An August, 2018, decision by the Eleventh Circuit highlights the differences in the U.S. courts under Chapter 1 of the Federal Arbitration Act (FAA) relating to domestic matters and Chapter 2 of the FAA, which addresses international disputes and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the NY Convention). These differences especially impact the ability to compel the arbitration of a third-party through joinder.
Outokumpu Stainless USA et al v Sompo Japan Insurance Company of America, No. 1:16-cv-00378 (11th Cir. August 30, 2018), involved a dispute about defective motors installed in a steel mill in Alabama. Although the case is of interest for its discussion of a federal court’s power to remove a case involving arbitration from state court, this case note will focus only on the court’s discussion of the power of a court to compel arbitration under the NY Convention and the FAA. Additionally, it will discuss the impact of these differences on a tribunal’s power to compel arbitration through joinder.
The Outokumpu dispute involved two separate arbitration agreements and multiple parties. In 2007, F.L. Industries (FLI) entered into a contract to build a steel plant in Calvert, Alabama, for ThyssenKrupp Stainless USA (ThyssenKrupp). Under the contract, FLI was to provide three cold rolling mills (CRM) for the plant, and each CRM required multiple motors. FLI subcontracted with an engine manufacturer to provide the motors, and that manufacturer subsequently was purchased by GE Energy (GE). Shortly after the plant was completed, all of the motors failed.
While the plant was under construction, Outokumpu purchased ThyssenKrupp’s interest in the plant and assumed all of ThyssenKrupp’s rights under the contracts.
The contract between ThyssenKrupp (now Outokumpu) as buyer and FLI as seller (hereinafter, the Principal Contract) contained an arbitration agreement that required “all parties” to the Principal Contract to resolve their disputes via arbitration. This contract also provided that “[w]hen Seller is mentioned it shall be understood as Sub-contractors included, except if expressly stated otherwise.”
The Principal Contract defined “Sub-contractor” as “any person (other than the Seller) used by the Seller for the supply of any part of the Contract Equipment, or any person to whom any part of the Contract has been sub-let by the Seller[.]” The Principal Contract included an appendix listing approved subcontractors, and GE’s predecessor-in-interest was identified in that appendix and was not “expressly excluded.” Accordingly, by definition, GE was a seller under the Principal Contract.
Even though the Principal Contract defined GE and all the other subcontractors as the seller under the Principal Contract, none of the subcontractors signed the Principal Contract.
Three weeks after ThyssenKrupp and FLI signed the Principal Contract, FLI, GE, and others entered into and signed a subcontractor agreement (the Subcontractor Agreement). The Subcontractor Agreement also contained an arbitration clause. However, ThyssenKrupp did not sign the Subcontractor Agreement and Outokumpu was unaware of such agreement until after the steel mill was completed and the motors failed.
Unable to negotiate a resolution of the dispute, Outokumpu filed suit in State Court in Mobile, Alabama, against GE and others seeking damages. GE timely removed the case to the Federal Court based on subject matter jurisdiction pursuant to 9 U.S.C. § 205,
Outokumpu moved to remand the matter to the State Court, and GE moved to dismiss the Federal Court action and compel arbitration. The District Court ruled in favor of GE and ordered Outokumpu to arbitrate its dispute. The District Court’s decision turned upon its holding that the Principal Contract’s definition of subcontractors as “parties to the contract” meant that GE was a seller and therefore subject to the Principal Contract’s arbitration clause. As a result, GE was entitled to compel Outokumpu to arbitrate pursuant to that clause.
The Appellate Court disagreed. It held that that GE could not compel Outokumpu to arbitrate because GE did not sign the Principal Contract. The Appellate Court’s decision turned on two facts: (1) that it had jurisdiction to decide the case under Chapter 2 of the FAA because the case included foreign parties, and (2) as noted, GE did not sign the Principal Contract.
The FAA comprises three chapters. The first addresses wholly domestic arbitrations. Chapter 2 recognizes the NY Convention and provides in §202 that a dispute involving foreign parties, “envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states” is governed by it and not Chapter 1. Chapter 3 parallels Chapter 2 except that it applies to The Inter-American Convention on International Commercial Arbitration, a convention not applicable to this case.
Chapter 1 and Chapter 2 of the FAA have different and distinct jurisdictional provisions. Chapter 2 provides in §203: “An action or proceeding falling under the [NY] Convention shall be deemed to arise under the laws and treaties of the United States. The district courts of the United States . . . shall have original jurisdiction over such an action or proceeding, regardless of the amount in controversy.”
§205 of Chapter 2 applies to matters “pending in a State” court, and permits removal given the Federal Court’s original jurisdiction pursuant to §203. It provides:
Where the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the [NY] Convention [italic added], the defendant or the defendants may, at any time before the trial thereof, remove such action or proceeding to the district court of the United States for the district and division embracing the place where the action or proceeding is pending.
