Can a court vacate an award because it was based on a clear mistake of historical fact or on a conceded nonfact? Some might consider asking that question to be akin to using fighting words, but it is one that the U.S. Court of Appeals for the Seventh Circuit may ultimately answer if an appeal of the UPHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024) is taken.
In vacating in part the award in that case the UpHealth district court took a rather bold step, albeit one that has support in two circuit court labor arbitration cases (decided in 1974 and 1985), Electronics Corp. of Am. v. International Union of Elec., Radio and Mach. Workers, 492 F.2d 1255 (1st Cir. 1974); National Post Office, Mailhandlers, Watchmen, Messengers & Grp. Leaders Div, Laborers Int’l Union of N. Am., AFL-CIO v. United States Postal Serv., 751 F.2d 834, 843 (6th Cir. 1985) (Stewart, Associate Justice (ret.), sitting by designation), and at least one district court case, decided under the Federal Arbitration Act (the “FAA”) in 2002, Mollison-Turner v. Lynch Auto Grp., No. 01 6340, 2002 WL 1046704, at *3 (N.D. Ill. May 23, 2002). It vacated in part an award because the Court determined the arbitrators strongly relied on a conceded nonfact. Whether UpHealth will withstand appellate review is unclear at this juncture, but at least for the time being, it provides award challengers with some additional support for vacating a very narrow class of questionable but rare awards that feature the kind of unusual circumstances present in UpHealth, Electronics Corp., National Post Office, and Mollison-Turner. Each of these cases presented a situation where an award was based on a clear mistake of historical fact, a conceded nonfact, or both.
This post reviews what transpired in UpHealth. In one or more later posts we shall subject the Court’s decision to analytical scrutiny and consider whether, and if so, to what extent, the notion that an award can be vacated based on a mistake of historical fact or a conceded nonfact will likely gain traction in future cases. We may also consider whether, and if so, to what extent, vacatur on that ground comports with Federal Arbitration Act (“FAA”) principles, and discuss in more detail Electronics Corp., National Post Office, and Mollison-Turner.
Legal Background: Outcome Review of Arbitration Awards
Manifest Disregard of the Agreement and Manifest Disregard of the Law
Under the Federal Arbitration Act (“FAA”), and in labor arbitration cases, courts can vacate awards based on the outcome of the arbitration only in very limited, specific circumstances. First, Courts can vacate awards for what is sometimes called “manifest disregard of the agreement,” that is, when the arbitrator’s award does not “draw its essence from the agreement” and represents instead the arbitrator’s own notions of commercial or industrial justice. (See, e.g., here, here, here, here, and here.) Such an award exceeds the arbitrator’s powers within the meaning of Section 10(a)(4) of the Federal Arbitration Act, 9 U.S.C. § 10(a)(4), and federal common law derived from Labor Management Relations Act Section 301 cases. (See, e.g., here, here, here, here, and here.) Manifest disregard of the agreement vacatur may be granted where the arbitrator’s award is not even arguably an interpretation of the parties’ agreement and is based instead on extracontractual considerations. See, e.g., Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 566-70 (2013); Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671-72, 676-77 (2010).
An example is Stolt-Nielsen, where the U.S. Supreme Court held that the award had to be vacated because the arbitrators ignored the parties’ stipulation that the parties never reached an agreement about consent to class arbitration, and the arbitrators made their award based not on the parties’ agreement, but on a supposed, extra-contractual public policy in favor of class arbitration. See Stolt-Nielsen, 559 U.S. at 671-72, 676-77.
