanation or rationale for the result. All sides agreed that the panel had been "correctly advised of the applicable legal principles."5
2.
Arbitration panel, without explanation, denied overtime pay under The Fair Labor Standards Act to claimant who admittedly had worked more than forty 4 This article does not discuss the other non-statutory basis for vacating an arbitral award, long recognized, because it offends public policy when it violates "explicit, well defined, and dominant" positive law. W.R. Grace v. Rubber Workers, 461 U.S. 757, 766 (1983). Nor do it discuss the parties' ability by contract to vary and expand the scope of review beyond ordinary judicial restraints. See Lapine v. Kyocera, 130 F.3d 884 (9th Cir. 1997)(upholding this contractual "circumvention" of the limited statutory provisions). Contra, Chicago Typographical Union v. Chicago SunTimes, 935 F.2d 1501, 1504-05 (7th Cir. 1991). The Commissioners proposing the revised Uniform Arbitration Act (see infra text at note 35) take no position. See Note, Expanded Judicial Review of Commercial Arbitration Awards - Bargaining for the Best of Both Worlds, 68 U. Cin. L.Rev. 529 (2000). 5 Halligan v. Piper Jaffray, 148 F.3d 197, 203 (2d Cir. 1998), cert. denied, 526 U.S. 1034 (1999). Award vacated because of "manifest disregard" of not only the law but the evidence as well. This case is an extreme extension of the "manifest disregard" rule. Cf. United Paperworkers v. Misco, 428 U.S. 29, 37-38 (1987): "Courts do not sit to hear claims of factual or legal errors by an arbitrator" (emphasis added). The Second Circuit has taken pains to limit its effect. See infra at pp..
hours weekly. Employer claimed she was exempt from the FLSA because she held either an "administrative" or "executive" position. Counsel repeatedly explicitly urged the arbitrators to disregard the law.6 The 11th Circuit Court of Appeals found that, although claimant had performed some administrative tasks, there was conflicting evidence as to their extent, and "[o]n the whole the evidence did not show that [her] primary duties consisted of work directly related to management policies or general business operations and required the exercise of discretion and independent judgment."7
3. An experienced investor purchased forty thousand shares of XYZ stock through his broker, which he initially was tempted to sell, as it started to decline in price. Allegedly relying on the broker's recurring advice that transactions by other owners of this stock and other market forces would enhance its value, he not only held on but bought more. None of these optimistic predictions came true. Eventually XYZ went into receivership, and the broker sold the investor out, leaving a $70,000 deficit in his account. The claimant filed a claim for over $1,000,0008 with the NASD; the broker counterclaimed for $70,000. Without explanation, the panel awarded the claimant only $40,875 and dismissed the counterclaim. The investor moved
6 Counsel for respondent: "I know, I have served many times as an arbitrator, that you as an arbitrator are not guided strictly to follow case law precedent . . . you can also do what's fair and just and equitable. . . .You have to decide whether you're going to follow the statutes that have been presented to you or whether you will do or want to door should do what is right and just and equitable. . . . You, as arbitrators, are not strictly bound by case law and precedent. . . . You have the ability to do what is right, what is fair and what is proper." In closing: ". . . I now ask you in my closing, not to follow the FLSA if you determine that she's not an exempt employee." The various quotations are sprinkled throughout the opinion. 7 Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1464 (11th Cir. 1997)(award vacated). In the absence of an agreement to the contrary arbitrators are indeed bound to follow the law, although "this does not mean that arbitrators can be reversed for errors or misinterpretations of law," only for their "clear disregard" of the law. Id. at 1460.
to vacate the award, arguing, among other bases, that it was the "product of such gross mistake as to imply failure to exercise honest judgment"; alternatively, the investor asked for a modification of the award because it was impossible to support the $40,875 figure from the evidence.9
4. Arbitrators awarded $14,000,000 damages to a hotel owner against a construction manager for lost profits based on delays experienced after the project had been substantially completed. The latter's guaranteed fee was only $600,000. In its motion to vacate, the construction manager argued that the damages awarded were speculative and so disproportionate to its fee that the award should be disallowed as a matter of law. Further, he argued that lost profits never had been contemplated as foreseeable damages, and additionally could not be awarded to a new business.10 In awarding post construction damages to an owner, the arbitrator calculated item-by-item moneys due the builder (when he found the contract had been satisfied) less moneys expended by the owner to complete per the contract. After totaling these amounts, he awarded the owner the net balance of $260,000, but, 8 The difference between the price paid and the proceeds received from the stock's sale. 9 McIlroy v. Painewebber, 989 F.2d 817 (5th Cir. 1993). Too Bad! Award affirmed. "In this circuit, section 10 of the Arbitration Act describes the only grounds upon which a reviewing court may vacate an arbitration award." 989 F.2d at 820 (emphasis added). But cf. other Fifth Circuit cases, infra at pp. 10 Perini Corporation v. Greater Bay Hotel, 129 N.J. 479, 610 A.2d 364 (1992)(overruled by Tretina, infra note 11). In Perini the award was affirmed on a four-to-three vote. Five judges held that awards should be reviewed for "manifest disregard," but only two found that the arbitrator had "manifestly disregarded" the law. Three of the five justices adopting the "manifest disregard" principle did not find it here, although they "were troubled by the magnitude of this award," 129 N.J. at 517, and two, rejecting the "manifest disregard" rule, found no statutory bases for vacating. So the award was affirmed because of a coalition between the "manifest disregarders" and their opponents.
without explanation, did not credit against this balance an admitted accumulated retainer of $203,248.11
5.
A health services provider provided diagnostic testing and other services for an injured motorist, but the latter's carrier...
To continue reading
Request your trial