Matter of Daesang Corporation et al. v. NutraSweet Company et al.
Issue Discussed: Federal Arbitration Act
Submitted by Michele L. Jacobson, Beth K. Clark
Date Promulgated: September 27, 2018
Matter of Daesang Corporation et al. v. NutraSweet Company et al. 167 A.D.3d 1(1st Dept. Sept. 27, 2018)
Court: New York State Supreme Court, Appellate Division, First Department
Date Decided: September 27, 2018
Issue Decided: Whether under the Federal Arbitration Act a court is authorized to substitute its own judgment regarding the law and the facts for that of an arbitration tribunal in determining whether to vacate the tribunal’s international arbitration award under the doctrine of manifest disregard of the law.
Submitted by: Michele L. Jacobson Esq.[1] and Beth K. Clark Esq.[2]
In Matter of Daesang Corporation v. The NutraSweet Company., the First Department of the Appellate Division of the New York Supreme Court, held that, under the arbitration awards under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (“FAA”) for “manifest disregard of the law” had severely limited authority and could not impose their own conclusions of the relevant facts and law to vacate an international arbitration award on the grounds that the arbitration tribunal had acted in manifest disregard of the law. The Appellate Division also held that ordinary errors of law or fact are insufficient to support vacatur of an arbitral award for manifest disregard of the law.
In 2002, Daesang Corporation (“Daesang”) and The NutraSweet Company (“NutraSweet”) entered into a Joint Defense and Confidentiality Agreement (“JDA”) in connection with NutraSweet’s potential acquisition of Daesang’s aspartame business. Under the JDA, NutraSweet had the authority to rescind the ultimate acquisition if a customer with annual worldwide aspartame requirements in excess of 1 million pounds commenced legal proceedings against the parties to challenge the deal as an antitrust violation. The parties closed the acquisition in 2003 and, in turn, entered into an Asset Purchase Agreement (“APA”) and a Processing Agreement. Both the APA and Processing Agreement were governed by New York law and included clauses which provided that disputes were to be resolved in arbitration pursuant to the International Chamber of Commerce Rules. Daesang Corp., 167 A.D.3d at 5-6.
For the first two years following the transaction’s closing, NutraSweet complied with its obligations and paid two of the annual installment payments on the purchase price under the APA. In the third year, however, NutraSweet defaulted causing Daesang to invoke its contractual right to accelerate the $55 million balance on the purchase price and inform NutraSweet that it planned to manufacture aspartame for its own account. In response, NutraSweet advised Daesang that it was exercising its rights under the JDA to rescind the acquisition based on an antitrust class action lawsuit filed against the parties by several industrial aspartame customers. Id. at 6.
In 2008, Daesang commenced arbitration against NutraSweet under the APA and Purchasing Agreement seeking monetary damages for NutraSweet’s breach of those agreements. In response, NutraSweet asserted four defenses and counterclaims: (1) it had appropriately rescinded the acquisition under the JDA based on the antitrust lawsuit; (2) equitable rescission based on allegations that Daesang had issued a false compliance-with-law warranty in the APA and had fraudulently induced NutraSweet into the acquisition; (3) equitable rescission based on Daesang’s allegedly false representations and warranties in the APA and Processing Agreement concerning its product quality, manufacturing processes, production capacity, production costs and customer complaints; and (4) Daesang was in breach of the APA and Processing Agreement based on is failure to maintain the plant, timely manufacture aspartame and supply sufficient amounts of saleable aspartame. Id. at 7.
In December 2012, after a nine-day evidentiary hearing and oral argument on post-hearing submissions, the arbitration panel issued a 34-page “Partial Final Award” unanimously ruling in Daesang’s favor on all of its claims and dismissing all of NutraSweet’s defenses and counterclaims. Among the reasons asserted for its ruling, the arbitrators stated that NutraSweet’s breach of contract counterclaim, “ ‘ha[d] not asserted any alleged breaches of the APA and Processing Agreement as a claim independent of its claim for rescission of those agreements.’ ” Id. at 8. After the Partial Final Award, the parties addressed the appropriate remedy for NutraSweet’s breaches, on which the arbitration panel had reserved decision.
On June 14, 2016, the tribunal issued its final award and awarded Daesang over $100 million in monetary damages. In the award, the tribunal reaffirmed its decision to dismiss NutraSweet’s defenses and counterclaims, including its breach of contract claim, which decision NutraSweet had challenged during the remedy phase of the proceeding. In response to NutraSweet’s contention that its breach of contract claim was independent of its claims for rescission, the arbitrators ruled that, to the extent that was true, NutraSweet had waived its right to assert that independent claim during the course of the proceedings. Id. at 11-12.
