IN BRIEF
- A recent U.S. Supreme Court case held that in certain circumstances, even nonsignatories to an agreement may compel arbitration of international disputes.
- By expanding the application of arbitration in this way, the Supreme Court continues to encourage the use of arbitration to resolve disputes.
The U.S. Supreme Court held in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048, 2020 WL 2814297 (June 1, 2020), that in certain circumstances, even nonsignatories to an agreement may compel arbitration of international disputes. This ruling clarifies that the doctrine of equitable estoppel currently recognized under chapter 1 of the Federal Arbitration Act (FAA), which governs U.S. domestic arbitrations, can also be applied to international arbitration proceedings governed by chapter 2 of the FAA.
Facts and Procedural History
ThyssenKrupp Stainless USA, LLC (TS) entered into certain contracts in 2007 with F.L. Industries, Inc. (FLI) for construction at U.S.-based plants owned by TS. The contracts contained clauses requiring all disputes to be resolved through arbitration, seated in Germany, in accordance with the International Chamber of Commerce’s Rules of Arbitration (collectively, the Agreements). The Agreements also provided that FLI and all of its subcontractors would be treated as one entity for purposes of applying the terms of the Agreements. Thereafter, FLI entered into subcontract agreements with GE Energy Power Conversion France SAS, Corp. (GEP) with respect to designing and manufacturing equipment to be utilized at TS’s plants. Outokumpu Stainless USA, LLC (OS) acquired ownership of a TS plant and claimed that the equipment manufactured by GEP under the Agreements failed and caused substantial damages to OS.
OS commenced suit in state court against GEP, and GEP then removed the case to federal court and moved to compel arbitration under the Agreements. The district court granted GEP’s motion to compel arbitration and dismissed the case, holding that GEP qualified as a “party” under the arbitration clause even though it was not a signatory to the Agreements.
On appeal, however, the Eleventh Circuit concluded that the decision to compel arbitration was inconsistent with the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), which requires that an agreement to arbitrate be “signed by the parties.” The appellate court found that because GEP had not specifically signed the Agreements, and unlike TS and FLI was not a party to the Agreements, GEP had no right to compel arbitration. The court did not find persuasive the fact that the Agreements specifically provided that FLI and its subcontractors should be treated as one and the same, which would therefore include GEP. The Eleventh Circuit held that “[p]rivate parties cannot contract around the requirement that the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration.”
In support of its argument that OS should be compelled to arbitrate, GEP had relied heavily upon the doctrine of equitable estoppel, which in this circumstance would mean that a nonsignatory to a written agreement containing an arbitration clause may compel arbitration when a signatory brings a claim arising out of the agreement against the nonsignatory. The Eleventh Circuit held that this doctrine was applicable in cases concerning domestic arbitration under chapter 1 of the FAA, which does not expressly restrict arbitration to the specific parties to an agreement, but it found that in cases concerning international arbitration, which are governed by chapter 2 of the FAA, the doctrine is not applicable because the New York Convention (as applied to international arbitration agreements) imposes such a restriction.
Decision
Upon review, the U.S. Supreme Court reversed the Eleventh Circuit and in a unanimous decision held that the New York Convention did not conflict with the doctrine of equitable estoppel and was actually silent on the question of whether nonsignatories could enforce an arbitration agreement. The court noted that the New York Convention was never intended to “set a ceiling that tacitly precludes the use of domestic law to enforce arbitration agreements.” The court found that the only provision of the New York Convention that addressed the enforceability of arbitration agreements was Article II(3). Although Article II(3) of the New York Convention mandates that the courts enforce written arbitration agreements, Article II(3) does not restrict the courts from enforcing arbitration agreements under other circumstances. The court held that because the New York Convention was “drafted against the back drop of domestic law, it would be unnatural to read Article II(3) to displace domestic doctrines in the absence of exclusionary language;” and was in fact drafted in a manner that was intended to allow domestic contract law to “fill [any] gaps in the Convention.” The court also recognized that courts of numerous contracting states to the New York Convention permit nonsignatories to compel arbitration under their domestic laws. As a result, the court reversed the Eleventh Circuit and remanded the case for further proceedings consistent with its ruling.
Conclusion
By expanding the application of arbitration to international commercial agreements comprised of multitiered arrangements whereby nonsignatories can seek to compel arbitration, the Supreme Court continues to encourage the use of arbitration as a viable and attractive means to resolve disputes.