United States: NY Appellate Division Confirms Narrow Scope Of The Manifest Disregard Doctrine

Summary: A recent decision of the Appellate Division reaffirms the extreme skepticism with which claims of "manifest disregard of the law" are viewed by New York courts in the context of applications to vacate international arbitral awards. The court's holding is further evidence that U.S. law, as applied by New York courts, is as favorable to the enforcement of international arbitral awards as the laws of other major international arbitration centers around the world.

On September 27, 2018, the Appellate Division of the New York Supreme Court rendered an important decision reaffirming the "extremely limited" review to which international arbitral awards are subjected by New York courts and confirming the narrow scope and applicability of the "manifest disregard of the law" doctrine.¹

In Daesang Corporation v. NutraSweet Company, the Appellate Division rejected the Supreme Court's invocation of the "manifest disregard" doctrine to partially vacate an international arbitral award for what the Supreme Court described as "an egregious dereliction of duty on the part of the Tribunal."² In reversing the Supreme Court's decision, the Appellate Division concluded that the Supreme Court had erred by effectively substituting its own judgments about the law and facts for those of the arbitral tribunal. In strongly rejecting this approach, the Appellate Division confirmed, once again, that the manifest disregard doctrine is a "severely limited . . . doctrine of last resort" that requires more than a mere error of law to warrant vacatur of an arbitral award.

The Case

The NutraSweet case concerned a dispute between Daesang, a producer of the artificial sweetener aspartame, and NutraSweet, which acquired Daesang in the early 2000s. Pursuant to a series of contracts governing the acquisition, NutraSweet reserved the right to reverse the deal in the event that a customer with annual aspartame requirements in excess of a certain threshold commenced an action against NutraSweet alleging that the acquisition violated the antitrust laws.³ The parties' contracts also contained an arbitration agreement providing for arbitration seated in New York under the rules of the International Chamber of Commerce.

After the closing, the parties were sued in a federal antitrust class action brought on behalf of a class comprising all industrial aspartame customers worldwide. In response, NutraSweet ceased payment of the purchase price balance and exercised its right to rescind the transaction.⁴ Daesang subsequently commenced an arbitration proceeding against NutraSweet for breach of contract, seeking approximately $80 million in damages and interest.

NutraSweet asserted four defenses and counterclaims: (1) rescission under the parties' contract triggered by the antitrust class action; (2) equitable rescission for fraudulent inducement based on Daesang's contractual compliance-with-law warranty; (3) equitable rescission for fraudulent inducement based on Daesang's contractual representations and warranties concerning product and manufacturing quality, capacity, and cost; and (4) breach of contract for Daesang's alleged failure to meet quality and manufacturing requirements.⁵

Over the next eight years of proceedings, the arbitration tribunal rendered two awards. The first partial award found in favor of Daesang on the merits and dismissed all of NutraSweet's defenses and counterclaims. The second award granted Daesang damages totaling over $100 million.⁶ When Daesang later sought to confirm the arbitration awards in New York state court, NutraSweet filed a motion to vacate the awards on the grounds that the tribunal's dismissal of its counterclaims and defenses amounted to a "manifest disregard of clearly established law" and a violation of public policy.⁷ The Supreme Court agreed, concluding that the tribunal's dismissal of all but NutraSweet's first defense (regarding the right to rescind) amounted to a manifest disregard of New York law. It granted NutraSweet's motion and remanded the case back to the tribunal for redetermination of NutraSweet's counterclaims.⁸

On appeal, the Appellate Division reversed the Supreme Court's order, finding that it could not "be justified under the 'emphatic federal policy in favor of arbitral dispute resolution' embodied in the [Federal Arbitration Act], a policy that 'applies with special force in the field of international commerce.'"⁹ The Appellate Division first noted that an award may only be modified or vacated for manifest disregard of the law upon a finding "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."¹⁰ The court concluded that neither of the requirements of this "severely limited doctrine . . . of last resort" had been satisfied in this case.¹¹

First, the Appellate Division looked to NutraSweet's counterclaims for equitable rescission, which alleged that Daesang had fraudulently induced NutraSweet to enter into the acquisition by providing a compliance-with-law warranty, as well as other contractual representations and warranties, that were alleged to be materially false when made. The tribunal had rejected NutraSweet's counterclaims, reasoning that, on the facts of the case, the claims of misrepresentation were not actionable on a fraud theory (as opposed to a breach of contract theory) under New York law.

The Supreme Court found that this disposition disregarded a "governing legal principle" that was well-established and had been repeatedly raised by NutraSweet.¹² Having conducted its own legal analysis and noting that rescission was "clearly a viable remedy where one party demonstrates that it was fraudulently induced to enter a contract," the Supreme Court concluded that the tribunal manifestly disregarded New York law by dismissing those counterclaims.¹³

The Appellate Division rejected that analysis and found that the tribunal's disposition of the counterclaims did "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.'"¹⁴ "On the contrary," the court observed, "the tribunal accepted the authority of the decision on which NutraSweet primarily relied," and, after analyzing the legal support offered by both sides, "made a good-faith effort" to apply the law to the facts of the case.¹⁵ The court further noted that, in any event, the legal point at issue must be sufficiently "well defined" to give rise to a claim of manifest disregard—here, the issue was "far from 'obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator' which is the standard for a showing of manifest disregard of the law."¹⁶ Finally, the court rejected NutraSweet's argument on appeal that a Daesang witness's admission of criminal wrongdoing "should have been of critical importance to the arbitrators' deliberations," as entirely without merit. The court emphasized that "[m]anifest disregard of the facts is not a permissible ground for vacatur of an award."¹⁷

