ALS & Associates, Inc. v. AGM Marine Constructors, Inc.

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by Michael T. Walsh, Fiona C. McCormack

Date Promulgated: June 2, 2008

Issue Decided: Whether an arbitration award may be vacated for an arbitrator’s refusal to postpone a hearing to give a party more time to obtain evidence, failure to investigate and disclose possible conflicts, and/or manifest disregard of the law.

In ALS & Associates v. AGM Marine Constructors, Inc., the District Court of Massachusetts recently reinforced the difficult standards for vacating an arbitration award, confirming that courts give “profound deference to arbitral decisions.”¹ Notably, the Court cited a recent U.S. Supreme Court case,Hall Street Associates, L.L.C. v. Mattel, Inc., 128 U.S.1396 (2008), to hold unequivocally that manifest disregard of the law is not grounds for vacating an award under the Federal Arbitration Act (FAA).

Ruling on a party’s attempt to vacate an award based upon an arbitrator’s alleged: (1) failure to postpone a hearing to give it more time to obtain evidence, (2) partiality to one party over the other, (3) failure to investigate and disclose possible conflicts, and (4) manifest disregard of the law, the Court rejected each allegation in turn, at times with little discussion. Though the opinion discusses only a few details of the underlying arbitration, it appears that the party moving for vacatur had little support for its assertions against the arbitrator. It also appears that throughout the litigation of the review of the award, the movant had made a practice of accusing various parties of misconduct, with little or no support—a practice which clearly irritated the Court.

The Court reiterated the policy of promoting arbitration as a speedy and relatively inexpensive vehicle for resolving certain disputes², and acknowledged that the FAA limits judicial review of arbitral decisions by laying out streamlined procedures to be followed by reviewing courts in order to prevent those courts from closely scrutinizing arbitration decisions.³ “Because arbitration’s essential virtue is resolving disputes straightaway, . . . judicial review of an arbitral award is extremely narrow and exceedingly deferential,” stated the Court.⁴

In summary, the Court announced the following holdings: First, an arbitrator’s refusal to postpone a hearing does not warrant vacatur, even if it may have deprived that party of the chance to obtain certain evidentiary documents, where the party has not proved the relevance of the documents sought, and has been given the chance to cross-examine and impeach its adversary as to the failure to produce such documents. Second, a party seeking vacatur based on an arbitrator’s evident partiality to its adversary must show that a reasonable person would have to conclude that the arbitrator was partial to one party over another. Third, an arbitrator’s failure to investigate and timely disclose possible conflicts, in and of itself, does not warrant vacatur. Finally, manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the FAA.

Underlying Facts

The Court in ALS was called on to review an arbitral award given in a dispute between AGM Marine Contractors (“AGM”) and ALS & Associates, f/k/a Southeast Floating Docks, Inc. (“Southeast”) that had arisen from a construction project in which the town of Provincetown, Massachusetts had hired AGM to install a floating dock system as part of a larger municipal project. The docks which AGM installed had been manufactured by Southeast. During a December 2003 storm, the dock system failed, resulting in the dispute between AGM and Southeast as to which party was at fault for the failure. The dispute went to arbitration, and the arbitrator awarded $389,703 to AGM. Southeast moved to vacate the award.

Exclusion of Evidence

In its attempt to vacate the award, Southeast first asserted that the arbitrator had severely prejudiced it by refusing to grant its request to postpone a hearing in order to give it more time to obtain certain documents from third parties. Southeast had issued arbitral subpoenas to several third parties and, dissatisfied with their responses, filed separate actions in the District Court to secure compliance from two of the parties. Meanwhile, the arbitrator refused to delay the hearing pending the outcome of the separate court actions, and the hearing was held before Southeast had a chance to obtain the documents.

In its analysis, the Court laid out the requirement for vacatur based on the exclusion of evidence in an arbitration: namely, the complaining party must show that the exclusion has so affected its rights that it has been deprived of a fair hearing.⁵ The Court also stated that an arbitrator may successfully ameliorate unfairness that might otherwise result from the exclusion of evidence by drawing inferences against the party that has failed to produce.

That said, it went on to find that Southeast failed to show that the documents in question were vital to its case. “On the contrary, th[e documents] seem fairly innocuous,” it stated. The Court also pointed to the fact that the arbitrator had permitted the party to cross-examine and impeach the subpoenaed third parties as to their failure to produce the documents, and that the arbitrator had expressly drawn an inference against those parties for their failure to produce. Noting that Southeast never showed how such measures were inadequate to protect its rights, the Court held that the arbitrator’s refusal to hold up the arbitration did not deprive Southeast of a fair hearing.

The Court also rejected Southeast’s suggestion that its eventual victory in the two separate subpoena actions proved that postponement of the hearing was necessary. The court in the two separate actions had ultimately found that the third parties had not complied with Southeast’s subpoenas. However, the Court in ALS found that those rulings had no bearing on the case before it, because the materiality and relevance of the subpoenaed documents were not at issue in those actions. Rather, the issue in the separate cases was whether the third parties had substantially complied with a court order to respond to the subpoenas. The Court also noted that the subpoena cases took several years to resolve—a fact which underscored the reasonableness of the arbitrator’s decision not to wait for their outcome, given the fact that expediency is a principal benefit of arbitration.

