Arbitration has been a much-followed topic in the last few weeks because of the U.S. Supreme Court’s decision in Henry Schein v. Archer and White Sales, ­__ S.Ct. __ (2019). In Schein, the U.S. Supreme Court decided in favor of a strict application of the Federal Arbitration Act, supporting the governing arbitration principle that arbitrability of a dispute should be decided by the arbitrators and not by courts.

In this same line, although prior to the U.S. Supreme Court’s decision in Schein, New York’s Appellate Division, First Department, underscored the finality of arbitration awards and ratified the deference courts owe to arbitrators and their decisions. In Daesang v. Nutrasweet Co., 2018 NY Slip Op 06331 (App. Div. 1st Dept. 2018), the Appellate Division reversed a controversial decision from the New York Supreme Court, the state’s trial court level, that applied the manifest disregard of the law doctrine to vacate and “remand” an international arbitration award.

The Appellate Division’s decision in Daesang is an important development for parties involved in arbitration. This decision removed the uncertainty around the attempted expansion of vacatur grounds by the lower court, thus asserting New York courts’ long-standing position in favor of arbitration

Appellate Division’s Reinstatement of a Vacated Award

The dispute between Daesang Corporation and the NutraSweet Company related to the sale of Daesang’s aspartame production business to NutraSweet in 2003. In June 2008, Daesang commenced an arbitration against NutraSweet pursuant to the arbitration provisions in the Assets Purchase Agreement and the Processing Agreement signed in 2003 (the Agreements) that called for arbitration under the Rules of Arbitration of the International Chamber of Commerce, seated in New York, and governed by New York law. Daesang claimed that NutraSweet had failed to pay the purchase price, and had breached the Processing Agreement by terminating the agreement without cause. NutraSweet asserted various defenses and counterclaims on the grounds of an alleged right to contractual rescission of the purchase based on false representations made in the Agreements.

The arbitral tribunal dismissed all of NutraSweet’s defenses and counterclaims, holding that NutraSweet did not have a claim for equitable rescission, and that NutraSweet had waived its claim for damages for breach of the Agreements during the arbitration. The arbitral tribunal awarded damages of around $100 million to Daesang. Daesang sought to confirm the award in New York Supreme Court, while NutraSweet moved for vacatur.

The court vacated the arbitral tribunal’s decision on two of NutraSweet’s counterclaims applying the doctrine of manifest disregard of the law. The court understood that, in dismissing NutraSweet’s claim for fraudulent inducement seeking equitable rescission, the arbitral tribunal had “manifestly disregarded” 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.” In reaching this decision, the court expressed that, “[n]otwithstanding the presumption in favor of upholding arbitration awards, “deference to arbitrators is not without its limits.” Daesang v. Nutrasweet Co., 55 Misc. 3d 1218(A) (N.Y. Sup. 2017), rev’d, 167 A.D.3d 1 (N.Y. App. Div. 2018) (internal citations and quotations omitted). Additionally, upon a “careful reading of the [hearing] transcript,” the court also vacated the award regarding to the arbitral tribunal’s finding that NutraSweet had waived its breach of contractual claim, understanding that the tribunal’s ruling was factually incorrect. Id.

The Appellate Division reversed the court’s decision, noting that the “order vacating the award in part cannot be justified under the ‘emphatic federal policy in favor of arbitral dispute resolution’ embodied in the [Federal Arbitration Act].” Daesang v. NutraSweet Co., 167 A.D.3d 1, 4 (N.Y. App. Div. 2018) (internal citations omitted). The Appellate Division expressly referenced the consideration given to the amicus brief submitted in support of the appeal by the Association of the Bar of the City of New York, which cautioned that “[a]ny suggestion that New York courts will review the arbitrators’ factual and legal determinations, as if on appeal, … will discourage parties from choosing New York as the place of arbitration.” Id. n.1.

