SCOTUS holds that Nonsignatories to International Arbitration Agreements May Rely on Equitable Estoppel to Compel Arbitration

On June 1, 2020, the United States Supreme Court issued its unanimous opinion in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048, 2020 WL 2814297 (U.S. June 1, 2020) (“GE Energy v. Outokumpu”), holding that the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”)[i] does not conflict with the enforcement of arbitration agreements by nonsignatories under equitable estoppel doctrines found in domestic law. The Court’s interpretation of the Convention sets an important precedent that both resolves a current split between Federal Appellate Circuits and reinforces the pro-arbitration stance of US courts.

Article II of the New York Convention and the Federal Arbitration Act

The New York Convention is implemented in the United States through Chapter 2 of the Federal Arbitration Act (“FAA”) and primarily “appl(ies) to the recognition and enforcement” of international arbitral awards. The award enforcement focus notwithstanding, Article II[ii] of the Convention diverts from the rest of the text to address agreements to arbitrate. Paragraph II(1) provides that “[e]ach Contracting State shall recognize an agreement [to arbitrate] in writing […];” paragraph II(2) states that an “’agreement in writing’ shall include an arbitral clause in a contract … signed by the parties or contained in an exchange [of communications];” and paragraph II(3) further states that courts of Contracting States “shall … refer the parties to arbitration, unless it finds that [the agreement to arbitrate] is null and void, inoperative or incapable of being performed.”

Paragraphs (1) and (2) of Article II have given rise to divergent interpretations amongst US Courts of Appeal, with some, such as the Ninth Circuit, holding that, “only a ‘party’ or ‘parties to the agreement referred to in article II’ may litigate its enforcement.”[iii] This interpretation limits the parties who may compel a dispute to international arbitration to only signatories of a written agreement or those who otherwise qualified under Article II(2), effectively excluding nonsignatories. By contrast, nonsignatory parties seeking to compel a matter to domestic arbitration could still avail themselves of various state law theories, such as equitable estoppel, under Chapter 1 of the FAA, because their dispute did not fall under the Convention. Since not all US Courts of Appeal followed a restrictive interpretation of Article II, a split developed between Federal Circuits on this issue.

The Present Dispute

The dispute in GE Energy v. Outokumpu involved three agreements between the owner of a steel manufacturing plant located in Alabama and a contractor for the construction of cold rolling mills for the facility. The contractor had subcontracted the design, manufacture, and supply of motors for the mills to GE Energy Power Conversion France SAS, Corp (“GE Energy”).

Outokumpu Stainless USA, LLC (“Outokumpu”) subsequently took over the Alabama facility, and together with its insurers brought suit in Alabama state court against GE Energy for defects allegedly discovered in the motors it had supplied. GE Energy removed the case to federal court and successfully moved to dismiss and compel arbitration.[iv] The Eleventh Circuit reversed the District Court and reject both GE’s contractual arguments and equitable estoppel theory, holding that “the [New York] Convention … 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.”[v] GE Energy appealed and the US Supreme Court granted certiorari.

The Supreme Court’s Analysis

The Supreme Court’s review focused on whether the New York Convention conflicts with domestic equitable estoppel doctrines that permit the enforcement of arbitration agreements by nonsignatories.[vi] The Court relied primarily on the Convention’s text to determine that no such conflict exists. In this regard, the decision was founded on three analytical planks:

• First, the Court determined that the Convention was silent on the application of domestic legal doctrines like equitable estoppel, and thus it could not be said to exclude them.[vii] Simply put, “a matter not covered is to be treated as not covered.”[viii]
• Second, the Court construed paragraph II(3), where it states that courts “shall … refer the parties to arbitration,” as both broad and unrestrained by the previous two paragraphs: “Article II(3) contains no exclusionary language; it does not state that arbitration agreements shall be enforced only in the identified circumstances.”[ix] Far from setting forth exclusive grounds by which courts may compel arbitration, the first two paragraphs of Article II merely “address the recognition of arbitration agreements, not who is bound by a recognized agreement.”[x]
• Third, the Court considered portions of Article II where, by necessity, application of domestic law is implicit. For example, Article II(1) states that arbitration agreements are enforceable only if they concern a “matter capable of settlement by arbitration,” which compels reference to domestic law since the question is not addressed in the Convention. The Court found such instances instructive to show that “the Convention requires courts to rely on domestic law to fill the gaps; it does not set out a comprehensive regime that displaces domestic law.”[xi]

