Ending a nagging circuit split and narrowing differences between domestic and international arbitration, the Supreme Court has now made it easier for non-signatories to enforce international arbitration agreements in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC, No. 18-1048, 2020 WL 2814297 (U.S. June 1, 2020). In doing so, the Court healed a two-way split in four Circuit Courts of Appeal and made international arbitration agreements under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), 21 U.S.T. 2517, T.I.A.S. No. 6997, more like domestic agreements under the Federal Arbitration Act (the FAA), 9 U.S.C.A. §§ 1-16 (West 2020). If a non-signatory to an international arbitration agreement can show that it has a sufficiently strong connection to a signatory, it will now have standing to enforce that agreement in a United States court much as it would with respect to a domestic arbitration agreement.
The winner in the Supreme Court’s decision, GE Energy Power Conversion France SAS (GE Energy), manufactured electric motors that a general contractor for Outokumpu Stainless USA (Outokumpu) installed in a steel plant now owned by Outokumpu in Alabama. When the motors failed, Outokumpu sued GE Energy in Alabama state court. GE Energy removed the case to federal court under 9 U.S.C.A. § 205 (West 2020), a statute permitting removal of cases involving international arbitration, and sought to compel arbitration.
The problem for GE Energy was that it did not have a direct contractual relationship with Outokumpu. The arbitration clause was in the relevant contracts between Outokumpu and its general contractor, not the subcontract between Outokumpu and GE Energy, although the contracts with the general contractor did define the “parties” to include subcontractors. Given these facts, GE Energy argued that Outokumpu’s claim “arose out of” the agreements with its general contractor; that subcontractors were either parties or intended to be treated as parties in such agreements; that GE Energy was such a subcontractor; and that GE Energy was therefore either a party or that Outokumpu was equitably estopped from treating it any differently than a party when it came to arbitration.
GE Energy initially won this argument. The District Court held that it qualified as a party to the underlying contracts because those agreements defined the terms “Seller” and “Parties” to include subcontractors. Outokumpu Stainless USA LLC v. Converteam SAS, 2017 WL 401951, at *4 (S.D. Ala., Jan. 30, 2017), rev’d 902 F.3d 1316 (11th Cir. 2018), rev’d, 2020 WL 2814297 (U.S. June 1, 2020). Because the court concluded that both Outokumpu and GE Energy were “Parties,” it did not reach or decide the equitable estoppel argument. See id. at *1 n.1.
On appeal, however, the United States Court of Appeals for the Eleventh Circuit reversed. See Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F.3d 1316 (11th Cir. 2018), rev’d, 2020 WL 2814297 (U.S. June 1, 2020). It noted that the New York Convention (like the FAA) requires an agreement in writing, but that Article II of the New York Convention also provides that “[t]he term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” Citing the Supreme Court’s decision in Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630-31 (2009), the Court of Appeals observed that GE Energy might well have had standing to enforce the underlying arbitration clause in a domestic arbitration under the FAA. Outokumpu, 902 F.3d at 1327. But, in the Court of Appeal’s view, the New York Convention’s express reference to “signed by the parties” left less room than under the FAA for theories that would allow non-signatories to arbitrate, whether the specific contract language theory used by the District Court, or theories such as equitable estoppel. See id. at 1326–27. Instead, the Court of Appeals held that “to compel arbitration, the Convention requires that the arbitration agreement be signed by the parties before the Court or their privies.” Id. at 1326. Because GE Energy was not an actual signatory to the contracts between Outokumpu and its general contractor, no written agreement existed for GE Energy sufficient to satisfy Article II of the New York Convention. Id.
The Eleventh Circuit’s decision widened an existing circuit split on this issue. Like the Eleventh Circuit, the Ninth Circuit had held that non-signatories could not enforce arbitration agreements under the New York Convention. See Yang v. Majestic Blue Fisheries, LLC, 876 F. 3d 996, 1001–02 (9th Cir. 2017). Both the First Circuit and the Fourth Circuit had held the opposite. See Aggarao v. MOL Ship Mgmt. Co., 675 F. 3d 355, 375 (4th Cir. 2012); Sourcing Unlimited, Inc. v. Asimco Int’l, Inc., 526 F. 3d 38, 48 (1st Cir. 2008).
The Supreme Court resolved this split by first referring to the FAA and its allowance for the invocation of state law doctrines (such as equitable estoppel) applicable to contracts generally. See GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, No. 18-1048, 2020 WL 2814297, at *3 (U.S. June 1, 2020) (citing, e.g., 9 U.S.C.A. § 2 and Volt Information Scis., Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U. S. 468, 474 (1989)). It next turned to the content of the New York Convention, noting (among other things) that the Convention focuses primarily on arbitral awards, that its Article VII(1) states that the “Convention shall not . . . deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon,” and that only one Article—Article II, in just three sentences—“addresses arbitration agreements.” GE Energy, 2020 WL 2814297, at *4.
