“Manifest Disregard of Law as a Ground for Vacating an Arbitration Award in the United States Federal Courts: A Case of Uncertainty”

A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree

Aliyu Abubakar-AbdullahiJuly 16, 2010

14, 935 words (excluding footnotes)Supervisor 1: Professor Clifford Larsen

Supervisor 2: Dr. Stefan Kroll

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Table of Contents

Table of Contents……………………………………………………………….. I

Dedication………………………………………………………………………. IV

Acknowledgment……………………………………………………………….. V

Table of Cases………………………………………………………………….. VI

Abstract………………………………………………………………………… X

Chapter 1……………………………………………………………………… 1

1.1 International Commercial Arbitration……………………………… 1

1.2 Emergence And Definition………………………………………… 1

1.3 Vacatur of International Arbitral Awards under International Arbitration Convention and Some National Legislation…………………………………… 3

1.3.1 International Instrument………………………………………… 3

1.3.2 National Legislation…………………………………………….. 4

1.4 The Origin and History of the Doctrine of “manifest of disregard”. 6

Chapter 2…………………………………………………………………… 7

2.1 What constitutes “Manifest Disregard of Law” by the Federal Courts? 7

2.2 The Two Prong Test ………………………………………………… 7

2.3 Disregard Law or Facts or Both: What is the Applicable Standard? ... 9

2.4 Does Parties’ Agreement create the Standard? ………………………. 12

2.5 Can Wrong Interpretation or Alteration of the Governing Agreement by the Arbitrator

Trigger the Doctrine? …………………………………………………….. 13

2.6 Pre-Hall Street Case Law……………………………………………... 14

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2.7 Case Law in Support for Expanded Judicial Review…………………. 15

2.7.1 Gateway Technologies, Inc., v. MCI Telecommunications Corp…… 15

2.7.2 Roadway Package System, Inc. v. Kayser…………………………… 16

2.7.3 Jacada (Europe), Ltd. v. International Marketing Strategies, Inc…….. 17

2.7.4 Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp…….. 17

2.8 Case Law Disallowing Expansive Judicial Review……………………. 18

2.8.1 Ernest Bowen; Mary Bowen, v. Amoco Pipeline Company………… 18

2.8.2 Kyocera Corp. v. Prudential Bache Trade Service Inc………………. 19

2.8.3 Hoeft v. MVL Group, Inc., Discovery Research Group of Utah……. 20

Chapter 3…………………………………………………………………………. 22

Part A……………………………………………………………………………… 22

3.1 The Famous Hall Street Associates, L.L.C., v. Mattel, Inc’s Decision… 22

Part B……………………………………………………………………………… 29

3.2 Post Hall Street’s Decisions……………………………………………. 29

3.3 Circuits holding Hall Street decision abolishes “manifest disregard of law” as basis

for Vacatur of arbitration awards under the FAA…………………………. 29

3.3.1 Ramos-Santiago v. United Parcels Services…………………………. 29

3.3.2 Citigroup Global Markets, Inc., v. Bacon……………………………. 30

3.4 Circuits holding that “manifest disregard” survive Hall Street as ground for Vacatur

independent of FAA……………………………………………………….. 31

3.4.1 Coffee Beanery, Ltd., at al., v. WW, L.L.C.; Deborah Williams; and Richard

Welshams…………………………………………………………………… 31

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3.5 Circuits Holding that the Doctrine of “Manifest Disregard” Survived as Integral Part

of Section 10 (a) (4) of the FAA………………………………………………... 33

3.5.1 Stolt-Nielsen SA v. Animal Feeds International Corporation (Part I)……. 33

Chapter 4………………………………………………………………………………. 37

Part A………………………………………………………………………………….. 37

4.1 Stolt-Nielsen Part II (Supreme Court’s verdict)………………………......... 37

4.2 Germany’s Position on Judicial Review of Merits of Arbitrator’s Award….. 39

4.3 English Law’s Position on Judicial Review of Merits of Arbitrator’s Award.. 40

4.4 French’s Position on Judicial Review of Merits of Arbitrator’s Award…….. 41

4.5 Malaysian Position on Judicial Review of Merits of Arbitrator’s Award…… 41

Part B…………………………………………………………………………………….. 43

4.6 The Public Policy Defense as compared to the Doctrine of Manifest Disregard

Standard…………………………………………………………………………. 43

4.6.1 United States Position on Public Policy’s Ground of Vacatur……………. 43

4.6.2 Germany’s Position on Public Policy’s Ground of Vacatur………………. 45

4.6.3 England’s Position on Public Policy’s Ground of Vacatur……………….. 46

4.6.4 India’s Position on Public Policy’s Ground of Vacatur…………………… 48

4.7 Conclusion…………………………………………………………………… 49

Bibliography…………………………………………………………………………….. 52

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Dedication

For Fateema Kabeer Umar, the love of my life!!!

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Acknowledgement

I have to acknowledge the mercies and blessings of God the Almighty, for his miracles, and love

to me, without those I could not have accomplished any of these. Let thy name be glorified. My

parents for their love and support and their usual advice that “knowledge is the glowing light in

our life”, I say thank you. To both my brothers, Shehu and Kabir, for your constant support and

love, thank you.

To my supervisor and mentor, Professor Clifford Larsen, for your guidance, contributions and

constructive criticism of this work, your teachings and affections, words alone are not sufficient

for my gratitude, I remain indebted to you. To Dr. Stefan Kroll my second supervisor, for your

guidance, contributions, this work would have been difficult, I am very grateful. I have to

acknowledge the MLB team for their love, support and always ready to help attitude, mostly for

been the best school administrators I have known, Aimee, Maite, Magdalena, and Julia, you

Guys are fantastic and superb.

During the course of this masters program, my fellow classmates made life easier for me, I had

no idea how time passes by, without you guys I possibly may have find it difficult to cope. To

Erika Tari, for your love and friendship, Mantsekhe Masupha for your sisterly advise and love,

Reena Purshotam my flat mate, for making me that perfect gentleman, Aidai Askarova my sister

for your love, Zitto Kabwe for your brotherly love and friendship, Godfrey Mugari Alias

Mugabe for your brotherly love, friendship and constant effort to look for “Action”, Yambani

Mulemba for your brotherly role and friendship, George Taliashvili (Roomie) my friend for your

love, Ammad Ahmad, my friend for your love, Anna Konchenkova, my friend for your love,

Courtenay Fisher, my friend for your love and the entire MLB 2010 Class, I say a big thank you,

let the world be our playing field, for we are sojourners.

To all the people out there that for want of space I could not have mention, I appreciate you all,

“Out of curiosity we learn and contribute to learning”.

ALIYU ABUBAKAR-ABDULLAHI MLB2010

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TABLE OF CASES REFERRED TO

1. Apex Plumbing Supply, Inc. v. U.S. Supply Co., 142 F.3d 188, 194 (4th Cir. 1998)

2. BGH, Decision of March 1, 2007, III ZB 7/06, 120 ZEITSCHRIFT FÜR ZIVILPROZESS 371 et seq. (2007)

3. Burchell v. Marsh, 58 U.S 344, 349-50, 17 How. 344, 15 L.Ed. 96 (1854)

4. Bowen v. Amoco Pipelines Co., 254 F.3d 925 (10th Cir. 2001)

5. Citigroup Global Markets, Inc., v. Debra M. Bacon, 562 F. 3d 349 available at west law: http://international.westlaw.com/result/documentettext.aspx?mqv=d&f... Retrieved on 03.06.2010

6. Clout Case 371, Hanseatisches Oberlandergerischt, Bremen, 30th September, 1999.

7. Clout Case 456, Germany: Hanseatisches Oberlandergericht Hamburg, 6 Sch 11/98 4, November 1998.

8. Coffee Beanery, Ltd., at al., v. WW, L.L.C.; Deborah Williams; and Richard Welshams, 300, Fed. Appx. 415, 418, (Sixth Cir. 2008), available at: http://international.westlaw.com/result/documentettext.aspx?mqv=d&f, retrieved on 03.06.2010.

9. Comedy Club Inc., v. Improv. West Associates, 553 F.3d 1277, 1289-90 (9th Cir. 2009)

10. DiRussa v. Dean Witter Reynolds, Inc., 121 F. 3d 818, 821 (2nd Cir. 1997)

11. Duferco International Steel Trading, v. T. Klaveness Shipping A/S, 333 F.3d 383, (2nd

Cir. 2003), available at westlaw international: http://international.westlaw.com/print/printsream.aspx?spa=intbuc... Retrieved on 12.04.2010.

12. Egmatra AG v. Marco Trading Corp, [1991] 1 Lloyd’s Rep. 480 (Q.B.)

13. Entscheidungen des Reichs-Oberhandelsgerichts [ROHG] 7, 311

14. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995)

15. Folkways Music Publishers v. Weiss, 989 F.2d 108, 111 (2nd Cir. 1993)

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16. Gateway Technologies, Inc., v. MCI Telecommunications Corp., 64 F.3d 993, 996 (5th

Cir. 1995)

17. Grain v. Trinity Health, Mercy Health Services Inc., 551, F.3d, 374, 380 (6th Cir. 2008)

18. Halligan v. Piper Jaffray, Inc., 148 F. 3d 197 (2nd Cir. 1998), available at west law international: http://international.westlaw.com/print/printstream.aspx?spa=intbuc... Retrieved on 03.06.2010.

19. Hall Street Associates, L.L.C., v. Mattel, Inc, 552 U.S 576,, 128 S.Ct. 1396, available at Westlaw International: http://international.westlaw.com/print/printstream.aspx?spa=intbuc... Retrieved on 12.04.2010.

20. Hall Street Associates, L.L.C., v. Mattel, Inc., 196 Fed. Appx. 476, 477 (9th Cir. 2006)

21. Hoeft v. MVL Group, Inc., Discovery Research Group of Utah, 343 F.3d 57 (2nd Cir. 2003)

22. International Longshoreman’s Ass’ n v. Seatrain Lines, Inc., 326 F. 2d 916 (2nd Cir. 1964)

23. I/S Stavborg v. National Metal Converters, Inc., 500 F.2d 424, 431 (CA2, 1974)

24. Jacada (Europe), Ltd. v. International Marketing Strategies, Inc., 401 F.3d 701 (6th Cir. 2005)

25. Karthaus v. Ferrer, 26 U.S. 222, 228, 1 Pet. 222, 7 L.Ed. 121 (1828)

26. Kyocera Corp. v. Prudential Bache Trade Service Inc., 341 F.3d 987 (9th Cir. 2003)

27. Ledee v. Ceramiche Ragno, 684 F.2d 184 (1st Cir. 1982)

28. Lesotho Highlands Development Authority v. Impreligo SpA, [2006] 1 A.C. 221 (House of Lords Decision)

29. Ludwig Honold Mfg. Co. v. Fletcher, 405 F.2d 1123, 1128 (3rd Cir. 1969)30. Mitsubishi Motors Corp. v Soler Chrysler Plymouth, Inc., 473 U.S 614, 656 (1985)

31. Misco, Inc. v. United Paper Workers Int’l Union, 484 U.S. 29 (1987)

32. New York Telephone Co. v. Communications Workers of America Local 1100, AFL-CIO District 1, 256 F.3d 89 (2nd Cir. 2001)

33. Northrop Corp. v. Triad International Marketing SA, 811 F.2d 1265 (9th Cir. 1987)

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34. Oil and Natural Gas Corp. Ltd v. Saw Pipes Ltd,(2003) 5 SCC 705

35. Omnium de Traitement et de Valorisation S.A. v. Hilmarton, [1999] 2 Lloyd’s36. Rep. 222 (Q.B.) (U.K.)

37. Parsons & Whittemore Overseas Co. v. Societe Generale De L’ Industries Du Papier. 508 F.2d 969 (2nd Cir. 1974)

38. Patton v. Signature Ins. Agency, 441 F.3d 2320 (4th Cir. 2006)

39. Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp, 427 F.3d 21 (1st Cir. 2005)

40. Ramos-Santiago v. United parcel Service, 524 F.3d 120 (1st cir. 2008)

41. Reliance Indust. Ltd. v. Enron Oil & Gas India Ltd [2002] 1 All E.R. (comm.) 59 (Q.B.)

42. Renusagar Power Co. Ltd v. General Electric’s Co. 1994 Supp. (1) SCC 644

43. Roadway Package System v. Kayser, 257 F.3d 287 (3rd Cir. 2001)

44. Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989)

45. Sanghi Polyesters (India) Ltd v. International Investment (KCFC) (Kuwait), [2001] 1 Lloyd’s Rep. 480 (Q.B.)

46. Schoch v. Info USA, Inc., 341 F.3d 785, 789 (8th Cir. 2003)

47. Soleimany v. Soleimany, [1999] Q.B. 785

48. Stolt-NeilsenS.A v. Animalfeeds International Corp. (http://www.supremecourt.gov/opinions/09pdf/08-1198.pdf), retrieved on 15.06,2010.

49. Stolt-Nielsen SA v. Animal Feeds International Corporation, 548 F.3d 85, (2nd Cir. 2008) available at west law: http://international.westlaw.com/print/prinstream.aspx?spa=intbuc... Retrieved on 12.04.2010.

50. Stollt-Nielsen SA v. Animal Feeds Int’l Corp., 435 F.Supp. 2d 382, 387 (S.D.N.Y. 2006).

51. Syncor International Corp. v. Mcleland, 120 F.3d 262 (Table), 1997 WL 452245 at p. 6 (4th Cir. 1997)

52. United States Steel & Carneigie Pension Fund, et al. v. John McSkimming, 759 F.2d 269 (3rd Cir. 1985)

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53. Venture Global Engineering v. Satyam Engineering, Jan 10 2008, Supreme Court of India (Unreported)

54. Volt v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479, 109 S.Ct. 1248, 103 L.Ed. 2d 479

55. Wallace v. Buttar, 378 F. 3d 182 (2nd Cir. 2004)

56. Westerbeke Corp. v. Daihatsu Motor Co. Ltd., 304 F. 3d 200, 209 (2nd Cir. 2000)

57. Westcare Investment, Inc. v. Jugoimport-SP-DR Holdings, [2000] Q.B. 288

58. Wilko v. Swan, 346 U.S. 427 (1953)59. Wing Construction (M) Sdn Bhd, v. Johor Port Authority, [2010]1 LNS 31 (CA)

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Abstract

Introduction

Arbitration remains one of the most prevalent means of dispute resolution in trans-national

commercial world.1 One of its principal benefits continues to be the available supply of industry

professionals who are, unlike most judges, steeped in the practical reality of the business world.2

Some commentators described arbitration as an efficient, economical, and often confidential

means of resolving disputes-goals frequently shared by parties seeking a continuance of an on-

going business relationship.3 For these reasons mentioned above and probably others, this thesis

agrees with Attisani & Brennan (2008) that parties’ in commercial business relationship tends to

opt for arbitration in place of litigation.4 However, this choice often comes with downside of

relinquishing some benefits available to litigants, and one Court puts it succinctly, “Arbitration

awards are subject to very limited review in order to avoid undermining the twin goals of

arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation.”5

In recent years, however, as international commerce evolved and business relationships have

become increasingly complex, commercial disputes have been more adversarial and arbitration

have become more formal and trial-like.6 As a result, enforcement of arbitration awards by a

winning party faces stiff challenge by parties with unfavorable outcome. A party who wishes to

challenge the outcome of an award has two choices; he may wait and resist confirmation of the

award based on non-recognition and enforcement grounds under the legislation of the enforcing

State, alternatively he can bring an action to vacate the arbitral award under the permissible

grounds in the country where the award is made or sought to be enforced.7

As Born (2001) pointed out in his book, the option to resist enforcement is not very attractive to

the losing party because the award will continue to exist and its confirmation or enforcement can 1 Attisani A, D, & Brennan A, J., “An Elephant in the (Arbitration) Room-The Power of Panels and Its Outer Limits.”In Arias U.S quarterly, Vol. 15, No 4. Fourth Quarter, 2008, at P. 2.2 Id.3 Id.4 Id.5 Folkways Music Publishers v. Weiss, 989 F.2d 108, 111 (2nd Cir. 1993).6 Attisani & Brennan, (2008), supra ante note 1 at p. 2.7 Born, B. Gary, International Commercial Arbitration “Commentaries & Materials”, 2nd. Edition, Kluwer Law International, The Hague, The Netherlands. 2001, p. 709-710.