The other form of outcome review is “manifest disregard of the law” but it is not recognized in all jurisdictions. Under Section 10(a)(4)—or “as a judicial gloss” on all the Section10(a) vacatur grounds—some courts vacate awards for “manifest disregard of the law,” a standard that to some extent overlaps with the “essence of the agreement” or “manifest disregard of the agreement” standard. See Stolt-Nielsen, 559 U.S. at 668 n.3; Oxford, 133 S. Ct. at 2068-71 (2013); see, e.g., Schwartz v. Merrill Lynch & Co., Inc., 665 F. 3d 444, 451-52 (2d Cir. 2011) (manifest disregard of the law is a judicial gloss on Section 10(a)); Comedy Club, Inc. v. Improv West Assoc., 553 F.3d 1277, 1290 (9th Cir. 2009) (manifest disregard of the law falls under Section 10(a)(4)). Vacatur under that standard may be appropriate if arbitrators disregard or ignore a well-defined, explicit, clearly applicable and outcome determinative rule of law that the challenger argued to the arbitrators. See, e.g., Schwartz, 665 F.3d at 451-52. Manifest disregard of the law does not authorize courts to vacate awards for errors of law—even serious ones—or “a failure on the part of the arbitrators to understand or apply the law.” See, e.g., Lagstein v. Certain Underwriters at Lloyd’s, 607 F.3d 634, 641 (9th Cir. 2010) (quotation and citation omitted).
The Second Circuit’s No-Longer-Viable “Manifest Disregard of the Facts” Standard
There was a time when the Second Circuit recognized not only manifest disregard of the law but also manifest disregard of the facts. In 1998, in Halligan v. Piper Jaffray, Inc., 148 F.3d 197 (2d Cir. 1998), the Second Circuit suggested that, at least in the context of awards concerning statutory employment discrimination claims, manifest disregard of the evidence was an independent ground for vacating an award. Halligan concerned an arbitration award, issued after an evidentiary hearing, that, in the face of overwhelming evidence to the contrary, found in favor of the employer on a statutory age-discrimination claim despite “overwhelming evidence that [the employer’s] conduct after [person A] became CEO was motivated by age discrimination.” Halligan,148 F.3d at 203.
Reversing the district court’s confirmation of the award, the Second Circuit concluded that “[i]n view of the strong evidence that Halligan was fired because of his age and the agreement of the parties that the arbitrators were correctly advised of the applicable legal principles, we are inclined to hold that they ignored the law or the evidence or both.” 148 F.3d at 204.
Given the Court’s reference to the Panel having “ignored the law or the evidence or both[,]” Halligan was, for a period, interpreted as endorsing manifest disregard of the facts as a ground to vacate an award, at least in the context of statutory employment claims. The Second Circuit, however, subsequently decided that this reading of Halligan was incorrect and that manifest disregard of the evidence, as opposed to manifest disregard of the law, is not a valid ground for vacating an arbitration award. See Wallace v. Buttar, 378 F.3d 182, 191-93 (2d Cir. 2004).
The Seventh Circuit Does not Recognize Manifest Disregard of the Law but Does Recognize a Few Other Exceedingly Narrow Bases for Overturning an Award Based on Its Outcome
The Seventh Circuit does not recognize manifest disregard of the law as a ground for vacating an award but it has held that “a court may set aside an award that directs the parties to violate the legal rights of third persons who did not consent to the arbitration.” Affymax, Inc. v. Ortho-McNeil-Janssen Pharms., Inc., 660 F.3d 281, 284 (7th Cir. 2011) (citing George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir.2001)). The Seventh Circuit explained in Affymax that “an award directing the parties to form a cartel, and fix prices or output, could be vacated as a violation of the Sherman Antitrust Act, even though the Federal Arbitration Act does not authorize the award’s vacatur.” 660 F.3d at 284. For “[a]rbitration implements contracts, and what the parties cannot do through an express contract they cannot do through an arbitrator.” Id.
