Keywords

manifest disregard of law; New York; Federal Arbitration Act; state courts; vacatur

Introduction

The grounds for judicial review of international arbitral awards rendered in the United States are, in principle, strictly limited to those enumerated in Chapter 1 of the Federal Arbitration Act (the Chapter 1 grounds are arguably broader than the Chapter 2 grounds, which may also be applicable). The Federal Arbitration Act (‘FAA’) is binding, where applicable, on both federal and state courts. A party can choose to challenge an international arbitral award rendered in the United States either in the federal or state courts, with the right to have the case removed from a New York state court to the federal courts in cases involving international arbitration. 9 USC § 205.

The Chief Administrative Judge of the Courts of New York State designated New York state court judge Charles E. Ramos to hold the unique position of hearing all international arbitration disputes arising before the Commercial Division of the Courts of New York County.

On 15 May 2017, invoking the controversial and rarely applied doctrine of manifest disregard of law, Justice Ramos partially vacated an international ICC award rendered in New York between Daesang Corporation, a Korean company, and The Nutrasweet Company, a Delaware company. Daesang Corp. v Nutrasweet Co., 55 Misc. 3d 1218(A) (N.Y. Sup. Ct. 2017) (‘Nutrasweet’).

The doctrine derives not from statutory law, but from a US Supreme Court dictum in the 1953 case Wilko v Swan. This doctrine has survived despite a 2008 ruling of the US Supreme Court that the FAA grounds for vacatur of arbitral awards are exclusive (Hall St. Assocs., L.L.C. v Mattel, Inc., 552 U.S. 576 (2008)). A number of state and federal courts in the United States, including New York, continue to consider the doctrine of manifest disregard of law viable. Currently on appeal, Justice Ramos’s Nutrasweet decision appears to be the first time that the doctrine has been used in New York as the sole ground to vacate a truly international arbitral award. See NYC Bar Ass’n, Committee on International Commercial Disputes, The ‘Manifest Disregard of Law’ Doctrine and International Arbitration in New York (2012). It is worth noting that the Supreme Court has refused to grant certiorari on recent attempts to challenge the applicability of the doctrine. See e.g. Dewan v Walia, 544 F. App’x 240 (4th Cir. 2013), cert. denied, 134 S.Ct. 1788 (2014); Lagstein v Certain Underwriters at Lloyd’s, London, 607 F.3d 634 (9th Cir. 2010), cert. denied, 562 U.S. 1110 (2010); Coffee Beanery, Ltd. v. WW, L.L.C., 300 F. App'x 415 (6th Cir. 2008); cert. denied, 558 U.S. 819 (2009).

Nutrasweet adopts an unusually interventionist approach to judicial review of international awards, underpinning the concerns that the critics of the doctrine have been voicing. See e.g. Restatement (Third) U.S. Law of Int’l Comm. Arb. § 4-22 TD No 2 (2012) (‘The Restatement takes the position that manifest disregard of law is not a ground for vacating or denying recognition or enforcement of an award under FAA § 10’); Baravati v Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 706 (7th Cir. 1994) (Posner, J.) (‘We can understand neither the need for the formula nor the role that it plays in judicial review of arbitration (we suspect none—that it is just words). If it is meant to smuggle review for clear error in by the back door, it is inconsistent with the entire modern law of arbitration. If it is intended to be synonymous with the statutory formula that it most nearly resembles—whether the arbitrators "exceeded their powers"—it is superfluous and confusing. There is enough confusion in the law. The grounds for setting aside arbitration awards are exhaustively stated in the statute.’).