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be sought in other jurisdictions.8 On the other hand, an action to vacate the award if successful

will render the award null and consequently ceases to have a legal effect at least in the forum.9

That is the focus of this thesis, to examine the grounds of arbitration awards vacatur, particularly

under the controversial doctrine of “manifest disregard” of law in the United States Courts.

Background Information

Most international instruments and national arbitration laws regulating arbitration contain certain

provisions for vacatur of awards that failed to meet the requirement of these statutes10. A party

challenging an award must prove one of the grounds listed in the arbitration laws of the

enforcing country. There are several grounds on which a challenge of an award may be based.

These grounds often reflect the grounds listed in Article V of New York Convention as well as in

Article 34(2) of Model Law, albeit with some linguistic differences.11

However, the grounds allowed for judicial review under these international and national

instruments are limited in scope. These are grounds that provide for failure of the awards to meet

the procedural requirements of these statutes, not the merits of the arbitration awards.12 The

procedural provisions for vacating arbitral awards includes issues on challenge to appointment of

arbitrators, invalid agreement due to lack of capacity or otherwise, composition of the arbitral

panel, award contrary to public policy of enforcing State, and lack of fair hearing to the losing

party.13

With the settled position of the so called pro-arbitration courts for limiting judicial review of the

merits of arbitration awards, a group of dissenters emerged among courts in various nations. This

8 Id.9 Born, Supra at p. 710, 745-74610 See e.g., Model Law article 34; US FAA Section 10-12; New York Convention Article V(1)(e) & VI; England, Arbitration Act sections 67-71; Switzerland PIL Articles 190-1; European Convention Articles IX; Inter American Convention Articles 5(1)(e) and 6.11 Lew, Julian, D.M. QC; Mistelis, A. Loukas; & Kroll, M. Stefan., Comparative International Commercial Arbitration, Kluwer International, The Hague, The Netherlands. 2003. P. 673.12 Born, Gary Brian, International Commercial Arbitration, Vol. 2. Alphen [u.a.]: Kluwer, 2009, at p. 263813 Id.

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group views judicial review of arbitration award from a different perspective. Either for giving

effect to parties’ autonomy or in some cases where the arbitrators flagrantly jettisoned an

applicable law, the judiciary feels justified to intervene and vacates such awards.14

The birth of “manifest disregard of law” as a ground for vacatur of arbitration award by the

United States Courts was not something that was premeditated nor conceived but simply put,

dynamism of judicial precedent. “Manifest disregard of law” is not a statutory ground listed in

the Federal Arbitration Act 1925 (FAA), but a common law doctrine that finds its origin in a

dictum from the Supreme Court’s decision in Wilko v. Swan.15 There the Supreme Court stated

that “the interpretations of the law by the arbitrators in contrast to manifest disregard are not

subject, in the federal courts, to judicial review for error in interpretation.”16 This 1953 ruling

was since overruled on other grounds in Rodriguez de Quija v. Shearson/Am. Express, Inc.17

Since its rather historic birth, the doctrine of “manifest disregard” has been employed by some

federal courts in the United States to vacate awards where the arbitrator knew of a well defined,

explicit and clearly applicable governing legal principle yet failed to apply it or ignored it

altogether.18 While the articulated standards for manifest disregard of the law are not perfectly

aligned, federal courts are generally in accord in their analytical approach with respect to certain

fundamental elements of the manifest disregard standard.19 It is widely agreed that federal

courts’ review of an arbitrator’s decision is extremely narrow and highly deferential.20 However,

despite the narrow approach by the courts on the doctrine, some observed that the doctrine opens

the door to judicial review of the legal merits of arbitration awards, which modern arbitration law

has long viewed as inimical to core process values such as efficiency and finality.21

14 Halligan v. Piper Jaffray, Inc., 148 F. 3d 197 (2nd Cir. 1998), available at west law international: http://international.westlaw.com/print/printstream.aspx?spa=intbuc... Retrieved on 03.06.2010.15 Wilko v. Swan, 346 U.S, 427, 437 (1953),16 Id.17 Rodriguez de Quija v. Shearson/Am. Express, Inc., 490 U.S. 477 (1989)18 See Halligan v. Piper Jaffrey, supra ante note 11, Duferco International Steel Trading v. T. Klaveness Shipping A/S., 333 F. 3d 383 A.M.C. 1521 (2nd Cir., 2003)19 Louis J. Auricho, Noonan III P. Joseph, What’s left of “Manifest Disregard of Law” as a basis for Vacatur of Arbitration Awards after Hall Street? In Arias U.S quarterly, Vol. 17, No 1. First Quarter, 2010, P. 1720 See e.g. Ramos-Santiago v. United Parcel Services, 524 F.3d 120, 123 (1st Cir., 2008) 21 Aragaki, N, Hiro., “The Mess of Manifest Disregard”. In: The Yale Law Journal Online, 119:1 (2009), at p. 1.

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Structure and Methodology

This thesis is divided into four chapters. Chapter one covers the permissible grounds challenging

arbitration awards under some leading international instruments and national legislations and the

origin of the doctrine of “manifest disregard” standard. Chapter two discusses the standards

employed by the Federal Courts in the United States to find where the doctrine is applicable.

Same chapter reviews some selected cases Pre-Hall Street’s decision on the doctrine of

“manifest disregard.”

While chapter three thoroughly analyzed the most significant decision on U.S arbitration law to

come down in 2008, and certainly one that garnered most attention, the Supreme Court’s

decision in Hall Streets Associates LLC v. Mattel.22 The Court’s opinion as observed by

Donovan (2009) included substantial dicta about “manifest disregard” as a ground for vacatur,

which may prove as significant as the holding.23 A complete analysis on the case can be seen in

this chapter. Much jurisprudence has emerged after the Hall Street decision with continued split

among the various Circuits (the United States Federal Courts of Appeal).

Further analysis on the commentary of the holding from different perspectives and the confusion

that trails the Hall Street’s decision through the cases adjudicated by the Federal Circuits in the

Post-Hall Street regime is covered in this chapter.

Chapter four discusses the recent decision of the United States Supreme Court in the Stolt-

Neilsen v. Animal feeds24 case handed down to address the split among the Circuits on the

continued viability of the doctrine of “manifest disregard’ as a ground for vacatur and vindictive

of the position taken by this thesis that the controversial doctrine of “manifest disregard” is still a

valid ground for vacatur of arbitral awards in the United States Courts, albeit with s statutory

gloss of section 10(a)(4) of the FAA.

22 Hall Street Associates, L.L.C., v. Mattel, Inc, 552 U.S 576,, 128 S.Ct. 1396, available at Westlaw International: http://international.westlaw.com/print/printstream.aspx?spa=intbuc... Retrieved on 12.04.2010.23 Donovan, D. Francis., “Current Developments in the United States”. In: Contemporary Issues in International Arbitration and Mediation, (2009), The Fordham Papers 2008, Martinus Nijhoff Publishers, at p. 85-86.24Stolt-Neilsen S.A v. Animalfeeds International Corp. (http://www.supremecourt.gov/opinions/09pdf/08-1198.pdf), retrieved on 15.06,2010.

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A comparative analysis from other jurisdictions outside the United States in order to find out

whether similar non-statutory ground exists as a ground for vacating an arbitration award is

equally perused in the final chapter.

The public policy defense as a ground for vacatur which is widely seen as a doctrine of last

resort by an award debtor and similar to “manifest disregard” doctrine is equally analyzed in this

chapter taking into considerations a comparative analysis of the doctrine from some selected

jurisdictions outside the United States. Finally, same chapter forms the conclusion of this thesis.

1

CHAPTER ONE

1.1 International Commercial Arbitration

1.2 Emergence and Definition:

The emergence of international commercial arbitration in the world can be seen as acquiescence

of sovereign nations to a new dispute mechanism by private individuals. As noted by

Schmitthoff (1982) following the Second World War, nation states were content to allow the

international mercantile community to self-regulate25. At this juncture, local economies were still

operating at national level; vital matters of national importance were not implicated; and world

trade was largely experimental and had not become the vehicle of international

interdependence.26

As the pace of international trade increased and multinational entities and markets grew,

commerce and arbitration required greater scope and recognition. Nation States acquiesced to the

more formal emergence of the international arbitral process by ratifying the 1958 New York

Arbitration Convention (hereinafter referred to as New York Convention).27

For national governments, this is the inevitable reality of economic self-interest. International

commerce had became and one of the effective means of boosting national economies. And

Arbitration provided the neutral, confidential and expert forum necessary for the resolution of

international commercial disputes. Arbitration, therefore, was essential to the stability of

international commerce. According to Carbonneeau (1994) the consequence was many nations

saw little disadvantage in a treaty giving international arbitration greater currency and a

heightened standing.28

Born (2005) defined international commercial arbitration as the means of through which

international commercial disputes can be definitively resolved, pursuant to the parties’

25 See Schmitthoff, C, & Norn, C. Nature and Evolution of the Transnational Law of Commercial Transactions, in The Transnational Law of International Commercial Transactions 21, 1982 Edition.26 Id. 27 Id.28 Carbonneau, E. Thomas, National Law and Judicialization of Arbitration: Manifest Destiny, Manifest Disregard, Manifest Error, In International Arbitration in the 21st Century: Towards “Judicialization” and Uniformity?, Transnational Publishers, Inc. Irvington, New York, 1994, p. 120

2

agreement, by independent, non-governmental decision makers.29 Redfern and Hunter (1991) on

the other hand see “arbitration as a process by which “two or more parties, faced with a dispute

which they cannot resolve for themselves, agree that some private individual resolve it on their

behalf, and if the arbitration process runs its full course… it will not be settle through a

compromise, but through the making of a binding decision.”30

Although international arbitration is a consensual means of dispute resolution by non-

governmental decision makers, it only has a binding effect by virtue of a complex framework of

national and international law.31 While Born (2005) advocated that the sets of international and

national legal instruments seeks to enhance the enforcement of arbitral awards, and insulate the

arbitral process from interference by the national courts or other governmental authorities. Ball

(2006) on the other hand disagrees with the idea that arbitration is a separate, free standing

system of justice.32 He further defined arbitration as “the process, through which a neutral third

party, not a court, adjudicates a dispute and renders a legally binding decision”.33 While in the

same light Reisman, Craig & Paulson (1997) define arbitration as “a contractual method for the

relatively private settlement of disputes”.34

Most of the definitions by prominent writers on arbitration are in agreement on the presence of

two key factors in arbitration, namely, the contractual nature of arbitration which forms the bed

rock of any arbitration agreement through the mutual wishes of the parties, and the need for the

role of States in providing the legal framework and atmosphere that will facilitates the smooth

running of the arbitration process.

29 Born, B. Gary, “International Commercial Arbitration, Commentary and Materials.” 2nd Ed. Transnational Publishers, Kluwer Law International (2005), p.130 Redfern, A. & Hunter, M. “Law and Practice of International Commercial Arbitration” 3, 2nd Ed, (1991).31 Supra Born (2005), at p. 3.32 Ball Markham, The Essential Judge: The Role of the Courts in A System of National and International Commercial Arbitration. Vol. 22, No. 1 2006.33 Id at p. 314.34 Reisman, M. Craig, L. Park. W & Paulson, J. International Commercial Arbitration xxvii (1997)

3

1.3 Vacatur of International Arbitral Awards under International Arbitration Convention

and Some National Legislation:

1.3.1 International Instrument: According to Born (2005), neither the New York Convention

nor the Inter-American Convention contains any exception permitting vacatur of an arbitral

awards simply because the arbitrators got their decision wrong, his opinion was based on Article

V; & Article 5 of New York and Inter-American Conventions respectively.35 The effect of the

foregoing reasoning is that no judicial review on merits of the arbitrator’s decision is permissible

under these international instruments. However, there are grounds for non-recognizing

international arbitration awards under the New York Convention as exceptions to the

presumption of enforceability in Article III, these exceptions are contained in Articles V and VI

of the convention. He summarizes these grounds and considers them as extremely limited as

reproduced below:36

1. Where the award was rendered pursuant to an arbitration agreement that was invalid

because, under the applicable law, the parties lacked capacity to make the agreement or

the agreement was itself invalid.37

2. The losing party was not giving proper notice of the appointment of the arbitrator or of

the arbitration proceedings or was otherwise unable to present his case.38

3. The arbitral award deals with a difference not contemplated by or not falling within the

terms of the submission to arbitration.39

4. The composition of the arbitral panel or the panel’s procedure violated either the parties’

agreement or the law of the arbitral forum.40

5. The arbitral award is either not yet “binding” or has been set aside or suspended “by a

competent authority of the country in which, or under the law of which, the award was

made.41

35 Supra Born (2005) at p. 79736 Supra Born (2005) at p. 795-796.37 New York Convention Article V (1) (a); Inter-American Convention Article 5(1)(a)38 New York Convention Article V (1) (b); Inter-American Convention Article 5(1)(b)39 New York Convention Article V (1) (c); Inter-American Convention Article 5(1)(c)40 New York Convention Article V (1) (d); Inter-American Convention Article 5(1)(d)

4

6. The subject matter of the parties’ dispute is not capable of settlement by arbitration, or is

“non-arbitrable,” under the law of the enforcing nation.42

7. Recognition or enforcement of the arbitral award would be contrary to public policy of

the enforcing nation.43

8. Where an application has been made to a court or other competent authority of the

“country in which, or under the law of which, that award was made,” then the court

where enforcement is sought “may, if it considers it proper, adjourn the decision on the

enforcement of the award….”44

One of the reasons for reproducing these summarized grounds for non-recognition and

enforcement of international awards here is to show the reader the distinction between the

aforementioned grounds which are totally procedural grounds in nature and other grounds

embarked upon by some countries for judicial review based on the substance (merits) of the

arbitral awards.

