Daesang Corp. v. Nutrasweet Co.

• Decision Date: 27 September 2018
• Docket Number: 5973,Index 655019/16
• Parties: In re DAESANG CORPORATION, Petitioner–Appellant, v. The NUTRASWEET COMPANY, et al., Respondents-Respondents. The Association of the Bar of the City of New York, Amicus Curiae.
• Court: New York Supreme Court — Appellate Division

167 A.D.3d 1

85 N.Y.S.3d 6

In re DAESANG CORPORATION, Petitioner–Appellant,

v.The NUTRASWEET COMPANY, et al., Respondents-Respondents.

The Association of the Bar of the City of New York, Amicus Curiae.

5973

Index 655019/16

Supreme Court, Appellate Division, First Department, New York.

ENTERED: SEPTEMBER 27, 2018

Morvillo Abramowitz Grand Iason & Anello P.C., New York (Edward M. Spiro, Jonathan S. Sack and Miriam L. Glaser of counsel), and Law Offices of Richard B. Pacella, New York (Richard B. Pacella of counsel), for appellant.

Tannenbaum Helpern Syracuse & Hirschtritt LLP, New York (Paul D. Sarkozi of counsel), for respondents.

Baker & McKenzie, LLP, New York (Grant Hanessian and Derek A. Soller of counsel), for amicus curiae.

David Friedman, J.P., Richard T. Andrias, Anil C. Singh, Peter H. Moulton, JJ.

FRIEDMAN, J.P.

This appeal, arising from a bitter international commercial dispute between producers of an artificial sweetener, raises the question of whether, under the Federal Arbitration Act ( 9 USC § 1 et seq. ) (FAA), grounds exist to deny confirmation to an arbitration award rendered in New York. In the order under review, Supreme Court vacated the award in substantial part and remanded to the arbitrators, for their redetermination, certain defenses and counterclaims that they had dismissed. The court took this action, albeit "reluctant[ly]" (as it told the parties at oral argument), based on its view that the arbitrators, in disposing of these defenses and counterclaims, had manifestly disregarded the law and had misconstrued the procedural record. This was error.

The order vacating the award in part cannot be justified under the "emphatic federal policy in favor of arbitral dispute resolution" embodied in the FAA, a policy that "applies with special force in the field of international commerce" ( Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth , 473 U.S. 614, 631, 105 S.Ct. 3346, 87 L.Ed.2d 444 [1985] ).¹ Under the FAA, even if an arbitral tribunal's legal and procedural rulings might reasonably be criticized on the merits, an award is not subject to vacatur for ordinary errors of the kind the court identified in this case, as opposed to manifest disregard of the law, a concept that, as more fully discussed below, means "more than a simple error in law" ( Wien & Malkin LLP v. Helmsley–Spear, Inc. , 6 N.Y.3d 471, 481, 813 N.Y.S.2d 691, 846 N.E.2d 1201 [2006] [internal quotation marks omitted] ). "The potential for ... mistakes [by the arbitrators] is the price for agreeing to arbitration" ( Oxford Health Plans LLC v. Sutter , 569 U.S. 564, 572–573, 133 S.Ct. 2064, 186 L.Ed.2d 113 [2013] ), and, "however disappointing [an award] may be," parties that have bargained for arbitration "must abide by it" ( Wilkins v. Allen , 169 N.Y. 494, 497, 62 N.E. 575 [1902] ; see also Matter of Pine St. Realty Co., Inc. v. Coutroulos , 233 App.Div. 404, 407, 253 N.Y.S. 174 [1st Dept. 1931], lv denied 258 N.Y. 609, 180 N.E. 354 [1932] ["Errors, mistakes, departures from strict legal rules, are all included in the arbitration risk"] ). Accordingly, we reverse, grant the petition to confirm the award, and deny the cross motion to vacate it.

In 2002, petitioner Daesang Corporation and respondent The NutraSweet Company, the world's largest producer of the artificial sweetener aspartame, began to discuss NutraSweet's potential acquisition of Daesang's aspartame business.² In connection with these discussions, Daesang and NutraSweet entered into a December 2002 Joint Defense and Confidentiality Agreement (JDA). Section 10 of the JDA provides, inter alia, that NutraSweet is entitled to rescind any transaction ultimately agreed upon in the event legal proceedings challenging the deal as an antitrust violation are instituted "by any customer with annual worldwide aspartame requirements in excess of 1,000,000 pounds[.]"

