€643 Million Arbitration Award Was Within Arbitration Panel’s Power to Award and Not a Result of Manifest Disregard of the Law

Carlton Fields

Carlton Fields

Precision Castparts Corp. purchased companies with manufacturing facilities in the United States and Germany for €800 million. After the sale closed, Precision discovered that the seller had “manipulated financial documents of the acquired companies to show that they were ‘high margin’ and ‘high cash flow’ businesses. In fact, the acquired companies were ‘functionally insolvent.'”

Precision instituted an arbitration before the American Arbitration Association, International Centre for Dispute Resolution, alleging claims for fraudulent inducement and breach of warranty. The tribunal found that the seller breached the contractual agreement and fraudulently induced Precision to purchase the acquired companies. The tribunal awarded damages of €643 million for the fraudulent inducement claim, and €100 million for the breach of contract claim, which was subject to a contractual cap of the same amount. The tribunal stated that the breach of contract award was subsumed within the €643 million fraudulent inducement award and was not in addition to that amount.

The Southern District of New York confirmed the award, finding that it was within the scope of the arbitrators’ power and that the arbitrators had not engaged in manifest disregard of the law. The seller argued that the tribunal disregarded two Delaware legal doctrines, the rehash doctrine and the bootstrapping doctrine, which are “intended to prevent taking contract breach and damages allegations and dressing them up as a fraud claim for the same damages where the contract and fraud allegations are materially identical.”

In rejecting the seller’s argument that the claim was subject to the rehashing or bootstrapping doctrines, the tribunal found that, although there was overlap between the two claims, the “fraudulent misconduct went well beyond breaches of the [contract].” “The broader and different nature of the conduct pleaded to support the fraudulent inducement claims, combined with the additional pleading of intent, which is an element of fraud but not contract breach, was enough to defeat [the seller’s] bootstrapping argument.”

With regard to the rehashing doctrine (which focuses on the claimed damages as opposed to the bootstrapping doctrine, which focuses on the claimed basis for liability), the court found that the rehashing doctrine did not apply because the contract breach claim was limited to €100 million by the contractual indemnity cap, but the fraudulent inducement claim was not subject to any cap. The court found that the tribunal’s determinations did not manifestly disregard the law but rather were well supported by the law. In addition, the issues were within the scope of the arbitrators’ powers as both claims arose from the acquisition that was the subject of the contract, and the contract provided for arbitration of any claim or controversy arising out of or related to it.

Precision Castparts Corp. v. Schulz Holding GmbH & Co. KG, No. 1:20-cv-03029 (S.D.N.Y. July 20, 2020).

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Carlton Fields

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