The defense of public policy of an enforcing State is one cardinal point of this thesis, hence, the

importance to see how it emanates from these international conventions and ultimately

incorporated in most national legislations.

1.3.2 National legislations on judicial review:

Most national arbitration legislations provide for non-recognition and enforcement of arbitral

awards based on similar grounds as those under the New York Convention with some minor

variations.45 Article 34 and 36 of the UNCITRAL Model law provides for a denial of arbitral

award based on similar provisions of the New York Convention, so are the Articles 190 1nd 194

of the Swiss Law on Private International Law (hereinafter called SLPIL) and the section 10 of

the American FAA. While some countries legislations like Article 758 of the Argentine Code of

Civil and Commercial Procedure and Articles 273 and 274 of Iraq Code of Civil Procedure

41 New York Convention Article V (1) (e); Inter-American Convention Article 5(1)(e).

42 New York Convention Article V (2)(a); Inter-American Convention Article 5(2)(a).43 New York Convention Article V (2)(b); Inter-American Convention Article 5(2)(b).44 New York Convention Article VI; Inter-American Convention Article 6.45 Born (2001) Supra at p. 706.

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permit more expansive judicial review to the extent of treating the awards like lower courts

judgments’, or alternatively, local courts review afresh the decision of the arbitrators.46

Born (2009) also acknowledges that judicial review of the merits of arbitrator’s award does not

exist under the UNCITRAL Model law.47 He however, noted that despites the trend towards

pro-arbitration and abandonment of judicial review on merits, there still exist even among the

arbitration hubs, the tendency of reviewing the merits of arbitral award’s decisions. These

jurisdictions include England, China, Australia, Singapore, Abu Dhabi, Egypt, and United

States.48

Judicial review of arbitration awards is not something that is totally unwarranted but rather is the

nature and scope of the review that is of concern to process. It is widely agreed that some of the

characteristics of arbitration are speed and efficiency for determination of the dispute. While

Kroll (2005) observed that finality of arbitral award is one of the six most important

characteristics of arbitration.49

However, where the judicial review is limited in scope and necessary for effecting justice in line

with the wishes of the parties in cases where the award presents egregious error of law on the

face of the award not mere error of law or fact, such review could only help in facilitating the

arbitration process. Damman (2008) noted that there are situations in which a review on the

merits of the arbitral award’s decision may be called for under certain circumstances.50 Another

writer Jean-Paul also observes the need for some limited judicial review on legitimate

expectations of the parties when he said “nevertheless, processes of judicial review are never

entirely absent from the law. In some case, checking the correct application of the law by

arbitration is inherent to the control itself.”51

46 Supra, Born (2005), at p. 796.47 Born, Gary Brian, International Commercial Arbitration, Vol. 2. Alphen [u.a.]: Kluwer, 2009, at p. 2638.48 Id, at p. 263949 Kroll, S. Setting Aside Proceedings in Model Law Jurisdictions- Selected Procedural and Substantive Questions from the Case law 5, International Arbitration Law Review, 2005 8 (5) p.170-178.50 Damman, A. Vacating Arbitration Awards for Mistakes of Fact, The review of litigation 2008, available online at www.highbeam.com51 Jean-Paul, B. Egregious Error of law as Grounds for Setting Aside an Arbitral Award, available online at http://www.kluwerarbitration.com,, retrieved on 17.06.2010.

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1.4 The Origin and History of the Doctrine of “manifest of disregard”

Despite being overruled in 1989, Wilko v. Swan52 continues to be cited as authorizing courts to

review arbitration awards for “manifest disregard of the law.”53 Of course, Wilko itself did not

review an award for manifest disregard of the law; much less vacate an award on that ground.

Instead, while holding that pre-dispute agreements to arbitrate 1933 Securities Act claims were

unenforceable (the holding that has been overruled), the Court stated its famous dictum that “[I]n

unrestricted submissions ... the interpretations of law by the arbitrators in contrast to manifest

disregard are not subject, in the federal courts, to judicial review for error in interpretation.”54

The Federal Arbitration Act (FAA) nowhere expressly provides for an award to be vacated for

manifest disregard of the law,55 nor has the Supreme Court since Wilko ever reviewed an award

on that ground.5 Nonetheless, based on the Wilko dictum, every United States Court of Appeals

has adopted some form of “manifest disregard” review.56

According to Draholza (2007), the manifest disregard as a “non statutory” or “judicially” ground

for vacating arbitration award lacks a firm doctrinal footing.57 The Circuits disagree on what

manifest disregard is and consequently resulted in split among the Circuits in the United States

jurisprudence. A thorough analysis of this split can be seen below and what similar approach if

any is taken by some selected jurisdictions outside the United States.

52 346 U.S. 427 (1953), overruled on other grounds, Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989).

53 Drahozal, R.C, “Codifying Manifest” the article is based on a presentation in a conference on “Rethinking the Federal Arbitration Act,” held at University of Nevada-Las Vegas Boyd School of Law. Available at: http://ssrn.com/abstract=13847779, retrieved on 25.06.2010.54 Wilko Supra, at p. 436.55 9 U.S.C. Sections 10.56 Drahozal, Supra at p. 1.57 Id. at p. p.2

7

CHAPTER TWO

PART A

2.1 What constitutes “Manifest Disregard of Law” by the Federal Courts?

2.2 The Two Prong Test

The Second Circuit in Duferco International Steel Trading, v. T. Klaveness Shipping A/S58

undertook an extensive analysis of some cases within the limited authority of cases where

manifest disregard of law was found by the federal appellate courts. The court observed that as

of June, 2003, it had vacated “some or all of arbitration award for manifest disregard in the

following four out of the last forty-eight cases where it applied the standard.59 But for the

decision in Halligan, the remaining three cases concerned review of arbitral awards that

exceeded the arbitrator’s authority.60 Accordingly, the Second Circuit contends that in those

cases “It is arguable that manifest disregard need not have been the basis for vacating the award,

since vacatur would have sufficed under the FAA.

Three elements can be deduced from the laid standard in the Duferco case. First, the doctrine is

one of last resort. It may only be used upon exhausting all other grounds upon which vacatur

would be appropriate. In addition, the last resort doctrine element would only apply to the most

extreme and egregious circumstances. Lastly, the doctrine may attach only where the provisions

of the FAA simply do not apply. In order to avoid the risk of interfering with the object of

arbitration which is discreet resolution of disputes between parties independent of judicial

intervention or the influence of doctrines embodied in legislative instruments or case law that

reflects the public policy of the State far beyond the particular dispute at issue. In this regard, the

Second Circuit stressed the need to refrain from interfering with a process to avert frustrating the

intent of the parties, and thwart the usefulness of arbitration, making it ‘the commencement, not

the end, of litigation.61

58 Duferco International Steel Trading, v. T. Klaveness Shipping A/S, 333 F.3d 383, (2nd Cir. 2003), available at westlaw international: http://international.westlaw.com/print/printsream.aspx?spa=intbuc... Retrieved on 12.04.2010.59 Id.60 Id.61 Id. at p. 356.

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Admittedly, the Second Circuit acknowledges the rarity of application of this doctrine

nevertheless agrees that the doctrine has generated a paucity of jurisprudence.62 Consequently,

the Court found out that the doctrine’s “precise boundaries are ill defined, although its rough

contours are well known”.63 Therefore in addition to the above outlined three elements, another

three-inquiry standard was established by the duferco Court in an attempt to define with greater

clarity and precision the doctrine’s triggering standard.

First, a court must determine whether the governing law or authority ignored by the arbitrator

itself is not ambiguous, that is, clear,64 and also should be applicable to the issue in question

before the arbitrator. Therefore, the law must be clear and clearly applicable.

Second, where the first question is answered in the affirmative, a court must find “that the

governing law was improperly applied, leading to an erroneous result.”65 Emphasis here is on the

result having a direct causal nexus with the improper application to obviate a scenario where

irrespective of the propriety of the application of law to facts, the result would still have been the

same. It means the doctrine of manifest disregard will not have been relevant where the

erroneous result was a consequence of proper application of the law.66

Third, where a court is satisfied with the first two preceding enquiries, then the intent of the

arbitrator is analyzed. This is to ascertain the arbitrator’s knowledge of the governing law,

Martinez-Fraga, (2010) noted in his book, “It is plain and obvious that only that which is known

can be manifestly disregarded”.67 To fulfill this requirement, the Second Circuit identifies two

factors to be considered.68 At the outset, only the law the parties communicated to the arbitrator

will be analyzed for purposes of arriving at a conclusion concerning the arbitrator’s knowledge

of the law that was intentionally disregarded. Second, where no such laws was communicated to

the arbitrator, then the court will apply an objective test, that is the reasonableness test where

such law or the nature and character of the error was so blatant and obvious that it will be affront

62 Id. at p. 376.63 Id.64 Westerbeke Corp. v. Daihatsu Motor Co. Ltd., 304 F. 3d 200, 209 (2nd Cir. 2000).65 Duferco Int’l Steel, 333 F. 3d at p. 390.66 Id.67 Martinez-Fraga, J. Pedro, The American Influence on International Commercial Arbitration: Doctrinal Developments and Discovery Methods. Cambridge University Press, New York, 2010, at p. 98.68 Id. at p. 99.

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to reason not to acknowledge it as capable of being recognized by the average person qualified to

serve on such an arbitral panel.

Since the Second Circuit’s ruling in Duferco, that Court to August 2007 has reviewed a total of

twelve cases concerning petitions to vacate arbitral awards (excluding Duferco) based upon the

manifest disregard of law doctrine.69 Where Duferco is included, and then the total of thirteen

cases exactly eleven awards has been affirmed despite the manifest disregard of the law

challenge. One case was remanded, and the award was vacated on the ground of manifest

disregard of the law in one other action.70

2.3 Disregard Law, Facts or Both: What is the Applicable Standard?

In Halligan v. Piper Jaffray Inc’s case,71 where Irene Halligan acting as executrix for the estate

of Theodore Halligan appealed two New York District Court’s orders refusing to vacate the

arbitration’s award which was rendered in favor of the defendant (Piper).72 The dispute is that

Halligan alleged wrongful termination of employment based on old age which is against the Age

Discrimination Employment Act (ADEA). The second order by the Court dismissed Mrs.

Halligan claims based on the principle of res judi cata, since she rely on same facts that was

adjudicated by the arbitral tribunal. In an appeal to the Second Circuit, Mrs. Halligan relied on

manifest disregard of law.73

The Second Circuit found compelling evidence suggestive of age discrimination by the

defendant in terminating Halligan’s employment. Also all evidences shows that Halligan was

one of the best in his chosen field of sales for the company and has been that for a long time, this

coupled with the inconsistency of testimony by the defendant’s personnel shows that age was a

factor. The award however, does not contain any rationale for reaching a decision that denied

69 Id.70 Id.71 Halligan v. Piper Jaffray, Inc., 148 F. 3d 197 (2nd Cir. 1998), available at west law international: http://international.westlaw.com/print/printstream.aspx?spa=intbuc... Retrieved on 03.06.2010.72 Id. at p. 23.73 Id.

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Halligan any relief. The Court noted that the standard for applying the doctrine of manifest

disregard “clearly means more than error or misunderstanding with respect to the law”.74

The Court additionally enunciated a two-prong standard for application of the doctrine: “A Court

must find both that, (1) the arbitrator knew of a governing legal principle yet refused to apply it

or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and

clearly applicable to the case.”75 However, the problems of applying these sets of criterions are

compounded in the case of mandatory binding arbitration of employment discrimination disputes

as a condition of employment.76

The Second Circuit in applying the above enumerated standards and reversing the district court

found in addition to the evidences that the record shows both counsels generally agreed on the

applicable law and those applicable laws were explicitly communicated to the arbitrators. The

Court held that “in view of the strong evidence that Halligan was fired because of his age and the

agreement of the parties that the arbitrators were correctly advised on the applicable legal

principles, we are inclined to hold that they ignored the law, the evidence or both.” 77

The Second Circuit’s holding created some confusion among lower courts and commentators.

Three possibilities were contemplated from the language used by the Court. First, that the court

finds it inclined to vacate the award on the basis of manifest disregard of law because the

arbitrators ignored the law.78 The court vacated the award based on the evidence that was

ignored, or thirdly, that the arbitrators ignored both the law and the facts (evidence). It was this

third position that led numerous courts to adopt another doctrine “manifest disregard of facts”

standard in addition to the manifest disregard of law doctrine, Martinez-Fraga (2010)79 noted that

this development by other courts as erroneous conclusion, and rightly so when the Second

Circuit got the opportunity in Wallace v. Buttar80 to clarify its position on the manifest disregard

of facts as a dicta, and not a holding.

74 Id.75 The Court cited DiRussa v. Dean Witter Reynolds, Inc., 121 F. 3d 818, 821 (2nd Cir. 1997)76 Martinez-Fraga, Supra at p. 113.77 Halligan v. piper, supra at p. 123.78 Martinez-Fraga, Supra at p. 100.79 Id, at p. 10780 Wallace v. Buttar, 378 F. 3d 182 (2nd Cir. 2004).

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The problem with the two established prongs by the Halligan court is too abbreviated to find

universal application to standard fact-intensive arbitration proceedings.81 The first prong speaks

of the arbitrator’s knowledge of the governing law. The question is, does it mean the knowledge

from what the parties has briefed the arbitrators, or is it the reasonable test standard of

objectivity?82 The second prong has also its share of difficulty in interpreting the elements

contained therein. The reference to “refusal or ignored” is rather disjunctive, “refusal to apply the

governing law” suggest an intentional disregard of the law by the arbitrator, while “ignoring the

law” may mean negligence or unintentional recklessness standard.83

The two prongs must be met in the conjunctive for the doctrine of manifest disregard to apply.

Proving the elements of the first prong may not be that easy especially in common law countries.

As observed by Martinez-Fraga (2010), rarely are any governing principles well defined,

explicit, and let alone clearly applicable to a case.84

In light of the above confusion about establishing “applicable or governing law” can a court rely

on persuasive authority to prove the two prong test? The Second Circuit answered this question

in their judgment of New York Telephone Co. v. Communications Workers of America.85 They

confirmed the vacation of the award by the District Court for the Southern District of New York,

where a labor arbitration agreement was entered against the New York Telephone Co. The crux of

the matter was that the arbitrator expressly disregarded the Second Circuit’s ruling in

International Longshoreman’s Ass’ n v. Seatrain Lines, Inc.,86 and chose to rely on two recent

decisions from courts outside the Second Circuit. The Second Circuit held the vacatur was in

order as those opinions were not the law of the Second Circuit. The court was not basing their

decision based on the Halligan’s two prong test but rather from the persuasive nature of the

applied authority which the court fails to find as binding.

Respectfully, this thesis begs to differ from the ruling of the Second Circuit in this case,

arbitrator’s reliance on persuasive decisions from dicta’s of other courts, could not have been

81 Martinez-Fraga, Supra at p. 109.82 Id.83 Id. at p. 110.84 Id.85 New York Telephone Co. v. Communications Workers of America Local 1100, AFL-CIO District 1, 256 F.3d 89 (2nd Cir. 2001).86 International Longshoreman’s Ass’ n v. Seatrain Lines, Inc., 326 F. 2d 916 (2nd Cir. 1964).

