Court Erred in Vacating Arbitral Award; High Standard for Manifest Disregard of the Law Not Met

On September 27, 2018, the First Department issued a decision in Matter of Daesang Corp. v. NutraSweet Co., 2018 NY Slip Op. 06331, holding that a motion court erred in vacating an arbitral award because the high standard for showing manifest disregard of the law had not been met, explaining:

An award may be vacated under federal law if it exhibits a manifest disregard of the law. But manifest disregard of the law is a severely limited doctrine. It is a doctrine of last resort limited to the rare occurrences of apparent egregious impropriety' on the part of the arbitrators, where none of the provisions of the FAA apply. The doctrine of manifest disregard, therefore, gives extreme deference to arbitrators. The Second Circuit has also indicated that the doctrine requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law. We agree with that premise. 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.

. . .

The resolution in the partial award 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 arbitrators 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. On the contrary, the tribunal accepted the authority of the decision on which NutraSweet primarily relied (Merrill Lynch) and, after analyzing the case law offered by both sides, made a good-faith effort to apply to the facts of this case the Merrill Lynch standard proffered by NutraSweet. That the arbitrators did not accept NutraSweet's view of how the relevant legal principle applies to the facts of this case does not amount to refusing to apply the principle or ignoring it altogether. The arbitrators' ruling, whether or not we agree with it on the merits, more than meets the requirement that there be at least a barely colorable justification for the outcome reached. Even if a thorough analysis of the underlying legal issue (which we do not propose to undertake here) would lead us to conclude that NutraSweet was correct on the merits, a finding of manifest disregard of the law requires more than a simple error in law or a failure by the arbitrators to understand or apply it. On this record, NutraSweet can show nothing more than this.

Moreover, it cannot be said that the point of law at issue was sufficiently well defined to give rise to a claim that the award was rendered in manifest disregard of the law. The meaning of the rule that an alleged misrepresentation is actionable as fraud if it is collateral or extraneous to the contract — which NutraSweet unsuccessfully argued to the tribunal that its second and third counterclaims satisfied — is not necessarily transparent from the quoted words alone and must be drawn out through detailed analysis of cases in which the rule has been applied. Even if the arbitrators erred in concluding that NutraSweet's fraud claims were not collateral or extraneous to the contractual representations in the APA and the Processing Agreement, the arbitrators did not manifestly disregard the law by according to the quoted decisional language what may have reasonably seemed to them its natural meaning. Certainly, any error by the arbitrators in deciding this issue (and, again, we make no determination as to whether they in fact erred) was far from obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator, which is the standard for a showing of manifest disregard of the law.

In its appellate brief, NutraSweet appears to defend the vacatur of the dismissal of its second counterclaim (based on the alleged falsity of the compliance-with-law warranty) on the ground that Daesang's admissions of criminal wrongdoing in the aforementioned affidavit of its executive, Dae Yeob Park should have been of critical importance to the arbitrators deliberations. Any such argument, to the effect that the tribunal did not give sufficient weight to a part of the evidentiary record before it, is entirely without merit. Manifest disregard of the facts is not a permissible ground for vacatur of an award.

(Internal quotations and citations omitted) (emphasis added).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. And as this decisions shows, the decisions of those arbitrators are subject to only very limited review by the courts. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.