Although the Court considered other issues relevant to treaty interpretation, the force of its Opinion rests on its analysis of the Convention’s text, leading it to conclude that nonsignatory parties may plead equitable estoppel grounds to compel arbitration of international disputes.

Implications of this decision.

Since US Supreme Court decisions interpreting the New York Convention are comparatively rare, GE Energy v. Outokumpu is likely to garner significant attention in the years to come. Some takeaways from this decision are as follows:

(1) Nonsignatories may now plead state law equitable estoppel to compel arbitration of disputes falling within the ambit of the New York Convention.

(2) Other state law doctrines beyond equitable estoppel, such as, e.g., alter ego, third-party beneficiary, and incorporation by reference, have also been raised under Chapter 1 of the FAA, as it pertains to nonsignatories and arbitration. Although the GE Energy v. Outokumpu decision is confined to the issue of equitable estoppel, the reasoning adopted by the Court could arguably be extended to allow for other theories to be used to compel arbitration under the Convention.

(3) Although Footnote 3 states the Court does “not address whether Article II(2) requires a signed agreement,”[xii] the Court’s analysis in this case suggests the possibility that this provision may be interpreted as not requiring a written arbitration agreement (or contract including one) to be signed in order to be enforceable.[xiii]

ENDNOTES:

[i] Convention Done at New York June 10, 1958;, T.I.A.S. No. 6997 (Dec. 29, 1970).

[ii] Article II states that:

(1.) Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

(2.) 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.

(3.) 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.

[iii] Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996, 1001 (9th Cir. 2017).

[iv] The District Court held that GE qualified as a party under the arbitration clauses of the contract because the contracts defined the terms “Seller” and “Parties” to include subcontractors. See GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048, 2020 WL 2814297, at *3 (U.S. June 1, 2020).

[v] Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F.3d 1316, 1326 (11th Cir. 2018).

[vi] GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048, 2020 WL 2814297, at *2 (U.S. June 1, 2020).

[vii] “The text of the New York Convention does not address whether nonsignatories may enforce arbitration agreements under domestic doctrines such as equitable estoppel.” GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048, 2020 WL 2814297, at *5 (U.S. June 1, 2020).

[viii] Id.

[ix] Id., at *5, emphasis added. The Court also noted that “the only provision of the Convention that addresses the enforcement of arbitration agreements is Article II(3)” and held that “[w]e do not read the nonexclusive language of that provision to set a ceiling that tacitly precludes the use of domestic law to enforce arbitration agreements.” Id.

[x] Id., at *7, emphasis added.

[xi] Id., at *5.

[xii] Id., at *7, footnote 3.

[xiii] The Court’s reading of Article II(3), that it “does not state that arbitration agreements shall be enforced only in the identified circumstances,” Id. at *5, may provide guidance on how Article II(2)’s language will be read in future decisions: “The term “agreement in writing an ‘agreement in writing’ shall include an arbitral clause in a contract … signed by the parties or contained in an exchange [of communications].” Courts have previously viewed Article II(2) as the exclusive definition of what constitutes an enforceable written agreement under the Convention. Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd., 186 F.3d 210, 218 (2d Cir. 1999 – abrogated on other grounds). Nevertheless, Article II(2) is predicated on the word “include,” which if one were to apply the Supreme Court’s analysis here, could be seen as an indication that the article is not intended to cover the field of what may be considered an enforceable written agreement.