12

manifest disregard, worst case scenario; it should be seen as a mere legal error. Yet, all courts are

in agreement that mere legal error alone is not sufficient to ignite the application of the doctrine

of manifest disregard of law.

2.4 Does Parties’ Agreement create the Standard?

Another standard of manifest disregard of law emanates from the Third Circuit ruling in the case

of United States Steel & Carnegie Pension fund v. John Mc Skimming87, the court reversed the

judgment of the district court and affirmed the award concerning a statutory labor dispute under

the enforcement provision of the Employee Retirement and Income Security Act (“ERISA”), 29

U.S.C Section 1132 (1982). The Third Circuit found that the applicable standard should be one

the arbitral award be upheld “if the interpretation is derived from the parties agreement, viewed

from the light of its language, its context, and any other indicia of the parties’ intention; only

where there is manifest disregard of the agreement, totally unsupported by principles of contract

construction and the law of the shop, may a reviewing court disturbs the award”.88

The reasoning of the Third Circuit is akin to that of section 10 (4) of the FAA, the provision of

vacating award where the arbitrator exceeded his authority. In particular, it underscored that “if

an arbitral decision is based ‘solely upon the arbitrator’s view of the requirements of enacted

legislations,’ rather than on the contract, the arbitrator has exceeded the scope of the submission

and the award would not be enforced.”89

Both standards enunciated by the Third Circuit merits closer attention. Martinez-Fraga (2010)

noted that in the first standard, a reasonableness test is adopted such that only if some connection

between the award and the labor contract at issue can only be construed as irrational can vacatur

attach. The standard is so exacting that it stands in sharp relief compared to the Second Circuit

standards analyzed in Halligan and NY Tel.90 while the second standard sets by the Third Circuit

is far-away in terms of distance from their very own first standard. It is also unclear where it falls

as a standard between “manifest disregard doctrine” on one hand and Section 10 of the FAA on

the other hand. To issue a vacatur based on the findings that arbitrator premised his decision on

87 United States Steel & Carneigie Pension Fund, et al. v. John McSkimming, 759 F.2d 269 (3rd Cir. 1985).88 Id. at p. 270-71 (citing Ludwig Honold Mfg. Co. v. Fletcher, 405 F.2d 1123, 1128 (3rd Cir. 1969).89 Id. at p. 27190 Martinez-Fraga, Supra at p. 110.

13

interpretation of enacted legislations rather than the text of the operative agreement is rather

difficult to reconcile as a test with the other standards. Can vacatur be applied based on legal

error on methodology? Put another way, would vacatur ensue where the arbitrator reaches the

right result but through the wrong analysis?

The requirement of reaching correct analysis in articulation of standards, use of precedents is

important could either be seen as conducive to mere subjective relativism for the doctrine’s

application, or as an important part of the judicial review for creation of uniformity in a legal

doctrine that has generated so much jurisprudence, this thesis opted for the later.

2.5 Can wrong interpretation or alteration of the Governing agreement by the Arbitrator

trigger the Doctrine?

Patton v. Signature Ins. Agency yet marks another approach to the standard of manifest disregard

application by the Fourth Circuit. The court stated that the doctrine comes into play and vacatur

can be granted where the arbitrator fails to draw its essence from the governing arbitration

agreement.91 The court by this holding is trying to distinguish between “misapplication of

contractual interpretation” or “erroneous interpretation”, where neither ground suffices for

vacating award,92 the Court carved a category triggering application of the doctrine where an

arbitrator “amended or altered the agreement, so says the argument, the “essence of the

agreement” is frustrated and thus a “scope of authority” issue arises but under common law and

not Section 10 of FAA.

The lacuna with this standard is that often times contracts creates multiple binding obligations

and incident objectives as against the assumption of the standard of a single ‘essence” factor of

the contract. It is equally almost impossible to draw a line between disavowing the “essence of

an agreement” and simply misconstruing as a matter of contractual interpretation.93

91 Patton v. Signature Ins. Agency, 441 F.3d 2320 (4th Cir. 2006), at p. 271.92 Apex Plumbing Supply, Inc. v. U.S. Supply Co., 142 F.3d 188, 194 (4th Cir. 1998).93 Martinez-Fraga, Supra at p. 111.

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PART B

2.6 Pre-Hall Street Case Law

Going by the analysis of the doctrine of “manifest disregard of law” above, armed with the

discussion on vacatur of arbitral awards under the international instruments and some selected

national legislations on commercial arbitration including that of the United States, the stage is

ripe for the analysis of the doctrine in Pre-Hall Street era. How the federal circuits interprets

expansive judicial review. An inherent tension could be deduced at all times by the federal courts

in trying to balance on one hand the policy underlying the FAA (“congressional desire to enforce

agreements into which parties had entered), conflicts with the FAA’s enumerated standards of

judicial review such that the contracting parties agree to a standard of review different than the

standards called for under the FAA.94

2.7 Case Law in Support for Expanded Judicial Review

“Five federal circuits have indicated that expanded judicial review clauses in agreements to

arbitrate should be enforced as any other contractual terms. These courts have generally

concluded that parties may make agreements to expand a federal court’s scope of reviewing an

arbitral award, because, as the Supreme Court has emphasized, arbitration is a creature of

contract” the court in Gateway noted.95

2.7.1 Gateway Technologies, Inc., v. MCI Telecommunications Corp96

The Fifth Circuit was the first federal court to uphold an agreement calling for expanded judicial

review in Gateway.97 In that case, the parties agreed to arbitrate disputes arising under their

94 Accurso, Laura; Petty W. Rachel, “How Final Are Arbitration Awards? “The Enforceability of Expanded Judicial Review Clauses”, In ARIAS U.S Quarterly, Vol. 15, No. 2. 2nd Quarter, 2008, at p. 3

95 Id. at p. 496 Gateway Technologies, Inc., v. MCI Telecommunications Corp., 64 F.3d 993, 996 (5th Cir. 1995).97 Supra (Accurso, & Petty) 2008 at p. 4.

15

contract, but they also agreed that “errors of law shall be subject to appeal.”98 A dispute arose,

and the matter was referred to arbitration as called for under the contract.99

A dispute arose where MCI complained of some technical hitches in Gateway’s equipments,

while Gateway was about to correct the hitches, MCI replaced them with their own which will

earn them substantial profit. Gateway called for arbitration in line with their agreement and the

arbitrator awarded both actual damages and punitive damages in favor of Gateway. MCI move to

vacate the award while Gateway moves to confirm the award at the district court of Northern

District of Texas. The district court refused vacatur and confirms the award as the court reads the

clause “errors in law” under the harmless and less strict principle of “errors in law” which is not

sufficient to vacate an arbitral award.100

The Fifth Circuit observed that the lower court erred in their decision for not interpreting “errors

in law” as requiring “a scrutiny as strict as would be applied by an appellate court reviewing the

actions of a trial court. The main contention by MCI that the arbitrator erred in law when he

awarded punitive damages to the tune of $2,000,000 to Gateway as it ran contrary to the

Virginian law which the arbitrator used. Under Virginian law, no award of punitive damages can

be made to an action of breach of contract but can be made to an action for breach of fiduciary

duties. The Fifth Circuit held that there was no evidence that a fiduciary duty exists between the

parties since they were neither partners nor agent and principal. And for that reason, the court

found an error in law by the arbitrator, and vacated the award based on manifest disregard of law

by applying an expansive judicial review.101

Other federal circuits have reached similar conclusions. In the case of Syncor International Corp.

v. Mcleland,102 the Fourth Circuit followed Gateway’s decision. The agreement calling for

arbitration provided that “the arbitrator shall not have the power to commit errors of law or legal

reasoning, and the award may be vacated or corrected by judicial review for any such error”.103

98 Gateway, (5th Cir. 1995), at p. 995.99 Id. at p. 994.100 Id.101 Id.102 Syncor International Corp. v. Mcleland, 120 F.3d 262 (Table), 1997 WL 452245 at p. 6 (4th Cir. 1997)103 Id.

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2.7.2 Roadway Package System, Inc. v. Kayser104

The facts are Roadway Package System (hereinafter called RPS) is a carrier that ships small

packages for corporate clients while the defendant (kayser) assists in its operations as a sub-

contractor. A dispute arose when RPS terminated Kayser’s contract alleging non-performance of

obligation under the contract, and Kayser submits for arbitration in line with the contract

agreement. Arbitrator awarded substantial damages to Kayser and RPS move to vacate the award

at district court for Eastern district of Pennsylvania, applying the grounds for vacatur under the

FAA, the district vacated the award as the arbitrator was found to have exceeded his authority.105

Kayser appeals to the Third Circuit, argued that Pennsylvanian vacatur standards, which are

more restrictive than the FAA standards, applied because the parties agreed that their contract

“governed by and construed in accordance with laws of the commonwealth of Pennsylvania”.106

Kayser further submitted to the Third Circuit two questions, first, whether contracting parties

may opt out of the FAA’s default vacatur standards and fashion their own. Second, how courts

will decide whether parties have contracted out of the FAA’s default rules. The Court

acknowledged that “parties may opt out of the FAA’s default vacatur standards and fashion their

own (including by referencing state law standards),” but ultimately concluded that this “generic”

choice-of-law clause was insufficient to supplant the enumerated standards of judicial review set

forth in the FAA.107

2.7.3 Jacada (Europe), Ltd. v. International Marketing Strategies, Inc.

The Sixth Circuit found that a generic choice-of-law clause was insufficient to displace the

FAA’s vacatur standards or to exceed the review under “manifest disregard”.108 The background

of the case is as follows: Jacada is a software development company incorporated in United

104 Roadway Package System v. Kayser, 257 F.3d 287 (3rd Cir. 2001).105 Id. at p. 288.106 Id. at p. 289.107 Id, at p. 288-293.108 Jacada (Europe), Ltd. v. International Marketing Strategies, Inc., 401 F.3d 701 (6th Cir. 2005), at p. 713.

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Kingdom that created a software package referred to as Jacada/400. International Marketing

Strategies (IMS) is a marketing firm incorporated in State of Michigan that offered expertise in

attracting possible customers for software such as Jacada’s.

The two companies signed a distribution agreement, under which IMS received the right to

market and distribute the software to some countries. The Sixth Circuit found three provisions in

the contract as crucial to the appeal in question. The parties agreed to a general choice-of-law

clause stating in its entirety, “this agreement will be governed by the laws of the State of

Michigan, ‘which applies more thorough review’ of arbitral award than does the FAA.”109 The

distribution agreement also contained an arbitration clause specifying that all disputes under this

agreement would be resolved “in Kalamazoo, Michigan, and exclusively by arbitration by the

American Arbitration Association in accordance with its commercial arbitration rules.

The court ruled that the parties did not intend to displace the federal standard for vacatur when

only evidence of such intent is a generic choice-of-law provision; the court did not apply the

broader standard of review in that case.110

2.7.4 Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp111

Similar to the above two analyzed cases, here too the parties included a generic choice-of-law

clause, opting for Puerto Rico law which allows judicial review for errors of law.112 Addressing

the question of whether expanded review clauses are enforceable, the First Circuit stated: “We

agree with the other Circuits that have concluded that the parties can by contract displace the

FAA’s standard of review.”113

However, the court ultimately concluded that the parties had not contractually displaced the

FAA’s standard of review, reasoning that a generic choice-of-law clause within the arbitration

109 Id, at p. 710.110 Id.111 Puerto Rico Telephone Co. v. U.S. Phone Manufacturing Corp, 427 F.3d 21 (1st Cir. 2005).

112 Id. at p. 24.113 Id. at p. 31.

18

agreement is insufficient to “require the application of state law concerning the scope of review,

since there is a strong federal policy requiring limited review.”114

2.8 Case Law Disallowing Expansive Judicial Review

About five federal circuits in the United States were of the view that expansive judicial review

contractual provisions encroaches on the legislature’s power.115 According to these courts,

private parties cannot, broadly speaking, contract for review of arbitral awards on any grounds

other than those permitted in Section 10 of the FAA.116 The following cases represent the

highlights of those circuits position.

2.8.1 Ernest Bowen; Mary Bowen, v. Amoco Pipeline Company117

The Tenth Circuit was the first federal court to hold that expanded judicial review clauses are

unenforceable in the Bowen’s case.118 In that case, there was some oil pollution discovered on

the property of the Bowens. This pollution was traced to Amoco’s pipeline through the help of

expert witness reports. Amoco agreed of a leakage in his pipelines sometimes in 1953 but

nonetheless, refused responsibility of the contamination of the Bowen’s creek as he maintained

that the leakage could not be the source of the contamination as it was within the acceptable

limit. The Bowens opted for litigation but Amoco proved that there was an arbitration agreement

existing between the parties predated to 1918 through their predecessors-in-interest.119

The Bowen’s case was tried by a panel of three arbitrators in 1999. The parties agreed to use the

Rules for Non Administered Arbitration of Business Disputes (NABD), but they also agreed to

modify these rules to expand the scope of judicial review. Specifically, the parties agreed that

both would have the right to appeal any arbitration award to the district court within thirty days

“on the grounds that the award is not supported by the evidence.” They also agreed that the

district court’s ruling “shall be final”. The panel in a two to one decision made an award in favor

114 Id. at p. 29.115 Accurso & Petty, Supra at p. 4-5.116 Id.117 Bowen v. Amoco Pipelines Co., 254 F.3d 925 (10th Cir. 2001).118 Id.119 Id.

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of the Bowen, and Amoco moves to vacate at the district court. The district refused the expand

review of the award and limit their review to FAA grounds, and vacatur was denied.

The Tenth Circuit, restricting its review to the vacatur standards under the FAA, held that parties

may not contract for expanded judicial review, stating that allowing parties to expand judicial

review by contract would undermine the FAA’s primary goal of “ensuring judicial respect for the

arbitration process.”120 Furthermore, limited judicial review ensures respect for the arbitration

process by preventing “courts from enforcing parties’ agreements to arbitrate only to refuse to

respect the results of the arbitration.” Finally, the Tenth Circuit determined that contractually

expanded standards…undermine the independence of the arbitration process and dilute the

finality of arbitration awards….and place federal courts in the awkward position of reviewing

proceedings conducted under potentially unfamiliar rules and procedures.”121

2.8.2 Kyocera Corp. v. Prudential Bache Trade Service Inc122

In this case, the parties contracted for resolving their disputes by arbitration, but their agreement

to arbitrate further provided that the arbitrator’s decision could be vacated by a court “(a) based

upon any grounds referred to in the FAA, or (b) where the arbitrator’s findings of fact are not

supported by substantial evidence, or (c) where the arbitrator’s conclusions of law are

erroneous.”123 After the arbitrators issued an award, the losing party moved to vacate the award,

contending that all three grounds were met.

