United States: First Department Rules That Arbitrators Did Not Manifestly Disregard The Law And Confirms Arbitration Award

On September 27, 2018, in a widely followed arbitration case, a unanimous panel of the Appellate Division, First Department concluded that the New York County, Commercial Division (Ramos, J.) erred when it partially vacated an arbitration award on the ground that the arbitrators' disregarded the law. As a result, the Appellate Division confirmed the arbitration award. ¹

The case arose from an international commercial dispute between artificial sweetener producers.² NutraSweet Company ("NutraSweet") had entered into an agreement with Daesang Corporation ("Daesang") to purchase Daesang's aspartame business. The agreement provided that disputes were to be "resolved through arbitration by a three-member tribunal in New York under the rules of the International Chamber of Commerce."³ Daesang commenced an arbitration proceeding against NutraSweet for breach of contract because, nearly four years after the closing of the transaction, NutraSweet sought to rescind the agreement.⁴

After an evidentiary hearing, a three-member tribunal unanimously ruled in favor of Daesang and dismissed all of NutraSweet's defenses and counterclaims.⁵ Thereafter, Daesang petitioned the Commercial Division to confirm the arbitration award. NutraSweet moved to vacate the award, claiming "that the arbitrators manifestly disregarded the law and evidence, violated public policy, and utterly failed to discharge their duties in accordance with the law and the Terms of Reference governing the arbitration."⁶

Justice Charles E. Ramos⁷ of the Commercial Division "reluctant[ly]" ruled in favor of NutraSweet, holding that the arbitrators had "manifestly disregarded the law and had misconstrued the procedural record,"⁸ and the lower court remanded a substantial portion of the claims to the arbitrators for redetermination. Daesang appealed.⁹

According to the First Department, in New York, it is well-settled "that judicial review of arbitration awards is extremely limited[,]" and courts must give "extreme deference to arbitrators."¹⁰ Therefore, "[a]n arbitration award must be upheld when the arbitrator offers even a barely colorable justification for the outcome reached."¹¹ Moreover, "[u]nder the [Federal Arbitration Act (9 USC § 1 et seq., the "FAA")], even if an arbitral tribunal's legal and procedural rulings might reasonably be criticized on the merits, an award is not subject to vacatur for ordinary errors[.]"¹²

First, the Appellate Division reviewed the arbitrators' finding that Daesang's false representations in the agreement were purely contractual and thus could not be pursued based on a fraud theory. ¹³ NutraSweet alleged that the tribunal had manifestly disregarded the law when it dismissed its fraud counterclaims. According to the New York Court of Appeals, the manifest disregard doctrine is only to be used in the "rare occurrences of apparent egregious impropriety on the part of the arbitrators, where none of the provisions of the FAA apply."¹⁴ An arbitration award can be vacated only if: "(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."¹⁵ The Appellate Division found that the tribunal had not ignored the law; in fact, the tribunal accepted the authority put forth by NutraSweet and "made a good-faith effort to apply" the legal standard proffered by NutraSweet.¹⁶ Even if the tribunal had misapplied the law, the First Department held that such a decision was a mere error of law and did not rise to the level of manifest disregard. ¹⁷

Second, the First Department reviewed the tribunal's determination that NutraSweet had waived its freestanding claim to recover damages for breach of contract.¹⁸ NutraSweet claimed that the tribunal's utter failure to discharge its duties was within one of the four statutory grounds under the FAA to vacate an arbitration award.¹⁹ The Appellate Division, however, explained that the arbitrators' asserted misunderstanding of NutraSweet's oral arguments and written submissions would not result in a dereliction of duty. "A court is not empowered by the FAA to review the arbitrators' procedural findings, any more than it is empowered to review the arbitrators' determinations of law or fact."²⁰ The First Department concluded that as long as the tribunal was construing the procedural record, as it was here, then the FAA²¹ does not give courts the power to correct their mistakes.²²

Finally, NutraSweet argued, in the alternative, that the lower court's order should be affirmed on independent public policy grounds—grounds not reached by the Commercial Division.²³ NutraSweet claimed that allowing Daesang to profit from its wrongdoing—i.e. fraudulently inducing NutraSweet into the agreement—would be against public policy. While the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 (the New York "Convention") permits a country to deny an arbitration award for public policy reasons, the First Department ruled that no such policy basis was present here. The Appellate Division cautioned that "the Convention's public policy defense to enforcement of an award 'should be construed narrowly' and 'should apply only where enforcement would violate our most basic notions of morality and justice.'"²⁴

New York is "one of the world's preeminent international arbitration centers[]"²⁵ and parties want predictability in the enforcement of arbitration awards, which is why the doctrine of manifest disregard should be narrowly applied. The First Department's decision will quell concerns that resulted from the Commercial Division's 2017 decision and reaffirm New York's pro-arbitration outlook.

Footnotes

[1] Matter of Daesang Corp. v. NutraSweet Co., 655019/2016, 2018 NY slip op. 06331, at *2 (App. Div. 1st Dep't Sept. 27, 2018).

[2] A more detailed recitation of the facts can be found here.

[3] Id. at *3.

[4] Section 10 of the Joint Defense and Confidentiality Agreement provides that "NutraSweet is entitled to rescind any transaction ultimately agreed upon in the event legal proceeding challenging the deal as an antitrust violation are instituted 'by any customer with annual worldwide aspartame requirements in excess of 1,000,000 pound[.]'" Id. at *3.

[5] Id. at *4.

[6] Id. at *6.

[7] Justice Ramos is currently the Commercial Division Justice assigned to hear international arbitration matters.

[8] Id. at *2.

[9] Id. at *6.

[10] Id. at *7.

[11] Id. (quoting Wien & Malkin LLP v Helmsley-Spear, Inc., 6 NY.3d 471, 479-80 (2006)).

[12] Matter of Daesang, at *2 (quoting Wien & Malkin, 6 NY.3d at 481 (internal quotation marks omitted)).

[13] Matter of Daesang, at *8.

[14] Id. at *7 (quoting Wien & Malkin, 6 NY.3d at 480-481 (internal quotation and citations omitted)).

[15] Id.*7-8 (quoting Wien & Malkin, 6 NY.3d at 480-481 (internal quotation and citations omitted)).

[16] Matter of Daesang, at *8.

[17] Id.

[18] Id. at *9.

[19] Id. at*7; "[W]here the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." Id. (quoting 9 USC § 10[a]).

[20] Matter of Daesang, at *10.

[21] "[T]his matter is governed by the FAA, we observe that similar conclusions have been reached by courts applying the analogue of 9 USC § 10(a)(4) in CPLR article 75, which authorizes vacatur where an arbitrator 'exceeded his [or her] power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made'(CPLR 7511[b][iii])." Matter of Daesang, at *9-10.

[22] Id. at *11 (quoting Oxford Health Plans LLC v. Sutter, 569 US 564, 572-573 (2013)).

[23] Matter of Daesang, at *11.

[24] Id. at *11 (quoting Waterside Ocean Navigation Co.v. Int'l Navigation Ltd., 737 F.2d 150, 152 (2d Cir. 1984) (internal quotation marks omitted)).

[25] Brief for the Association of the Bar of the City of New York as Amicus Curiae In Support of Appellant and Reversal, page 2.

Originally published October 2, 2018

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