The manifest disregard of the law standard for vacating an arbitration award has evolved over the last 50 years since Wilko v. Swan, 346 U.S. 427 (1953). Although there has been a split among the circuits, the Fifth Circuit has authorized vacatur if an arbitrator manifestly disregards clearly applicable law. The new decision of the Supreme Court in Hall St. Assocs. v. Mattel, Inc., 128 S.Ct. 1396, 1400 (2008) raises the question of whether manifest disregard will continue to be a viable ground for vacatur. In Hall Street after the parties failed to settle a pending case in federal court through mediation, the parties agreed, with the court’s permission, to submit the claims to binding arbitration. The parties crafted an arbitration agreement that provided for expanded judicial review “. . .where the arbitrator’s findings of facts are not supported by substantial evidence, or where the arbitrator’s conclusions of law are erroneous.” At the conclusion of the arbitration proceeding, the arbitrator decided for Mattel. Hall Street filed a motion to vacate the order, claiming legal error. The District Court, reviewing the award under the expanded review provisions in the arbitration agreement, vacated the award and remanded the case to arbitration. Upon remand, the arbitrator decided for Hall Street. Each party sought to have the award modified. The District Court made a minor modification to the award. The case was appealed to the Ninth Circuit and ultimately the Supreme Court granted certiorari to determine if the grounds for vacatur in the Federal Arbitration Act could be supplemented by private agreement. Writing for the six-justice majority, Justice Souter held that the vacatur grounds listed in the Federal Arbitration Act are exclusive and cannot be expanded by private contract.
The majority opinion offers no conclusive definition for “manifest disregard of the law” beyond negatively defining it as not “general review for an arbitrator’s legal errors.” The opinion’s discussion of the phrase is exploratory and raises the possibilities that the phrase “was meant to name a new ground for review,” or that “it merely referred to the § 10 grounds collectively, rather than adding to them,” or finally, that the phrase “may have been shorthand for § 10(a)(3) or § 10(a)(4), the subsections authorizing vacatur when the arbitrators were ‘guilty of misconduct’ or ‘exceeded their powers.'” After raising these possibilities, Justice Souter does not settle on any one of them.
Since the Hall Street decision, a federal court considered manifest disregard as a ground for review and found that the arbitration panel did not manifestly disregard the law. In Halliburton Energy Services, Inc. v. NL Industries, 2008 WL 906037 (S.D. Tex, 2008), Judge Rosenthal used manifest disregard as a viable ground for vacating an award analyzing the parties’ arguments using manifest disregard as both “. . . a summary of some of the statutory grounds and as an additional ground for vacatur.”
The Hall Street Court’s decision is clear – parties can no longer privately contract for judicial review beyond the statutory grounds under the Federal Arbitration Act. However, the opinion in Hall Street still leaves open the possibility that manifest disregard of the law standard is still viable under the reasoning of the Halliburton Energy Services case.