Ultimately, after multiple return trips between the district court and the court of appeals, the

Ninth Circuit rejected the argument that parties to arbitration agreements are free to contract for

expanded judicial review. In its decision, the Ninth circuit stated that “broad judicial review of

arbitration decisions could well jeopardize the very essence and benefits of arbitration, rendering

informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review

process.”124 The Ninth Circuit went further ahead to say “because the Constitution reserves to

120 Id.121 Id, at p. 935.122 Kyocera Corp. v. Prudential Bache Trade Service Inc., 341 F.3d 987 (9th Cir. 2003).123 Id. at p. 990.124 Id. at p. 998.

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Congress the power to determine the standards by which federal courts may review an

arbitrator’s… private parties may not contractually impose their own standard on the courts.125

In addition to the Ninth and Tenth Circuits, other Circuits have questioned-without deciding-

whether expanded review clauses are enforceable.126 In Chicago Typographical Union No. 16 v.

Chicago Sun-Times, Inc., the Seventh Circuit stated that (a) federal courts do not review the

soundness of arbitrator’s award” and (b) parties “can contract for an appellate arbitration panel to

review the arbitrator’s award” if they desire additional review, but (c) they “cannot contract for

judicial review of arbitration awards; federal jurisdiction cannot be created by contract.” Courts

and litigants are of the view that the Seventh Circuit language used in the decision of Chicago-

Sun forbids expansive review of arbitration awards.127

2.8.3 Hoeft v. MVL Group, Inc., Discovery Research Group of Utah128

Finally, in our analysis of case laws disallowing expansive judicial review of awards, we see the

Second Circuit’s standpoint from Hoft. The Second Circuit was faced with the opposite of an

expanded review clause, a “restrictive review” clause, one that foreclosed any judicial review of

the award. The arbitration agreement provided that the arbitrator’s award “shall be binding and

conclusive upon each of the parties hereto and shall not be subject to any form of review or

appeal whatsoever.”129 While acknowledging that some Circuits “have enforced private

agreements to alter the judicial review to be applied to arbitral awards” by “raising the level of

judicial review otherwise available under the FAA,” “there is a fundamental difference between

an agreement to increase the scrutiny that courts apply when considering whether to confirm or

vacate an arbitration award and an agreement to prevent courts from reviewing the substance of

an arbitration award at all.”130 The Second Circuit refused to enforce the restrictive review

clause.

125 Id. at p. 100.126 Supra (Accurso, & Petty) 2008 at p. 5127 See the Kyocera’s case, Bowen’s case, (all cited above), & Schoch v. Info USA, Inc., 341 F.3d 785, 789 (8th Cir. 2003).128 Hoeft v. MVL Group, Inc., Discovery Research Group of Utah, 343 F.3d 57 (2nd Cir. 2003).129 Id. at p. 60. 130 Id. at p. 64.

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22

CHAPTER THREE

PART A

3.1 The Famous Hall Street’s Decision

Acknowledging the split in the federal authority on the issue of whether parties to arbitration

agreements may contractually provide for expanded judicial review of arbitral awards, the

United States Supreme Court granted certiorari in Hall Street Associates, L.L.C., v. Mattel,

Inc.131 The Supreme Court agreed to decide whether “the Federal Arbitration Act (FAA)

precludes a federal court from enforcing the parties’ clearly expressed agreement providing for

more expansive judicial review of an arbitration award than the narrow standard of review

otherwise provided for in the FAA. The Supreme Court resolved the split in authority by holding

that parties to an arbitration agreement may not contractually provide for expanded judicial

review of arbitral award.132

Briefly, the disputes at issue in Hall Street Associates arose from a property lease between a

landlord (Hall Street Associates, L.L.C.) and its tenant (Mattel, Inc.) about who bore

responsibility for clean-up costs associated with environmental contamination. The lease did not

contain an agreement to arbitrate. However, after the dispute arose and the parties were engaged

in civil litigation in federal district court in Oregon, they notified the court that they intend to

resolve their dispute through arbitration, which request the district court granted, entering

arbitration agreement as an order.133

The arbitration agreement provided in relevant parts: “the arbitrator shall decide the matters

submitted based upon the evidence presented and the applicable law. The arbitrator shall issue a

written decision which shall state the basis of the decision and include specific findings of fact

and conclusions of law.134 The United States District Court for the District of Oregon may enter

judgment upon any award, either by confirming the award, or by vacating, modifying or

correcting the award. The Court shall vacate, modify, or correct any award: (i) where the

131 Hall Street Associates, L.L.C., v. Mattel, Inc, 552 U.S 576,, 128 S.Ct. 1396, available at Westlaw International: http://international.westlaw.com/print/printstream.aspx?spa=intbuc... Retrieved on 12.04.2010.132 Id. Hall Street slip op at p. 9-10.133 Id.134 Id. at p. 13.

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arbitrator’s findings of fact are not supported by substantial evidence, or (ii) where the

arbitrator’s conclusions of law are erroneous.”135

After the arbitrator issued an award in favor of the tenant, the landlord filed a motion asking the

district court to review the award, contending that the arbitrator committed legal error.

Reviewing the award under the expanded review clause, the district court concluded that the

arbitrator made an error of law. Accordingly, the district court vacated the award and remanded

the dispute to the arbitrator.136 On remand, the arbitrator reached a different conclusion, only this

time issuing an award in favor of the landlord. The district court subsequently confirmed the

award. The tenant appealed.

Relying on its decision in the Kyocera’s case, which held that parties cannot contract for

expanded judicial review, the Ninth Circuit in Hall Street Associates reversed. Remanding to the

district court, the Ninth Circuit instructed the district court to confirm the arbitrator’s initial

award “unless the district court determines that the award should be vacated on the grounds

allowable under Section 10 & 11 (for correction & modification) of FAA.137 On remand, the

district court did not confirm the initial award, but instead concluded that vacatur under section

10 was the appropriate remedy because the arbitrator’s initial award was “implausible.”138 On

appeal a second time, the Ninth Circuit again reversed and remanded “with instructions to

enforce the original arbitration award and declare Mattel (tenant) as the prevailing party.”139

Thereafter, Hall Street Associates (landlord) sought review in the Supreme Court.

Hall Street Associates advanced some arguments similar to the arguments the Circuit made in

their decision upholding expanded review clauses: the principal policy reason underlying

passage of the FAA was to promote freedom of contract by placing agreement to arbitrate on the

same footing as all other forms of contracts; the FAA does not prescribe the exclusive grounds

for vacating or modifying arbitral awards as evidenced by Wilko’s manifest disregard standard;

135 Id. at p. 2.136 Id.137 Id. at p. 142.138 Hall Street Associates, L.L.C., v. Mattel, Inc., 196 Fed. Appx. 476, 477 (9th Cir. 2006)139 Id at p. 478.

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and enforcing expanded review clauses promotes efficiency in arbitration, a significant policy

consideration.140

In response, Mattel argued that Section 10 and 11 of the FAA are “the exclusive grounds on

which a court may deny an application to confirm an arbitration award and vacate, modify, or

correct the award.”141 Mattel further argued that permitting parties to contract for expanded

judicial review would impermissibly “empower them to dictate the workings of a court in a

manner that no party to any other type of contract is entitled.”142

The Supreme Court vacated the Ninth Circuit’s decision based on two reasons. First, the court

rejected the argument that Supreme Court’s prior decision in Wilko in which the court stated that

“interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in

the federal courts, to judicial review for error in interpretations,” established the rule that

“expandable judicial review authority has been accepted as the law.”143 The Court in Hall Street

Associates stated that even “if judges can add grounds to vacate (or modify) arbitral awards, this

logic cannot be extended to allowing “contracting parties” to likewise provide for expanded

judicial review of arbitral awards.144 The court stated:

“Then there is the vagueness of Wilko’s phrasing. Maybe the term “manifest disregard” was

meant to name a few ground for review, but maybe it merely referred145 to the Section 10

grounds collectively, rather than adding to them. See e.g., Mitsubishi Motors Corp. v Soler

Chrysler Plymouth, Inc., (Steven J’s dissenting) (“Arbitration awards are only reviewable for

manifest disregard of the law, section 10 of the FAA. See also I/S Stavborg v. National Metal

Converters, Inc.,146 or, as some courts have thought, “manifest disregard” may have been a short

hand for section 10 (a)(3) or 10 (a)(4), the subsections authorizing vacatur when the arbitrators

were “guilty of misconduct” or “exceed their powers.” See, e.g., Kyocera’s case, we when

speaking as a Court, have merely taken the Wilko language as we found it, without

140 Supra Hall Street Associate’s, at p. 13, 16-38, (Supreme Court Decision, 2008), this is part of the petitioners brief.141 Id, at p. 15, part of the respondent’s brief.142 Id. at p. 36. Respondent’s brief at p. 15.143 Id. slip op at p. 7.144 Id. at p. 8.145 Mitsubishi Motors Corp. v Soler Chrysler Plymouth, Inc., 473 U.S 614, 656 (1985)

146 I/S Stavborg v. National Metal Converters, Inc., 500 F.2d 424, 431 (CA2, 1974).

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embellishment, see First Options of Chicago, Inc. v. Kaplan,147 and now that its meaning is

implicated, we see no reason to accord it the significance that Hall Street urges”.148

Second, by relying on the rule of statutory interpretation known as ejusdem generis and by

reading Section 10 and 11 in conjunction with Section 9 of the FAA respectively, the Court

determined “that the text compels a reading of the Section 10 and 11 categories as exclusive.”

Accordingly, to the Court, the ejusdem generis rule provides that “when a statute sets out a series

of specific items ending with a general term that general term is confined to covering subjects

comparable to the specific it follows.”149

Because the FAA emphasizes “extreme arbitral conduct” as grounds for vacatur or modification

of arbitration of awards, and because the FAA contains “no textual hook for expansion” of

grounds for vacatur or modification, the ejusdem generis rule yields the conclusion that

contracting parties’ cannot “supplement review for specific instances of outrageous conduct with

review for just any legal error.”150 In addition, the Court relied on the text of the FAA itself to

reach its decision. Reading Section 10 and 11 together with Section 9 language that district

courts “must grant” an order confirming arbitration award “unless the award is vacated as

prescribed in sections 10 and 11 of this title.” The Court concluded that this language

“unequivocally tells courts to grant confirmation in all cases,” except when the grounds of

section 10 and 11 apply.151

The Court ultimately held that “instead of fighting the text, it makes more sense to see the three

provisions, Section 9-11, as substantiating a national policy favoring arbitration with just the

limited review needed to maintain arbitration’s essential virtue of resolving disputes

straightway.”152 The Court’s decision makes clear that expanded review clauses in arbitration

agreements are unenforceable. When asked to vacate or modify arbitral awards under the FAA,

the federal courts are limited to the grounds enumerated in section 10 and 11 of the FAA.

147 First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995).

148 Supra Hall Street Associate’s, at p. 8149 Id. at p. 9.150 Id.151 Id. at p. 10.152 Id. at p. 11.

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The Hall Street decision attracts a global commentary and analysis; commentators analyzed the

decision from different perspectives and the potential consequences it may pose to international

commercial arbitration both within the United States and outside.153 Different approaches were

taken by various writers on the Hall Street’s decision.

Some commentators took the view of parties’ autonomy as paramount consideration in

arbitration agreements that include the desire to have or not have an expanded judicial review in

a post-arbitration award as one of the corner stone of the arbitration process.154 While others still

arguing on the supremacy of parties’ autonomy goes a little further to criticize the United State’s

Supreme Court’s decision for not paying attention to the validity of the agreement if the

expansive review clause is extinct from the rest of the arbitration agreement.155 They question

whether the rest of the agreement could stand alone and if so, what were the criterions of

validating the rest of the arbitration agreement, most importantly, why did the United State’s

Supreme Court failed to address the issue.156

One of the likely problems the Hall Street’s decision may generate as observed by Zell (2009), is

the likelihood of enforcing an arbitration agreement without the expansive judicial review clause.

He goes further to argue that, “a rigid rule severing the invalid clause and enforcing the

remainder of the agreement could force parties that viewed the expansive judicial review as an

indispensable protection to the arbitration agreement. While on the other hand, a rigid rule

invalidating all arbitration agreements with expansive judicial review clauses could deprive

parties that view expansive judicial review clauses as beneficial but not indispensible fruit of

hard work and expensive negotiations.”157

153 Shaughnessy, Patricia, Party Autonomy or Finality and Efficiency, “should the international arbitration community rethink the limits of party autonomy after Hall Street v. Mattel” in: Fest LH_inlaga.book, p. 457 Thursday, August 7, 2008, at p. 458154 Id. at p. 457-458. Also see, Wolff, Reinma, Party Autonomy to Agree on Non-Final Arbitration, In 26 ASA Bulletin, Vol. 3, September, 2008.

155 Zell, L. Jeremy, Discerning the Validity of Arbitration Agreements Containing Heightened Judicial Review Clauses after Hall Street Associates, LLC v. Mattel, Inc. Draft for distribution to be published in Loyola University Chicago Law Journal forthcoming spring 2009, at p. 10

156 Id. at p. 9-16.157 Id. at p. 10-11.

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Questions on the extent of the Hall Street’s holding could be manifold, ranging from what

happens now to all those agreements out there with expansive judicial review clauses, while the

parties continue to perform their respective obligations under those agreements to issue of

doctrine of severability of the expansive judicial review clauses from the rest of the arbitration

agreement. Whose responsibility to decide what part of the arbitration agreement to leave and

what part to invalidate? What if parties would not have entered such arbitration agreement

without the expansive judicial review, could the courts enforce the remaining part? The

discussion on doctrine of severability in arbitration agreement is beyond the scope of this thesis.

Shaughnessy (2008) while analyzing the Hall Street remarked that, the United State’s Supreme

Court failed to address what was raised in some of the amicus briefs, that even if expanded

review reduced efficiency, it was a choice made and bargained for by the parties who apparently

placed greater value on ensuring that an award was not arbitrary than they placed on

efficiency.158 She also argued the shortcomings of the court’s opinion that parties can have an

expansive judicial review but just outside the Act. The American Arbitration Association (AAA)

took that opportunity to suggest a second layer of arbitration appeal panel. Some of the short

comings observed by this writer are that the most arbitration institutions and their rules do not

provide for this second-panel review, because they provide for finality of award. If they provide

for such a review, then arbitration award may not be final, one of the fundamental characteristic

of arbitration.159

According to Gross (2009), Hall Street’s ruling did not actually overruled “manifest disregard of

law” as an independent ground for vacating an arbitral award. She stated that the ruling

suggested that lower courts could review an award under the manifest disregard of law as part of

Section 10 (a) (3) or (4).160 Gross (2009) went further in her analysis of Hall Street to state that,

the public policy of United States dictates that the doctrine of manifest disregard should be

preserved as a ground for review because the federal common law which predated the FAA

imposed a “fundamental fairness” requirement on commercial arbitration. She argued that it was

the need for risk management that usually prompts parties to contract for expansive review

158 Supra (Shaughnessy, 2008), at p. 469.159 Id.160 Gross, J, “Hall Street Blues: the Uncertain Future of Manifest Disregard” in Security Regulation Law Journal, (2009), Vol. 37: 3, at p. 8. Available at: http://ssrn.com/abstract=1384779, retrieved on 26.07.2010.