Evident Partiality

As a second basis for its application for vacatur, Southeast alleged that the arbitrator displayed evident partiality to AGM, in part because the arbitrator was the acting as an attorney in an unrelated matter against a party represented by the same law firm that was representing AGM in the arbitration. Noting the tenuous nature of this alleged connection, the Court held that a party seeking vacatur based on an arbitrator’s evident partiality to its adversary must show that a reasonable person would have to conclude that the arbitrator was partial to one party over another.

Significantly, the Court declared that courts deciding the question of partiality should bear in mind that arbitrators, by necessity, usually have extensive practical experience in the same field in which the parties to the dispute are involved. As a result, arbitrators are often not only familiar at the outset with the parties appearing before them, but are more likely than a typical juror to be precommitted to a particular substantive position.⁶ Thus, because an arbitration by nature is not characterized by “austere impartiality,” the standard for showing evident partiality sufficient to vacate an award is particularly high: it is not enough to identify some remote connection between the arbitrator and one of the parties⁷ ; rather, the standard is a tough, objective one that is close to the “beyond a reasonable doubt” standard in criminal law.

Failure to Disclose Possible Conflicts

As part of its argument for evident partiality, Southeast also alleged that the arbitrator had failed to investigate and timely disclose possible conflicts of interest which might impair its impartiality or independence. Apparently, Southeast claimed that this failure violated Rule 16 of the American Arbitration Association (AAA) Commercial Arbitration Rules, which requires arbitrators to disclose any conflict of interest likely to impair his or her ability to preside over a case without bias. ⁸

The Court rejected this assertion, noting that the case was not governed by the AAA, but by the FAA—which contains no provisions for vacatur based on an arbitrators’ failure to disclose a possible conflict of interest alone.⁹ Rather, vacatur is warranted under the FAA only when a failure to disclose a conflict is linked to evident partiality. In this case, since the Court saw little evidence that the arbitrator was partial to AGM, it rejected Southeast’s argument.

The Court further stated that even an unsupported accusation of partiality can cast an arbitrator in an unfavorable light. As such, given the shaky basis for Southeast’s assertion of partiality and its apparent history of issuing similar unfounded accusations, the Court criticized Southeast for its “unhelpful penchant for levying poorly supported accusations of impropriety and malfeasance against various individuals and entities involved,” and stated that “at least some of Southeast’s aspersions border on the vexatious.”¹⁰

Manifest Disregard of the Law

Finally, Southeast argued that the award should be vacated because the arbitrator had manifestly disregarded the law. Without going into the facts of the arbitration, the Court swiftly rejected this argument, holding that that manifest disregard of the law is not a ground for vacating an award in cases brought under the FAA.¹¹ Specifically, the Court cited another First Circuit case from earlier this year, Ramos-Santiago v. UPS, 524 F.3d 120 (1st Cir. 2008), which itself cited the recent U.S Supreme Court case, Hall Street Associates, supra, as standing for the rule that the FAA does not provide for vacatur based on manifest disregard. However, the ALS Court also briefly noted that even if manifest disregard of the law remained a valid basis for vacatur, Southeast had failed to show that the arbitrator in question had manifestly disregarded the applicable law. ¹²

Summary

The Court’s decision to affirm the award in ALS may have been predictable, given that the allegations made in support of vacatur were apparently largely unfounded. However, the opinion clearly reinforces the strong sense of deference to arbitrator’s decisions. This sense of deference indicates that parties who submit to binding arbitration—particularly those who submit to the governance of the FAA—will have an increasingly difficult burden in vacating arbitration awards.

*Mr. Walsh is a Principal in the New York office of Boundas, Skarzynski, Walsh & Black, LLC, concentrating on reinsurance and insurance litigation and arbitration. He is also a certified arbitrator for ARIAS.

Ms. McCormack is an associate concentrating on insurance and reinsurance coverage issues.

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¹ Id., at *1.
² Id., at *2.
³ Section 10 of the FAA provides, in pertinent part:

In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration:

1. Where the award was procured by corruption, fraud, or undue means.

2. Where there was evident partiality or corruption in the arbitrators, or either of them.

3. Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.

4. Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

⁴ ALS, at *1.
⁵ Id., at *2, citing Nat’l Cas. Co. v. First State Ins. Group, 430 F.3d 492 (1st Cir. 2005).
⁶ Id., at *3
⁷ Id.
⁸ Rule 16 of the AAA Commercial Arbitration Rules provides that:

Any person appointed or to be appointed as an arbitrator shall disclose to the AAA any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives.

⁹ ALS, at *4.
¹⁰ Id., at *4, fn 6.
¹¹ Id., at *4, citing Ramos-Santiago v. UPS, 524 F.3d 120, 124 n.3 (1st Cir. 2008)
¹² Id.