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Article: August 2020: Supreme Court Rules That Non-Party to an International Arbitration Agreement May Compel Arbitration

August 27, 2020

Supreme Court Rules That Non-Party to an International Arbitration Agreement May Compel Arbitration

Recently, the Supreme Court unanimously ruled in GE Energy Power Conversion France SAS, Corp. v. Outokump Stainless USA, LLC, 140 S. Ct. 1637 (2020) that that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards does not conflict with domestic equitable estoppel doctrines that permit the enforcement of arbitration agreements by non-signatories under domestic equitable estoppel doctrines.  This ruling resolves a decades long split in the Circuits and overturns the rule previously followed in the Second, Third, Ninth, and Eleventh Circuits that only a signatory to an international arbitration agreement could enforce its terms.

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997 (“Convention”) governs the enforcement of international arbitration awards among parties to the Convention.  In the United States, the statute implementing the Convention is Chapter 2 of the Federal Arbitration Act (FAA) 9 U.S.C. § 201 et seq. (“Chapter 2”).  A party seeking to compel arbitration under Chapter 2 must prove the existence and validity of “an agreement in writing within the meaning of the Convention.”  E.g., Balen v. Holland Am. Line Inc., 583 F.3d 647, 654-55 (9th Cir. 2009) (citation omitted).  Article II, section 1 of the Convention provides that each contracting state “shall recognize” an “agreement in writing” to arbitrate a given dispute.  Article II, section 2 defines the term “agreement in writing” to include “an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.”  

The Split Among the Circuits

In 1988, the Fourth Circuit ruled in J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 320-21 (1988) that when claims against a parent and its subsidiary are inherently inseparable, a court may refer claims against the parent to arbitration under the Convention even though the parent was not a party to the arbitration agreement.  To reach this conclusion, the Fourth Circuit relied upon the statement of the Supreme Court in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985) that the federal policy in favor of arbitration “applies with special force in the field of international commerce,” 863 F.2d at 319 rather than the language of the Convention.

In 1994, the Fifth Circuit ruled that a non-signatory to an international contract with an arbitral provision could enforce that provision under the Convention in Sphere Drake Ins. PLC v. Marine Towing, Inc., 16 F.3d 666, 669 (5th Cir. 1994).  The Fifth Circuit examined the language of Article II, section 2 of the Convention and concluded that the term “signed by the parties” modified the term “arbitration agreement” but not the term “an arbitral clause in a contract” .  Accordingly, the Fifth Circuit affirmed a district court ruling that a party could enforce the arbitral provision in an unsigned insurance policy stating: “[b]ecause what is at issue here is an arbitral clause in a contract, the qualifications applicable to arbitration agreements do not apply. A signature is therefore not required.” Id.

The Second Circuit disagreed with the Fifth Circuit’s interpretation of Article II, section 2 in Kahn Lucas Lancaster, Inc. v. Lark International Ltd., 186 F.3d 210, 215-18 (2d Cir. 1999).  In Kahn Lucas, the Second Circuit analyzed Article II section 2's text and drafting history and held that the definition of “agreement in writing” in the Convention requires that any agreement, whether it be an arbitration agreement or an arbitral clause in a contract, be signed by the parties or contained in a series of letters or telegrams.  Accordingly, the Second Circuit reversed a district court order compelling arbitration because the contract at issue was not signed by one of the litigants.  

The Second Circuit’s reasoning in Kahn Lucas was later adopted by the Third Circuit in Standard Bent Glass Corp. v. Glassrobots Oy, 333 F.3d 440, 449 (3d Cir. 2003) and the Eleventh Circuit in Czarina, LLC v. W.F. Poe Syndicate, 358 F.3d 1286, 1290-91 (11th Cir. 2004).  The Ninth Circuit adopted the Kahn Lucas Court’s reasoning in Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996, 1000-1001 (9th Cir. 2017) referring to the Kahn Lucas Court’s “faithful adherence to the principles of treaty interpretation,” “detailed analysis of Article II(2)'s legislative history and negotiations,” and “cogent analysis” and dismissing Sphere Drake as a “decision [that] cited no authority and provided no analysis . . . and has therefore been rejected by our sister circuits.”  Id. at 1001.

The Supreme Court granted certiorari in GE Energy Power Conversion France SAS, Corp. v. Outokump Stainless USA, LLC, to resolve this split in the Circuits.  140 S. Ct. at 1643.  

