It is sometimes said—particularly by international arbitration practitioners resident outside the United States—that the “manifest disregard of law” doctrine provides United States courts with broad scope to vacate arbitral awards rendered in the United States.
In fact, the manifest disregard doctrine has very rarely been used as a basis to vacate arbitral awards of any kind, and no federal or New York appellate court has ever applied the doctrine to vacate an international award.
On Sept. 27, 2018, in Daesang v. NutraSweet Co., 2018 NY Slip Op 06331 (1st Dept. Sept. 27, 2018), the Appellate Division, First Department maintained this record, and strongly reaffirmed the very limited application of the manifest disregard doctrine, overturning a May 2017 decision by the New York Supreme Court vacating an international arbitral award on that grounds.
This is an important case for arbitration practitioners and institutions in New York. As stated in the amicus curie brief submitted by the International Commercial Disputes Committee (ICDC) of the Association of the Bar of the City of New York, quoted with approval by the Court: “Any suggestion that New York courts will review the arbitrator’s factual and legal determinations, as if on appeal, … will discourage parties from choosing New York as the place of arbitrators.” Daesang v. NutraSweet Co., 2018 NY Slip Op 06331 at 2.
The First Department’s decision in Daesang should put to rest any suggestion in the lower court’s decision that New York courts will not respect the good-faith factual and legal determinations of arbitrators.
Grounds for Vacating Arbitral Awards Rendered in the U.S.
The New York Convention on the Recognition and Enforcement of Arbitral Awards (the Convention) specifies, in article V, the grounds under which a court may refuse recognition and enforcement of a Convention award rendered in another state party, but is silent on the grounds for setting aside an award in the courts of the country where it is made. Thus, the grounds for vacating a Convention award must be supplied by the domestic law of the country where the award was made. In the United States, the relevant domestic law is section 10 of the Federal Arbitration Act (FAA) or state arbitration law.
The FAA grounds for setting aside an award apply in both state and federal courts as long as the underlying agreement evidences a transaction involving interstate commerce, an easily satisfied test, or if the award is considered a ‘non-domestic’ Convention award.
The FAA mandates that an arbitral award rendered in the United States ‘must’ be ‘confirmed’—the U.S. process by which an award is reduced to a court judgment—unless it is vacated pursuant to one of the grounds set forth in §10(a) (9 U.S.C. §10(a)).
Evolution of the Manifest Disregard Standard
In addition to the statutory grounds in the FAA, many U.S. courts continue to recognize “manifest disregard of law” as a ground to vacate an award rendered in the United States.
In the 1953 U.S. Supreme Court decision Wilko v. Swan, 346 U.S. 427 (1953), the court in dictum arguably opened the door to a very limited scope of review of awards—not where the arbitrators have erred in interpreting and applying the law, but only where they have manifestly disregarded the law they were bound to apply:
Power to vacate an award is limited … . In unrestricted submission, such as the present margin agreements envisage, 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.
Id. at 436-37 (emphasis added). Although the U.S. Supreme Court expressly overruled Wilko v. Swan in 1987, the concept of ‘manifest disregard’ survived. Shearson/American Express v. McMahon, 482 U.S. 220, 221 (1987).
The U.S. Supreme Court’s decision in Hall Street Associates v. Mattel, 552 U.S. 576 (2008) further circumscribed the manifest disregard doctrine. In Hall Street, the Supreme Court specifically stated that §10 of the FAA provides the “exclusive grounds” for vacating an arbitration award. Id. at 584. The Court noted that those grounds address only “egregious departures from the parties’ agreed-upon arbitration,” and specifically held that a court may not review an arbitration an award “for just any legal error.” Id. at 586. The Court also remarked that its “manifest disregard of the law” dictum in Wilko v. Swan did not have to be read as recognizing an extra-statutory ground for vacatur but could merely be a reference to “the §10 grounds collectively” or for the grounds set forth in §10(a)(3) and (4) specifically. Hall Street, 552 U.S. at 585.
After Hall Street, the Second Circuit recognized that the doctrine of manifest disregard of law is not a separate basis for vacating an award, but merely a “judicial gloss” on §10(a)(4) of the FAA, allowing vacatur when the arbitrators have “exceeded their powers, or so imperfectly executed them that a mutual, final, and 7 definite award upon the subject matter submitted was not made.” Stolt-Nielsen SA v. Animal Feeds Int’l, 548 F.3d 85, 95 (2d Cir. 2008), rev’d on other grounds, 559 U.S. 662 (2010).
The most recent New York Court of Appeals decision to discuss the manifest disregard doctrine is Wien & Malkin v. Helmsley-Spear, 6 N.Y.3d 471 (2006). There, the Court of Appeals emphasized that “an arbitrator’s award should not be vacated for errors of law and fact committed by the arbitrator and the courts should not assume the role of overseers to mold the award to conform to their sense of justice”, and therefore “to modify or vacate an award on the ground of manifest disregard of the law, a court must find ‘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’.” In Wien & Malkin, the New York Court of Appeals, like numerous federal courts, made clear that the manifest disregard of law doctrine does not permit vacatur based on allegedly erroneous factual findings of an arbitration tribunal. Wien & Malkin, 6 N.Y.3d at 483 (“manifest disregard of the facts is not a permissible ground for vacatur of an award”).
‘Daesang v. NutraSweet’: Lower Court Decision
The dispute between Daesang Corporation and the NutraSweet Company (NSC) arose out of the 2003 sale of Daesang’s aspartame business to NSC.
