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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: June 24, 2019

Court Refuses to Vacate Arbitration Award for Manifest Disregard of the Law

On June 12, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Werner Worldwide Holding Co., LP v. Werner US Sub Holding, Inc., 2019 NY Slip Op. 31691(U), refusing to vacate an arbitral award for manifest disregard of the law, explaining:

Under CPLR ยง 7511(b)(1)(iii), an arbitration award may be vacated when an arbitrator, or agency or person making the award exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made. It is well settled that a court may vacate an arbitration award only if it violates a strong public policy, is irrational, or clearly exceeds a specifically enumerated limitation on the arbitrator’s power. Moreover, courts are obligated to give deference to the decision of the arbitrator. This is true even if the arbitrator misapplied the substantive law in the area of the contract. An arbitrator’s rulings, unlike a trial court’s, are largely unreviewable.

Under federal law, an arbitration award may be vacated in the event of fraud, corruption, or misconduct of the arbitrators, or if the award exhibits a manifest disregard of the law. To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators 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. Notably, manifest disregard of the facts is not a permissible ground for vacatur of an award.

In sum, under New York and federal law, a party moving to vacate an arbitration award has the burden of proof, and the showing required to avoid confirmation is very high.

. . .

Plaintiff has not provided sufficient grounds to warrant vacating BOO’s arbitration award. First, BOO’s decision did not constitute manifest error. While reasonable minds might differ as to whether the exclusion of Transaction Bonuses from Transaction Expenses and Indebtedness elsewhere in the contract shows an intent for Transaction Bonuses to be excluded from Net Working Capital under the Calculation Principles, the Court cannot conclude that BOO’s decision was fraudulent or manifestly wrong. BOO consulted the Calculations Principles and concluded that that company’s historical accounting methods, the first guiding principal, did not provide proper guidance as to how the Transaction Bonuses should be accounted. Therefore, it concluded, GAAP was the proper methodology to apply in determining Net Working Capital. The record does not support Plaintiff’s assertion that BOO’s conclusion was so beyond the pale as to constitute manifest error.

Second, Plaintiff has not shown that BOO was prohibited from determining whether the Transaction Bonuses impacted the Final Closing Price. The reference to “calculations” in Section 2.07 does not constitute the type of enumerated carve out that would limit the authority of BOO to resolve “any items that remain in dispute” at the end of the sixty-day period after Plaintiff’s notice of objection to Buyer’s Final Closing Documents. The bottom line is that BOO was retained to resolve the dispute over the Final Purchase Price, and the categorization of Transaction Bonuses as Net Working Capital under the Calculation Principles is an integral part of that dispute. That is what it did.

Plaintiff also cannot vacate the award on the basis that the arbitrator made a mistake of law. The manifest disregard standard rarely results in vacatur because it is limited to those rare occurrences of apparent egregious impropriety on the part of the arbitrators, which requires more than a simple error in law or failure by the arbitrators to understand or apply it; in other words, it must be more than an erroneous interpretation of the law. This type of error did not occur in this case.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. And as this decisions shows, the decisions of those arbitrators are subject to only very limited review by the courts. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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