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Federal Appeals Court Threatens Sanctions for Baseless Challenges to Arbitration Awards
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January 28, 2008
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Howrey LLP
A federal appeals court has warned that those who insist on challenging arbitration awards may face sanctions.
The U.S. Court of Appeals for the 11th Circuit wrote that Congress enacted the Federal Arbitration Act (FAA) in order to reduce congestion in the courts while still allowing parties a separate, independent avenue to resolve their disputes. Going through arbitration, obtaining a decision at the arbitration, and then going to court to dispute the arbitration decision defeats the purpose of the FAA by both adding another, expensive step to the dispute resolution process and by clogging up the courts, the court wrote. B.L. Harbert International v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006).
It warned that courts have the power to sanction parties who abuse the judicial process and may use that power if the courts feel that parties disputed the arbitration award without a sound legal basis.
In Harbert, a contractor and subcontractor arbitrated a schedule dispute as provided in their subcontract. The arbitrator ruled in favor the subcontractor. The decision resulted in denial of the contractor's counterclaims and an award of nearly $500,000 to the subcontractor.
Dissatisfied with the decision by the arbitrator, the contractor challenged the arbitrator's decision in U.S. District Court on grounds of manifest disregard for the law. The trial court denied the motion to vacate the arbitration award and enforced the arbitration award. The contractor appealed. The Court of Appeals affirmed the District Court's decision.
In its opinion, the appeals court noted that the "FAA liberally endorses and encourages arbitration as an alternative to litigation.. The reasons for this strong pro-arbitration policy are 'to relieve congestion in the courts and to provide parties with an alternative method for dispute resolution that is speedier and less costly than litigation.' "
The court warned: "The laudatory goals of the FAA will be achieved only to the extent that courts ensure arbitration is an alternative to litigation, not an additional layer in a protracted contest. If we permit parties who lose in arbitration to freely relitigate their cases in court, arbitration will do nothing to reduce congestion in the judicial system; dispute resolution will be slower instead of faster; and reaching a final decision will cost more instead of less. This case is a good example of the poor loser problem.."
The court noted: "Judicial review of commercial arbitration awards is narrowly limited under the Federal Arbitration Act.. The FAA presumes the confirmation of arbitration awards. and federal courts should defer to an arbitrator's decision whenever possible."
It wrote that only a few statutory or common law grounds exist for overturning an arbitration award: (1) the award was procured by corruption; (2) there as evident bias or corruption by the arbitrator; (3) there was prejudicial misconduct by the arbitrator, including refusal to hear pertinent and material evidence or to postpone a hearing for good cause; (4) the arbitrator exceeded his powers or imperfectly executed them; (5) the award is arbitrary and capricious; (6) enforcement of the award would be contrary to public policy; and (7) there was manifest disregard for the law by the arbitrator.
In Harbert, the contractor claimed that the arbitrator had manifestly disregarded the law because the subcontract was the law and the arbitrator misapplied it. The court rejected this contention, writing: "The contract is not part of the applicable law, but the agreement of the parties to which the law is applied."
In addition, "[t]his ground for vacating an arbitration award requires clear evidence that the arbitrator was 'conscious of the law and deliberately ignore[d] it.' A showing that the arbitrator merely misinterpreted, misstated, or misapplied the law is insufficient." The court added: "Even if the arbitrator applied the wrong legal standard, appellant did not show that 'this alleged error was intentional or that the arbitrator made a conscious decision not to follow the appropriate legal standard.' "
The court concluded that the facts in the Harbert case "do not come within shouting distance" of a manifest disregard of the law that warrants vacating an arbitration award. It described the case as "a typical contractual dispute in which the parties disagree about the meaning of terms of their agreement. There are arguments to be made on both sides of the contractual interpretation issue, and they were made to the arbitrator before being made to the district court and then to us. Even if we were convinced that we would have decided this contractual dispute differently, that would not be nearly enough to set aside the award..
" 'An arbitration board that incorrectly interprets the law has not manifestly disregarded it. It has simply made a legal mistake...' "
Rather, a " 'litigant arguing that an arbitrator acted in manifest disregard of the law must show something more than a misinterpretation, misstatement, or misapplication of the law...' Even "a showing of a clear error on the part of the arbitrator is not enough. The arbitration loser must establish more than that in order to have the award set aside, the more being that the arbitrator actually recognized a clear rule of law and deliberately chose to ignore it."
After denying the appeal, the court stated that it had seriously considered ordering Harbert and its counsel to show cause why sanctions should not be imposed on them. "When a party who loses an arbitration award assumes a never-say-die attitude and drags the dispute through the court system without an objectively reasonable belief it will prevail, the promise of arbitration is broken."
"Instead of costing less, the resolution of this dispute has cost more than it would have had there been no arbitration agreement. Instead of being decided sooner, it has taken longer than it would have to decide the matter without arbitration. Instead of being resolved outside the courts, this dispute has required the time and effort of the district court and this Court."
The court concluded that Harbert and its counsel had not had the benefit of a clear warning. But, it added: "[T]his Court is exasperated by those who attempt to salvage arbitration losses through litigation that has no sound basis in the law applicable to arbitration awards. The warning this opinion provides is that in order to further the purposes of the FAA and to protect arbitration as a remedy we are ready, willing, and able to consider imposing sanctions in appropriate cases. While Harbert and its counsel did not have the benefit of this notice and warning, those who pursue similar litigation positions in the future will."
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2008 Howrey LLP
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