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process, and eliminating the doctrine may drive away parties from arbitration which will negate

one of the aims of arbitration to free the overload dockets of the courts.161

Scott Rau (2009) criticized the decision of The United States Supreme Court in Hall Street from

the angle of misconstruing the statute.162 According to him, the Supreme Court avoided the

hurdle of truly applying the canon of construction when faced with a vague provision. He noted

the questions posed by Justice Stevens to the defendants in Hall Street during the oral argument

as the only question the court need to have asked. “Why do they want to prevent the parties from

choosing the option they chose in the case?” “What purpose can we rationally attribute to the

legislature that will justify the ban on contractual autonomy? What, after all, is the purpose of

section 10 of the FAA?”163 He equally observed that the court failed to address the issue of

public policy, one of the grounds which the plaintiff’s claim rested upon. He further argued that

the non-mention of public policy as a ground which is universally recognized in every legal

system, which cannot be found in the plain text of the FAA, yet a valid ground albeit less

successful for claimants makes the Supreme Court’s omission more striking.164 He concluded

that as a way forward, the FAA enumerated grounds need not be exclusive grounds for vacatur

of arbitral awards, that parties might well “contemplate enforcement under state statutory or

common law” as suggested also by Justice Breyer in his dissenting opinion.165

161 Id.162 Scott Rau, A, “Fear of Freedom”, 17 AM. Rev. Int’l Arb. 469, (2009), at p. 18. Available at: http://ssrn.com/link/texas-public-law.html, retrieved on 27.06.2010.163 Id at p. 19.164 Id. at p. 33.165 Id. at p. 34.

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PART B

3.2 Post Hall Street’s Decisions

3.3 Circuits holding Hall Street decision abolishes “manifest disregard of law” as basis for

Vacatur of arbitration awards under the FAA.

3.3.1 Ramos-Santiago v. United Parcels Services

First Circuit was the first federal court in the United States to be presented with the opportunity

of addressing the validity of the doctrine after the U.S Supreme Court’s holding in Hall Street166.

This opportunity came in the case of Ramos-Santiago v. United Parcel Services.167 The arbitrator

in that case granted summary judgment against an employee of UPS and in favor of UPS in a

dispute submitted to arbitration pursuant to a collective bargaining agreement. Briefly the issue

in contention was the termination of the appellant employment with UPS when he failed to

deliver thirty-seven packages over the span of two business days as the company’s driver.

The petitioner through his union representative submits for arbitration pursuant to the controlling

collective-bargaining agreement (CBA).The UPS employee challenged the arbitrator’s decision

in a State Court action, which was removed to federal court on the basis of jurisdiction granted

by the Labor management Relations Act. The challenge by the petitioner was premised on the

ground that that UPS failed to follow the disciplinary procedure mandated by the CBA

provisions, which requires the application of progressive discipline. While the arbitrator justified

his award based on Article 11, Section 3 of the CBA and held that UPS was justified in

terminating the petitioner’s employment.

Finding that the arbitrator had not acted in manifest disregard of the law, the first circuit court

affirmed the district court’s enforcement of the award and held as follows “this court has

recognized a very limited exception under which we may vacate an arbitration award when there

is evidence that the arbitrator acted in “manifest disregard of the law”. The court went further to

acknowledge the Hall Street decision that the Supreme Court has spoken and the doctrine of

manifest disregard of law is no longer a ground to vacate an arbitral award in cases brought

166 Louis J. Auricho, & Noonan III P. Joseph, What’s left of “Manifest Disregard of Law” as a basis for Vacatur of Arbitration Awards after Hall Street? In Arias U.S quarterly, Vol. 17, No 1. First Quarter, 2010.167 Ramos-Santiago v. United parcel Service, 524 F.3d 120 (1st cir. 2008)

30

under the FAA. That the case at hand is not an FAA case-neither party has invoked the FAA’s

expedited review provisions.

3.3.2 Citigroup Global Markets, Inc., v. Bacon

The Fifth Circuit squarely considers the question whether the doctrine of “manifest disregard of

law” has survived as an independent ground of vacatur in light of Hall Street. The facts of that

case are as follows. The petitioner Debra Bacon submitted a claim for arbitration against

Citigroup seeking for reimbursement for unauthorized withdrawals made by her husband by

forging her signature. The arbitration panel granted Bacon total of $256,000 for damages and

attorney fees cost. Citigroup moved to vacate at the district court. The district court granted the

motion to vacate holding that the award was made in manifest disregard of law based on three

following reasons:

1] That Bacon was not harmed by the withdrawal because her husband use the money for her

benefit and subsequently promised to pay her back

2] Bacon’s claims were barred by Texas law, which permits such claims only if the customer

reports the unauthorized transaction within thirty days of the withdrawal.

3] Texas law requires apportionment among the liable parties, which, in this case, includes

Bacon’s husband.

The Fifth Circuit held that in light of Hall Street “manifest disregard of law is no longer a ground

for vacatur. 168They reached that decision after taking a detour of long list of cases starting from

some old cases of Burchell v. Marsh (1854) & Karthaus v. Ferrer (1828) in support of their

decision,. “That where an arbitration award was “within the submission, and contained the

honest decision of the arbitrators, after a full and fair hearing of the parties, a court of equity

[would] not set aside for error, either in law or fact”.169 The court in Burchell went ahead to

point that “A contrary course would be a substitution of the judgment of the chancellor in place

of the judges chosen by the parties, and would make an award the commencement, not the end,

of litigation”. Burchell also cautioned against assuming improper conduct from mere error. “We

168Citigroup Global Markets, Inc., v. Debra M. Bacon, 562 F. 3d 349 available at west law:http://international.westlaw.com/result/documentettext.aspx?mqv=d&f... Retrieved on 03.06.2010169 Karthaus v. Ferrer, 26 U.S. 222, 228, 1 Pet. 222, 7 L.Ed. 121 (1828).

31

are all too prone, perhaps, to impute either weakness of intellect or corrupt motives to those who

differ with us in opinion”.170

The Fifth Circuit summed up their reasoning as follows, “In light of the Supreme Court’s clear

language that, under the FAA, the statutory provisions are the exclusive grounds for vacatur,

“manifest disregard” as an independent non-statutory ground for setting aside an award must be

rejected and abandoned.171 Indeed, the term itself as a term of legal art is no longer useful in

vacating award”. Such is the strong language the fifth circuit used to interpret the “Hall Street”

decision and do away with the doctrine of manifest disregard of law.

3.4 Circuits holding that “manifest disregard” survive Hall Street as ground for Vacatur

independent of FAA.

3.4.1 Coffee Beanery, Ltd., at al., v. WW, L.L.C.; Deborah Williams; and Richard

Welshams,172

The brief issues in contention here which prompt an appeal from the United States District Court

for the Eastern District of Michigan to the Six Circuit were as follows: Arbitration award granted

all claims in favor of Coffee Beanery (petitioner-appellee) over a dispute with the appellant

regarding a business transaction involving a franchise agreement between the parties.173 The

appellant alleged to have suffered losses from using the franchise name of the appellee due to

non-disclosure of all material facts regarding the franchise name of Coffee Beanery and the

criminal record of some of their employees which the appellant view as fraud and undue

coercion to enter in to the contract among other things. The appellant subsequently called for

arbitration in line with the franchise agreement and later opted for litigation which the appellee

objected and insisted on arbitration as all claims relating to the franchise agreement must be

decide by arbitration in line with the agreement.174

170 Burchell v. Marsh, 58 U.S 344, 349-50, 17 How. 344, 15 L.Ed. 96 (1854).171 Supra Citigroup case at p.354-356.172 Coffee Beanery, Ltd., at al., v. WW, L.L.C.; Deborah Williams; and Richard Welshams, 300, Fed. Appx. 415,

418, (Sixth Cir. 2008), available at: http://international.westlaw.com/result/documentettext.aspx?mqv=d&f, retrieved on 03.06.2010.

173 Id174 Id. at p. 416.

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The District Court denied vacatur as the appellant failed to prove partiality of the arbitrator or

manifest disregard of law. The appellant submitted four arguments in support of vacating the

award. First, the arbitrator overreached her authority when she ruled on franchise Act claims.

Second, the franchise agreement was unconscionable. Third, the arbitrator had a conflict of

interest that rose to the level of bias. Fourth, the arbitrator manifestly disregarded the law. With

regards to this last claim, the appellant contends that the arbitrator ignored undisputed evidence

that it was misled about certain promotions and contracts, that Shaw (one of the mangers’ of

Coffee Beanery) made false representations about potential earnings, and that Shaw failed to

disclose his prior felony conviction for grand larceny which is a violation of the Franchise Act,

Md. Bus. Reg. Code Ann. Section 14-216(8) (i) and thereby conclude that arbitrator manifestly

disregards the law.175

After reviewing the grounds enumerated in section 10 of FAA, the Six Circuit stated, “that its

ability to vacate an arbitration award is almost exclusively limited to these grounds, although it

may also vacate an award found to be in manifest disregard of the law”.176 The Court goes

further to analyze Hall Street narrowly, that while the Supreme Court significantly reduced the

ability of federal courts to vacate arbitration awards for reasons other than those specified in

section 10 FAA, but it did not foreclose federal courts’ review for an arbitrators’ manifest

disregard of the law. The court held that FAA does not allow private parties to supplement by

contract the FAA’s statutory grounds for vacatur of an arbitration award. But with respect to

“judicially-invoked” ground for manifest disregard of law, the court thought that Hall Street’s

discussion of Wilko demonstrated a “hesitation to reject the manifest disregard doctrine in all

circumstances…”177.

With this analysis as a backdrop, and after noting the widespread acceptance of manifest

disregard by other circuits, the court said, it will continue to employ the doctrine as a basis for

vacatur.178

175 Id.176 Id.

177 Id at p. 418-419178 Id

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This is how the Sixth Circuit analyzed the doctrine of “manifest disregard of law” post Hall

Street. However, Aruicho and Noonan III (2010) reported that the Sixth Circuit shifted their

position in a subsequent case that followed the Coffee Beanery’s case. 179 The Sixth Circuit

observed while it has previously suggested that manifest disregard of law is a “judicially created

supplement” to the FAA expressed grounds of vacatur “Hall Street’s reference to the ‘exclusive’

statutory grounds for obtaining relief casts some doubt on the continued validity of that

theory.”180

3.5 Circuits Holding that the Doctrine of “Manifest Disregard” Survived as Integral Part of

Section 10 (a) (4) of the FAA.

3.5.1 Stolt-Nielsen SA v. Animal Feeds International Corporation (Part I)

The Second Circuit in Stolt-Nielsen addressed the effect of Hall Street on the manifest disregard

doctrine. The Court acknowledged Hall Street’s holding- that the FAA set forth the “exclusive

grounds for vacating an arbitral award.181 The Second Circuit agreed that “the holding in Hall

Street is undeniably inconsistent with some dicta by this Court treating the “manifest disregard”

standard as a ground for vacatur entirely separate from those enumerated in the FAA.”182 The

Second Circuit goes further to point out that the Hall Street Court also speculated that “the term

‘manifest disregard’… merely referred to the Section 10 grounds collectively, rather than adding

to them”- or as a shorthand for Section 10(a)(3) or 10 (a)(4).183It did not, we think, abrogate the

“manifest disregard” doctrine altogether.184

The background of the case is as follows: Animalfeeds alleges that Stolt-Nielsen is engaged in a

“global conspiracy to restrain competition in the world market for parcel tanker shipping services

in violation of federal antitrust laws.” Animalfeeds seeks to proceed on behalf of a class of “[a]ll

direct purchasers of parcel tanker transportation services globally for bulk liquid chemicals…..,

179 Supra at Aruicho, & Noonan III at p. 19.180 Grain v. Trinity Health, Mercy Health Services Inc., 551, F.3d, 374, 380 (6th Cir. 2008)181 Stolt-Nielsen SA v. Animal Feeds International Corporation, 548 F.3d 85, (2nd Cir. 2008) available at west law: http://international.westlaw.com/print/prinstream.aspx?spa=intbuc... Retrieved on 12.04.2010. 182 Id 183 Hall Street, 128 S.Ct. at 1404.184 Stolt-Nielsen (2nd Cir. 2008) at p. 93- 95.

34

from Stolt-Nielsen at any time during the period from August 1, 1998, to November 30, 2002.”

Hence, they demands for a consolidated class action.

While Animalfeeds were pursuing a litigation angle, Stolt-Nielsen moves to compel arbitration.

The parties then entered into an arbitration agreement stating, inter alia, that the arbitrators “shall

follow and be bound by Rules 3 through 7 of the American Arbitration Association’s

Supplementary Rules for Class Arbitrations (as effective Oct.8, 2003).” Agreement regarding

New York Arbitration Procedures for Putative Class Action plaintiffs in Parcel tanker Services

antitrust Matter (“Class Arbitration Agreement”).185

The arbitration panel, tasked with deciding whether that silence permitted or precluded class

arbitration, received evidence and briefing from both sides. Animalfeeds argued that because the

arbitration clauses were silent, class arbitration could proceed. They cited clauses under Rule 3 o

the Supplementary Rules permitting class arbitration awards where the arbitration clause was

silent. They also argued that public policy favored class arbitration and that the contracts’ clauses

would be unconscionable and unenforceable if they forbade class arbitration.

Stolt-Nielsen on the other hand argued that since the clause is silent, it could only mean the

parties did not intend class action arbitration. They cited several federal cases and arbitration

decisions denying class arbitration where the arbitration agreement was silent. Stolt-Nielsen also

argues the class arbitration is alien to cases of international maritime agreement, where parties

have no expectation that arbitration will proceed on behalf of a class, distinguishing the present

case from the cited decisions by Animalfeeds. Furthermore, Stolt-Nielsen furnishes the arbitration

panel with extrinsic evidence regarding “the negotiating history and the context” of the

arbitration agreements to “reinforce the conclusion that the parties did not intend… to authorize

class arbitration.”186

The arbitration panel issued an award in favor of Animalfeeds only with regards to the question

of clause construction that the agreement permits class arbitration. The panel based its decision

on the fact that in all twenty-one published clause construction awards issued under Rule 3 of the

Supplementary Rules, the arbitrators had interpreted silent arbitration clauses to permit class

185 Id at p. 94.186 Id.

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arbitration. They concluded that Stolt-Nielsen’s argument regarding the negotiating history and

context of the agreements failed to establish that the parties did not intend to preclude class

arbitration and nor did Stolt-Nielsen furnish any arbitration decision under Rule 3 in which

contractual silence was construed to prohibit class arbitration.187

Dissatisfied with the panel’s decision, Stolt-Nielsen petitioned the district court to vacate the

Clause Construction Award. The district court granted the petition, holding that the award was

made in manifest disregard of the law.188 According to the district court, the arbitrators “failed to

make any meaningful choice-of-law analysis.”189 That the arbitrators failed to recognize the

dispute was governed by federal maritime law which requires the interpretation of charter parties

(contract agreement) be dictated by customs and usage, and that Stolt-Nielsen had demonstrated

that maritime arbitration clauses are never subject to class arbitration.190 Because these clearly

established rules of law were presented to the panel and the panel failed to apply them, the

district court held, the Clause Construction Award must be, and was, vacated.191

After reviewing the relevant post-Hall Street case laws, the Second Circuit agreed with those

courts which concluded that manifest disregard is a “judicial gloss on the specific grounds

enumerated by section 10 of the FAA,” and thus remains a valid ground for vacatur.192 Having

reached this conclusion, the court stated that, even after Hall Street, it still had the responsibility

to vacate arbitral awards in the “rare instances” in which the arbitrator knew of a legal principle

that controlled the outcome of the disputed issue but nonetheless refused to apply it. In those

instances, the arbitrator has failed to interpret the contract at all, which is akin to exceeding their

powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject

matter submitted was not made.193

Aruicho & Noonan III (2010) observed that even the Ninth Circuit has held that Hall Street did

not undermine the doctrine of manifest disregard of law as a statutory ground for vacatur.194 This

187 Id at p. 95.188 Stolt-Nielsen SA v. Animal Feeds Int’l Corp., 435 F.Supp. 2d 382, 387 (S.D.N.Y. 2006).189 Id at p. 385.190 Id at p. 385-386.191 Id. at p. 387.192 Stolt-Nielsen (2nd Cir. 2008) at p. 94.193 Id. at p. 94.194 Supra (Aruichio & Noonan III) at p. 20.