The critical issue in determining whether Federal Court jurisdiction exists and whether GE can compel Outokumpu to arbitrate is, therefore, whether the Outokumpu dispute “fall[s] under” the NY Convention. Several Appellate Courts have articulated a four-part test to determine if an arbitration agreement “falls under” the NY Convention. That test is best summarized in Bautista v Star Cruises, 396 F.3d 1289 (2005), which the Appellate Court in Outokumpu cited and relied upon:
- there must be “an agreement in writing within the meaning of the Convention;”
- the agreement must “provide for arbitration in the territory of a signatory of the Convention;”
- the agreement must “arise out of a legal relationship, whether contractual or not, which is considered commercial;” and
- there must be “a party to the agreement [who] is not an American citizen, or that the commercial relationship has some reasonable relation with one or more foreign states.”
Bautista, 396 F.3d at 1295–96, n.7.
The Appellate Court in Outokumpu focused on the first element of the test: was there an “agreement in writing within the meaning of the Convention.” The NY Convention, Article 2, §2 states: “The 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.”
In the Outokumpu dispute, there were two arbitration agreements. Neither, however, was signed by GE and ThyssenKrupp (Outokumpu’s predecessors-in-interest). Therefore, no “agreement in writing” “signed by the parties to the dispute” existed, hence the Appellate Court found that GE could not compel Outokumpu to arbitrate. Moreover, per the court:
[t]he fact that non-signatory [GE], and not signatory Outokumpu, seeks to enforce the arbitration provision does not alter our analysis . . . . [T]he Convention, as codified in Chapter 2 of the FAA, only allows the enforcement of agreements in writing signed by the parties and Congress has specified that the Convention trumps Chapter 1 of the FAA where the two are in conflict.
It should be noted that Federal jurisdiction under Chapter 1 of the FAA is significantly broader than under Chapter 2. Indeed, the Appellate Court in Outokumpu expressly recognized this fact, noting that parties can compel arbitration under Chapter 1 of the FAA through estoppel, which would not be permitted under Chapter 2.
The differing scope of jurisdiction lies in the differing language of the two provisions, and U.S. Supreme Court precedent. As related above, a Federal Court’s jurisdiction and power to compel arbitration under Chapter 2 of the FAA requires that there be an “arbitration agreement” as defined by the NY Convention that “falls under” the convention. Thus, there must be an agreement signed by the parties seeking to compel arbitration and being compelled to arbitrate, in addition to the other three elements of the test articulated in Bautista.
Chapter 1 of the FAA (9 U.S.C. §2), however, requires only:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. [italic added]
The italicized language is where the difference lies. The U.S. Supreme Court, in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009) held:
“(S)tate law,” therefore, is applicable to determine which contracts are binding under §2 and enforceable under §3 “if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.” [citation omitted] Because “traditional principles” of state law allow a contract to be enforced by or against nonparties to the contract through “assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel,” [citation omitted] the Sixth Circuit’s holding that nonparties to a contract are categorically barred from §3 relief was error.
Id. p. 630–31.
This difference in the scope of jurisdiction is especially significant in involuntary joinder cases proceeding under arbitral institution rules. Several arbitral institutions and dispute resolution organizations, including The United Nations Commission on International Trade Law (UNCITRAL), have adopted rules in recent years that permit persons to be joined to an arbitration involuntarily (in other words, parties who are not signatories to the arbitration agreement and who do not consent to arbitrate may still be joined as parties to the arbitration).
For example, UNCITRAL Rule 17.5 states:
The arbitral tribunal may, at the request of any party, allow one or more third persons to be joined in the arbitration as a party provided such person is a party to the arbitration agreement, unless the arbitral tribunal finds, after giving all parties, including the person or persons to be joined, the opportunity to be heard, that joinder should not be permitted because of prejudice to any of those parties. The arbitral tribunal may make a single award or several awards in respect of all parties so involved in the arbitration. [italic added]
Consider: were the Outokumpu case proceeding under this rule, given the Principal Contract’s express inclusion of the subcontractors as “parties to the agreement” it is possible (indeed likely) that the tribunal would have found that it had jurisdiction and permitted the mater to proceed. Further, were all of the parties in the Outokumpu case domestic, then GE likely would have been able to compel Outokumpu to arbitrate for the same reason.
Conclusion: For arbitrations seated in the United States, parties contemplating implementing arbitral joinder rules or compelling an unwilling party to arbitrate must give careful consideration to the differences between Chapter 1 and Chapter 2 of the FAA. The same careful consideration should be given to wholly foreign proceedings if enforcement is contemplated in the United States.
James Reiman is the principal of ReimanADR in Chicago, Illinois.
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