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Maryland High Court Recognizes That Arbitration Awards Can Be Vacated

August 15, 2018 By Gerald W. Ueckermann, Jr.

The Maryland Uniform Arbitration Act (MUAA) sets forth several grounds upon which a Circuit Court is empowered to vacate an arbitrator’s award.  Cts. & Jud. Proc. Art., § 3-224(b). These do not include the authority of a court to vacate an arbitrator’s award because the award manifestly disregards applicable law.  Nevertheless, Maryland’s highest court recently found that a party can challenge an arbitration award for manifest disregard of the law even though that authority is not recognized in the MUAA.

WSC/2005 LLC v. Trio Ventures Associates (decided July 30, 2018) involved the sale of a business.  The seller subsequently claimed that it was owed money by the purchaser pursuant to the terms of the sales agreement, and the dispute was submitted to binding arbitration.  After the arbitrator found in favor of the seller, the purchaser filed a petition to vacate the arbitration award in the Circuit Court for Montgomery County.  The petition alleged that the arbitrator had manifestly disregarded well-established Maryland law in reaching his decision.  The seller moved to dismiss the petition on the grounds that manifest disregard of a law was not a permissible reason to vacate an arbitrator’s award under the MUAA.  After the Circuit Court dismissed the petition, appeals ensued.  Eventually, the matter was heard by Maryland’s highest court, the Court of Appeals.

The Court of Appeals found that the authority of a court to set aside an arbitrator’s decision on the grounds that it manifestly disregarded applicable law was a well-established Maryland common law rule that predated the 1965 enactment of the MUAA.  The Court then found that the MUAA did not abrogate the common law rule.  Therefore, the Court held that a party is permitted to challenge an arbitration award that is governed by the MUAA for manifest disregard of the law.

The Court then went on to consider what needs to be proven in order for an arbitrator’s decision to manifestly disregard the law.  The Court said that a manifest disregard of the law is beyond, and different from, a mere error in the law or failure on the part of the arbitrator to understand or apply the law.  Rather, manifest disregard of the law occurs when: (1) the applicable legal standard is clearly defined and not subject to reasonable debate; and (2) the arbitrator refused to heed that legal principle.  It connotes a palpable mistake of the law or fact apparent on the face of the award.  The error must be readily perceived or obvious, and clear or unquestionable.

The Court then examined the arbitrator’s award in favor of the seller and found that it did not manifestly disregard the law.

The Court’s decision in WSC/2005 LLC v. Trio Ventures Associates will undoubtedly lead to more litigation in which losing parties ask Circuit Courts to vacate arbitration awards.  The standard set by the Court of Appeals in WSC/2005 LLC, however, is very high.  It suggests that arbitration decisions involving unsettled areas of the law or factual scenarios that are distinguishable from those in reported cases will not justify a finding that an arbitrator manifestly disregarded well-established Maryland law.