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Kevin Schlosser Authors, "NutraSweet Can Rescind APA Based Upon Fraudulent Inducement When $79 Million Aspartame Deal Sours"

Jun 19, 2017Litigation & Dispute Resolution
Source: The decision of New York County Commercial Division Justice Charles E. Ramos in Daesang Corp. v. The NutraSweet Co., 2017 NY Slip Op 50646(U), 55 Misc 3d 1218(A), 655019/2016, NYLJ 1202788875727, at *1 (Sup., NY, Decided May 15, 2017) is a must read for numerous reasons. The underlying subject of the case is NutraSweet’s $79 million acquisition of Daesang’s aspartame business. Of interest are terms of the acquisition, admissions of antitrust violations in an affidavit of Daesang’s president, the enforceability of arbitration awards subject to the Federal Arbitration Act and, of course, claims of misrepresentations and fraudulent inducement. Quite a sweet read even beyond the fraud issues. The key fraud issue in the case was the effect of express contractual representations on claims of fraudulent inducement and rescission. The Transaction and the Resulting Dispute Under the basic purchase terms of the deal, NutraSweet was to pay the $79 million purchase price with a $5 million payment at closing, and the balance paid in installments over five years. In the contractual documents for the transaction, NutraSweet had the right to rescind the transaction within five years if a customer purchasing a large volume of aspartame commenced an action alleging antitrust violations. Within the five-year period, an action was instituted alleging such an antitrust violation. NutraSweet stopped payment and demanded rescission and return of the moneys it had paid to that point. Daesang refused and held NutraSweet in default, demanding the entire remaining balance of the purchase price. The parties then resorted to arbitration as required by their agreement, before the International Chamber of Commerce (“ICC”). In the arbitration, the ICC ruled in favor of Daesang, and awarded it damages of over $100 million. Both sides sought relief in the Commercial Division – to confirm and vacate, respectively, the arbitration award. The Arbitration Award is Thrown Out and Fraudulent Inducement Claim Allowed Although there were a number of issues raised by the parties, this discussion focuses on the manner in which Justice Ramos dealt with the fraudulent inducement claim. (The Court rejected NutraSweet’s argument that the ICC manifestly disregarded the law in ruling that NutraSweet did not have the contractual right to rescind and obtain damages because the customer bringing the antitrust claims (even though brought as a class action for other customers) was not large enough to trigger the contractual right to rescind. Thus, NutraSweet was left to a fraud basis for rescission.) In the contractual documents, Daesang made a number of representations and warranties, including that it was in compliance with all applicable laws, and had the capacity to produce aspartame in accordance with strict contract specifications. In support of its counterclaim that Daesang fraudulently induced NutraSweet to enter into the transaction by misrepresenting its compliance with laws in the operation of its aspartame business, NutraSweet submitted an affidavit to the ICC, which was previously produced in the antitrust action, in which the president of Daesang admitted in detail the manner in which Daesang and other large producers of aspartame conspired to coordinate their market behavior for the purpose of reducing competition, maintaining or increasing aspartame prices and protecting each other’s pricing from encroachment by other producers, for at least ten years prior to entering into the transaction. NutraSweet argued that the ICC manifestly disregarded the law when it concluded that NutraSweet’s defense and counterclaim seeking equitable rescission based on fraudulent inducement does not give rise to an actionable fraud claim under New York law because it was based solely on the contractual representations in the parties’ agreements, and NutraSweet was merely seeking contract damages. Justice Ramos determined that the ICC “manifestly disregarded New York law in dismissing NutraSweet’s claim for fraudulent inducement seeking the remedy of equitable rescission. Notwithstanding the presumption in favor of upholding arbitration awards, ‘deference to arbitrators is not without its limits’ (Jock v. Sterling Jewelers, Inc., 143 FSupp3d 127, 133 [SDNY 2015]).” Contractual Representations Do Not Bar Fraud Claims Based Upon Factual Misrepresentations Encompassing the Same Subject Justice Ramos found that the ICC “chose to disregard the well-established principle that a fraud claim can be based on a breach of contractual warranties where the misrepresentations are of present facts (in contrast to future performance) and cause the actual losses claimed (see Wyle Inc. v. ITT Corp., 130 AD3d 438 [1st Dept 2015]; GoSmile, Inc. v. Levine, 81 AD3d 77 [1st Dept 2010], dismissed 17 NY3d 782; MBIA, Ins. Corp. v. Credit Suisse Sec. [USA] LLC, 33 Misc3d 1208[A] [Sup Ct, NY County 2011], reversed on other grounds 102 AD3d 488 [1st Dept 2013]).” As support for his conclusion, Justice Ramos noted the “sworn affidavit in which Daesang’s president admitted to Daesang’s participation in a decade-long criminal antitrust conspiracy with other major aspartame manufacturers right up until the transaction…which undermined the very basis of this bargain.” He continued: “Nonetheless, the [ICC] ignored the applicable law, and mischaracterized NutraSweet’s fraudulent inducement counterclaim and defense as one in which NutraSweet merely alleged that Daesang made an insincere promise of future performance. This conclusion is unsustainable. The fact that Daesang represented to NutraSweet in contract documents that it had ‘complied in all material respects with applicable laws…in connection with the operation of the Business and the ownership and use of the Purchased Assets’ (APA, §f), does not render NutraSweet’s fraudulent inducement claim non-viable as redundant because NutraSweet demonstrated that Daesang misrepresented present facts which induced it to enter into the transaction.” Noting that a “‘warranty is not a promise of performance, but a statement of present fact’ (Wyle Inc., 130 AD3d at 441)’” Justice Ramos found that “by giving false representations about its criminal conduct pertaining to the operation of its business, Daesang was not making a promise of future performance-the breach of which would clearly constitute solely a breach of contract claim, but rather, misrepresenting a present, material fact designed to induce NutraSweet to enter into the transaction. The present intent to defraud at the outset of the transaction is what distinguishes NutraSweet’s fraudulent inducement claim from a mere breach of contract claim. Thus, because rescission is clearly a viable remedy where one party demonstrates that it was fraudulently induced to enter into a contract (Gosmile, Inc., 81 AD3d at 82), the [ICC’s] dismissal of the fraudulent inducement claim lacks even a ‘barely colorable justification’ in black letter law (compare Wien & Malkin LLP, 6 NY3d at 480-81).” Commentary Defendants facing fraud claims often argue that the alleged fraud is merely a failure to abide by the contractual promises. Thus, the claim is nothing more than a breach of contract, not giving rise to the powerful fraud remedies under tort law, including rescission. As Justice Ramos correctly observed, however, a fraud claim can be properly based upon factual misrepresentations conveyed before the contract is entered into, which induce the other party to enter into the contract. The fact that the contract also contains those same representations (which turn out to be false) does not bar a fraud claim seeking rescission of the contract because the misrepresentations are of existing facts, rather than the failure to fulfill promises of future conduct.