In a recent decision, the New York Appellate Division (First Department) considered and rejected a manifest disregard defense against confirmation of an arbitration award under the New York Convention and Chapter 2 of the Federal Arbitration Act (FAA) in Daesang Corp. v. NutraSweet Co. While the decision did not announce any new developments in the law of manifest disregard, it does provide guidance to counsel who may find themselves defending (or asserting) a manifest disregard defense in the context of an award confirmation proceeding. Specifically, the decision confirms that errors of law are not sufficient to satisfy the manifest disregard standard; rather, a showing that the arbitrators knew the controlling legal principle and ignored or refused to apply it is required. See 2018 WL 4623562, at *9 (N.Y. App. Div. Sept. 27, 2018).
The NutraSweet decision arose in context of the ongoing jurisprudential debate regarding the application of a manifest disregard doctrine under the FAA. The question of whether (or not) to recognize the doctrine as a defense to confirmation of an award has led to different answers across different jurisdictions. For example, the defense has been recognized by the Second Circuit but has been rejected by the Fifth Circuit. The debate centers on the lack of an explicit manifest disregard defense in the text of the FAA and the New York Convention. In other words, manifest disregard is an implied defense, and as such, it has been rejected by some courts and applied narrowly by the courts that do recognize it.
Overturning an arbitral award is difficult. Manifest disregard, however, can offer a last resort in situations where arbitrators have knowingly flouted the applicable legal principles. This is what the Respondent NutraSweet argued had occurred when an arbitration tribunal issued two awards against it in an ongoing, eight-year proceeding in New York under the rules of the International Chamber of Commerce. Claimant Daesang was awarded over $100 million. The details of the dispute are numerous, but the impetus for the post-award litigation was the tribunal’s decision to dismiss NutraSweet’s four counterclaims, finding them either inapplicable based on the evidence adduced during the merits hearing or, in the case of NutraSweet's counterclaim for breach of contract, finding it was waived.
When Daesang filed an action in the New York Supreme Court to confirm the awards, NutraSweet moved to vacate the awards under the FAA, asserting defenses based on manifest disregard and, alternatively, on the public policy of the United States. The trial court ruled for NutraSweet and remanded the counterclaims to the tribunal for redetermination, but the First Department reversed and confirmed the awards.
The First Department began by reciting the usual legal standards for manifest disregard—specifically that it is "a doctrine of last resort," that is requires "more than a simple error in law," and that "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." NutraSweet Co., 2018 WL 4623562, at *7. Applying these principles, the First Department rejected the application of manifest disregard based on the tribunal’s factual findings—even if the tribunal did ignore certain facts, manifest disregard requires ignoring the law. Next, the First Department concluded that the tribunal did not ignore the law in finding that NutraSweet had waived its breach of contract counterclaim, essentially reasoning that even if the tribunal erred in the application of the law of damages, it made a good faith effort and nothing more was required.
The NutraSweet decision confirms that manifest disregard remains a viable defense to award confirmation under the FAA and New York Convention, at least in New York courts when New York was the seat of the arbitration. But it also confirms the difficulty of prevailing on the defense, even in a case where the trial judge found that the tribunal did manifestly disregard the law. The decision also demonstrates that litigants can expect the manifest disregard doctrine to be applied uniformly across both federal and state courts in New York. Thus, in either forum, the proponent of a manifest disregard defense will need to make a significant showing to prevail.