The New York Appellate Division, First Judicial Department, recently reaffirmed the state’s strong public policy favoring the enforcement of international arbitration awards. Specifically, the Appellate Division addressed, and soundly reversed, a lower court ruling partially vacating an international arbitration award on grounds that the tribunal had “manifestly disregarded the law.” The Appellate Division decision—uncommon in its length and detailed reasoning—was clearly aimed at preventing the wrongful vacatur of international arbitration awards in the future. In so doing, the Appellate Division reinforced New York’s status as an international arbitration-friendly jurisdiction.
In Matter of Daesang Corp. v. Nutrasweet Co., Daesang Corp. (“Daesang”) moved in New York Supreme Court to confirm partial and final arbitration awards that awarded it over $100 million in a dispute arising out of the sale of its assets to NutraSweet Co. (“NutraSweet”). (Index No. 655019/2016, 2018 WL 4623562 (N.Y. App. Div., 1st Dep’t Sept. 27, 2018).) NutraSweet cross-moved to vacate the awards on multiple grounds, including that the arbitrators had “manifestly disregarded” applicable law and violated public policy. The Supreme Court partially granted NutraSweet’s cross-motion and remanded NutraSweet’s counterclaims to the tribunal for its “redetermination” of the claims. Daesang appealed. Evidencing the public import of the decision, the Association of the Bar of the City of New York submitted an amicus curiae brief on appeal to explain that the vacatur risked New York City’s status as a leading international arbitral seat, arguing that the ruling would subject arbitration awards issued in New York-seated arbitrations to an unlawfully low standard for vacatur. (See id. at *2 n.1.)
Citing the amicus brief in support of its decision, the Appellate Division held that the Supreme Court had “plainly erred” in partially vacating the arbitration awards. (Id. at *8, 13.) In doing so, it explained that, according to the New York Court of Appeals, “[a]n arbitration award must be upheld when the arbitrator offers even a barely colorable justification for the outcome reached.” (Id. at *7 (quoting Wien & Malkin LLP v. Helmsely-Spear, Inc., 846 N.E.2d 1201, 1206 (NY 2006)).) Mere error is insufficient to establish manifest disregardof the law. The manifest-disregardstandard “is a doctrine of last resort limited to the rare occurrences of apparent egregious impropriety by the arbitrators[.]” (Id.)Applying the same requirements as those imposed by the United States Court of Appeals for the Second Circuit, the Appellate Division explained that, to satisfy that standard, a party must establish 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.” (Id. (quoting Wien & Malkin, 846 N.E.2d at 1207).)
The Appellate Division held that NutraSweet failed to meet this stringent standard. Extensively quoting the tribunal’s reasoning, it explained that the arbitral tribunal had laid out the applicable case law cited by the parties, grappled with the law’s meaning, deemed some cases analogous and others not, and applied the law to the facts at hand in good faith. This analysis satisfied the requirement that a tribunal provide a “barely colorable justification” for its decision—and that was so irrespective of whether the tribunal applied the law correctly or gave appropriate weight to certain facts.
The Appellate Division applied a similar standard to the tribunal’s procedural ruling that NutraSweet had waived a counterclaim. The court afforded substantial deference to the procedural ruling, as it had done with the rulings on the merits. Once again, the tribunal’s discussion of the hearing transcript and a relevant exhibit in support of its conclusion of waiver satisfied the minimal, “barely colorable justification” standard. Again, the standard was satisfied by the tribunal’s analysis, irrespective of whether it had misinterpreted or misunderstood the record: the court explained that “[t]he sole question for us is whether the arbitrators (even arguably) interpreted the procedural record, not whether they got its meaning right or wrong.” (Id. at *11 (quoting Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013)).)
Finally, the Appellate Division dismissed NutraSweet’s arguments that the arbitration awards violated public policy, explaining that the awards themselves lacked any finding that would support NutraSweet’s public-policy arguments, which were based on alleged fraud. The court reiterated the heightened standard that must be met to warrant vacatur on public-policy grounds: the New York Convention’s “public policy defense to enforcement of an award ‘should be construed narrowly’ and ‘should apply only where enforcement would violate our most basic notions of morality and justice.’” (Id. at *12 (quoting Waterside Ocean Nav. Co. Inc. v. Int’l Nav. Ltd., 737 F.2d 150, 152 (2d Cir. 1984)).)