Effect of “Manifest Disregard of Law”

By Leslie King O’Neal

Pipeline Contractors Arbitrate Stand-by Costs Dispute

Trinity Energy Services, L.L.C. (“Trinity”) was the general contractor for constructing natural gas pipelines from western Pennsylvania to the Delaware River. Trinity and Southeast Directional Drilling, L.L.C. (“Southeast”) had a subcontract for horizontal directional drilling. There were construction delays for various reasons. Southeast claimed entitlement to “stand-by costs” resulting from the delays. Trinity filed for arbitration seeking declaratory judgment; Southeast filed a counterclaim seeking its stand-by costs. The arbitration panel awarded Southeast $1,662,00 in stand-by costs.

Trinity Asserts Arbitrators Acted In “Manifest Disregard of the Law”

Trinity moved to vacate the arbitration award under §10(a)(4) of the Federal Arbitration Act (“FAA”)[i], asserting the arbitration panel had exceeded its authority and “acted in manifest disregard of the law.” Trinity asserted the arbitrators “failed to harmonize numerous subcontract provisions limiting Trinity’s obligation to pay Southeast’s standby costs.” The district court denied this motion but granted Southeast’s motion to confirm the award. Trinity appealed to the U.S. Court of Appeals for the Fifth Circuit[ii].

Arbitrators’ Interpretation Upheld Whether “Good, Bad or Ugly”

The Fifth Circuit noted Section 10 of the FAA provides the exclusive statutory grounds for vacating arbitration awards. Under the FAA, arbitration awards are vacated in limited circumstances. Parties seeking to overturn awards under §10(a)(4) (arbitrators exceeding their powers) have a heavy burden. See Post: Arbitration Awards: Avoiding Unfair Results https://theconstructionadrtoolbox.com/2024/08/arbitration-awards-avoiding-unfair-results/ The question is not “whether the arbitrators construed the parties’ contract correctly, but whether they construed it at all.”[iii] “In simpler terms, [t]he potential for . . . mistakes is the price of agreeing to arbitration.”[iv]

The record showed the arbitrators reviewed the evidence, considered the subcontract provisions and concluded Trinity owed Southeast for stand-by costs. The Fifth Circuit concluded, “The parties bargained for this dispute resolution arrangement, and we conclude this arbitration panel’s ‘construction holds, however, good, bad or ugly.’”[v]

Fifth Circuit: “Manifest Disregard of Law” Not a Basis for Vacatur

The Fifth Circuit has never held “manifest disregard of the law” was a basis to establish that arbitrators exceeded their powers under FAA §10(a)(4). It has consistently held “the statutory grounds are the exclusive means for vacatur under the FAA.”[vi] Consequently, the order confirming the arbitration award was affirmed.

Manifest Split on “Manifest Disregard”

The federal circuits split on recognizing “manifest disregard of law” as grounds for vacating an arbitration award after SCOTUS decided Hall Street Associates, L.L.C. v. Mattel, Inc. in 2008.[vii] The “manifest disregard” doctrine allowed vacatur if a party established the arbitrators knew of a governing legal principle controlling the dispute’s outcome but refused to apply it. The Hall Street decision held the grounds listed in FAA §§10 and 11 were the exclusive grounds to vacate or modify arbitration awards. However, the decision did not specifically address “manifest disregard” as a basis to vacate.

Currently, four circuits hold “manifest disregard” is a valid ground to vacate arbitration awards.[viii] Four circuits hold it is not.[ix] Four circuits are undecided.[x] SCOTUS has not indicated it intends to address this issue. Perhaps the Trinity case will provide the opportunity.

Takeaways

• “Manifest Disregard of Law” is more than an arbitrator’s error in applying the law or misunderstanding the law. It requires a showing of disregard for a clearly applicable legal principle.

• Before filing a petition to vacate on grounds of “manifest disregard of law” check the law in the specific circuit. If it’s one of the four circuits that doesn’t recognize this doctrine, prudence dictates finding another theory.

• To succeed in vacating an award for “manifest disregard” there must be evidence in the record that the arbitrator knew of a governing legal principle but intentionally ignored it or refused to apply it. This can be difficult.

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[i] 9 U.S.C.§10(a)(4).

[ii] United States Trinity Energy Services, L.L.C. v. Southeast Directional Drilling, L.L.C, (No: 24-10833, 5^th Cir. April 28, 2025). https://law.justia.com/cases/federal/appellate-courts/ca5/24-10833/24-10833-2025-04-28.html?utm_source=summary-newsletters&utm_medium=email&utm_campaign=2025-05-02-arbitration-mediation-3f985b1276&utm_content=text-case-read-more-1

[iii] Citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013).

[iv] Id.at 572-573.

[v] Citing BNSF Ry. Co. v. Alstom Transp., Inc., 777 F.3d 668, 790 (5^th Cir. 2015) (quoting Oxford Health, 569 U.S. at 573).

[vi] See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008)(holding FAA §§ 10 and 11 are exclusive grounds for vacatur and modification of arbitration awards.

[vii] Id.

[viii] 2d Circuit, 4^th Circuit, 6^th Circuit, 9^th Circuit.

[ix] 5^th Circuit, 7^th Circuit, 8^th Circuit, 11^th Circuit.

[x] 1^st Circuit, 3d Circuit, 10^th Circuit, D.C. Circuit. See Joshua Daniel Jones and Elizabeth C. Wheeler, Manifest Disregard as Grounds for Vacatur after Hall Street, ABA Litigation Section, Alternative Dispute Resolution Committee (March 28, 2025) https://www.bressler.com/publication-manifest-disregard-as-grounds-for-vacatur-after-hall-street