Texas Federal Court Upheld Arbitration Award Despite ‘Manifest Disregard of the Law’ Challenge

Despite a strong challenge, court upheld arbitral award. The U.S. District Court for the Southern District of Texas denied a motion to vacate an arbitral award and held that the arbitration panel did not “manifestly disregard” the law. Dealer Computer Services, Inc. v. Hammonasset Ford Lincoln-Mercury, Inc., Case No. 08-1865 (USDC S.D. Tex. Dec. 22, 2008). In 1993, Computer agreed to provide services for Ford’s dealership software system. The contract included, among other things, an arbitration clause and the parties agreed that Michigan’s law would govern the contract.

In 2006, a breach of contract dispute arose and Ford filed an arbitration demand. The arbitration panel concluded that Computer had breached the contract and Ford was awarded $297,567.59 in damages, which included attorney fees of $120,327. Computer moved to vacate the award.

The district court explained that, under FAA’s section 10(a)(4), a court may vacate an award if the arbitrators exceed their authority or manifestly disregard the law. However, a court “will not vacate an award simply because the arbitrator applied the law incorrectly; rather, the arbitrator must be aware of a governing legal principle and choose to ignore it.”

Although Michigan courts would usually not allow attorney’s fees as costs, the court upheld the arbitration panel’s award of attorney fees to Computer and held that the panel did not manifestly disregard the law.

See also Reinsurance Focus for recent cases citing the doctrine of Manifest Disregard for the Law.