When Does a Statute Abrogate the Common Law and When May an Arbitration Award be Vacated Due to Legal Error?
In 1793, the General Court of Maryland – which from 1776 to 1806 exercised both general and appellate jurisdiction – held that an arbitration award could be set aside for reasons “apparent on the face of the award.” Dorsey v. Jeoffray, 3 H & McH. 81 (Md. 1793). In the ensuing years, and well into the Twentieth Century, the Court of Appeals followed that general principle, holding that an arbitrator’s “gross and manifest” mistake can lead a court to set aside an award, Roloson v. Carson, 8 Md. 208, 220-21 (1853), and that an award may be set aside if there is a mistake of fact or law appearing on the face of that award, Parr Constr. Co. v. Pomer, 217 Md. 539, 544 (1958).
In 1965, however, Maryland adopted the Uniform Arbitration Act, Md. Code Ann., Cts. & Jud. Proc. §§3-201 et seq., which contains five specific grounds for vacating an arbitration award, but a manifest mistake of law is not among them. In the years following adoption of the Act, Maryland courts continued to rule – in cases not governed by the Act – that an arbitration award could be set aside for manifest disregard of the law. Baltimore Cty. Fraternal Order of Police Lodge No. 4 v. Balt. Cty., 429 Md. 533, 564 (2012); Downey v. Sharp, 428 Md. 249, 265 (2012); Board of Educ. of Prince George’s Cty. v. Prince George’s Cty. Educators’ Ass’n, 309 Md. 85, 101-02 (1987). But what about those cases covered by the Act? May an award in one of those cases be vacated for manifest disregard of the law? Or may an award in a case covered by the Act be disturbed only if based on a ground specified by the Act? In WSC/2005 LLC v. Trio Ventures Assocs. (Md. July 30, 2018), the Court of Appeals answered that question.
In 2005, the Washington Science Center Joint Venture (“WSCJV”) owned various commercial properties, including 6100 Executive Boulevard and 6011 Executive Boulevard. That year, Trio Venture Associates, along with three individuals and a family-owned limited partnership (collectively, “Trio”), sold a controlling interest in the joint venture to WSC/2005 LLC and two individuals (collectively, “WSC”). The purchasers made an initial payment of $10 million and owed an additional $3.5 million if the government tenants at those two Executive Boulevard properties renewed their leases for at least ten years. Alternatively, they would owe that second payment if those two properties “in the aggregate are not less than seventy-five percent (75%) leased to and occupied by tenants for terms of not less than five (5) years in each case (excluding options) ….” Id., Slip Op. at 2 (internal quotation marks omitted). WSCJV was required to “use commercially reasonable efforts to obtain renewal leases on terms and conditions acceptable to WSCJV as soon as is practical.” Id. (internal quotation marks omitted).
In 2010, Trio learned that WSC had sold 6100 Executive Boulevard four years earlier. Trio claimed that, because “WSC had an obligation to lease 6100 Executive Boulevard and that Trio was misled into thinking that WSC remained the owner,” the sale of that property triggered WSC’s obligation to pay Trio the additional $3.5 million. WSC disagreed, so Trio commenced arbitration. WSC moved to dismiss Trio’s claims and “Trio moved for summary judgment, arguing that the sale deliberately frustrated and destroyed any possibility that WSC could fulfill the leasing contingency.” Id. at 3. The Arbitrator dismissed three of Trio’s five claims, but granted “Trio’s motion for summary judgment on the issue of whether WSC breached the [purchase and sale agreement] by selling 6100 Executive Boulevard,” concluding that the sale breached the agreement and that WSC consequently must pay Trio the $3.5 million mandated by the agreement. Id. WSC asked the Circuit Court for Montgomery County to vacate the arbitration award, arguing that the award “manifestly disregarded Maryland law in several significant respects,” and that the Arbitrator was wrong in concluding that WSC breached the agreement by selling 6100 Executive Boulevard. Id. at 4 (internal quotation marks omitted). The circuit court, however, rejected WSC’s request and it also denied Trio’s request for attorney’s fees and costs, which was made pursuant to Md. Code Ann., Cts. & Jud. Proc. §3-228(a)(2). In an unreported opinion, the Court of Special Appeals affirmed the circuit court and the Court of Appeals granted WSC’s petition for writ of certiorari.
