Arbitration Award Can Be Vacated If It Directs Party To Perform Illegal Act

[author: Liz Kramer]

In a new decision from the First Circuit, which refuses to make any definitive pronouncements about the law on vacating arbitration awards, the court said it assumes “with some confidence” that if an arbitration award directed a party to violate an administrative agency rule, it could be vacated on that basis.

In Bangor Gas Company, LLC v. H.Q. Energy Services (U.S.) Inc., __ F.3d __, 2012 WL 4373685 (1st Cir. Sept. 26, 2012), the dispute was between a natural gas supplier and a pipeline owner over the meaning of their contract.  The dispute was arbitrated, and the award was “largely favorable to” H.Q. (the supplier).  The owner then sought to vacate the arbitration award.  Both the district court and court of appeals upheld the award.

One of the owner’s main arguments was that the arbitrators had issued an award that forced the parties to violate FERC regulations (as well as Maine contract law, which looks down on illegal contracts).  The owner argued that, therefore, the award was  in manifest disregard of the law.  (The First Circuit continues to waffle on the validity of  “manifest disregard” as a basis for vacating arbitration awards.  After acknowledging the circuit split on that issue, it reasoned that ”[e]ven if the manifest-disregard doctrine were assumed to survive and were applied in this case,” the arbitration award would not rise to the level of manifest disregard of the law.)

With respect to the allegation that the award forced the parties to violate a FERC regulation, the Court first acknowledged that ordering parties to violate the law would be a problem, albeit in less-than-strident language.  It writes “we will assume (arguendo but with some confidence) that an arbitration would be vulnerable to the extent that it directed one or both of the parties clearly to violate” a rule or regulation of an administrative agency.  The Court then relied on two facts to find that this particular award was not “vulnerable” for that reason.  First, there was not an official FERC rule or regulation prohibiting the conduct called for in the award.  There had only been an opinion from FERC staff that the award would violate FERC regulations, and the staff repeatedly said that its view was not binding on the Commission.  Second, the arbitration panel had required the supplier to confirm that it would repay any amounts it received if FERC later determined the payments were not consistent with FERC policy.  For those reasons, and because the First Circuit seemed to think FERC would never care about the potential violation raised, the First Circuit upheld the arbitration award, despite the allegation that it ordered the parties to act illegally.