Underlying arbitration proceeding

The underlying dispute in Nutrasweet arose between Daesang and Nutrasweet, along with two of Nutrasweet’s wholly-owned subsidiaries, as part of the sale of Daesang’s aspartame manufacturing assets to Nutrasweet. Under the terms of the 2003 acquisition, Nutrasweet agreed to pay a total of $79.25 million in a series of six instalments. In 2007, however, a class-action alleging violations of the US antitrust laws was brought against Nutrasweet and Daesang in the federal courts. Nutrasweet invoked the rescission clause in the parties’ 2002 Joint Defence and Confidentiality Agreement (one of three agreements concluded as part of the sale), which expressly authorized rescission within five years of the execution of the agreement in the event that an antitrust action was ‘brought by …. any customer with annual worldwide aspartame requirements in excess of 1,000,000 pounds’. Subsequent reports appeared to confirm that Daesang had been actively involved in price fixing and other activities proscribed under US antitrust laws prior to the acquisition by Nutrasweet.

Daesang initiated ICC arbitration in 2008. Nutrasweet’s reply included assertions of a defence of contractual rescission on the basis of a class-action suit against Daesang; a defence of equitable rescission on the basis of Daesang’s alleged fraudulent inducement; and series of breach-of-contract counterclaims. The ICC tribunal rendered a partial award in 2012, in which it rejected all of Nutrasweet’s defences and counterclaims. The tribunal issued its final award for US$ 100.76 million in favour of Daesang in 2016.

Daesang brought an action to enforce the award in the Supreme Court of the County of New York, a state court of first instance. New York law governed the various agreements.

The court’s analysis of the tribunal's findings on the fraudulent inducement claims

Nutrasweet asserted a right to equitable rescission on the grounds that Daesang obtained its agreement to enter the contract through fraud, referring, inter alia, to the latter’s express representation that it was in full compliance with all applicable laws, a statement that later revelations proved to be false. The ICC tribunal, invoking New York precedent, responded that claims for fraudulent inducement cannot arise from a duty under the contract; any qualifying misrepresentation would have to be collateral or extraneous to the contract. Given that Nutrasweet was protesting an express representation made by Daesang in the contract itself, the tribunal held that Nutrasweet’s claim was barred.

Justice Ramos rejected the tribunal’s construction of New York law and held that the ICC tribunal, despite being well aware of the relevant New York law principles through Nutrasweet’s briefing, ‘disregard[ed]’ and ‘ignored’ what would have been a ‘viable remedy’ if Nutrasweet demonstrated it had been fraudulently induced to enter the contract.

The court's analysis of the tribunal's dismissal of the breach-of-contract counterclaims

The ICC tribunal dismissed Nutrasweet’s counterclaims in its partial award, finding that Nutrasweet alleged only ineligible, rescissionary damages under these claims. In its final award, the tribunal further held that the claims were barred by Nutrasweet’s own waiver of its breach-of-contract claims through statements Nutrasweet made during oral argument.

Justice Ramos noted that Nutrasweet’s breach-of-contract claims had been reiterated at multiple stages of the process, specifically in the terms of reference for the arbitration, as well as through its numerous witness statements, testimony, and claims for roughly US$ 14 million in contract damages. The court further held that the transcript of oral argument ‘"utterly fails’ to support the tribunal’s conclusion that Nutrasweet waived its breach of contract claims. Here, Justice Ramos cited no principle of law that the tribunal had violated, but noted that the tribunal’s failure to consider Nutrasweet’s claims was ‘an egregious dereliction of duty’.

US courts’ rare and restrained application of manifest disregard

As early as 1854, the US Supreme Court articulated a policy of broad deference to arbitral awards, holding that courts may not set awards aside on the basis of legal or factual errors, even ‘serious error’. Even as the US Supreme Court introduced the doctrine of manifest disregard in Wilko, it stated that ‘the interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation’. In 2008, while leaving some uncertainty as to whether the manifest disregard doctrine should apply, Hall Street clarified that the FAA grounds for vacatur were exclusive. The uncertainty as to the survival of the doctrine may have been somewhat lessened two years later, when the Supreme Court refrained from criticizing the Second Circuit’s holding that Hall Street did not abrogate the manifest disregard doctrine, but rather ‘reconceptualized’ it as a ’judicial gloss’ on the FAA grounds for vacatur. Stolt-Nielsen S.A. v AnimalFeeds Int'l Corp., 559 U.S. 662, 130 S. Ct. 1758, 176 L. Ed. 2d 605 (2010).