36

could be seen from the decision in Comedy Club, Inc., v. Improv.& West Associates.195 The

court noted that it has previously treated manifest disregard standard as a shorthand for the

subsections in FAA authorizing vacatur when the arbitrators were “guilty of misconduct” or

“exceeded their powers.” The Supreme Court did not address the question whether the manifest

disregard doctrine fits within Section 10 & 11 of the FAA, instead listing several possible

interpretation of the doctrine; they acknowledged that they were bound by their precedent. Thus

the Ninth Circuit concluded that after “Hall Street”, manifest disregard of the law remains a

valid ground for vacatur because it is a part of Section 10 (a)(4) of FAA.196 Thereafter, the

United States Supreme Court granted certiorari to decide whether imposing class arbitration on

parties whose arbitration clauses are “silent” on that issue is consistent with the FAA.

195 Comedy Club, Inc., v. Improv. West Associates, 553 F.3d 1277, 1289-90 (9th Cir. 2009).196 Id.

37

CHAPTER FOUR

PART A

4.1 Stolt-Nielsen Part II (Supreme Court’s final verdict):197

The facts and issues in contention of this case were fully discussed in the preceding chapter of

this thesis. The Supreme Court in a five against three decision ruled that, arbitrators asked to

interpret an arbitration agreement that is silent on the issue of class action arbitration, cannot rule

on the basis of their policy interpretation that class action arbitration is permitted. The judgment

of the majority which was delivered by Justice Alito went further to cite a long list of judicial

precedents in support of their decision. Citing the case of First Options of Chicago, Inc. v.

Kaplan,198 the majority stated that “Arbitration is simply a matter of contract between the parties;

it is a way to resolve those disputes-but only those disputes-which the parties have agreed to,

submit to arbitration.”199 It falls to courts and arbitrators to give effect to these contractual

limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the

exercise: to give effect to the intent of the parties.200

The majority stated that a party may not be compelled under the FAA to submit to class

arbitration unless there is a contractual basis for concluding that the party agreed to do so.201

That in this case, the arbitral panel imposed class arbitration even though the parties concurred

that they had reached “no agreement” on that issue. Thus, the panel’s conclusion based on public

policy favoring class arbitration is fundamentally at war with the foundational FAA principle

that arbitration is a matter of consent, exceeded the scope of their powers under the FAA section

10(a)(4) and therefore can disregarded.202

197 Stolt-Neilsen S.A v. Animalfeeds International Corp. (http://www.supremecourt.gov/opinions/09pdf/08-1198.pdf), retrieved on 15.06,2010.198 First Options of Chicago, Inc. v. Kaplan, 514 U.S 938, 943, 115 S. Ct. 1920, 131 L.Ed.2d 985 (1995).199 Stolt-Neilsen (S.Ct), supra at p. 183.200 Volt v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479, 109 S.Ct. 1248, 103 L.Ed. 2d 479.201 Stolt-Neilsen (S.Ct), supra at p. 185.202 Id.

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While Justice Ginsburg in her dissenting opinion stated that the majority errs in addressing the

issue not ripe for judicial review.203 She opined that the FAA contemplates judicial review of

awards that have become final, while in this case the arbitrators’ addresses only preliminary

issue of clause construction, had not even certified a class, and issue no “award”.204 She goes

further to state that, even if she would have considered the merits of the case, she would have

confirmed the judgment of the Second Circuit because the parties jointly asked the arbitrators to

decide whether the arbitration clause in their shipping contract permitted class arbitration.205 The

panel did just what it was commission to do.206 She stated that the import of section 10 (a) (4) of

the FAA is to review whether the arbitrators had the power, based on the parties’ submission or

the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided

that issue.207 She concluded that “the arbitrators here not merely “arguably,” but certainly,

“construed the contract” with fidelity to their commission. This court, therefore, may not disturb

the arbitrators’ judgment, even if convinced that “serious error” infected the panel’s award”.208

A commentator opined that the Supreme Court seemed to circumscribe the authority of the

arbitrators. That the court concluded, the arbitrators’ “proper task was to identify the rule of law

that governs” in order to interpret the parties agreement.209 Cole (2010) concluded that the ruling

suggested manifest disregard of law as a standard of review may still exist. Although, the

majority stated they were not deciding whether manifest disregard of law survives Hall Street,

but that “manifest disregard” existed in this case.210 Another commentator, while applauding the

Supreme Court’s decision in strengthening the role of judicial review on arbitral awards casted

some doubt on the majority’s reasoning that the panel’s decision centered on public policy

instead of applying a governing law.211 He argued that the decision may sets a dangerous

precedent to lower courts especially, and it may open a floodgate of judicial review of most

203 Id. at p. 196.204 Id.205 Id. at p. 199206 Id.207 Id.208 Id.209 Cole, S, Stolt-Neilsen v. Animal Feeds: Major Victory for Business, available at: http://www.indisputably.org/?p=1268, retrieved on 15.06.2010.

210 Id.

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award that arbitrators have supplied missing link to the contract even if those links are limited to

public policy.212

4.2 Germany’s Position on Judicial Review of Merits of Arbitrator’s Award

As mentioned above, the countries that adopted the UNCITRAL Model Law have no judicial

review of merits of arbitration awards.213 German Courts have held that they can review the

question of whether a contract, on which the claim in the arbitral proceedings was based, is void

for violating the principle of bonos mores, if such a violation is clearly apparent on the face of

the award.214 According to Kroll (2005), section 1059 of the German Code of Civil Procedure

(Zivilprozessordnung – ZPO) provides exclusive grounds for review and any extended

provisions are contrary to the laws of arbitration in Germany.215

However, in a decision of the German Federal Supreme Court of March 1st, 2007, the court had

to decide whether enforcement of an “award” rendered upon an expansive contractual arbitration

clause is admissible.216 Wolf observed that, there are ample of precedents dating back to 1873’s

decision of the Commercial Supreme Court of German Reich (Reichsoberhandelsgericht)217

declining to recognize arbitration agreement with expansive review clause.218 Until 1931, when

the court issued a dissenting opinion in support of such extended clause, against this background

and overruling all earlier precedents, the Supreme Court in the instant case ruled that the award

with expansive review clause is admissible.219 The court premised its decision on the cornerstone

of parties’ autonomy. The court stated that there is no provision under German arbitration law

prohibiting the parties to tie their submission to arbitration to certain conditions.220 The court

read section 1029 of ZPO which defines arbitration agreement, does not outs the jurisdiction of

211 Kirgis, P, More on Stolt-Neilsen v. Animal Feeds, available at: http://www.indisputably.org/?p=1284, retrieved on 15.06.2010.212 Id.213 Born (2009), Supra at p. 2649.214 Id at p. 2650, Born citing the judgment of Court of Appeal of Berlin of 27 May 2002 as reported in Kroll, Schiedsrichterliche Rechtsprechung 2003.215 Kroll, S., Supra at p. 3.216 BGH, Decision of March 1, 2007, III ZB 7/06, 120 ZEITSCHRIFT FÜR ZIVILPROZESS 371 et seq. (2007).217 Entscheidungen des Reichs-Oberhandelsgerichts [ROHG] 7, 311.218 Wolff, Reinma, Party Autonomy to Agree on Non-Final Arbitration, In ASA Bulletin, Vol. 3, Sept. 2008, p. 627219 Id. at p. 628220 Id.

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the state courts for judicial review.221 This holding was criticized in some quarters that viewing

the ruling from an international perspective and subject to particularities of national law, it is

legally erroneous.222

4.3 English Law’s Position on Judicial Review of Merits of Arbitrator’s Award

Judicial review under the English law is similar to the doctrine of manifest disregard of law

traditionally, albeit with statutory robe around it. Born (2009) reported that English law provided

for comparative expansive judicial review of the merits of arbitral award in the past, and this has

now been altered with the coming into law of the English Arbitration Act, 1996.223 The famous

Section 69 of the 1996 Act provides that, in some limited cases, an award may be subject to

appellate review by the English Courts for substantive error of law just like that of judgment of a

lower court as was held by the courts of Egmatra AG v. Marco Trading Corp.224 and Sanghi

Polyesters (India) Ltd v. International Investment (KCFC) (Kuwait).225

Section 69 of the 1996 Act, applies only to matters under English law, not foreign laws and

facts.226 The provision applies by default except parties impliedly or expressly excluded its

operation, either through agreement or by incorporating arbitration institutional rules.227 In

Lesotho Highlands Development Authority v. Impreligo SpA, the House of Lords stated that the

import of section 69 was to significantly reduce the extent of courts interference with the

outcome of arbitral award.228 Born (2009), concluded that the preponderance of recent English

cases indicated that section 69 is a “long stop provision” that is exercise by the courts in order to

give effect to wishes of parties’ choices.229

221 Id.222 Id. at p. 640223 Born, (2009), Supra at p. 2646.224 Egmatra AG v. Marco Trading Corp, [1991] 1 Lloyd’s Rep. 480 (Q.B.)225 Sanghi Polyesters (India) Ltd v. International Investment (KCFC) (Kuwait), [2001] 1 Lloyd’s Rep. 480 (Q.B.)226 Reliance Indust. Ltd. v. Enron Oil & Gas India Ltd [2002] 1 All E.R. (comm.) 59 (Q.B.)227 English Arbitration Act, 1996, Section 69 (1); See also BLCT Ltd. v. Sainsbury Plc [2003] EWCA Civ. 884 (English Court of Appeal)228 Lesotho Highlands Development Authority v. Impreligo SpA, [2006] 1 A.C. 221 (House of Lords Decision).229 Born (2009), Supra at p. 2647.

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4.4 French’s Position on Judicial Review of Merits of Arbitrator’s Award

In France, the law is well settled in case of expanded judicial review of arbitration, parties have

no power to contractually expand review of the merits of an arbitral awards. Franc (1998) wrote

that, “it has been a constant under French law that the grounds enumerated in the statute cannot

be extended, nor reduced; they are exclusive.”230 However, the justification for the French

position may not be unconnected with the structure of judicial enforcement and supervision of

arbitral award which is harnessed to certain contingent preferences with respect to organization

of their state’s judiciary: in particular, it rests on a preference that “review” functions be

centralized in the courts of appeals, primarily the Cour d’ Appel de Paris.231

4.5 Malaysian Position on Judicial Review of Merits of Arbitrator’s Award

In Malaysia, the position is not different from most developed jurisdictions in arbitration, that no

judicial review of merits of arbitration award.232 As one commentator reported that in the recent

case of Wing Construction (M) Sdn Bhd, v. Johor Port Authority,233 the Malaysian Court of

appeal emphasized the limited jurisdiction of the court to vacate arbitral award on the grounds of,

inter alia, an error of law on the face of the award.234 In that case the dispute arose between the

appellant (contractor) and the respondent (employer) to carry out some work in the port and the

contract was terminated.235 The appellant instituted arbitration in pursuance to their contract

agreement and claims wrongful termination of the contract. The arbitrator found in favor of the

employer and held no evidence of wrongful termination, the High Court confirms the award and

the contractor appeals the judgment. The court of appeal stated that judicial review of arbitral

award must be distinguished from an appeal of a lower court, and review is only permissible in

some very exceptional cases where the error of law is manifest on the face of the award. The

230 Franc, L, “Contractual Modification of Judicial Review of Arbitral Awards: The French’s position,” 10 Amer. Rev. Int’l Arb. (1999), at p. 215.231 Gaillard, E, (“a keystone of the recent reforms of French arbitration law…has been to rationalize the means of challenging awards by unifying all litigations on the subject in the courts of appeal”). [1995] Rev. de l’arb. At p. 620-621. 232 Shearn Delamore & Co. “Courts have limited jurisdiction to set aside or remit an award on error of law grounds.” Available at: www.internationallawoffice.com?i=1600766&l=7CYN85A, retrieved on 01.07.2010.233 Wing Construction (M) Sdn Bhd, v. Johor Port Authority, [2010]1 LNS 31 (CA).234 Id. as reported by Shearn ante note 143, (2010).235 Id.

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court concluded that even in cases where the arbitrator draw wrong inference from the facts or

evidence of the case, would not suffice to allow review of the substance of the arbitrator’s

award.236

236 Id.

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PART B

4.6 The Public Policy Defense as compared to the Doctrine of Manifest Disregard Standard

Rai (2009) defines public policy or odre public as “the set of fundamental principles that binds

together the social, moral, and economic values of a modern civil society. It is the act of the

government in protection of its policies and fundamental principles and refers to its intentions

that determine them all. This can further be simplified as the choice of the government in acting

or abstaining from acting in a certain way in regards to its national issues, legislative policies and

other concerns.”237

Born (2005) observed that one of the most significant and controversial ground for vacating an

arbitration award is the claim by the losing party that the award is contrary to public policy of the

enforcing state.238 The public policy exception to the non-recognition for enforcement of

international arbitral award was set forth in Article V (2) (b) of the New York Convention as

stated in chapter one of this thesis. The provision basically says that award may be refused

recognition if it would be contrary to the public policy of the country where such enforcement or

recognition is sought. Other jurisdictions also permit non-recognition of awards on that ground,

albeit with great difference in interpreting what violates public policy.

4.6.1 United States Position on Public Policy’s Ground of Vacatur

In the United States, the first chapter of the FAA does not contain an express public policy

exception.239 However, Born (2005) opined that it is already well established that awards that are

contrary to public policy of United States will not be enforced under the FAA by U.S. Courts.240

In the United Steels Paperwork’s case, the Supreme Court stated that “the defense of public

237Rai, S, “How do or should Arbitrators deal with Domestic Public Policy or Regulatory Issues; Does it affect Arbitrability?” Available at: http://ssrn.com/abstract=1433799, retrieved on 22.06.2010.238 Supra Born (2005), at p. 815.239 See 9 U.S.C Sections 10.240 Supra Born (2005), at p. 816, he went ahead to cite some cases in support of this preposition, such as Misco, Inc. v. United Paper Workers Int’l Union, 484 U.S. 29 (1987).