On April 30, 2003, Daesang and NutraSweet entered into an Asset Purchase Agreement (APA), pursuant to which Daesang sold all of its aspartame assets to NutraSweet for $79,250,000, $5 million of which was to be paid at closing and the remainder in five annual installment payments. In connection with the APA, the parties also entered into a Processing Agreement, dated May 13, 2003, pursuant to which NutraSweet engaged Daesang to provide aspartame production services at the Korean manufacturing facilities that NutraSweet was acquiring. The APA and the Processing Agreement each provides that it is governed by New York law and that disputes are to be resolved through arbitration by a three-member tribunal in New York under the rules of the International Chamber of Commerce. In this regard, the APA provides that "the resolution of disputes by the arbitrators ... shall be conclusive and binding upon and non-appealable by the Parties."

The APA and the Processing Agreement contain a number of representations and warranties by Daesang that are relevant to this appeal. Among these is Daesang's representation in the APA that it "has complied in all material respects with all applicable laws" in operating its aspartame business (the compliance-with-law warranty). Also pertinent are Daesang's representations and warranties in the APA and the Processing Agreement concerning its product quality, manufacturing processes, production capacity, and production costs, and concerning the absence of customer complaints. However, another provision of the APA bars either party from seeking rescission based solely on the other party's breach of its representations and warranties in the APA or the Processing Agreement.

After the transaction closed in May 2003, NutraSweet made the 2004 and 2005 annual installment payments of the purchase price under the APA, each in the amount of $5 million.³ NutraSweet failed, however, to remit the third installment payment of $9.25 million, which became due in June 2006. In December 2006, after the requisite period of time had passed without cure of the default, Daesang exercised its right under the APA to accelerate the $55 million balance of the purchase price. In March 2007, Daesang notified NutraSweet that, pursuant to Daesang's rights under the APA in the event of a default, Daesang would resume manufacturing aspartame for its own account at the Korean plant NutraSweet had purchased. Five days later, NutraSweet notified Daesang that it was rescinding the transaction pursuant to section 10 of the JDA, based on an antitrust class action that several industrial aspartame customers had commenced against NutraSweet and Daesang (among other aspartame producers) in June 2006 (In re Aspartame Antitrust Litig. , U.S. Dist. Ct., E.D. Pa., Master Docket No. 2:06–CV–1732).

In June 2008, Daesang, pursuant to the arbitration provisions of the APA and the Processing Agreement, commenced an arbitration proceeding against NutraSweet, seeking about $80 million in damages, plus interest, for breach of those agreements. NutraSweet filed its answer, defenses and counterclaims in August 2008. As clarified by the prehearing memorandum it submitted to the arbitrators in July 2010, NutraSweet asserted four defenses and counterclaims against Daesang:

(1) First, NutraSweet asserted that it had validly rescinded the entire transaction pursuant to section 10 of the JDA, based on the Aspartame Antitrust action, which was brought on behalf of a class comprising all industrial aspartame customers worldwide—although it is undisputed that the annual requirements of the named plaintiffs in that proceeding, even in aggregate, did not meet the million-pound level required to trigger the contractual right of rescission.

(2) Second, NutraSweet asserted that, independent of the JDA's rescission provision, it was entitled to "equitable rescission" of the transaction on the ground that Daesang's compliance-with-law warranty in the APA had been false when made and had fraudulently induced NutraSweet to enter into the deal.⁴

(3) Third, NutraSweet asserted it was entitled to equitable rescission based on the alleged falsity of Daesang's representations and warranties in the APA and Processing Agreement concerning its product quality, manufacturing processes, production capacity, and production costs, and concerning the absence of complaints from customers.

(4) Fourth, NutraSweet alleged that Daesang had "continuously breached its obligations under the [APA and the Processing Agreement]" by "fail[ing] to maintain the plant, fail[ing] to manufacture aspartame according to the agreed-upon specifications, and fail[ing] to supply NutraSweet with sufficient quantities of saleable aspartame."

In support of their claims and defenses, the parties submitted, in addition to their pleadings and legal memoranda, written declarations by 20 witnesses and hundreds of evidentiary exhibits. In July 2011, a nine-day evidentiary hearing was held in New York before the tribunal of three arbitrators, at which 11 witnesses were cross-examined. At the end of the hearing, the tribunal directed the parties to make additional submissions, including documents outlining the parties' respective claims and defenses, with citations of supporting evidence and legal authority.

Pursuant to the tribunal's direction, NutraSweet submitted a 76–page document entitled "NutraSweet's Post–Hearing Summaries" (hereinafter, the NS Post–Hearing Summaries), which, among other things, set forth, in outline form, NutraSweet's aforementioned four defenses and counterclaims—the first for rescission under the JDA, the second and third for rescission based on fraudulent inducement, and the fourth for breach of contract. Attached to the NS Post–Hearing Summaries was a three-page exhibit marked for identification as "NS 230—Updated," and entitled "Summary of NutraSweet's Counterclaim Damages Based on JDA and Equitable Rescission Alternatives" (hereinafter, NS 230), which sets forth separate tabular calculations of damages based, respectively, on rescission pursuant to the JDA (the first counterclaim) and ...