Nonetheless, in declaring the continued applicability of the doctrine of manifest disregard, the Stolt-Nielsen Second Circuit decision noted that its ‘review of manifest disregard is "severely limited," "highly deferential," and confined to "those exceedingly rare instances" of "egregious impropriety on the part of the arbitrators"’. Stolt–Nielsen, 548 F.3d at 91–92. On this basis, the three-prong test for invoking manifest disregard of law as grounds for setting aside an arbitral award in New York is purposefully narrow:

The law allegedly disregarded by the arbitrator must be clear and plainly applicable to the matter before the arbitrators.

Disregarding the law in fact led to an erroneous outcome.

The arbitrator knew of the law’s existence and its applicability to the problem before the arbitrator, with the proviso that the only knowledge that will be imputed is the information briefed by the parties to the arbitration.

Stolt-Nielsen, 548 F.3d at 93. In accordance with this strict policy of deference, New York courts may not interpret the substantive conditions of the contract or attempt to determine the merits of the dispute. United Fed’n of Teachers, Local 2, AFT, AFL-CIO v Bd. of Educ. of City Sch. Dist. of City of N.Y., 1 N.Y.3d 72, 82–83, 801 N.E.2d 827, 835 (2003). Moreover, manifest disregard of the facts has been held to be insufficient for vacatur. Wien & Malkin LLP v Helmsley–Spear, Inc., 6 N.Y.3d 471, 483, 813 N.Y.S.2d 691, 846 N.E.2d 1201 (2006).

Under this standard, New York courts have, for example, refused to vacate awards for manifest disregard of law when the law was ambiguous, the factual situation was especially complex, or because the tribunal misconstrued a contract.

Significance of the Nutrasweet decision

The focus of the Nutrasweet court’s manifest disregard analysis was that (1) the ICC tribunal's dismissal of Nutrasweet’s claims of fraudulent inducement is barred by New York law; and (2) the tribunal incorrectly concluded that Nutrasweet had irrevocably ‘waived’ its breach-of-contract counterclaims on the basis of statements made to the tribunal during oral argument.

Such an approach to manifest disregard is uncharacteristic in several respects. First, after acknowledging that ‘[a]n award may be vacated under federal law only if it violates a ground set forth in Section 10 of the [FAA]’, Nutrasweet applies the doctrine ‘in addition to the grounds set forth in the FAA’. Nutrasweet, 55 Misc. 3d 1218(A) at *5 (emphasis added). The implication of the court’s language, namely, that the statutory grounds provided in §§10-11 of the FAA are not the exclusive grounds, places the Nutrasweet court at odds with both the Supreme Court's holding in Hall Street and the Second Circuit's holding in Stolt-Nielsen.

Second, the court did not systematically apply the three-prong test developed for the doctrine of manifest disregard of law to the two issues. On the first issue, in a cursory analysis, Justice Ramos considered that the ICC tribunal’s finding on Nutrasweet’s equitable rescission claim disregarded a ‘well-established principle’ of New York law and lacked a ‘barely colourable justification’. Nutrasweet at *7-8. As to the second issue of the ICC tribunal’s finding that Nutrasweet waived its breach-of-contract counterclaims in oral arguments, Justice Ramos concluded that it constituted an ‘egregious dereliction of duty’ by the tribunal, relying on his disagreement with the tribunal’s interpretation of the transcript of oral argument in the arbitration. Thus, Justice Ramos does not apply the Second Circuit’s test on manifest disregard to this second issue. Moreover, an inquiry into the tribunal’s interpretation of oral argument probably ranges beyond the narrow confines of the New York standard, which precludes judicial review where the tribunal offers ‘any colourable justification’ (emphasis added).

The Second Circuit observed that ‘[p]erhaps because we so infrequently find manifest disregard, its precise boundaries are ill defined’. Duferco, 333 F.3d at 389. Nutrasweet’s analysis missed an opportunity to lift the uncertainty regarding the contours of the doctrine.