Second, the Appellate Division considered NutraSweet's counterclaim for breach of contract. The tribunal had rejected this claim on the basis that NutraSweet had either failed to assert an independent claim for breach of contract or had waived any such claim during the arbitration proceedings. NutraSweet argued on appeal that the tribunal's failure to address the merits of the claim amounted to such imperfect execution of the arbitrators' powers that the final award did not constitute a "mutual, final, and definite award upon the subject matter submitted," thus warranting vacatur under Section 10(a)(4) of the Federal Arbitration Act.¹⁸

Once again, the Appellate Division disagreed and instead upheld the tribunal's determination. The court noted that an award is only deficient under Section 10(a)(4) "'if it leaves the parties unable to determine their rights and obligations, if it does not resolve the controversy submitted or if it creates a new controversy.'"¹⁹ As to the Supreme Court's conclusion that NutraSweet had not waived its breach of contract argument based on "its own 'careful reading of the transcript,'" the Appellate Division found that this determination "was misplaced in a proceeding brought to confirm an arbitration award under the FAA."²⁰ Because courts are no more empowered to review an arbitrator's procedural findings than an arbitrator's conclusions of law or fact, the Appellate Division applied "the same highly deferential standard" that would otherwise apply to judicial review of an arbitration award.²¹ As long as the arbitrators provided "a barely colorable justification for the outcome reached," the court concluded, "their finding of waiver must stand."²²

Finally, the Appellate Division took up NutraSweet's alternative argument that enforcement of the arbitration awards would be contrary to the public policy of the United States.²³ Because the arbitration award showed no indications of a public policy violation, much less a violation of the "most basic notions of morality and justice," as required under this narrow defense to enforcement, the court rejected this argument as well.²⁴

Conclusions

The Appellate Division's reasoning in Daesang Corporation v. NutraSweet once again demonstrates the highly deferential standard that New York courts will apply when considering applications to vacate international arbitral awards. In particular, the decision demonstrates the extreme skepticism with which claims of "manifest disregard of the law" will be viewed by New York courts. Although some international users have raised concerns about the willingness of New York courts to overturn international arbitral awards under the "manifest disregard of the law" doctrine, the NutraSweet decision should give comfort to clients and practitioners world-wide that the doctrine is exceedingly rarely—if ever—applied to overturn arbitral awards. Indeed, the decision is further evidence that U.S. law, as applied by New York courts, is as favorable to the enforcement of international arbitral awards as the laws of other major international arbitration centers around the world.

Footnotes

1 Daesang Corp. v. NutraSweet Co., No. 5973, 2018 WL 4623562 (N.Y. App. Div. Sept. 27, 2018) (hereinafter Daesang 2). For more information on the genesis of the "manifest disregard of the law" doctrine and its treatment in the federal courts of New York, see John V.H. Pierce, et al., Challenging and Enforcing International Arbitral Awards in New York, in International Commercial Arbitration in New York, 13.126 et seq. (James H. Carter & John Fellas eds., 2d ed. 2016).

2. Daesang 2, 2018 WL 4623562, at *7. New York's Supreme Court is the trial-level court of general jurisdiction in the state. 

3. Daesang 2, 2018 WL 4623562, at *2.

4. Daesang 2, 2018 WL 4623562, at *3.

5. Daesang 2, 2018 WL 4623562, at *3.

6. Daesang 2, 2018 WL 4623562, at *4.

7. Daesang Corp. v. NutraSweet Co., 58 N.Y.S. 3d 873, at *4 (N.Y. Sup. 2017), rev'd, No. 5973, 2018 WL 4623562 (N.Y. App. Div. Sept. 27, 2018) (hereinafter Daesang 1).

8. Daesang 1, 58 N.Y.S. 3d 873, at *7.

9. Daesang 2, 2018 WL 4623562, at *1 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 631 (1985)).

10. Daesang 2, 2018 WL 4623562, at *7 (quoting Wallace v. Buttar, 378 F.3d 182, 189 (2d Cir. 2004)).

11. Daesang 2, 2018 WL 4623562, at *7 (citation omitted).

12. Daesang 1, 58 N.Y.S. 3d 873, at *5-6.

13. Daesang 1, 58 N.Y.S. 3d 873, at *6.

14. Daesang 2, 2018 WL 4623562, at *9 (quoting Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 217 (2d Cir. 2002)).

15. Daesang 2, 2018 WL 4623562, at *9 (citation omitted).

16. Daesang 2, 2018 WL 4623562, at *9 (quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir. 1986)).

17. Daesang 2, 2018 WL 4623562, at *10 (citation omitted).

18. Daesang 2, 2018 WL 4623562, at *10 (citing 9 U.S.C. § 10(a)(4)).

19. Daesang 2, 2018 WL 4623562, at *10 (quoting Matter of Meisels v. Uhr, 79 N.Y.2d 526, 536 (1992)).

20. Daesang 2, 2018 WL 4623562, at *11.

21. Daesang 2, 2018 WL 4623562, at *11.

22. Daesang 2, 2018 WL 4623562, at *12 (quotation omitted).

23. This argument was not reached by the Supreme Court in light of its determination that the tribunal's other findings constituted a manifest disregard of the law. Daesang 1, 58 N.Y.S. 3d 873, at *7.

24. Daesang 1, 58 N.Y.S. 3d 873, at *12 (citation omitted).