Commercial Division Partially Vacates ICC Arbitration Award in Artificial Sweetener Dispute
Justice Charles Ramos of the New York Commercial Division partially vacated an International Chamber of Commerce (“ICC”) arbitration award in a major legal battle between artificial sweetener giants NutraSweet and Daesang. Daesang Corp. v. The NutraSweet Co., et al., No. 655019/2016, 2017 BL 164971 (N.Y. Sup. Ct. May 15, 2017). The partial vacatur sends what was a $100,766,258 award in favor of Daesang back to the arbitral tribunal.
The dispute centers on Daesang’s sale of its aspartame artificial sweetener business to NutraSweet. Id. at *1. In connection with the sale, Daesang and NutraSweet entered into a joint defense and confidentiality agreement (“JDA”), asset purchase agreement (“APA”), and a processing agreement (“Processing Agreement”). Id. The JDA provided that if any customer with annual worldwide aspartame requirements in excess of £1,000,000 brought an antitrust claim against NutraSweet within five years of the transaction, NutraSweet could rescind the agreements. Id.
Three years later, NutraSweet and Daesang were sued by a class of aspartame customers in the Eastern District of Pennsylvania for violation of federal antitrust laws (the “Lawsuit”). Id. Importantly, the suit was brought on behalf of potentially all aspartame customers. See id. Because of the Lawsuit, NutraSweet sought to rescind the agreements. Daesang rejected NutraSweet’s rescission, declared an event a default, and exercised its contractual right to accelerate payment of the purchase price. Id. Thereafter, Daesang filed a request for arbitration with the ICC, alleging that NutraSweet breached the APA and Processing Agreement. Id. at *2.
NutraSweet brought counterclaims and defenses, including: rescission under Section 10 of the JDA; equitable rescission; fraud seeking rescissionary and consequential damages; and breach of contract, alleging that Daesang breached multiple provisions of the APA and Processing Agreement. Id. at *2.
The tribunal found that the Lawsuit did not meet the requirements for a rescissionary event under Section 10 of the JDA because the antitrust action was not brought by a “large customer of aspartame.” Id. According to the tribunal, the Lawsuit did not qualify under the JDA because it was not brought directly by a customer, but instead brought on behalf of potentially all aspartame customers. Id.
The tribunal further determined that NutraSweet failed to establish its defense of equitable rescission based on fraudulent inducement because, in the tribunal’s view, New York does not permit that claim based solely on express contractual representations. Id. at *3. Lastly, the tribunal determined that NutraSweet did not allege any breach of contract claim independent from its claims for rescission and fraud, and that it waived any counterclaim during closing arguments. Id. The tribunal awarded Daesang $100,766,258 for NutraSweet’s breach of the APA and Processing Agreement. Id. Thereafter, Daesang petitioned the New York Supreme Court, Commercial Division to confirm the award. NutraSweet moved to vacate the award. Id.
First, Justice Ramos laid out the standard for vacating an arbitration award. According to Justice Ramos, under the Federal Arbitration Act (“FAA”), an award may be vacated for the reasons delineated in Section 10 of the FAA. In addition, an award can be vacated “if it was rendered in manifest disregard for the law.” Id. (citing Schwartz v. Merrill Lynch & Co., 665 F.3d 444, 451 (2d Cir. 2011). Under the “manifest disregard” standard, well-settled New York law only permits the overturning of an arbitration award if “the arbitrators knew of a governing legal principle yet refused to apply it or ignored it all together.” Id. (citing Matter of Roffler v. Spear, Leeds & Kellogg, 13 A.D.3d 308, 310 (1st Dep’t 2004).
Justice Ramos then considered the tribunal’s decision regarding NutraSweet’s right of rescission because of the Lawsuit. NutraSweet argued that the tribunal’s decision finding that the Lawsuit did not meet the requirements for rescission was in blatant disregard of the American Pipe Doctrine. Id. at *4. Justice Ramos noted that, under American Pipe & Const. Co. v. Utah, 414 U.S. 538, 551 (1974), class members include all asserted members of a proposed class, unless they receive notice and opt-out. Daesang, 2017 BL 166858, at *4-5. Thus, NutraSweet argued that under American Pipe, the Lawsuit qualified because it was brought on behalf of all aspartame purchasers.
Justice Ramos found that, although he would have reached a different decision, the tribunal’s ruling did not manifestly disregard American Pipe. Id. at *5. Instead, Justice Ramos found that the tribunal merely interpreted the JDA to require an action brought directly by a large customer for aspartame, rather than merely on behalf of a large customer for aspartame.
Next, Justice Ramos considered the tribunal’s decision that NutraSweet had not established a valid fraud in the inducement claim because that claim was based only on express contractual representations. NutraSweet argued that the tribunal disregarded well-established law that a fraud claim can be based on breach of contractual warranties where the misrepresentations are of present facts and cause the actual losses. Id. at *5. NutraSweet contended before the tribunal and Justice Ramos that Daesang had expressly warranted that it had “complied in all material respects with applicable laws,” and that warranty was a misrepresentation of present facts. According to NutraSweet, the tribunal interpreted that language to be a promise of future performance.
Justice Ramos rejected the tribunal’s interpretation. He found that the tribunal manifestly disregarded well-settled New York law that a fraud claim can be based on breach of contractual warranties where the misrepresentations are of present facts and cause the actual losses. He noted that in the First Department, “a warranty is not a promise of performance, but a statement of present fact.” Id. at *6 (internal quotations omitted).
Justice Ramos also vacated the tribunal’s decision that NutraSweet waived its breach of contract counterclaim. Although the tribunal concluded that NutraSweet waived its counterclaim during closing arguments, Justice Ramos found that the transcript “utterly fails to demonstrate that there was a waiver by NutraSweet of its breach of contract counterclaim.” Id. at 7. Justice Ramos found that this decision by the tribunal was a “baseless determination of waiver [that] goes beyond a mere error in law or facts, and amounts to an egregious dereliction of duty on the part of the Tribunal.” Id.