Court May Not Vacate Arbitral Award Because Arbitrator Erred in Interpreting or Applying the Law

On October 24, 2019, the First Department issued a decision in Matter of Nexia Health Tech., Inc. v. Miratech, Inc., 2019 NY Slip Op. 07701, holding that a court may not vacate an arbitral award because the arbitrator erred in interpreting or applying the law, explaining:

At issue is whether the arbitrator manifestly disregarded the law in failing to apply the limitations of liability clause of the MSA to the damages awarded for Phase 2.

It is undisputed that the Federal Arbitration Act (FAA) applies to this dispute. 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. Vacatur on the basis of manifest disregard of a contract is appropriate where the arbitral award contradicts an express and unambiguous term of the contract. Manifest disregard of the law is a doctrine of last resort limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators and is severely limited.

A party seeking to vacate an award pursuant to 9 USC § 10(a)(4) bears a heavy burden. It is not enough to show that the arbitrator committed an error — or even a serious error. Section 10(a)(4) permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly. 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.

When the arbitrators give at least a barely colorable justification for the outcome reached, their finding stands. Mere error does not equate to a manifest disregard for the law.

Here, the arbitrator gave a colorable justification for the outcome reached. The arbitrator found that a correct reading of the clause assumes that invoices and amounts due must have been paid and the clause limits liability upon payment in the ordinary course. Since no invoices were paid for Phase 2, the arbitrator reasoned that the limitation of liability clause did not limit the damages awarded to respondent for work performed under Phase 2. In reaching his conclusion, the arbitrator did not contradict an express term of the contract, rather, he interpreted it. Even if the arbitrator's interpretation was erroneous, it does not equate to manifest disregard of the law.

(Internal quotations and citations omitted).

Complex commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. 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.