The Seventh Circuit applies that principle with equal force to authorize Courts to vacate awards in situations in other situations in which their enforcement would violate public policy, Zimmer Biomet Holdings, Inc. v. Insall, ___ F.4th ___, No. 23-1888, slip op. at 7-8 (7th Cir. July 12, 2024), because “the power of federal courts to enforce contracts is at all times ‘subject to the restrictions and limitations of the public policy of the United States as manifested in the Constitution, treaties, federal statutes, and applicable legal precedents.’” Zimmer, slip op. at 7 (quoting Hurd v. Hodge, 334 U.S. 24, 35 (1948)). “And[,]” said the Seventh Circuit, “where enforcement of private agreements would violate public policy, ‘it is the obligation of courts to refrain from such exertions of judicial power.’” Zimmer, slip op. at 7 (quoting Hurd, 334 U.S. at 35). But vacatur can be awarded only where the public policy is “well defined and dominant, and is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interests.” Zimmer, slip op. at 7 (quotation and citation omitted).
The Seventh Circuit has also recognized that courts may vacate awards where “different arbitrators have issued incompatible awards, only one of which could be enforced without commanding the parties to do the impossible.” 660 F.3d at 284 (citing Jonites v. Exelon Corp., 522 F.3d 721 (7th Cir. 2008)).
Arbitrator Fact Findings Ordinarily Immune from Review. . . . Is Arbitrator Reliance on a Conceded Nonfact Likewise Immune from Review?
Whether applying manifest disregard of the contract or manifest disregard of the law standards, Courts ordinarily hold that an arbitrator’s fact findings are simply not subject to review, no matter how grossly erroneous, “improvident,” “silly” or in manifest disregard of the evidence. See Major League Baseball Players Assoc. v. Garvey, 532 U.S. 504, 509-10, 511 (2001) (“When an arbitrator resolves disputes regarding the application of a contract, and no dishonesty is alleged, the arbitrator’s “improvident, even silly, factfinding” does not provide a basis for a reviewing court to refuse to enforce the award. . . . [and] established law ordinarily precludes a court from resolving the merits of the parties’ dispute on the basis of its own factual determinations, no matter how erroneous the arbitrator’s decision.”) (quoting Paperworkers v. Misco, Inc., 484 U.S. 29, 36, 39 (1987)) (applying manifest disregard of the agreement standard); Constellium Rolled Prods. Ravenswood, LLC v. United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Indus. & Serv. Workers Int’l Union, 18 F.4th 736, 739, 741-42 (4th Cir. 2021) (applying manifest disregard of agreement and manifest disregard of the law standards). The Seventh Circuit, likewise prohibits review of factual errors.” Zimmer, slip op. at 5 (“We may not reconsider the merits of an award even when a party argues that the arbitrators made a factual error or even a legal one when interpreting a contract.”) (quoting Misco, 484 U.S. at 36).
It does not bode well for UpHealth that Courts, including the Seventh Circuit, hold that gross mistakes of fact, or silly, improvident fact finding, does not provide grounds for vacatur. An arbitrator’s reliance on what the parties concede is a nonfact could easily be characterized as a gross mistake of fact, something “silly” and improvident, and thus outside the scope of the Court’s permissible scope of review.
Yes that would be an arbitration train-wreck for at least one of the parties, but is the risk of that something against which the FAA is supposed to protect? Can vacatur based on a clear mistake of historical fact, or a conceded nonfact be justified because a Court’s refusal to address it would amount to violating the parties’ agreement? After all, if the nonfact is conceded, then the parties agreed to its existence. Shouldn’t the Court recognize and give force to that agreement under the FAA, just like the Court in Stolt-Nielsen gave force and effect to the parties’ stipulation that they had reached no agreement concerning class arbitration?
These are interesting questions, which we’ll address in one or more future posts, but for now let us take a closer look at what the conceded nonfact in UpHealth was and why the Court vacated the award based on that conceded nonfact.
