The engineering firm then entered into a subcontract agreement with the designated subcontractors, one of whom was GE Energy. This subcontract called for GE Energy to manufacture and install nine electric motors to be used in the cold rolling units, which GE Energy delivered in a timely manner. The subcontract did not contain an arbitration clause, and GE Energy was not a signatory of any agreement between Outokumpu Stainless or its predecessor and the engineer.
The rolling mills manufactured by GE Energy allegedly failed. Outokumpu Stainless sued GE Energy in an Alabama state court over this failure, alleging negligence and breach of warranty. GE Energy removed the case to federal court, pursuant to the removal clause of the New York Convention. Even though GE Energy had not been a party to and had not signed any agreement containing an arbitration clause, it sought to compel Outokumpu Stainless to arbitrate the dispute in the underlying lawsuit on the basis of the common-law doctrine of equitable estoppel, that is, on the theory that Outokumpu Stainless, as a signatory to a written agreement containing an arbitration clause, was “equitably estopped” from blocking an effort by a non-signatory to compel arbitration when the signatory’s claim against the non-signatory relied upon the terms of that agreement. GE Energy contended that this doctrine had long been recognized as viably used in domestic arbitrations.
Ruling by the lower courts
Based upon the landmark Supreme Court decision in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, courts of the United States are authorized pursuant to the New York Convention to require arbitration in disputes involving foreign parties. Since GE Energy was a foreign party, its motion to compel was governed by the New York Convention rather than by the “domestically focused” provisions of Chapter 1 of the Federal Arbitration Act (FAA).
The United States District Court for the Southern District of Alabama granted the motion to compel and dismissed the lawsuit, finding that there was an “agreement in writing” within the meaning of the Convention’s Article II based on the existence of the requisite written agreement between Outokumpu Stainless and the engineer that specified GE Energy as an approved/required subcontractor and the corresponding status of GE Energy as suitably identified within the arbitration contract’s definitions of “Buyer” and “Seller.”
The United States Court of Appeals for the Eleventh Circuit reversed this decision and rejected GE Energy’s effort to invoke arbitration. The Eleventh Circuit acknowledged the propriety of invoking the equitable estoppel doctrine in domestic arbitrations, citing Arthur Andersen LLP v. Carlisle. However, it construed that decision as endorsing equitable estoppel in a domestic arbitration only because Chapter 1 of the FAA does not expressly restrict arbitration to the signatories to an agreement. It accordingly ruled that such a restriction existed in the New York Convention, with the result that only a party to an arbitration agreement could invoke the arbitral process. Since GE Energy lacked this status as a non-signatory, the Eleventh Circuit concluded that GE Energy could not rely upon Alabama equitable estoppel principles to override the New York Convention’s signatory requirement.
Supreme Court review
The Supreme Court granted certiorari and unanimously reversed the Eleventh Circuit’s ruling. The Court held that the New York Convention does not conflict with or bar a non-signatory’s invocation of domestic equitable estoppel doctrines to compel arbitration by a signatory.
Equitable estoppel in domestic arbitrations
Referring to its earlier decision in Arthur Andersen, the Court noted that in domestic arbitrations, the FAA does not bar the application of underlying state contract law principles that include doctrines, such as equitable estoppel, authorizing contract enforcement by a non-signatory. It then characterized the scope of equitable estoppel in the arbitration context as “allow[ing] a nonsignatory to a written agreement containing an arbitration clause to compel arbitration where a signatory to the written agreement must rely on the terms of that agreement in asserting its claims against the nonsignatory.”
Equitable estoppel under the New York Convention
Turning to a consideration of the New York Convention, which the Court characterized as a “multilateral treaty addressing international arbitration” that focuses “almost entirely on arbitral awards,” the Court noted that ordinary tools of treaty interpretation governed analysis of the impact of the Convention on the question presented.
