Vacating an Arbitration Award: Difficulties in Claiming Manifest Disregard of the Law

Vacating an Arbitration Award: Difficulties in Claiming Manifest Disregard of the Law

By: Jamie Johnson

Edited by: Molly MacKenzie

Zurich Am. Ins. Co. v. Team Tankers A.S., No. 13-cv-8404, 2014 WL 2945803 (S.D. N.Y. June 30, 2014).

Just how difficult is it to have an arbitration award vacated in a district court? This past summer, petitioners Zurich American Insurance Company and Vinmar International Limited moved to vacate an arbitration award. In response, respondents Team Tankers, Eitzen Chemical, and the M/V SITEAM EXPLORER moved to confirm the arbitration award and for recovery of attorney’s fees. The United States District Court for the Southern District of New York denied the motion to vacate an arbitration award despite compelling arguments by the petitioners.On June 10, 2008, Vinmar chartered M/V SITEAM EXPLORER from Team Tankers to transport the chemical acetonitrile, or ACN, from Texas to South Korea for Vinmar to sell. ACN is ideally colorless and serves as a versatile raw material. Vinmar requires that its ACN maintain a specified level of quality, which includes having a score of 10 or less on the American Public Health Association’s (APHA) “yellowness” index.Throughout the delivery trip, two independent surveyors tested samples of the CAN, and at all times, the ACN was found to be “on specification.” While the ship was at sea, the market value of ACN dropped significantly. Eventually, after forty-two days, Vinmar had the ACN retested, where it was discovered that, among other problems, the ACN had yellowed to an unacceptable score of 13 on the APHA index. Although Vinmar put Team Tankers on notice that they were being held responsible for the degradation, Vinmar was actually able to sell the ACN, albeit it at a low rate.While in arbitration, a panel of three arbitrators conducted a total of ten hearings. The panel came to a 2-1 ruling in favor of Team Tankers. In particular, they found that the ACN was in good condition when loaded and that the petitioners never proved that the ACN was damaged on board. They continued by stating that even if Vinmar showed that the ACN was damaged while on the ship, Team Tankers would not be liable because they exercised “due diligence” as required by the Carriage of Goods by Sea Act (COGSA). Finally, the panel said that even if Team Tankers was liable, the petitioners would have no damages because of the poor market value of ACN. After the award was released, the petitioners moved to vacate it based on manifest disregard of the law.To begin, because the award was entered in the United States, the Federal Arbitration Act (FAA) applied. “’Manifest disregard of the law’ is a ‘judicial gloss on the specific grounds for vacatur’ found in FAA.” It is a “’doctrine of last resort…limited only to those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.’” In other words, to claim manifest disregard of the law, there must have been more than simply a minor error or misunderstanding of the law. “’Disregard’ implies that the arbitrator appreciates the existence of a clearly governing legal principle but decides to ignore or pay no attention to it.” An arbitration award can be vacated for manifest disregard of the law if: “’1) the arbitrators knew of a governing legal principle yet refused to apply it…, and 2) the law ignored by the arbitrators was well defined , explicit, and clearly applicable to the case.’” An arbitration award “’should be enforced, despite a court’s disagreement with it on the merits, if there is a barely colorable justification for the outcome reached.’”The petitioners claimed manifest disregard of the law, asserting that the panel required them to prove causation. Under the law, the petitioners were actually only responsible for proving that there was damage while the ACN was in the respondents’ custody, not proving exactly what caused the damage. Regardless, the district court stated that even if the panel required them to prove causation, it would not be enough to vacate the arbitration award because manifest disregard of the law requires “overt disregard of the law” and this was merely an erroneous interpretation. Because the petitioners did not meet their burden of showing that there was a willful and overt disregard of the law, the court dismissed their arguments.Later in the proceedings, the petitioners became aware that one of the arbitrators had been diagnosed with an inoperable brain tumor prior to the arbitration in question and did not make any party aware of his illness. He later passed in January 2014. As a result of this knowledge, the petitioners amended their complaint to add a ground for vacatur based on the arbitrator’s purported corruption and misconduct for failing to disclose his illness.The petitioners alleged that “‘malignant primary brain tumors cause changes in cognitive function’” and that the arbitrator’s continued practice violated the code of ethics set forth within the Society of Maritime Arbitrators. The district court in turn ruled that violation of arbitration rules or ethics rules is “not a ground for vacating an arbitration award,” because such rules not have the force of law. Petitioners attempted to argue that the rules do have the force of law because the parties contracted to arbitration; however, parties cannot contractually expand the court’s authority to vacate an arbitration award.As for the argument that the arbitrator was corrupt, the court turned to the plain meaning of the word corrupt and stated that “at most, [he] served as an arbitrator when he had reason to doubt he could adequately discharge his responsibility,” which did not amount to corruption. As for the argument that he was misbehaving, the court stated that under the FAA, arbitrators have no duty to report medical conditions. Additionally, the petitioners conceded that throughout the span of ten hearings, nothing made them question the arbitrator’s competence.In conclusion, the judge denied the petitioners’ motion to vacate the arbitration award and granted Team Tanker’s motion to confirm the award and attorney’s fees. The court was ultimately unequivocal in its reasoning: “[The petitioner’s] motion seeks to transform a personal tragedy into a second chance for parties disappointed with the outcome of their arbitration…Parties are entitled to unbiased and uncorrupted arbitrators, not perfect arbitrators.”