First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement.
This fall, the US Supreme Court will consider the question of whether the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), permits a nonsignatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel. This is an important issue in many different commercial contexts. When parties to a contract with an arbitration clause enter into other relationships with other nonsignatories (for example, a subcontractor or supplier), it is not always clear whether disputes involving those nonsignatories are arbitrable. If the crux of the dispute is the failed performance of a nonsignatory, this creates a potential barrier to arbitration. The US Supreme Court now has a chance to clarify this issue in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC.
Petitioner GE Energy is a French company that manufactured motors for delivery to respondent Outokumpu Stainless USA, the operator of a steel plant in Alabama. Outokumpu installed the motors in its plant, but they later failed. Outokumpu ultimately sued GE Energy in Alabama state court, at which point GE Energy removed the case and filed a motion to compel arbitration. The problem was that GE Energy was a subcontractor and did not have a direct contractual relationship with Outokumpu. Thus, GE Energy invoked the arbitration clause in the contract between Outokumpu and the general contractor, arguing that Outokumpu was equitably estopped from avoiding arbitration because it signed an agreement containing an arbitration clause and the case was within the scope of that clause because Outokumpu's claim "arose out of" the agreement.
GE Energy prevailed at the district court. However, the Eleventh Circuit Court of Appeals reversed. The Court of Appeals focused on whether there was a sufficient agreement in writing for purpose of the New York Convention, which is enforceable in the United States through Chapter 2 of the Federal Arbitration Act (FAA). Article II of the New York Convention provides that "[t]he 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." Construing this provision, the Court of Appeals held that "to compel arbitration, the Convention requires that the arbitration agreement be signed by the parties before the Court or their privities." Thus, the Court reversed the District Court's decision.
The Eleventh Circuit's decision exacerbates an existing circuit split by joining the Ninth Circuit Court of Appeals in holding that nonsignatories cannot enforce arbitration agreements under the New York Convention. See Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996 (9th Cir. 2017). Conversely, both the First and Fourth Circuit Courts of Appeals have reached the opposite conclusion. See Sourcing Unlimited, Inc. v. Asimco Int'l, Inc., 526 F.3d 38 (1st Cir. 2008); Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355 (4th Cir. 2012). In a similar situation in a case litigated by Steptoe, the Second Circuit Court of Appeals determined that nonsignatories could not compel arbitration because Swiss law controlled and Swiss law did not permit nonsignatories to invoke arbitration agreements. See Motorola Credit Corp. v. Uzan, 388 F.3d 39, 52-53 (2d. Cir. 2004). However, the Second Circuit did not foreclose the possibility of compelling nonsignatories to arbitrate under the New York Convention, and subsequent decisions of district courts in that circuit have determined that "a nonsignatory may be bound to arbitrate pursuant to several different common law principles arising under contract and agency law." See Trina Solar US, Inc. v. JRC-Servs. LLC, 229 F. Supp. 3d 176, 185 (S.D.N.Y. 2017); see also Thomson–CSF, S.A. v. Am. Arbitration Assoc., 64 F.3d 773, 776 (2d Cir. 1995) (recognizing five theories for binding nonsignatories to arbitration agreements: 1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel).
The key distinction has been the willingness of US courts to use equitable estoppel to compel arbitration under an agreement even though the party seeking to enforce arbitration did not sign the agreement. This use of equitable estoppel is common in domestic arbitration agreements, which are subject to Chapter 1 of the FAA and US common-law doctrines for enforcing contracts. Foreign arbitration agreements, however, are subject to Chapter 2 of the FAA and the New York Convention.
This case squarely presents an important issue not just for arbitration practitioners, but also for any company that engages in cross-border commercial transactions. These transactions frequently involve performance by parties that are not actual signatories to the contract at issue. These include important roles in commercial transactions, such as sureties, sub-contractors, lenders, and third-party beneficiaries. If the Supreme Court agrees with the Eleventh Circuit's view, it will be harder to enforce arbitration agreements that fall under the New York Convention, and nonsignatories that are involved in the underlying commercial transaction may need to take additional steps to avoid being unexpectedly subject to suit in a foreign court.