Applying such tools, the Court held that only one Article in the Convention, Article II, even addresses arbitration agreements and, further, that the Convention does not address at all the potential role of a non-signatory in attempting to enforce an arbitration agreement. It construed this “silence” to support dispositively the use of the “domestic” doctrine of equitable estoppel in an international arbitration case. It held that nothing in the Convention’s text excludes application of such a doctrine or displaces application of domestic doctrines. It accordingly ruled that a state law equitable estoppel doctrine does not conflict with §208 of the Convention.
To bolster its decision, the Court took into consideration the drafting history of the Convention. It found little guidance from the treaty’s choice of language in Article II, noting only that “the drafters sought to impose baseline requirements on contracting states.” It specifically stated that “nothing in the drafting history suggests that the Convention sought to prevent contracting states from applying domestic law that permits non-signatories to enforce arbitration agreements in additional circumstances.”
Result of the decision: remand to court of appeals
The Court concluded by noting that the Eleventh Circuit had not determined whether GE Energy could compel arbitration using the equitable estoppel doctrine, and that as a result, the Court of Appeals could address this issue on remand. The case therefore returns to that court for a consideration of Alabama’s doctrinal law.
In a concurring opinion, Justice Sonia Sotomayor focused upon what she characterized as the “foundational” principle of “consent to arbitrate.” She invoked the Court’s 2010 decision in Stolt Nielsen SA v. AnimalFeeds International Corp. as support for the basic precept that arbitration is a matter of consent, not coercion. She utilized this precept as a springboard to the broader point that there is no one version of “equitable estoppel” and accordingly no explicit demonstration that the use of the doctrine automatically reflects consent to arbitrate. She thus forecast that lower courts would have to determine whether application of a domestic non-signatory doctrine would comport with the FAA’s consent restriction.
As with many US Supreme Court decisions, the ruling in GE Energy does not conclude this particular battle over arbitrability. The parties return to Atlanta to have the Eleventh Circuit (or the District Court in Alabama) determine the proper application of Alabama’s equitable estoppel doctrine.
This dispute’s international nature is important. Although GE Energy performed its contractual obligations in Alabama and Outokumpu Stainless filed suit over such performance in Alabama, the underlying contracts do not mention Alabama as the appropriate site for resolution of this dispute, and they do not designate Alabama law as the substantive law governing resolution of the dispute. Rather, the agreement in question calls for arbitration that is governed by the procedural and substantive law of Germany, with an arbitration to be conducted in Dusseldorf.
On remand, therefore, a domestic court will assess whether GE Energy can legitimately invoke Alabama’s equitable estoppel doctrine to compel Outokumpu Stainless to arbitrate. If Outokumpu Stainless is compelled to arbitrate its dispute with GE Energy, the terms of the applicable agreement will present to an arbitral tribunal in Germany the need to consider the extent to which GE Energy can present its claims and defenses through invocation of the doctrine of equitable estoppel.
The GE Energy v. Outokumpu Stainless decision marks the first foray of the Supreme Court into a consideration of whether domestic contractual law principles frequently invoked in domestic arbitrations can correspondingly be applied in international cases. The Court unanimously supports such an application in this case, empowering non-signatories in appropriate circumstances to take advantage of the arbitral process to resolve complex international construction and business disputes.
Going forward, courts confronted with motions to compel arbitration similar to the one submitted by GE Energy in this case will probably have to scrutinize the extent to which there is an appropriate equitable estoppel doctrine to apply and, if so, the breadth of that doctrine’s scope. The GE Energy decision also highlights the challenges confronting construction law practitioners seeking to devise an efficient and effective system of dispute resolution essential to maintaining the orderly process of construction in large international projects.
On one hand, a party to such a dispute may want to avoid massive arbitration proceedings involving multiple project participants. Taking such an approach may require creative ways to restrict participation in dispute resolution proceedings. On the other hand, considering all the many potential participants in a project – such as subcontractors, distributors, vendors, guarantors and customers – a client might prefer to control venue and applicable law of a dispute through an all-encompassing arbitration clause, even if this results in numerous parties being compelled to join the proceeding.