Bearing these considerations in mind, the Appellate Division reviewed the court’s application of the doctrine of manifest disregard to vacate the award. Manifest disregard, the Appellate Division argued, requires more than a “simple error” or “erroneous interpretation.” Id. at 16. The Appellate Division concluded that the alleged errors identified by the court in the arbitral tribunal’s decision did not amount to the high standard required, and that instead, the court had found the arbitral tribunal’s decision to be in manifest disregard of the law upon an unacceptable second review of the arbitral tribunal’s conclusions of law and facts. Similarly, the Appellate Division rejected the court’s determination that the arbitral tribunal had misinterpreted the procedural history of the arbitration in finding that NutraSweet had waived its breach of contract counterclaims.

These findings confirmed settled case law establishing “that judicial review of arbitration awards is extremely limited … 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.” Wien & Malkin v. Helmsley-Spear, 6 N.Y.3d 471, 479 (2006).

The Appellate Division’s decision leaned on the premise that parties who contract to arbitration accept up-front the risk of errors by the panel, as long as it rests on “a barely colorable justification for the outcome reached.” Id. 479-80. As established in the U.S. Supreme Court’s decision in Oxford Health Plans v. Sutter, 569 U.S. 564 (2013), “[t]he potential for … mistakes [by the arbitrators] is the price for agreeing to arbitration.”

Manifest Disregard: A Ground for Annulment Under the FAA?

The recognition and enforcement of international arbitration awards, such as the award in Daesang, is generally governed by the Convention on the Enforcement and Recognition of Foreign Awards (NY Convention), when enforcement is sought in a State member to the NY Convention (the United States is a member). The NY Convention, however, only governs the recognition and enforcement of awards, and not their annulment, which is governed by the laws of the seat of arbitration (i.e., where the award was made). When an award is made in the United States, as was the award in Daesang, the FAA provides the grounds for annulment.

Section 10 of the FAA lists the grounds on which a court can vacate an award, which include where (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators; (3) the arbitrators were guilty of misconduct or misbehavior that prejudiced any party; or (4) exceeded their powers. These grounds do not expressly include “manifest disregard of the law.”

The doctrine of manifest disregard had traditionally been (very rarely) used as a ground of last resort to vacate an award, “where none of the provisions of the FAA apply,”, in line with the strong policy in favor of giving “extreme deference to arbitrators.” Wien & Malkin, 6 N.Y.3d at 480 (internal citations omitted). The U.S. Supreme Court, in Hall Street Associates v. Mattel, 552 U.S. 576 (2008), later held that the narrow grounds for vacatur in the FAA cannot be expanded and that courts may not review arbitration awards for errors of law. Following this stance, the Second Circuit clarified that the manifest disregard doctrine is not a separate, additional ground, but rather a “judicial gloss” on the FAA’s specific grounds for vacatur. Stolt-Nielsen SA v. AnimalFeeds Intl., 548 F.3d 85, 94 (2d Cir 2008), rev’d on other grounds 559 U.S. 662 (2010).

These and other recent decisions therefore demonstrate that whether the doctrine of manifest disregard of the law can be held to be a separate ground for vacatur or an interpretation of the limited grounds established in the FAA, this doctrine cannot be used as an excuse for a court to do a de novo review of an arbitrator’s findings of law and facts.

Conclusion

The Appellate Division’s decision in Daesang ratifies the extremely limited application of the manifest disregard of the law doctrine to vacate an award. Moreover, this decision is significant as it reaffirms the long-standing policy that courts owe great deference to arbitrators, which the lower court had questioned by extending its review to questions of facts and law, vacating a substantial part of the arbitral award ultimately because it did not agree with the arbitral tribunal’s decisions.

Together with the recent U.S. Supreme Court’s decision in Schein, this recent precedent continues to confirm the long-established and strong federal policy in favor of arbitration.

Lucila I. M. Hemmingsen is a partner in the international arbitration department of Kirkland & Ellis, based in New York. Nathaniel E. Haas is a litigation associate in the firm’s Los Angeles office.