Second Circuit Recognizes Manifest Disregard, But Denies Appeal

In Tully Construction Company, Inc.v. Canam Steel Corporation the Second Circuit confirmed that "manifest disregard" is a viable basis for vacating an arbitration award under the Federal Arbitration Act (FAA).  Ultimately, however, the Court held that the arbitrator’s award not was rendered with manifest disregard of the law or the terms the relevant agreements.

The project involved replacing a span of a bridge in New York. The general contractor, Tully Construction Company (Tully), hired a steel fabricator to provide steel to the project.  After the project had gotten underway and some issues with performance arose with the initial steel fabricator, Canam Steel Corporation (Canam) became steel fabricator on the project.  This came about after Canam had taken on the initial fabricator's assets and liabilities under an "Asset Purchase Agreement" and state court declaratory judgment.  Disputes over performance continued with Canam.  Tully and Canam arbitrated.  An award was issued with Tully awarded almost $7 million.  Tully moved to confirm and Canam moved to vacate.  The district court confirmed the award.

 At the Second Circuit, the Court clearly acknowledged that "The Second Circuit recognizes two additional bases for vacatur [beyond those listed in Section 10 of the FAA]: if the award 'was rendered in manifest disregard of the law [ ] or 'the terms of the [parties’ relevant] agreement[s].'" Id.[citations omitted]  The Court observed, however, that "only 'a barely colorable justification for the outcome reached' by the arbitrator is necessary to confirm the award."Id.  Indeed, "party moving to vacate an arbitration award has a 'very high' burden of proof to avoid confirmation." Id.

At the district court and on appeal, Canam argued that the arbitrator had manifestly disregarded the declaratory judgment and Asset Purchase Agreement because, accordingly to Canam, it did not assume liability for the initial steel fabricator's breaches of contract before a certain date.  Canam also argued that the arbitrator ignored a contractual modification that extended the delivery time for the project.  For each of these allegations of error, the Court was not persuaded they rose to the level of manifest disregard.  It held that "manifest disregard clearly means more than error or misunderstanding with respect to the law" and that "manifest disregard of the evidence [is not a] proper ground for vacating an arbitrator’s award." Id.  The Second Circuit therefore affirmed the district court's decision.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Before You Litigate Your Construction Case, Test It!

Construction litigation is expensive. Why? Because construction cases usually involve complextechnical issues with lots of documents. Knowing that, it only makes sense for a party facing litigation or arbitration to try to settle the case by negotiation and mediation. If that is not possible, that party should thoroughly and candidly evaluate the prospects of achieving a good result at trial or in arbitration.

Even the most competent and experienced construction lawyers have great difficulty putting their biases aside when trying to determine how an independent and impartial decision-maker would decide the case. So, assuming that settlement is not likely, how does a party go about trying to assess the prospects of winning or losing—before going to trial?

Neutral Analysis

Neutral Analysis refers to a group of ADR techniques, including pre-file evaluations, brief-based case evaluations, second opinions and mock exercises, which help counsel assess their likelihood of success or failure before walking into a courtroom or arbitral tribunal.

Attorneys and their clients may have many questions pre-filing: which of your claims are likely to be successful and which are not? How will the trier of fact likely react to your fact witnesses and experts? Would a dispositive motion likely be successful? What are the chances that the construction contract limitation of liability or notice provisions will be strictly enforced?

Pre-File/Brief-based Case Evaluations

Putting these questions to an independent party who has similar expertise and experience as the trier of fact can be immensely useful to a party contemplating suit. The evaluator can be engaged on a number of levels:  she may review the complaint pre-filing and act as a sounding board to help develop counsel’s theory of the case; she might also help reassess settlement options, or manage client expectations about the likelihood of success.

Mock Arbitration

Similarly, a mock arbitration involves presenting a summary of a party’s case to one or more independent persons who have similar expertise and experience as do the actual arbitrators. The key difference is that this can be done before going to the actual hearing. The mock arbitrator(s) will hear the case presentation, which includes a summary of the opposing party’s positions as well, and offer their candid views on a confidential basis of how your case strategy would appear to an experienced, neutral third party.

If the case relies on documents, which documents are likely to be critical to the outcome? Having critical and honest feedback on issues like these—from persons who have no stake in the outcome— will allow you to adjust your case presentation strategy and tactics before it’s too late. Or, perhaps, after the mock arbitration, you may decide to settle on less favorable terms or even to abandon the case.

Perhaps the most important aspect of any mock is that the opposing party’s positions and arguments are presented credibly and persuasively, and this is typically done by having another lawyer in the appointing party’s law firm make that presentation. The standard practice is that each side’s position will be presented in the form of a general background statement—much like an opening statement in a trial—perhaps followed by presentations by expert witnesses, and with the use of PowerPoint demonstrations of documentary evidence. The typical case presentation will take one day or less, but in some complex cases, mock arbitration presentations can last several days.

Confidentiality

Of course, it is critical that the neutral evaluation process be kept strictly confidential. Therefore, an agreement should be made with the neutral that any and all confidential documents and other information that they receive, or any comments or advice given during the course of the evaluation, will be maintained in strict confidence with the appointing party.

Summary

Certainly, a mock exercise will add to the case preparation costs, but the expense of a mock is usually a small fraction of the total cost of preparing for and putting on the actual case. What is more sobering is the prospect of expending the considerable time and cost of going through the actual matter with a weak or less-than-persuasive case presentation. Because the cost of mocks and other neutral evaluations can be managed to fit the party’s needs, using them will usually be cost-effective. It is almost always the case that a party will make productive adjustments in its case based on feedback from the evaluation and will agree that the overall benefit of the exercise was worth the additional cost.

John W. Hinchey, Esq. is a panelist with JAMS based in Washington, D.C. He is recognized in the United States and internationally as a leader in resolving significant engineering, infrastructure and energy-related disputes as an arbitrator and mediator. He can be reached at jhinchey@jamsadr.com.