UpHealth: Vacatur when Award Based on Clear Mistake of Historical Fact or a Conceded Nonfact
On September 24, 2024, U.S. District Court Judge Sharon Johnson Coleman, of the Northern District of Illinois, considered competing motions to confirm or vacate an arbitration award made against Glocal Healthcare Systems Private Limited (“Glocal”); Glocal shareholders and board members Dr. Syed Sabahat Azim, Richa Sana Azim, Guantam Chowdhury, Meleveetil Damodaran (“Damodaran”); and Kimberlite Social Infra Private (collectively referred to as the “Glocal Respondents”). Based on the arbitrators’ strong reliance on a conceded nonfact (discused below), the Court vacated the award to the extent it purported to impose certain obligations on Damodaran but confirmed it against the remaining Glocal Respondents.
UpHealth’s Articulation of the Clear-Mistake-of-Historical-Fact or Conceded Nonfact Standard
The Court began by acknowledging that its “review of the Tribunal’s fact finding, like its review of legal conclusions, is quite limited.” UpHealth, slip op. at 19. A “factual error,” explained the Court, “‘no matter how gross,’” will not justify vacatur. UpHealth, slip op. at 19 (quoting Halim v. Great Gatsby’s Auction Gallery, Inc., 516 F.3d 557, 563 (7th Cir. 2008)).
The Court, however, said that its “deference is not unlimited, and “‘is appropriately applied to an arbitrator’s conclusions based on disputed or ambiguous evidence, as opposed to clear mistakes based on historical fact.’” Id. (citing Mollison-Turner v. Lynch Auto Grp., No. 01 6340, 2002 WL 1046704, at *3 (N.D. Ill. May 23, 2002)). And further, “[i]f an arbitrator bases its decision on a conceded ‘non-fact’ its ‘award cannot stand.’” UpHealth, slip op. at 19 (quoting Mollison-Turner, 2002 WL 1046704, at *3).
Putting it another way, the Court explained that “‘where the record that was before the arbitrator demonstrates an unambiguous and undisputed mistake of fact and the record demonstrates strong reliance on that mistake by the arbitrator in making his award, it can fairly be said that the arbitrator “exceeded [his or her] powers, or so imperfectly executed them” that vacation may be proper.’” UpHealth, slip op. at 19 (quoting National Post Office, Mailhandlers, Watchmen, Messengers & Grp. Leaders Div, Laborers Int’l Union of N. Am., AFL-CIO v. United States Postal Serv., 751 F.2d 834, 843 (6th Cir. 1985) (citations omitted) (Stewart, J., sitting by designation)).
Application of the Standard to the Facts and the Conceded Nonfact
Applying this standard to the facts, the Court concluded that the arbitrators “based [their] decision on a” conceded nonfact, and “substantially relied on” that conceded nonfact. Slip op. at 22.
The conceded nonfact was that Damodaran was supposedly present, and voted at, an emergency shareholder’s meeting, the purpose of which was—pursuant to the shareholder’s purchase agreement between UpHealth and Glocal (the “purchase agreement”)—to facilitate the appointment of UpHealth’s designees to Glocal’s board of directors, and thus, UpHealth’s acquisition of Glocal pursuant to the purchase agreement.
The Court explained that the only finding of fact by the arbitrators concerning Damodaran appeared in the award “after [the arbitrators] represented [in the award Damodaran’s] various objections. . . [:]”
While the Tribunal accepts that [Damodaran] had not actively participated in [Glocal’s] affairs, the breach in question under the present claim pertains significantly to the actions taken at the [Emergency General Meeting] to prevent [UpHealth] from appointing its designees to the Board. In this regard, the Tribunal notes that the [Damodaran], together with Respondent Nos. 2-4 and 6 voted against the said appointment, in plain contravention of the terms of the SPA. As such Damodaran must bear the consequences for his breach and is liable for the sum apportioned above.
Slip op. at 21 (quoting Award at ¶ 390) (some parenthetical material in original).
