Daesang Corp. v NutraSweet Co., 2018 NY Slip Op 06331 (App. Div. 1st Dept. 2018) [click for opinion]
A dispute between Daesang Corporation (“Daesang”) and the NutraSweet Company (“NutraSweet”) arose out of the 2003 sale of Daesang’s aspartame business to NutraSweet. Daesang brought claims in an ICC arbitration against NutraSweet for failure to pay the purchase price, along with claims for breach of the processing agreement, most notably for NutraSweet’s termination of the agreement without cause. NutraSweet asserted defenses and counterclaims based on NutraSweet’s alleged right to contractual rescission of the transaction based on false representations made in the asset purchase agreement (“APA”).
The arbitral tribunal held that NutraSweet did not have a claim for equitable rescission. The tribunal further found that NutraSweet had waived its damages for other breaches of the APA and processing agreement during the course of the arbitration. The tribunal accordingly awarded Daesang damages of about $100 million. Daesang sought to confirm the award in New York Supreme Court (the trial court level in New York), and NutraSweet sought vacatur.
In a widely reported 2017 decision, Justice Charles Ramos (who was the designated judge for determining international arbitration cases) applied the manifest disregard of the law doctrine and vacated and “remanded” to the deciding tribunal two of the decisions in the award. Noting that “deference to arbitrators is not without its limits,” Justice Ramos found that, in holding that a claim for fraudulent inducement could not be based upon representations made in a contract, the tribunal “chose to disregard the well-established principle that a fraud claim can be based on a breach of contractual warranties where the misrepresentations are of present facts (in contrast to future performance) and cause the actual losses claimed.” After reviewing the arbitration’s procedural record and concluding that the tribunal’s ruling was factually incorrect, Justice Ramos also vacated the tribunal’s award that NutraSweet had waived its breach of contract claims. No explicit grounds were given for this vacatur.
Daesang appealed and the Appellate Division First Department reversed on both points. Under New York law, manifest disregard of the law requires a court to find “both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.” The Appellate Division held that there was no need to determine whether the arbitrators in fact erred in their legal determinations, because the manifest disregard of law standard was not met.
With respect to the trial court’s application of the standard to the fraud counterclaims, the First Department noted that the award included an analysis and application of conflicting case law on the underlying legal issue. This alone, the court held:
[S]uffices to show that the resolution in the partial award of the issue of the viability of NutraSweet’s fraud counterclaims—whether or not that resolution was correct (a question on which we express no opinion)—does not meet the high standard required to establish manifest disregard of the law, namely, a showing that ‘the arbitrator[s] knew of the relevant principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.’
The court further held that the point of law at issue was not sufficiently “well defined” to give rise to a manifest disregard claim. It noted in particular that two of the New York appellate cases cited by NutraSweet in support of its interpretation of the law (one of which had in fact been decided after the issuance of the award at issue) had included dissenting opinions.
As to the second issue, the First Department noted that the “[trial c]ourt’s determination, based on its own ‘careful reading of the transcript,’ that the arbitral tribunal had misinterpreted the procedural history of the arbitration in finding that [NutraSweet] had waived its breach of contract counterclaim, was misplaced in a proceeding brought to confirm an arbitration award under the FAA.” The Appellate Division observed that arbitration was not intended to “become merely a prelude to a more cumbersome and time-consuming judicial review process.”
The reversal ended a lawsuit that had received much notoriety for being the first New York decision to reverse an international arbitration decision on grounds of manifest disregard.
A version of this post originally appeared in the November 2018 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.