The GE Energy Case

The GE Energy case arose out a dispute over allegedly defective motors. In 2007, ThyssenKrupp Stainless USA, LLC (“ThyssenKrupp”), entered into three contracts with F.L. Industries, Inc., to construct cold rolling mills at ThyssenKrupp’s steel manufacturing plant in Alabama. Each contract contained an arbitration clause providing that “all disputes arising between both parties in connection with or in the performances of the Contract … shall be submitted to arbitration for settlement.” F.L. Industries, Inc. then entered into a subcontract with GE Energy Power Conversion France SAS, Corp. (“GE Energy”) to provide motors for the mills. Later, Outokumpu Stainless USA, LLC (“Outokumpu”), acquired the plant from ThyssenKrupp. GE Energy’s motors allegedly failed in the summer of 2015, resulting in substantial damages.  

In 2016, Outokumpu and its insurers sued GE Energy in Alabama state court. GE Energy removed the case to federal court under section 205 of Chapter 2, which authorizes the removal of an action from state to federal court if the action “relates to an arbitration agreement … falling under the Convention.” GE Energy then moved to dismiss and compel arbitration, relying on the arbitration clauses in the contracts between F.L. Industries, Inc. and ThyssenKrupp.  Outokumpu Stainless USA LLC v. Converteam SAS, 2017 WL 401951 (SD Ala., Jan. 30, 2017). The district court held that GE Energy qualified as a party under the arbitration clauses because the contracts defined the terms “Seller” and “Parties” to include subcontractors.  Id., at *4. Because the court concluded that both Outokumpu and GE Energy were parties to the agreements, it declined to address GE Energy's argument that the agreement was also enforceable under the doctrine of equitable estoppel. Id., at *1, n. 1.  

The Eleventh Circuit reversed the District Court's order compelling arbitration.  Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F.3d 1316 (2018). The Eleventh Circuit first rejected the district court’s conclusion that GE Energy fell within the definitions of “Seller” or “Parties” and went on to explain that GE Energy could not compel arbitration because the Convention required “that the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration,” and “GE Energy is undeniably not a signatory to the Contracts.” Id. at 1326. The Eleventh Circuit also held that GE Energy could not rely on equitable estoppel because the doctrine conflicts with the Convention's signature requirement.  Id. at 1326-27 (citing Czarina, LLC v. W.F. Poe Syndicate, supra).  

The Supreme Court granted certiorari.  The Court’s analysis begins with Chapter 1 of the FAA which permits courts to apply state law doctrines related to the enforcement of arbitration agreements.  The Court noted that in Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631-32 (2009), “we recognized that Chapter 1 of the FAA permits a nonsignatory to rely on state-law equitable estoppel doctrines to enforce an arbitration agreement.” 140 S. Ct. at 1644. 

The Court then observed that the Convention “focuses almost entirely on arbitral awards. . . .” and “[o]nly one article of the Convention addresses arbitration agreements—Article II.”  Id. at 1644. The Court pointed out that Article II contains only three short sections: Article II sections 1 and 2 (which were quoted in pertinent part above) and Article II section 3 which provides “that the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.” Id.

The Court then explained that under 9 U.S.S. § 208 “Chapter 1 applies to actions and proceedings brought under this chapter to the extent that [Chapter 1] is not in conflict with this chapter [Chapter 2] or the Convention.” Id. The Court then framed the issue to be determined as “whether the equitable estoppel doctrines permitted under Chapter 1 of the FAA, conflict with” the Convention and concluded that they do not. Id. at 1644-45 (citations omitted).

The Court observed that the text of the Convention did not address whether non-signatories may enforce arbitration agreements under domestic doctrines such as equitable estoppel and stated: “[t]his silence is dispositive here because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”  Id. at 1645. The Court also pointed out that the language of Article II section 3 stating 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 arbitration “provides that arbitration agreements must be enforced in certain circumstances, but it does not prevent the application of domestic laws that are more generous in enforcing arbitration agreements.” Id. 

Based upon this analysis, the Court concluded that “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. The Court then reviewed the negotiation and drafting history of the Convention as well as the post-ratification conduct of signatory nations and concluded that they too were consistent with the Court’s interpretation of the Convention’s text. Id. at 1646-47. 

The Supreme Court did not determine whether GE Energy could enforce the arbitration provisions under the doctrine of equitable estoppel or which body of law would govern that determination, indicating that those questions could be addressed on remand. The Court stated that it held only that the Convention does not conflict with the enforcement of international arbitration agreements by non-signatories under domestic-law equitable estoppel doctrines.

Justice Sotomayor filed a concurring opinion emphasizing that “[a]ny applicable domestic doctrines must be rooted in the principle of consent to arbitrate.” Id. at 1648. The concurring opinion concluded that “[l]ower courts must therefore determine, on a case-by-case basis, whether applying a domestic nonsignatory doctrine would violate the FAA's inherent consent restriction.”  Id. at 1649.