That sole finding, the Court explained, “is not a mere ‘conclusion[] based on disputed or ambiguous evidence.’” Slip op. at 21 (quoting Mollison-Turner, 2002 WL 1046704 at * 3). The record contained no evidence “on which the Tribunal relied to make [that] finding.” Slip op. at * 21. “The Court” could “only surmise from the record that the Tribunal assumed Damodaran was present with the rest of the Respondents at the EGM without ever receiving evidence that he was in fact present.” Slip op. at 21.
Damodaran was but a nominal shareholder but “the Tribunal based its findings on ‘Mr. Beck’s evidence that at [the] EGM the minority shareholders voted against the Claimant’s designees being appointed to the Board.’” Slip op. at 21 (quoting Award at ¶¶ 360-61). Beck, however, “did not identify which minority shareholders were present. . . and noted that the vote was limited to ‘Glocal Healthcare shareholders in attendance’” at the Emergency General Meeting. Slip op. at 21 (quoting Dkt. 48-1, Ex. 2 at ¶ 121).
Seizing on this, UpHealth contended that there was no evidence that Damodaran wasn’t present, but the Court rejected this argument because, according to the Court, UpHealth never alleged that Damodaran was in fact present at the meeting or voted at the meeting, by proxy or in person. Slip op. at 22. Even were the arbitration a litigation, and Damodaran had defaulted, he would not be deemed to admit an allegation that was not made against him. See slip op. at 22.
Damodaran could not be expected “to deny and defend himself against allegations that were never made.” Slip op. at 22. “The key point[,]” said the Court, “is that there was no allegation or evidence in the record that Damodaran attended or voted at the EGM[,]” and “[t]he Court thus finds that the Tribunal based its decision as to Damodaran on a” nonfact. Slip op. at 22.
Court Determines the Arbitrators Strongly Relied on the Nonfact
Before it could vacate the award, the Court had to determine whether the arbitrators “acted in ‘strong reliance on that [nonfact]. . . in making [their] award’. . . .” Slip op. at 22 (quoting National Post Off., 751 F.2d at 843 (citations omitted)).
It found “plenty of evidence” of such strong reliance in paragraphs 386 and 413 of the Award, which demonstrates that the Panel “solely based” Damodaran’s “liability on his supposed vote at the EGM[:]”
- Paragraph 386: “‘[T]he Tribunal has concluded above that the date of breach is 26 September 2022 and voting against the appointment of the designees was the initial contractual breach. Since the act of breach is tied to their voting, the Tribunal considers it appropriate to apportion the damages based on the shareholding percentages of each of the Respondent Nos. 2 to 6.’”
- Paragraph 413: The Tribunal summarized its findings by explaining that ‘Respondents Nos. 2 to 6 breached their obligations under the SPA on 26 September 2022 when they voted against the appointment of the Claimant’s designees to the Board.’”
Slip op. at 22 (quoting Award at ¶¶ 386, 413).
UpHealth did not identify any “findings supporting an alternative factual basis for Damodaran’s liability.” Slip op. at 22. The Court accordingly “agree[d] that the Tribunal substantially relied on Damodaran’s supposed presence and vote at the EGM.” Slip op. at 22. Because that fact was “not alleged and not in evidence,” the Court held that the Tribunal, within the meaning of Section 10(a)(4) of the FAA, exceeded its powers. Slip op . at 22.
The Court acknowledged that Damodaran was “not blameless in the Tribunal’s error[:]” If he had participated in the arbitration, and if his evidence is as strong as he contends, “he likely could have made the Tribunal and this Court’s job significantly easier.” Slip op. at 23. But the Court perceived to be “understandable” Damodaran’s actions. He “represented himself in a complex foreign arbitration over claims in which he believed he had no stake[,]” he “objected and told UpHealth and the Tribunal that he had no power to appoint UpHealth’s designees; had no management power at UpHealth aside from his nominal shares; and had tendered his shares to UpHealth, which he believed ended his duties under the agreement.” Slip op. at 4. The Court remanded to the “Tribunal to determine whether Damodaran violated his duties at the EGM after further proceedings.” Slip op. at 22.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.
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