Manifest Disregard

Arbitration is by usually binding, meaning the arbitrator’s decision is final and the parties must legally abide by it. Since arbitration is type of Alternative Dispute Resolution that happens outside the judicial system, courts are reluctant to “vacate” an arbitrator’s decision. Most of the time, the decision stands.

But in rare instances, an arbitration award can be vacated. Federal and state law provide some limited statutory grounds for vacatur, which we’ll cover below.

In addition, some jurisdictions allow for vacatur due to “manifest disregard of the law.” South Carolina does recognize the high standard of “manifest disregard of the law” as valid grounds for vacating an arbitration award, as was reaffirmed by the SC Supreme Court in the Andrew Waldo v Michael Cousins (2024) decision.

Let’s look at this issue more closely.

Statutory Grounds for Vacating a Decision Made in Arbitration

Many states, including South Carolina, base state laws regarding arbitration on the Federal Arbitration Act (FAA), first enacted in 1925. Found in Title 9 of the U.S. Code, Section 10 lays out the following limited grounds for vacating an award:

1. Corruption, fraud, or undue means
2. Evident partiality or corruption of the arbitrator(s)
3. Misconduct of the arbitrator(s)
4. Arbitrator exceeding powers or failing to issue a definite and final decision

The South Carolina Uniform Arbitration Act, found in SC Code Title 15, Chapter 48, contains essentially the same grounds for vacatur as the FAA above, with the addition of a fifth:

5. An award may be vacated if there was no arbitration agreement, the matter was not adversely determined under Section 15-48-20, and the party property objected

Vacatur of an arbitration award on statutory grounds is relatively rare. So is vacatur on the basis of the judicial concept of “manifest disregard of the law.”

“Manifest Disregard of the Law” as Judicial Grounds for Vacatur

Manifest disregard of the law occurs when an arbitrator knows the relevant, applicable law but deliberately ignores it. This is different from an error of law or ignorance of the law, which are not grounds for vacatur.

Manifest disregard of the law is not considered valid grounds in all jurisdictions, which makes the SC Supreme Court’s 2024 Waldo decision notable.

                  The facts, briefly

Michael Cousins is the broker in charge of a realty company that represented National Golf Management, LLC (NGM) as sellers in a transaction. The buyers were represented by a realty company where Andrew Waldo is the broker in charge.

In a subsequent transaction, Waldo represented the buyers again when purchasing 13 golf courses from NGM. Cousins didn’t have a written agreement with any party in this deal, and he didn’t get a commission from it.

Cousins and his company then brought suit against several parties seeking a commission. Cousins, Waldo, and an agent at Waldo’s company entered into arbitration, as they were required to do as members in a local realtor association.

                  Legal action and arbitration

Should Cousins be awarded a commission for the transaction? The decisions went back and forth:

• The arbitration panel ruled that Cousins was entitled to half of the commission earned in the deal
• Upon appeal, a Master-in-Equity vacated the award
• Upon further appeal, the court of appeals reversed the Master
• Finally, the SC Supreme Court reversed the court of appeals and vacated the award

In its opinion, the supreme court starts by “acknowledging – and reaffirming – the rare and narrow basis upon which we may disturb an arbitration award.”

However, if a claim is made that the arbitrator failed to follow the controlling law, then it must be shown that the arbitrator knew of “well-defined, explicit, and clearly applicable controlling law” but “still refused to apply it.” The court has held that in these situations, “the arbitrator exceeded his power by manifestly disregarding or perversely misconstruing the law governing the dispute.”

This high standard is only met when it’s “intentional” or “reckless flouting” of the law – not simply an error of interpretation. In this particular case, Waldo argued that the arbitration panel manifestly disregarded statutes governed by real estate agency law; the court agreed.

1. Did the Arbitrators Apply Relevant and Applicable Law? No.

Cousins argued that he acted as a “cooperating broker” with the buyer’s agent and was therefore entitled to a commission based on an “implied contract.” But under South Carolina law pertaining to the SC Real Estate Commission, Act 24 (1997) and Act 218 (2004), a written agreement with a buyer or seller is required for a broker (including a cooperating broker, or subagent) to be entitled to a commission. Cousins did not have one.

Cousins also argued that previous cases recognized the realtor’s right to commission through oral or implied contract. However, these cases were decided before the Acts went into effect, and the law states that the statute’s provisions supersede the common law when the two are inconsistent. (See: Title 40, Chapter 57 of the SC State Code.)

The law is clear: Cousins needed a written agreement in order to be entitled to a commission, and he did not have one. The arbitration panel did not apply this law in its decision.

2. Was There Evidence of Manifest Disregard? Yes.

Demonstrating that the arbitrators did not follow controlling law is one part of applying manifest disregard of the law. Far more difficult is proving that the arbitrator had knowledge of the controlling law but ignored it.

In the Waldo case, the record clearly showed that the arbitrators were aware of relevant and applicable law. They knew of the Acts referenced above and had a circuit court order dismissing similar claims from the same transaction on the grounds that oral and implied contracts in for real estate commissions were unenforceable under the Acts.

The arbitrators ignored the law in favor of focusing on “the procuring cause,” which the chairman brought up in the arbitration hearing. Under this theory, the agent or broker may be entitled to a commission if it can be shown that he or she was the initial cause of the chain of events that led to the transaction, even if he or she did not finalize the deal at the end. Courts recognized this reasoning in some prior cases even in the absence of a written agreement. But the statute is now clear that a written agreement is required, procuring cause or not.

“The Legal End Is Not a Lawless One”: Final Words of the Court

In summary, the record showed the arbitrators knew of the relevant law yet chose to ignore it. The supreme court reversed the court of appeals’ opinion, the award was vacated, and Cousins received no commission.

It’s worth reading some of the court’s musings on the nature and goal of arbitration towards the end of its opinion:

“Arbitration rests on consent of the parties, where parties freely exchange the expansive litigation rights court actions provide for the speed, informality, and finality arbitration promises. But when parties calculate the benefits and risks of their exchange, they do not bargain to have their dispute resolved by whim. Arbitration is designed to be the end, not the beginning, of legal wrangling, and our strict manifest disregard standard for vacatur honors this design by ensuring the legal end is not a lawless one.”

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