Daesang brought claims in an arbitration conducted under the Rules of Arbitration of the International Chamber of Commerce (ICC) against NSC for failure to pay the purchase price under an Asset Purchase Agreement (APA). NSC alleged a right to rescind the transaction based on Daesang’s allegedly false representations in the APA that it had ‘complied in all material respect with all applicable laws … in connection with the operation of the business.’ NSC also alleged breach of a related agreement related requiring Daesang to continue production of aspartame.
The arbitral tribunal held that NSC did not have a claim for rescission based on fraudulent inducement because the alleged misrepresentations were contained only in the APA itself. The tribunal cited numerous cases holding that New York law “does not permit a claim of fraud in the inducement to be based solely on the express representations contained in the parties’ agreements.” The tribunal further found that NSC had waived its damages for other breaches of the APA and the processing agreement during the course of the arbitration and awarded Daesang damages of $100,766,258.
Daesang sought to confirm the award in New York Supreme Court, and NSC sought vacatur.
On May 16, 2017, the New York Supreme Court issued the first New York court decision applying the manifest disregard doctrine to vacate an international arbitration award. Daesang v. NutraSweet, No. 655019/2016, 2017 NY Slip Op 31023(U) (Sup. Ct., NY County May 16, 2012). The trial court held that the FAA governed the motion for vacatur, and recognized the Court of Appeals holding in Wien v. Malkin that ‘an arbitration award must be upheld when the arbitrator “offers even a barely colorable justification for the outcome reached.”
Nonetheless, noting that “deference to arbitrators is not without its limits,” the lower court found that in holding that a claim for fraudulent inducement could not be based upon representations made in a contract, the tribunal “chose to disregard the well-established principle that a fraud claim can be based on a breach of contractual warranties where the misrepresentations are of present facts (in contrast to future performance) and cause the actual losses claimed.”
The court also vacated the tribunal’s award that NSC had waived its breach of contract claims after reviewing the arbitration’s procedural record and concluding that the tribunal’s ruling was factually incorrect. No explicit grounds were given for this vacatur.
The First Department Decision
In its decision of Sept. 27, 2018, the Appellate Division, First Department reversed the decision of the Supreme Court.
The Appellate Division explained that Wien & Malkin set a very high standard of proof, e.g. “arbitrator’s award should not be vacated for errors of law and fact committed by the arbitrator and the courts should not assume the role of overseers to mold the award to conform to their sense of justice” citing Wien & Malkin, 6 NY3d at 479-480. The First Department stated that there was no need to determine whether arbitrators in fact erred, because manifest disregard of law “requires more then a simple error in law or a failure by arbitrators to understand or apply it.” Daesang v. NutraSweet Co., 2018 NY Slip Op 06331 at 24, citing Wien & Malkin, 6 N.Y.3d at 481.
As to the arbitral tribunal’s denial of rescission, the First Department noted that the arbitrators’ award included an analysis and application of conflicting case law as to whether fraud claims can only be brought based on misrepresentations that are collateral or extraneous to a contact. The fact that there is conflicting case law on the point, the court held
[S]uffices to show that the resolution in the partial award of the of the issue of the viability of NutraSweet’s fraud counterclaims—whether or not that resolution was correct (a question on which we express no opinion)—does 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.”
Daesang v. NutraSweet Co., 2018 NY Slip Op 06331 at 23-24, citing Westerbeke v. Daihatsu Motor Co., 304 F.3d 200, 217 (2d Cir 2002)).
The court also held that the point of law at issue was not sufficiently “well defined” to give rise to a manifest disregard claim. It noted in particular that two of the New York appellate cases cited by NSC in support of its interpretation of the law (one of which had in fact been decided after the issuance of the award at issue) had in fact included dissents.
As to the second issue, the First Department noted that the “Supreme Court’s determination, based on its own ‘careful reading of the transcript,’ that the arbitral tribunal had misinterpreted the procedural history of the arbitration in finding that NSC had waived its breach of contract counterclaim, was misplaced in a proceeding brought to confirm an arbitration award under the FAA.” The Appellate Division observed that arbitration was not intended to “become merely a prelude to a more cumbersome and time-consuming judicial review process.” Daesang v. NutraSweet Co., 2018 NY Slip Op 06331 at 31 citing Oxford Health Plans LLC v. Sutter, 569 U.S. 568-69 (2013).
The Appellate Division also quoted with approval the amicus curie brief submitted by the International Commercial Disputes Committee (ICDC) of the Association of the Bar of the City of New York: “Any suggestion that New York courts will review the arbitrator’s factual and legal determinations, as if on appeal, … will discourage parties from choosing New York as the place of arbitrators” Daesang v. NutraSweet Co., 2018 NY Slip Op 06331 at 2.
The Association and ICDC had previously considered the effect of the manifest disregard of law doctrine on New York’s position as one of the world’s preeminent international arbitration centers in a 2012 report. New York City Bar International Commercial Disputes Committee, The “Manifest Disregard of Law” Doctrine and International Arbitration in New York (2012) (the “Report”).
The Appellate Division’s decision in Daesang v. NutraSweet Co. continues the unbroken string of New York appellate decisions declining to apply the manifest disregard of law doctrine to vacate an international arbitration award, and emphasizing that the doctrine is reserved for exceptional cases in which arbitrators have acted in an egregious manner resulting in fundamental unfairness. In this, the U.S. courts act in a manner consistent with courts in many jurisdictions that decline to enforce such awards on grounds of public policy or mandatory law.
Grant Hanessian and Derek Soller are partners at Baker McKenzie in New York. They represented the Association of the Bar of the City of New York, which submitted an amicus curiae in ‘Daesang’ discussing the history and context of the manifest disregard of law standard and the important public policy considerations requiring its very limited application. Daniil Vlasenko, LL.M., assisted in drafting this article.