|
A federal district court in New York confirmed an arbitration award over objection that the award exhibited manifest disregard of the law because no one apprised the arbitrators of the governing legal principle.
In MetLife Securities, Inc. v. Bedford, No. 02 Civ. 3018(JES), 2006 WL 2871978 (S.D.N.Y. Oct. 4, 2006), Bedford made failed investments on the advice of an employee of Metropolitan Life Insurance Company (MetLife Insurance).
To recover his money, Bedford initiated arbitration before the NASD, seeking payment from the employee and from MetLife Securities, Inc. (MetLife Securities), which is a subsidiary of MetLife Insurance. The arbitrators awarded Bedford $84,718.42 on his claims against MetLife Securities.
MetLife Securities moved to vacate the award, arguing that the arbitration panel acted in manifest disregard of the law because MetLife Securities had no dealings with the Bedfords and no relationship with the MetLife Insurance employee who advised them to make the failed investments.
In the Second Circuit, an award may be vacated for manifest disregard of the law only if “(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.”
The Court found there was no manifest disregard of the law because MetLife Securities “failed entirely to educate” the arbitrators on the governing legal principle – namely, that a subsidiary is not liable for the acts of its parent company solely by virtue of “membership in the same corporate family.”
In making this finding, the Court observed that “[m]embers of an arbitration panel are not presumed to possess knowledge of corporate legal principles.” In fact, as the Court noted, an arbitrator does not have to be an attorney, and in this case, only two of the three arbitrators had a legal background.
Though the law does not require an arbitrator to be an attorney, parties to an arbitration agreement can adopt rules that require the arbitrator to apply the correct applicable law. For example, National Arbitration Forum (FORUM) arbitrators are either retired judges or attorneys with proven legal expertise. And, they are required to apply the substantive law pursuant to Rule 20 of the FORUM Code of Procedure. Should they fail to do so, a losing party can seek to vacate the award because the arbitrators exceeded their power under Section 10 of the Federal Arbitration Act or under a comparable section of a state arbitration act.
In any case, it is a wise practice to apprise an arbitrator of any prevailing legal principles a party wants applied during the arbitrator’s deliberations.
Subscribe to a free weekly update on ADR case law and
legislation
|