Justice Thomas, writing for the Court, then explained that, because the implementing legislation for the New York Convention appears in “Chapter 2 of the FAA,” 9 U.S.C.A. §§ 201-08 (West 2020), and because “Chapter 2” provides that “Chapter 1”—the domestic provisions of the FAA—“applies to actions and proceedings brought under” Chapter 2 “to the extent that [Chapter 1] is not in conflict with” Chapter 2 or the New York Convention, 9 U.S.C.A. § 208, this means that the question before the Supreme Court was “whether the equitable estoppel doctrines permitted under Chapter 1 of the FAA . . . ‘conflict with . . . the Convention.’” GE Energy, 2020 WL 2814297, at *4. The conclusion? “[T]hey do not conflict.” Id.
The most fundamental reason that no such conflict exists is that “[t]he text of the New York Convention does not address whether non-signatories may enforce arbitration agreements under domestic doctrines such as equitable estoppel” and “nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.” Id. at *5. While Article II(3) of the New York Convention provided that “courts of a contracting state ‘shall . . . refer the parties to arbitration’ when the parties to an action entered into a written agreement to arbitrate, and one of the parties requests referral to arbitration,” there is nothing in this provision which restricts “contracting states from applying domestic law to refer parties to arbitration in other circumstances.” Id. That silence was therefore “dispositive.” Id.
In addition, nothing in the New York Convention rejects the use of domestic law. For example, because the provisions in Article II of the New York Convention are not comprehensive, they necessarily leave certain matters to domestic law. “Article II(1) refers to disputes ‘capable of settlement by arbitration,’ but it does not identify what disputes are arbitrable, leaving that matter to domestic law” and “Article II(3) states that it does not apply to agreements that are null and void, inoperative or incapable of being performed,’ but it fails to define those terms,” leaving that to domestic law as well. Id. (citations omitted). “Thus, nothing in the text of the Convention ‘conflict[s] with’ the application of domestic equitable estoppel doctrines permitted under Chapter 1 of the FAA.” Id.
While not dispositive, Justice Thomas also reviewed the negotiation and drafting history of the New York Convention, concluding that it “confirm[s] our interpretation of the Convention’s text.” Id. at *6. He also looked to the “postratification understanding” by other countries concerning the use of domestic law in enforcing the New York Convention. As it turns out, “courts of numerous contracting states permit enforcement of arbitration agreements by entities who did not sign an agreement.” Id. (citing, e.g., 1 G. Born, International Commercial Arbitration § 10.02, at pp. 1418–84 (2d ed. 2014)).
What Justice Thomas and the Court did not do was decide whether the federal Executive branch’s interpretation of the New York Convention “should affect our analysis.” Id. at *7. Noting that “[w]e have never provided a full explanation of the basis for our practice of giving weight to” such interpretation, or “the limitations of this practice, if any,” the Court concluded that because its “textual analysis” of the New York Convention was consistent with the Executive branch’s interpretation, “there is no need to determine whether the Executive’s understanding is entitled to ‘weight’ or ‘deference.’” Id. (citation omitted).
Because the decision by the Court of Appeals below rested on the theory that only a signatory could enforce the arbitration clauses at issue, that court never reached the issue of whether GE Energy “could enforce the arbitration clauses under principles of equitable estoppel or which body of law governs that determination.” The Supreme Court therefore remanded the case for further proceedings.
While the Supreme Court’s decision was unanimous, Justice Sotomayor issued a separate concurrence, noting a limitation to Justice Thomas’s analysis for the Court: “Any applicable domestic doctrines must be rooted in the principle of consent to arbitrate.” Id. at *8 (Sotomayor, J., concurring). In her view, this principle “constrains any domestic doctrines under Chapter 1 of the FAA that might ‘appl[y]’ to Convention proceedings (to the extent they do not ‘conflict with’ the Convention).” Id. (citations omitted). For example, some theories of equitable estoppel do not account for this principle, while others do. As a result, “[l]ower courts must, therefore, determine, on a case-by-case basis, whether applying a domestic non-signatory doctrine would violate the FAA’s inherent consent restriction.” Id. Because the Court’s opinion in GE Energy itself is consistent with this “foundational FAA principle”, she joined it in full.
Even with Justice Sotomayor’s note of caution in her concurrence, the Court’s decision in Outokumpu is a very strong endorsement of arbitration. By effectively extending its views of domestic arbitration more fully into the sphere of international arbitration, the Court has today increased the likelihood of more such proceedings and, incidentally, aligned our nation with the views of most other nations at a time when such alignment is increasingly rare.
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Arbitration Alert | 04.08.22