Nonsignatories May Enforce Arbitration Agreement

The U.S. Supreme Court has held that a company that did not sign an arbitration agreement may nevertheless invoke the doctrine of equitable estoppel to compel arbitration inGE Energy Power Conversion France SAS Corp. v. Outokumpu Stainless USA et al. The case involved an international arbitration governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Convention). According to ABA Section of Litigation leaders, the Court’s interpretation brings the United States in line with other major jurisdictions allowing nonsignatories to enforce an arbitration agreement, which should make the United States an attractive forum for foreign parties.

Contractual Parties and Procedural Posture

In GE Energy Power, ThyssenKrupp Stainless USA, LLC, entered into three contracts with F.L. Industries, Inc., for construction of cold rolling mills at the former’s steel plant in Alabama. All the contracts had identical arbitration clauses that stated, in part, that “all disputes arising between both parties in connection with or in performance of the Contract . . . shall be submitted to arbitration for settlement.” Subsequently, F.L. Industries entered into a subcontractor agreement with GE Energy—a foreign entity—and then ThyssenKrupp Stainless USA was acquired by Outokumpu Stainless. After motors designed for the mills failed, Outokumpu Stainless sued GE Energy Power in Alabama state court.

GE Energy Power then removed the case to federal court and sought to dismiss the case and compel arbitration. Its request was based on 9 U.S.C. § 205, which provides for removal where an arbitration or award emanates under the Convention. Reasoning that under the Convention, both the plaintiff and the defendant were parties to the arbitration agreement, the U.S. District Court for the Southern District of Alabama granted the plaintiff’s motion.

The U.S. Court of Appeals for the Eleventh Circuit disagreed and concluded that the Convention required the parties to “actually sign an agreement to arbitrate. . . to compel arbitration.” The Eleventh Circuit reasoned that under the Convention, equitable estoppel could not be invoked by a nonsignatory to compel arbitration. Since GE Energy Power had not signed the agreement, the Eleventh Circuit reversed the lower court.

Statutory Silence Speaks

In a unanimous decision reversing the Eleventh Circuit, the U.S. Supreme Court deployed tools of statutory interpretation to hold that the Convention does not conflict with the principle of equitable estoppel to enforce arbitration agreements by nonsignatories. Citing Chapter 1 of the Federal Arbitration Act (FAA), the Court reasoned that state law principles of equitable estoppel apply to allow nonsignatories to enforce arbitration agreements. Further, the Court noted that Section 203 of the FAA grants federal courts jurisdiction over actions under the Convention.

Because the Convention is a multilateral treaty governing international arbitration, the Court found nothing in the Convention that addressed the specific issue of nonsignatory enforcement, or precluded enforcement of arbitration agreements by reference to state law—which the FAA expressly allows. The Court concluded that the “silence is dispositive because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.” The Court remanded the case to the Court of Appeals to consider whether GE Energy Power could enforce the arbitration provision by invoking equitable estoppel.

“There is a certain fairness in what the court has done,” concludes Henry R. Chalmers, Atlanta, GA, cochair of the Section’s Alternative Dispute Resolution Committee. The defendant “was seeking to enforce the underlying agreements and reap all of the benefits available to it under them, yet it also sought to deprive its adversary of the very procedural protections the defendant agreed to include in those documents,” Chalmers observes.

Even so, the Court “did not actually attempt to make clear how the doctrine of equitable estoppel” would apply under the facts of the case, noted Henry L. Parr Jr., Greenville, SC, cochair of Section’s International Litigation & Dispute Resolution. It “merely ruled that the Convention does not preclude” the application of the equitable estoppel doctrine to nonsignatories of the Convention, Parr Jr., opines.

Favorable Arbitration Award Forum

The holding makes the United States a favorable forum for resolution of international arbitration agreements, according to Section leaders. “By the Court’s estimation, its decision brings U.S. international arbitration law in line with other major jurisdictions for arbitration regarding enforcement of awards against nonsignatories,” states Betsy A. Hellman, New York, NY, cochair of the Section’s Alternative Dispute Resolution Committee. According to Hellman, the Court’s ruling “should enhance the attractiveness of the United States as a forum for enforcement of international arbitration awards.”

The Court was also following a central tenet of the Convention, which “was to give awards respect and make them enforceable from nation to nation, not to place limitations on their enforcement,” opines Mitchell L. Marinello, Chicago, IL, cochair of the Section’s Alternative Dispute Resolution Committee. Indeed, a broad reading of the Court’s unanimous decision may be that the Court favors arbitration, argues Hellman. “The Court's recent decision in Henry Schein Inc. et al. v. Archer and White Sales Inc.—in which the Court concluded that courts do not have the authority to override a decision by the parties to delegate the question of whether a dispute must be arbitrated to an arbitrator, consistent with the arbitral principle of kompetenz-kompetenz by which arbitrators determine their own jurisdiction—was also unanimous,” Hellman observes.