In an opinion authored by Judge Sally Adkins, the Court of Appeals also affirmed. The Court explained that it had “often refused to review the merits of arbitration awards,” largely because arbitration is intended to resolve disputes simply and inexpensively. Id. at 7 (citing Board of Educ. of Prince George’s Cty. v. Prince George’s Cty. Educators’ Ass’n, 309 Md. at 98). At the same time, however, the Court acknowledged that, at common law, an arbitration award could be vacated if it was rendered in manifest disregard of the law. Id. at 8. Did the 1965 adoption of the Maryland Uniform Arbitration Act affect that common-law principle? The Act specifies five grounds for vacating an arbitration award, none of which is manifest disregard of the law. Did the failure to include manifest disregard of the law as a basis for vacating an award serve to abrogate that common-law principle?
The Court explained that a statute abrogates a common-law principle where it expressly states an intention to abrogate that principle, or where it implicitly abrogates the principle by adopting “a statutory scheme that is so clearly contrary to the common law right that the two cannot occupy the same space.” Id. at 12 (internal quotation marks omitted) (citing Nickens v. Mt. Vernon Realty Grp., LLC, 429 Md. 53, 74 (2012), holding superseded by statute 2013 Md. Laws ch. 515 §2, at 4690-91) (other citations omitted). So while the Maryland Uniform Arbitration Act did not expressly abrogate the common-law basis for vacating an arbitration award, “legislative abrogation of common law need not be express. Although abrogation by implication is highly disfavored, it is possible in two situations: field preemption and conflict preemption.” Id.
Conflict preemption takes place “when the new legislation has a clear incompatibility and disharmony with the common law, such that both the common law and the statutes cannot coexist.” Id. at 12-13 (citing Genies v. State, 426 Md. 148, 155 (2012)) (other citations omitted). The enactment of the Maryland Uniform Arbitration Act did not have that effect. While the legislation “lists several grounds upon which a circuit court must vacate an arbitration award, these grounds do not clash with the common law ‘manifest disregard’ ground.” Id. at 13. As the grounds listed in the statute and the “manifest disregard” ground “can live in harmony – recognizing ‘manifest disregard’ as a valid reason for vacating an arbitration award will not conflict with any of the statutory grounds or render them nugatory.” Id.
Field preemption takes place “if a new enactment repeals and replaces the entirety of the prior law on a comprehensive basis.” Id. at 12 (citing Genies v. State, 426 Md. at 155) (other citations omitted). A statutory scheme does “not abrogate the common law through field preemption” unless that enactment is universally applicable. Id. at 13 (citing Genies v. State, 426 Md. at 155-56). While the Maryland Uniform Arbitration Act is extensive, it “makes no mention of an intent to preempt the field of arbitration.” Id. at 14. Moreover, the Act is not universally applicable. Id. “For example, the [Act] specifically declares that employment contracts with arbitration clauses are exempt from the statute unless the employment agreement specifies that the [Act] shall apply.” Id. at 14 (citing Md. Code Ann., Cts. & Jud. Proc. §3-206(b)). Thus, as the Court earlier held in Prince George’s Cty. Educators’ Ass’n, 309 Md. at 98, those exempt employment agreements are governed by common-law rules, not the Act. Slip Op. at 14. That “lack of universal applicability means that the General Assembly did not preempt the entire field of arbitration common law,” and “an arbitration award subject to the [Act] may be vacated for manifest disregard of the law.” Id.
