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Stolt-Nielsen S.A. v. AnimalFeeds International Corporation

United States Court of Appeals for the Second Circuit · 2008 · Contracts
548 F.3d 85 (2008)
Updated
ContractsArbitrationClass arbitrationManifest disregardFAA9 U.S.C. § 10(a)(4)silent arbitration clausefederal maritime law

Facts

The parties were bound by international maritime contracts containing broad arbitration clauses, and those clauses were silent on whether arbitration could proceed on a class basis. After prior litigation led to arbitration of the antitrust claims, the parties agreed that the arbitrators would follow AAA Supplementary Rules for Class Arbitrations, including Rule 3, which required the arbitrators to decide whether the clauses permitted class arbitration. The arbitration panel received briefing and evidence, including Stolt-Nielsen's arguments about maritime custom, usage, and negotiating context, and then issued a Clause Construction Award concluding that the agreements permit class arbitration. Stolt-Nielsen sought vacatur, arguing the panel acted in manifest disregard of the law and exceeded its authority.

Issue

Whether the arbitration panel, by construing the parties' silent maritime arbitration clauses to permit class arbitration, acted in manifest disregard of the law. Also, whether the panel exceeded its authority by deciding that issue.

Rule

An arbitral award may be vacated for manifest disregard only in exceedingly rare cases where the arbitrators knew of a clear and explicitly applicable legal principle, improperly applied it to reach an erroneous result, and willfully flouted that governing law. After Hall Street, manifest disregard survives, if at all, as a judicial gloss on the FAA's exclusive vacatur grounds, particularly where arbitrators have effectively exceeded their powers under 9 U.S.C. § 10(a)(4). Arbitrators do not exceed their powers by deciding a question the parties expressly submitted to them, even if a court believes they decided it incorrectly.

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Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.
Pine Harbor Logistics and Mesa Valley Ingredients arbitrated a contract dispute in Denver under a broad arbitration clause. The panel adopted one party's interpretation of a silent term after considering competing authorities, and the losing party asks a federal court to vacate because the panel's reading was legally wrong.

Which is the strongest reason the court should refuse vacatur?

Explanation. The majority emphasized the extreme deference owed to arbitral awards. Manifest disregard means more than legal error; courts may not vacate merely because they think the arbitrators made the wrong call. If there is a barely colorable justification for the outcome, the award must be confirmed. That is especially true in contract-interpretation disputes.