44

policy is a specific application of more general doctrine, deeply enshrined in the common law,

which a court may refuse to enforce contracts that violate law or public policy.”241

Born (2005) observes that there are twin problems of (1) the appropriate source of the doctrine of

public policy standards in international matters is not clear. This is true especially in cases under

the convention; national courts and scholars have variously looked to international standards and

national laws, without arriving at any consensus.242 (2) In cases where the standards are

identified, they are mostly unpredictable and expansive, hence the phrase that public policy is an

unruly horse that carries its rider to unpredictable destination.243 (3) There is uncertainty

surrounding the authority of an arbitrator, as distinguished from a court, to consider issues of

public policy in arriving at an award. The tribunal’s power is ultimately derived from the parties’

contract and, arguably, is limited to interpreting the contract.244

Public policy defense has been interpreted both narrowly and expansive depending on the

jurisdiction in question. In United States for example, in Parsons & Whittemore Overseas Co. v.

Societe Generale De L’ Industries Du Papier.245 Public policy was interpreted narrowly by the

Second Circuit. In that case, Overseas claimed that they are justified to abandon the project work

they were carrying in Egypt because of the severance of relationship between Egypt and the

United States especially following the actions of the U.S States department of withdrawing their

personnel and aids, Overseas as United States citizen feels to continue with the work will be to

undermine the U.S public policy. The court held that the reason given does not absolve Overseas

from their obligation under the contract and defense of public policy was rejected.

The case of Northrop Corp. v. Triad International Marketing SA246 is illustrative to how the U.S

Courts interpret narrowly the defense of public policy for non-recognition or enforcement of an

arbitral award. In that case, Northrop Corp refused to pay Triad the agreed sales commission for

the marketing services rendered by Triad because of an existing Saudi Arabia’s legislation

prohibiting payment of commission. The law governing the agreement was U.S law, Northrop 241 Misco, Inc. v. United Paper Workers Int’l Union, 484 U.S. 29 (1987).242 Supra Born (2005), at p. 816.243 Katzenbach, Conflicts on an Unruly Horse: Reciprocal Claims and Tolerances in Interstate and International Law, 65 Yale Law Journals. 1087 (1956).244 Supra Born (2005, at p. 816.245 Parsons & Whittemore Overseas Co. v. Societe Generale De L’ Industries Du Papier. 508 F.2d 969 (2nd Cir. 1974).246 Northrop Corp. v. Triad International Marketing SA, 811 F.2d 1265 (9th Cir. 1987).

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relied that the U.S States department has the same policy as the Saudi’s law. The Ninth Circuit

rejected the argument that the U.S States department policy could be equated with the public

policy of the United States.

In Ledee v. Ceramiche Ragno, the court confirmed that the enforceability of the arbitral clause

was to be decided not in accordance with parochial national law and public policy but in

accordance with “international neutral” principles and disregarded a Puerto Rican Statute which

decreed a contract position.247 This decision further confirms the pro-arbitration attitude and the

narrow interpretation approach of the courts in United States in case of public policy defense.

4.6.2 Germany’s Position on Public Policy’s Ground of Vacatur

The narrow standard of interpreting the doctrine of public policy in Germany is like that of the

United States. Germany adopted a restrictive view of what constitutes public policy; the doctrine

can be categorized broadly in to two classes, procedural and substantive. German courts takes the

view that for a party to successfully claim the defense of public policy as a ground for vacatur of

an award, there must be a causal link between the contravention and the content of the award.248

To pass the test for the claim under substantive public policy violation, the award must be

incompatible with a fundamental notion of justice as held in the Clout Case 456.249

Although there is general consensus among scholars in the arbitration field that German Courts

position on review of the merits of arbitral awards is that there is no ‘revision au fond’.250

However, as observed by Damman (2008), that when it comes to public policy defense, the

Bundesgerichthof not only review awards for errors of fact, but conducts an independent factual

inquiry to determine facts constituting the public policy violation.251

In another case, the Higher Court of Appeal of Bavaria vacated the award on grounds of public

policy where there was evidence of fraudulent concealment of a settlement of a dispute that had

been referred to arbitration.

247 Ledee v. Ceramiche Ragno, 684 F.2d 184 (1st Cir. 1982)248 Supra Jean-Paul, at p. 5.249 Clout Case 456, Germany: Hanseatisches Oberlandergericht Hamburg, 6 Sch 11/98 4, November 1998.250 Supra Damman (2008).251 Id.

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Similarly, in Clout case 371, the Hanseatisches Oberlandesgerischt of Bremen held that German

Odre Public (public policy) is only violated where the foreign award in case of international

arbitration is the result of procedure which differs fundamentally from the German procedural

rules. Where the disparity is such that cannot be accepted under German legal system as fair

outcome the outcome of the rule of procedure, where it contains substantial errors touching upon

the very foundation of public and economic life. The court concluded that while it is usually not

permissible to review an award on its merits, review on merit will stand if the substantive odre

public is concerned.252

In another German decision, the Hanseatisches Oberlandergericht of Hamburg found that in

Germany, arbitral award would be contrary to German public policy if it discloses errors that

affected the basic principles of public and economic life. The mere refusal by an arbitrator to

entertain a set off claim by the defendant, which was justified in that instance, did not constitute

an infringement of the right to be heard to warrant the violation of the German public policy.253

4.6.3 England’s Position on Public Policy’s Ground of Vacatur

Three celebrated English court decisions, when considering arbitral award enforcement, address

public policy concerns stemming from the asserted unlawfulness of the relevant contracts under

foreign mandatory law.254 The case of Soleimany v. Soleimany255 was the first case in which an

English court refused enforcement of an award because of public policy considerations derived

from violation of foreign law.256 A father and son had entered into an agreement to export

Persian carpets from Iran.257 However, export of the carpets violated Iranian revenue and export

controls.258 Once a dispute emerged, arbitration was held before the Beth Din (Court of Chief

252 Clout Case 371, Hanseatisches Oberlandergerischt, Bremen, 30th September, 1999.253 Clout Case 456, Hanseatisches Oberlandergericht, Hamburg, 6 Sch 11/98 4, November, 1998.254 Gibson, C, “ Arbitration, Civilization, and Public Policy: Seeking Counterpoise between Arbitral Autonomy and Public Policy Defense in view of Foreign Mandatory Public Law. In Legal Studies Research paper Series, Research Paper 09-26, April, 2009, available at: http://ssrn.com/abstract=1394447, retrieved on 23.07.2010. at p. 128255 Soleimany v. Soleimany, [1999] Q.B. 785.256 Lew, D. M. Julian, Mistelis, A. Loukas, & Kroll, M. Stefan, Comparative International Commercial Arbitration, The Hague [u.a] : Kluwer Law International, 2003, p. 724.257 Soleimany, [1999] Q.B. at p.789.258 Id.

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Rabbi) in London.259 The court rendered an award in favor of the son, but the award recited

openly that the carpets had been exported out of Iran illegally.260 Once it became necessary to

seek enforcement of the award, the English Court of Appeal ruled: “An English court will not

enforce a contract governed by English law, or to be performed in England, which is illegal by

English domestic law. Nor will it enforce a contract governed by the law of a foreign and

friendly state, or which requires performance in such a country, if performance is illegal by the

law of that country. . . . The rule applies as much to the enforcement of an arbitration award as to

the direct enforcement of a contract in legal proceedings.”261

Gibson (2009) observes that when illegality comes to play, even if that of a foreign country’s

law, the English Court would accept the defense of public policy as a ground for vacating an

arbitral award.262 However, shortly after the decision in Soleimany, the English Court of Appeal

in Westacre Investment, Inc. v. Jugoimport-SP-DR Holdings263 ruled on similar issues, yet

arrived at a different conclusion altogether. In the face of a challenge that enforcement of the

award would violate English public policy because the underlying contract involved paying

bribes to Kuwaiti officials for personal influence and would have been contrary to the public

policy of Kuwait, the English court nonetheless enforced the award. The fact that the issue of

illegality had been considered and rejected by the arbitral tribunal (and then by the Swiss Federal

Court) was enough to persuade the English court.264 Moreover, the relevant agreement was

governed by Swiss law, the arbitration had been located in Switzerland, and enforcement of the

award did not violate Swiss public policy.265 This decision signals a shift to greater deference to

arbitration award in favor of parties’ autonomy on choice of governing law against the potential

infringement of a foreign public policy as noted by Gibson (2009).266

259 Id.260 Id. at p. 790.261 Id. at p. 804.262 Supra Gibson at p. 129263 Westacre Investment, Inc. v. Jugoimport-SP-DR Holdings, [2000] Q.B. 288.264 Id. at p. 316265 Id at p. 316-317.266 Supra Gibson at p. 130.

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In the third case, Omnium de Traitement et de Valorisation S.A. v. Hilmarton,267 the English

Court of Appeal again enforced an award although, on its face, the award indicated that the

underlying consultancy contract violated Algerian law as the place of performance.268 In this

case, too, the governing law chosen by the parties was Swiss law and the arbitrator determined

that, as a matter of Swiss law, the contract in issue was not unlawful.269 The English court

indicated that “it may well be that an English arbitral tribunal, chosen by the parties, and

applying English law as chosen by the parties, would have reached a different result.”270

However, the court stopped short of further inquiry, stating that it was “not adjudicating upon the

underlying contract,” but instead deciding only whether:

“An arbitration award should be enforced in England. In this context it seems to me that (absent

a finding of fact of corrupt practices which would give rise to obvious public policy

considerations) the fact that English law would or might have arrived at a different result is

nothing to the point. Indeed, the reason for the different result is that Swiss law is different from

English law, and the parties chose Swiss law and Swiss arbitration.”271

4.6.4 India’s Position on Public Policy’s Ground of Vacatur

We have seen above the attitude of some pro-arbitration nations with regards to non-enforcement

of arbitral awards under the public policy exception. However, not all jurisdictions are so eager

to restrict to interpret the public policy exception narrowly, some courts have adopted a very

expansive interpretation of what constitutes public policy violation and nullify arbitral awards on

this basis. Prominent among such jurisdictions is the Indian Supreme Court which equates public

policy to that of their national laws or even contractual provisions. In Venture Global

Engineering v. Satyam Engineering,272 the Supreme Court of India adopted a broad interpretation

of public policy by holding that an arbitral award could be reviewed on the merits if it is

inconsistent with Indian law. 267 Omnium de Traitement et de Valorisation S.A. v. Hilmarton, [1999] 2 Lloyd’sRep. 222 (Q.B.) (U.K.).268 Id. at p. 223. That is the law that prohibits middlemen in connection with public contracts.269 Id. at p. 224. The award sought to be enforced in the English Court was a second award in the arbitration. The first one was set aside by the Swiss Supreme Court, and a new arbitrator was appointed after the case was remanded back.270 Id.271 Id.272 Venture Global Engineering v. Satyam Engineering, Jan 10 2008, Supreme Court of India (Unreported).

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The question of what public policy means in Indian judiciary was answered in the case of

Renusagar Power Co. Ltd v. General Electric’s Co.273 the Indian Supreme Court stated that

public policy includes:

A] The fundamental policy of India, or

B] The interest of India, or

C] Justice and morality

While a later decision from the celebrated case of Oil and Natural Gas Corp. Ltd v. Saw Pipes

Ltd,274 added a fourth ground to the Renusagar’s definition, that where the arbitral award is

patently illegal. The Court held that this definition could extend to foreign arbitral award even

where India was not the Enforcement State. Any foreign award that is contrary to Indian public

policy as laid down in Saw Pipes could be challenged and vacated by the Indian Courts.

4.7 CONCLUSION

From wider perspective of international commercial arbitration, there are still controversies over

the astuteness of judicial review of merits of the arbitrators’ decision. Craig (1988) argues that a

measure of judicial review of the substance of the arbitrator’s decision is an essential safeguard

against arbitrary awards.275 Damman (2008) and Jean-Paul are among other commentators that

share the same opinion with Craig, on the need to have some form of judicial review to check the

excesses of some arbitrators capricious decisions.276

On the other hand, Paulsson (1983) observed that judicial review of the substance of arbitrators’

award is unnecessary and leads to the very delays and involvement of national courts that

arbitration agreements are intended to avoid.277 Kroll’s (2005) position is somewhat sympathetic

273 Renusagar Power Co. Ltd v. General Electric’s Co. 1994 Supp. (1) SCC 644.274 Oil and Natural Gas Corp. Ltd v. Saw Pipes Ltd,(2003) 5 SCC 705.275 Craig, Uses and Abuses of Appeal From Awards, 4 Arbitration International 174, (1988), at p. 198-202.276 Damman (2008), supra at note 24, & Jean-Paul, Supra at note 25.277 Paulsson, Delocalization of International Commercial Arbitration: When and Why It Matters, 32 Int’l & Comp. L.Q. (1983), at p.53-59.

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to this view when he noted that finality is one of the six fundamental characteristics of arbitration

and reviewing the arbitrators’ decision on merits will defeat such an important characteristic.278

While Born (2009) obviously belonged to the earlier group that sees a rationale for some

measure of judicial review of arbitrators’ substance’s decision, as he commented while quoting a

passage in Lord Acton’s letter to Bishop Mandell Creighton, of 1887 that “absolute power

corrupts absolutely”. He concluded that the possibility of limited and exceptional judicial review

of substantive decisions by the arbitrators is at once both a necessary evil and an important

bulwark against abuses of arbitral authority.279

The issue is still debatable among commentators and scholars of international commercial

arbitration. This thesis’s position is that in some cases where the arbitrators’ refused to apply a

known governing law or decline to adhere to the parties’ arbitration agreement which is within

the ambit of arbitral seat’s law, then judicial review on merit becomes a workable solution only

to that extent that will correct that arbitrariness or the manifested legal error.

On the question of whether the common law doctrine of “manifest disregard of law” has

survived Hall Street as an independent ground for vacatur of arbitral award in the United States

Courts. This thesis’s position is based on the analysis of the most recent decision of the United

States Supreme Court of Stolt-Neilsen v. Animalfeeds, that the doctrine is now subsumed into

section 10(a)(4) of the FAA.

Where a losing party wishes to challenge an award that manifestly disregarded an applicable law

or the parties agreement, a review may be granted under the heading of section 10 (a) (4) on the

basis that the arbitrator exceeded his scope of authority. It is only logical that parties’ to a

commercial arbitration intends the arbitrator to operate and decides their dispute within the

applicable law chosen by them or known in the arbitral seat and abide by the agreement

submitted to him as they have reposed a great confidence and trust in the arbitrator. For an

arbitrator to base his decision on any other reason than those (applicable law and parties’

agreement) is as good as acting without an authority. Akin to the relationship between an agent

and a principal, an agent that continues to act without the principal’s authority only acts in void.

278 Kroll, S, (2005), supra at note23.279 Born (2009) supra at p. 2654-5.

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