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.