Setting aside arbitration awards and the manifest disregard of the law standard.

• Author: Dunlap, Eric D.

Parties who lose in arbitration proceedings and then move their disputes into the court system should take notice of a recent decision issued by the 11th Circuit Court of Appeals. In B.L. Harbert International, LLC v. Hercules Steel Company, 441 F.3d 905 (11th Cir. 2006), the court reviewed the "manifest disregard of the law" standard and, in doing so, clarified the requirements that must be satisfied in order to establish that an arbitrator acted in manifest disregard of the law. To meet the exacting requirements of this standard, an arbitration loser must prove the arbitrator recognized a clear rule of law and deliberately chose to ignore it. The court's opinion affirmed a decision by the U.S. District Court for the Northern District of Alabama denying Harbert's motion to vacate. The court's holding sends a strong message about overuse of the post-arbitration review procedures and reminds litigants that proving an arbitrator acted in manifest disregard of the law will be the exception rather than the norm. Although the Harbert decision involved a construction dispute rather than an employment arbitration, the analysis applies to arbitration of any type under the Federal Arbitration Act (FAA) (1), including arbitration of employment claims.

The FAA sets forth four statutory grounds for vacating an arbitration award. Additionally, the 11th Circuit Court of Appeals recognizes three nonstatutory grounds. This article will discuss one of the non-statutory grounds--manifest disregard of the law--and the impact Harbert should have on a losing party's consideration before seeking judicial relief through a motion to vacate. (2)

Harbert v. Hercules

B.L. Harbert International, LLC, is a general contractor on large construction projects. Hercules Steel Company manufactures structural steel for construction projects. In August 2000, the U.S. Army Corp of Engineers awarded Harbert a contract for construction at Fort Bragg, North Carolina. Less than one month later, Harbert awarded Hercules a subcontract for steel fabrication and erection. The subcontract between Harbert and Hercules included a provision requiring the parties to submit disputes between them to binding arbitration before the American Arbitration Association. In a separate document, the parties agreed that the Federal Arbitration Act would control arbitration proceedings. Harbert also released two different schedules for the project.

Hercules began work on the project in April 2001 and finished the project in January 2002. After disagreement arose between the parties as to the timeliness of Hercules' work on the project, Harbert stopped making payments and demanded that Hercules pay delay damages. Those damages exceeded the amount Hercules was due to receive on the subcontract. In January 2003, Hercules filed a demand for arbitration seeking to recover the unpaid balance due under the subcontract, other damages, interest, and attorneys' fees. Harbert proceeded to file a counterclaim seeking delay damages, acceleration costs, miscellaneous back charges, interest, and attorneys' fees.

The arbitration took seven days in February and May 2004. In September 2004, the arbitrator issued an award denying Hercules' additional damages claim, Harbert's counterclaims including the claims for delay damages, and each party's attorneys' fees claims. The arbitrator awarded $369,775 to Hercules representing the subcontract balance plus interest. Hercules believed the arbitrator made a scrivenor's error with respect to the amount of unpaid balance under the subcontract, so it submitted a request for clarification. Harbert also sought clarification and modification from the arbitrator, claiming that the arbitrator's award lacked the detail requested by the parties on each of the six issues outlined in the decision. Subsequently, the arbitrator corrected the scrivener's error by increasing Hercules' award from $369,775 to $469,775. The arbitrator's corrected award also provided additional findings on the six issues.

Harbert filed a motion to vacate the arbitration award (as corrected) in the U.S. District Court for the Northern District of Alabama. Harbert claimed that the arbitrator's rationale reflected a manifest disregard of the applicable law. Hercules filed a motion requesting the court to confirm the award. (3)

The district court entered judgment enforcing the arbitration award and, by doing so, denied Harbert's motion to vacate the award and granted Hercules' motion to confirm it. After reviewing the pre- and post-hearing briefs the parties submitted to the arbitrator and an affidavit from Harbert's lead attorney during the arbitration proceedings, the court concluded that there was no evidence of manifest disregard for the law. The court's decision distinguished Harbert's case from Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456 (11th Cir. 1997). Harbert proceeded to file a notice of appeal and a motion for stay judgment pending appeal, which the district court granted.

Arbitration Awards and Montes v...