Vacature, Ultra Vires, and Manifest Disregard of the Law

The Fifth Circuit Court of Appeals affirmed the district court's confirmation of an arbitration award in favor of Southeast Directional Drilling, L.L.C. against Trinity Energy Services, L.L.C.  The dispute arose over "stand-by costs" incurred by Southeast Drilling during a natural gas pipeline construction project due to delays caused by the permit procurement process, "loss of circulation" incidents, and a COVID-19 related work stoppage.

An arbitration panel awarded Southeast Drilling $1,662,000 in stand-by costs, which the district court upheld.  Trinity Energy appealed, arguing that the arbitration panel exceeded its authority under the Federal Arbitration Act (FAA) and acted in manifest disregard of the law by failing to properly interpret the subcontract's provisions limiting Trinity's liability for these costs.

Initially the Fifth Circuit noted Section 10 of the FAA provides the exclusive statutory grounds for vacatur of an arbitration award.

Addressing whether the arbitrators “exceeded their powers”, the Fifth Circuit observed merely convincing a court of an arbitrator’s error – even his grave error – is not enough.  Instead, arbitration decisions must stand regardless of the court’s view of it (de)merits.  The question is not whether the arbitrators construed the parties’ contract correctly, but whether they construed it at all.  A court may vacate an award only when the arbitrators act outside the scope of their contractually delegated authority issuing an award that simply reflects their own notions of economic justice rather than drawing its essence from the contract.  In simple terms, the potential for mistakes is the price of agreeing to arbitration.

Regarding Trinity Energy's argument of "manifest disregard of the law," the court clarified that this is not an independent basis for vacating an arbitration award in the Fifth Circuit, nor does it serve as a judicial gloss on the enumerated grounds for vacatur under § 10(a)(4) of the FAA.  The court reasoned that adopting this argument would improperly expand the scope of judicial review and undermine the purpose of arbitration as a swift alternative to litigation.

United States Trinity Energy Services, L.L.C. v Southeast Directional Drilling, L.L.C., United States Court of Appeals, Fifth Circuit, April 28, 2025 No.24-10833.