Originally from Dispute Resolution Journal

COMMERCIAL

Manifest Disregard of the Law

The 7th Circuit took a novel approach to the doctrine of manifest disregard of the law. The court adopted the principle that manifest disregard of the law occurs only when the arbitrator’s award requires the parties to violate the law or does not adhere to the legal principles specified by contract.

The case arose out of the termination of a distributorship agreement between Watts & Co. and Tiffany & Co. Watts, a former distributor for Tiffany, alleged that Tiffany violated the parties’ contract and the Wisconsin Fair Dealership Law. The parties agreed to arbitrate their dispute. The arbitration resulted in an award providing the following relief. Watts had an extended period of time to dispose of Tiffany merchandise through its bridal registry; Tiffany could stop selling to Watts at the end of the year and had to repurchase any of Watts’ remaining Tiffany inventory.

Watts sought additional relief in court, arguing that the arbitrator manifestly disregarded Wisconsin law in not awarding its attorneys’ fees and costs. The district court, however, enforced the award as written and the 7th Circuit affirmed.

Applying the principle stated above, the 7th Circuit found no manifest disregard of the law because no state law prevented the parties from agreeing to bear their own legal expenses. The award not only did not violate the law, it did not depart from the principles in the contract. The court observed that the parties could have included a “loser pays” clause in their agreement but chose not to specify the rule of decision. The court explained that when the parties agree to arbitrate without specifying such a rule, the arbitrator has “considerable leeway” so long as he or she respects the limits the parties’ contract and public law place on the arbitrator’s discretion.

This appeals court’s view of what constitutes manifest disregard is borrowed from the Supreme Court’s recent decision in Eastern Associated Coal v. United Mine Workers. That case addressed the question of when a violation of “public policy” justifies setting aside an award. In that case the Supreme Court upheld an arbitrator’s reinstatement of a truck driver who had twice tested positive for marijuana. The Court reasoned that reinstatement was within the employer’s power since it did not command the parties to violate positive law or any other well-defined federal policy.