But what constitutes a manifest disregard of the law? The Court discussed its earlier decisions that involved the manifest disregard of law principle. The Court acknowledged that, in Prince George’s Cty. Educators’ Ass’n, it had “recognized the long-held principle that ‘mere errors of law or fact would not ordinarily furnish grounds for a court to vacate or to refuse enforcement of an arbitration award.’" Id. at 15 (emphasis added) (quoting 309 Md. at 99). But in that case, the Court had required that the award be vacated “because the arbitrator ‘made a palpable mistake of law.’” Id. (quoting 309 Md. at 113) (emphasis added). The Court also noted that it had previously explained that an arbitrator’s decision must be given great deference and should be disturbed only if that decision reflects a manifest disregard of the law that goes beyond a mere error of law. Id. at 16 (citing Baltimore Cty. Fraternal Order of Police Lodge No. 4, 429 Md. at 564). The Court of Special Appeals had “also recognized that manifest disregard is more than a mere error of law or failure by the arbitrator to understand and apply the law.” Id. (citing Sharp v. Downey, 197 Md. App. 123, 151-52 (2010), vacated by Downey v. Sharp, 428 Md. 249 (2012) and MCR of Am., Inc. v. Greene, 149 Md. App. 91, 120 (2002). And “[f]ederal courts have explained that 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.” Id. at 17 (citing Wachovia Secs., LLC v. Brand, 671 F.3d 472, 480-81 (4th Cir. 2012); Sanchez v. Elizondo, 878 F.3d 1216, 1223 (9th Cir. 2018); Schwartz v. Merrill Lynch & Co., Inc., 665 F.3d 444, 451-52 (2d Cir. 2011); Hollern v. Wachovia Secs., Inc., 458 F.3d 1169, 1176 (10th Cir. 2006); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 418, 421 (6th Cir. 1995).
The Court conceded that, while it had “applied the manifest disregard standard,” it had “yet to explain how manifest disregard of law differs from ‘mere error.’” Id. After noting that “manifest” means something that is clear, obvious, or unquestionable – and referring back to its use of the adjective “palpable” in Prince George’s Cty. Educators’ Ass’n, and that “palpable” is defined as something tangible that can be handled, touched, or felt – the Court turned to Thomas Oehmke’s treatise on arbitration and his discussion of how federal courts apply the manifest disregard standard. Id. That treatise teaches that “to succeed in a claim that the arbitrator acted in manifest disregard of the law, the party challenging the award must show that the award is ‘based on reasoning so palpably faulty that no judge, or group of judges, could ever conceivably have made such a ruling ….’” Id. (quoting 4 Thomas H. Oehmke & Joan M. Brovins, Oehmke Commercial Arbitration §149:2, at 149-4 (3d ed. 2017)). So, a reviewing court in Maryland must decide whether an arbitrator “made a palpable mistake of law or fact appearing on the face of the award.” Id. at 18. A court must “look for an error that is readily perceived or obvious; an error that is clear or unquestionable. This can be the only logical interpretation of the standard that was applied, but not fully explained, in Prince George’s Cty. Educators’ Ass’n, 309 Md. at 105.” Id. at 18.
The Court then addressed whether the arbitrator in the case before it had committed a palpable mistake of law or fact appearing on the face of the award. The arbitrator wrote “a detailed opinion” that focused on the terms of the parties’ purchase and sale agreement, and the arbitrator concluded that “by selling 6100 Executive Boulevard … WSC did not exercise good faith or use commercially reasonable efforts to renew the leases according to terms that would satisfy” the parties’ agreement. Id. Relying on Clancy v. King, 405 Md. 541, 570-71 (2008)’s guidance that the implied covenant of good faith and fair dealing requires a party to a contract to abstain from anything that will deprive the other party to the contract from receiving the benefits of that contract, “the Arbitrator concluded that there was no evidence upon which a fact-finder could determine that WSC operated in good faith, used commercially reasonable efforts, or made an effort to satisfy the leasing conditions in” the purchase and sale agreement and had therefore breached that agreement. Id. at 18-19. The arbitrator also “concluded that Trio was not required to prove that the leasing requirements for the second building, 6011 Executive Boulevard, had been met, because WSC’s sale of 6100 Executive Boulevard made it impossible to satisfy the leasing requirement” in the agreement.” Id. at 19. Consequently, the “Arbitrator awarded Trio approximately $3.5 million, the amount that it would have received had WSC fulfilled its obligations according to” the parties’ agreement. Id.