In September 2016, Daesang commenced a proceeding in the New York Supreme Court, New York County to obtain confirmation of the final award under the Federal Arbitration Act, 9 U.S.C. § 1 et al. (“FAA”). The parties agreed that the FAA applied to the proceeding in this international dispute per the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 21 UST 2517, TIAS No. 6997 (1958) (“Convention”). NutraSweet answered and cross-moved to vacate both the partial and final awards on the grounds 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.’ ” Id. at 13. The New York Supreme Court granted NutraSweet’s motion to vacate the awards to the extent that the awards dismissed its counterclaims based on fraudulent inducement and breach of contract, and remanded the matter to the arbitration panel for a “redetermination” of those claims. Id. In so doing, the court determined that the panel had manifestly disregarded the law by ignoring the well-established rule that a fraudulent inducement claim may be based on a breach of contractual warranty if the misrepresentations are of present, as opposed to future, facts and caused actual loss. The court also concluded that, based on the record which it had carefully reviewed, NutraSweet had clearly not waived its breach of contract claim. The court held that “’[t]he refusal to consider the merits of NutraSweet’s breach of contract counterclaim and the baseless determination of waiver goes beyond mere error of law or facts, and amounts to an egregious dereliction of duty on the part of the Tribunal.’” Id. at 13-14.
On appeal, the Appellate Division reversed the Supreme Court’s decision. In so doing, the Appellate Division noted that Section 10 of the FAA sets forth only four grounds upon which a court may vacate an arbitration award; NutraSweet had only moved on one of those grounds, namely, “where 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.” 9. U.S.C. § 10(a)(4). Id. at 15. NutraSweet also moved on the grounds that the arbitrators had manifestly disregarded the law – which ground the Appellate Division stated was “a ‘severely limited’ doctrine.” “It is a doctrine of last resort limited to the rare occurrence of apparent ‘egregious impropriety’ on the part of the arbitrators, ‘where none of the provisions of the FAA apply.” Id. at 16. With that background, the Appellate Division held that, vis-à-vis the arbitrators’ decision to dismiss NutraSweet’s equitable rescission counterclaims, it must stand because it 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’.” Id. at 18 (quoting Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 217 (2d Cir. 2002). The record established that the arbitrators had considered and analyzed the competing case-law presented by both parties with respect to the viability of those fraud-based claims. Regardless of whether the arbitrators had ultimately reached the wrong conclusion, manifest disregard of the law requires more than an error of law or a miscomprehension by the arbitrators (and that was the most NutraSweet could establish). Moreover, given the existence of competing case-law, the law at issue was not sufficiently “well-defined” to support a finding of manifest disregard of the law. Id. at 19.
As regards the arbitrators’ dismissal of NutraSweet’s breach of contract counterclaim, the Appellate Division rejected NutraSweet’s argument that it constituted an imperfect execution of the tribunal’s powers such that the final award was not “a mutual, final and definite award upon the subject matter submitted” under Section 10(a)(4) of the FAA. NutraSweet had proffered this argument on the basis that the arbitrators had dismissed the breach of contract counterclaim only on procedural grounds without reaching the counterclaim’s substantive merits. The Appellate Division held that this was not a basis under the FAA to vacate an award. Rather, an award is subject to vacatur under Section 10(a)(4) of the FAA if it leave the parties unable to discern their rights and obligations, and fails to resolve the submitted dispute or creates a new one. Moreover, the Appellate Division held that the Supreme Court lacked authority to carefully review the underlying hearing transcript to ascertain whether NutraSweet had, in fact, waived its breach of contract counterclaim; proceedings to confirm and/or vacate arbitration awards under the FAA do not allow for such a review. Id. at 20-22. “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.” Id. at 22. Instead, a court is only empowered to ascertain whether the arbitrators arguably interpreted the procedural record; if they did, the court cannot inquire further.
Finally, the Appellate Division rejected NutraSweet’s argument that the Supreme Court’s decision should by upheld on the ground that enforcing the Partial and Final Awards would be contrary to public policy of the United States. Under the Convention, a court may deny enforcement of an arbitral award if it “would be contrary to the public policy of that country” Convention, art V, § 2 [b]. The Appellate Division explained that this provision must be construed narrowly and applied only where enforcement would violate the basic notions of morality and justice. In this case, NutraSweet had not argued that the transactional contracts were unlawful; it claimed, instead, that it had been fraudulently induced into entered into those agreements by Daesang, and that enforcing the monetary damage award would permit Daesang to profit from unclean hands The Appellate Division rejected this argument because the tribunal did not conclude that Daesang had fraudulently induced NutraSweet to enter into the deal; therefore, there existed no basis to vacate the award on public policy grounds. Id. at 24-25.
[1] Michele L. Jacobson is a partner in the litigation department and member of the Executive Committee of Stroock & Stroock & Lavan, L.L.P. concentrating her practice on complex insurance and reinsurance matters in the property, casualty and life insurance fields. She has represented clients in a wide array of disputes involving issues of misrepresentation, coverage, standard-of-conduct, broker negligence, underwriting and claims handling, YRT rate increases and insurance regulatory issues. Ms. Jacobson regularly appears in state and federal courts, as well as before arbitration Panels throughout the country.
[2] Beth K. Clark is Special Counsel in the litigation department of Stroock & Stroock & Lavan, L.L.P., concentrating on insurance and reinsurance litigation and arbitration. Ms. Clark has represented ceding companies, reinsurers, retrocessionaires, intermediaries and liquidators in a wide variety of matters in federal and state court and before arbitration panels. These disputes have involved, inter alia, property, casualty and life insurance issues such as YRT rate increases, allocation of loss, broker negligence, misrepresentation, coverage, underwriting and claims handling, as well as insurance regulatory issues.
