In Daesang Corp v The NutraSweet Co, a Commercial Division Justice (a court of first instance) in New York applied the controversial “manifest disregard of the law” standard to partially vacate an international arbitration award under the Federal Arbitration Act (FAA) granting damages to the seller of an aspartame (artificial sweetener) business to The NutraSweet Company. Prior challenges to international arbitral awards on this basis have not been successful. Indeed, the New York City Bar Report of its International Commercial Disputes Committee (ICDC) in 2012 explained that the concern about manifest disregard is purely theoretical in international arbitration, noting that it was unable to find a single international award that was vacated on those grounds. Prior to Daesang, this author is unaware of any such decision issued after the ICDC 2012 report.
The manifest disregard doctrine
Some US courts have held that arbitral awards may be vacated on the common law ground of manifest disregard of the law. However, continuing viability of the manifest disregard of the law ground for vacatur has been questioned in light of Hall Street Associates LLC v Mattel Inc., where the US Supreme Court held that the FAA’s grounds for vacatur are exclusive and may not be supplemented by any expanded scope for judicial review of arbitral awards that may be written into an arbitration agreement.
In New York, a party challenging an award on the basis of manifest disregard bears the heavy burden of showing the following:
- The arbitrator was made aware of a governing legal principle.
- The legal principle was well-defined, explicit and clearly applicable to the case.
- The arbitrator chose to ignore the law.
Vacatur is only available where the record is clear that the parties brought the relevant law to the tribunal’s attention and the arbitrators rule inconsistently with the law without explanation (see Citigroup Global Markets Inc v Fiorilla, leave to appeal denied).
In connection with Daesang’s sale of its aspartame business to NutraSweet, the parties entered into a joint defense and confidentiality agreement (JDA), asset purchase agreement (APA), and a processing agreement. The JDA provided that if any customer with annual worldwide aspartame requirements in excess of £1 million brought an antitrust claim against NutraSweet within five years of the transaction, NutraSweet could rescind that agreement. In section 9(g) of the APA, the parties agreed that any breaches of the APA and the processing agreement did not give rise to a right to rescind those agreements. The APA provided for the purchase price to be paid out over a five-year period.
Three years into the payout period, a class of aspartame customers, on behalf of potentially all aspartame customers, sued NutraSweet and Daesang in the Eastern District of Pennsylvania for violation of federal antitrust laws. NutraSweet then sought to rescind the agreements and missed a required purchase payment. Daesang rejected NutraSweet’s rescission, declared an event of default, and exercised its contractual right to accelerate payment of the purchase price. Daesang commenced an International Chamber of Commerce (ICC) arbitration to collect the balance of the purchase price and NutraSweet counterclaimed seeking rescission of the transaction.
In a partial award issued in 2012, the tribunal found that the class action did not trigger rescission under the JDA because the antitrust action was not brought by a customer with annual worldwide aspartame requirements in excess of £1 million.
The partial award further determined that NutraSweet failed to establish its counterclaim for equitable rescission based on fraudulent inducement, because New York law provides that parallel fraud and contract claims may only be brought where the misrepresentation is “collateral or extraneous to the contract.” Indeed, New York courts regularly hold that, “a fraud claim will not lie if it arises out of the same facts as plaintiff’s breach of contract claim.”
A final award was issued in 2016, awarding Daesang approximately US $100 million. Daesang sought to confirm the award and NutraSweet cross-moved to vacate it.
The Commercial Division decision
Justice Charles E. Ramos first considered the tribunal’s rejection of NutraSweet’s claim that the antitrust class action lawsuit triggered rescission under the JDA because all customers, large and small, were members of the class. Justice Ramos held that, although he would have reached a different conclusion, the tribunal’s decision did not manifestly disregard the law. Instead, Justice Ramos found that the tribunal merely interpreted the JDA to require an action brought directly by a large customer of aspartame, rather than on behalf of customers large and small.
However, Justice Ramos accepted NutraSweet’s argument that the tribunal disregarded law holding that a fraud claim can be based on breach of contractual warranties where the misrepresentations are of present facts and cause actual losses. NutraSweet argued that Daesang had expressly warranted, in section 3(f) of the APA, that it had “complied in all material respects with applicable laws,” and that warranty was a misrepresentation of present facts. Justice Ramos noted that “a warranty is not a promise of performance, but a statement of present fact.”
While the above quoted statement of law is correct, Justice Ramos overlooked the companion principle that parallel fraud and contract claims may only be brought where the misrepresentation is collateral or extraneous to the contract. Here, the representation at issue was contained within the four corners of the APA and therefore could not form the basis of a fraud claim. Ironically, it was Justice Ramos, not the tribunal, who manifestly disregarded New York law. Justice Ramos also misapplied the manifest disregard standard because, to vacate an award on that basis, the arbitrators must fail to apply a legal principle without explanation. Here, the arbitrators issued a fully reasoned award that was vetted by the ICC prior to its issuance.
Justice Ramos remanded the dispute back to the tribunal to reconsider the fraud claim as well as a damages claim for breach of contract that the tribunal had ruled was abandoned by NutraSweet. In doing so, he may not have understood that the tribunal may be functus officio.
The manifest disregard of the law doctrine is extremely controversial, especially in international arbitration, and, as noted, does not appear to have ever been applied to an international arbitration award. The fact that Justice Ramos has found it to apply in this case should give practitioners pause when seeking to enforce New York Convention awards in a state court. Fortunately, FAA provides that federal courts have federal question jurisdiction (9 U.S.C. § 203) for arbitration awards governed by the New York Convention. It is difficult to imagine any federal district court judge making a ruling such as this one.