The Court of Appeals explained that the arbitrator recognized the basic principle that a plaintiff who brings a breach of contract claim must simply show that the defendant breached a contractual obligation owed to the plaintiff, and that he properly applied that principle by emphasizing that the agreement required WSC to use commercially reasonable efforts to obtain renewal leases. Id. at 20. As the Court noted, the arbitrator’s conclusion was “consistent with Maryland law that contracting parties must exercise good faith in fulfilling their contractual obligations,” specifically the holdings in Questar Builders, Inc. v. CB Flooring, LLC, 410 Md. 241 (2009) and Julian v. Christopher, 320 Md. 1 (1990). Id. at 20-21. Relying on that precedent, and WSC’s “express obligation to use commercially reasonable efforts to secure re-leasing at 6100 and 6011 Executive Boulevard,” the arbitrator concluded “WSC did not act in good faith by selling 6100 Executive Boulevard.” Id. at 21. As the Court said: “The covenant of good faith and fair dealing does not allow WSC to sell these buildings to escape these obligations.” Id. As a result, the Court “conclude[d] that the Arbitrator did not manifestly disregard the law that WSC breached the [agreement] by selling 6100 Executive Boulevard. To the contrary, his conclusion is supported by Maryland law.” Id. at 22.
WSC also argued that the arbitrator manifestly disregarded the law “when he concluded that the sale of 6100 Executive Boulevard necessitated a payment of $3.5 million from WSC to Trio.” Id. Relying on Shoreham Developers, Inc. v. Randolph Hills, Inc., 248 Md. 267, 277 (1967) and the “prevention doctrine,” WSC contended that there can be no breach by nonperformance until the condition precedent is performed or excused, and “that the sale of 6100 Executive Boulevard did not foreclose the possibility that the leasing conditions in [the agreement] would have been satisfied.” Id. The Court rejected that argument, noting that “the prevention doctrine applies when one party prevents another party from performing under the contract.” Id. But in this case, “the Arbitrator concluded that WSC’s sale of 6100 Executive Boulevard prevented its own obligation to use commercially reasonable efforts to re-lease the building. WSC cannot use the prevention doctrine to justify its own breach of the [agreement].” Id. at 23 (emphasis in original) (citing Glen Alden Corp. v. Duvall, 240 Md. 405, 425-26 (1964)). The arbitrator did not manifestly disregard the law when he rejected WSC’s request to apply the prevention doctrine.
Finally, WSC claimed that the arbitrator had improperly “punished” it ordering it to pay the $3.5 million specified in the contract. Id. at 23. Although the arbitrator did not expressly rely on the governing legal principles, the decision was nonetheless “reasonably consistent with them.” Id. at 24. By directing WSC to make the payment specified in the agreement, “the Arbitrator attempted to place Trio in as good a position as it would have occupied had WSC fully performed its obligations.” Id. The arbitrator did not punish WSC. To the contrary, he compensated Trio. “The Arbitrator’s decision certainly did not manifestly disregard applicable law.” Id.
There was one more issue for the Court to consider. Trio asserted “that the Circuit Court erred when it refused requests for the attorney’s fees and costs Trio incurred while defending the Arbitrator’s award in Circuit Court.” Id. But the Court held “that an award of attorney’s fees to a prevailing party pursuant to [Md. Code Ann., Cts. & Jud. Proc.] §3-228(b) is merely discretionary and not required.” Trio relied on Blitz v. Beth Isaac Adas Israel Congregation, 352 Md. 31 (1998) to support its position, but the Court found that reliance misplaced, explaining that “[u]nlike the respondent in Blitz, who refused to pay any amount of the arbitration award, WSC did not refuse to pay the award. Instead, WSC brought good-faith legal challenges to the Arbitrator’s award.” Id. at 26-27. The circuit court did not abuse its discretion when it denied Trios’ request for fees and costs.
There are several important points to take away from the Court’s decision in this case. First, enacting a statutory scheme does not abrogate common-law principles unless one of three things is true. The legislation expressly states an intention to abrogate the common-law principle, i.e. express abrogation. Or the legislation is so clearly incompatible with that principle that the two cannot coexist, i.e. implicit abrogation through conflict preemption. Or the legislation comprehensively repeals and replaces the prior law, i.e. implicit abrogation through field preemption. Second, an arbitration award may be vacated due to legal error, but only if that error is palpable – i.e. clear, obvious, readily perceived, or unquestionable – and appears on the face of the award. And finally, an award of attorneys’ fees and costs to the prevailing party in an action to vacate an arbitration award is discretionary.
This article originally appeared in the Maryland Appellate Blog.
Brad McCullough represents businesses and individuals in a wide variety of cases in federal and state trial and appellate courts, as well as before arbitration panels and in mediation proceedings. For more information, contact him at 301-657-0734 or firstname.lastname@example.org.