U.S. Supreme Court to Resolve Circuit Split Over Arbitration by Non-Signatories Under New York Convention

August 14, 2019

The Supreme Court recently granted certiorari in the case entitled Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F.3d 1316 (11^th Cir. 2018), cert. granted, GE Energy Power Conversion France SAS Corp. v. Outokumpu Stainless USA, LLC (June 28, 2019). The case will resolve a circuit split regarding the ability of non-signatories to participate in arbitration under the Convention on the Recognition and Enforcement of Arbitral Awards (“New York Convention”).

The underlying dispute in Outokumpu concerned a contract for the construction of a steel mill in Alabama. The predecessor in interest to Outokumpu had entered into a contract with a contractor for the construction of a cold-rolling mill which contained a broad arbitration clause providing for ICC arbitration in Dusseldorf, Germany. The contract referred to the contractor as “Seller” and further provided that “[w]hen Seller is mentioned it shall be understood as Sub-contractors included except if expressly stated otherwise.” The contractor sub-contracted with GE Energy to supply motors for the mill. After some of the motors failed, Outokumpu sued GE Energy in Alabama state court. GE Energy removed the action to federal court and sought to compel arbitration in reliance on the arbitration agreement between Outokumpu and the contractor. The district court granted the motion to compel arbitration and dismissed the action.

On appeal, the Eleventh Circuit examined both whether it had subject matter jurisdiction and whether a non-signatory may compel an arbitration under the New York convention. The Eleventh Circuit affirmed the district court as to subject matter jurisdiction, finding that the New York Convention (as embodied in Chapter II or the Federal Arbitration Act (“FAA”)) confers jurisdiction over a dispute relating to an international arbitration agreement if the agreement could conceivably affect the outcome of the plaintiff’s case.

The Eleventh Circuit, however, reversed the district court on the issue of arbitrability. In reaching this result, the Eleventh Circuit focused on language from Article II, Paragraph 2 of the Convention stating that an agreement in writing under the convention includes “an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” The Eleventh Circuit reasoned that the New York Convention only applies to agreements in writing (Article II, paragraph 1) and that Article II, paragraph 2 limits agreements in writing only to parties who actually signed the agreement. Thus, according to the Eleventh Circuit, GE Energy could not invoke the agreement even though it was included in the definition of “Seller” because GE Energy had not itself signed the agreement.

The Eleventh Circuit noted in its decision that in domestic arbitration, governed by Chapter 1 of the FAA, GE Energy’s petition may have been granted under principles of estoppel. Under the Eleventh Circuit’s reasoning, estoppel is permissible under Chapter 1 of the FAA and not Chapter 2 because Chapter 1 does not include the signature language specified in the Convention. Therefore, the Eleventh Circuit held that GE Energy could not invoke estoppel to compel arbitration, even if that would disadvantage international arbitration in comparison to domestic arbitration, and even though Chapter 1 of the FAA applies to international proceedings where Chapter 1 is not in conflict with the Convention.

GE Energy filed a petition for certiorari with the Supreme Court on the question of whether the New York Convention permits a non-signatory to an arbitration agreement to compel arbitration on the basis of equitable estoppel. GE Energy cited a circuit split on the issue: i.e., the First and Fourth Circuits have held that non-signatories may compel arbitration under the New York convention, and the Ninth and Eleventh Circuits have held that they may not. C.f. Sourcing Unlimited v. Asimco Int’l, Inc. 526 F.3d 38 (1^st Cir. 2008); Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355 (4^th Cir. 2012); Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d (4^th Cir. 2000) with Majestic Blue Fisheries, LLC, 876 F.3d 996 (9^th Cir. 2017); Outukumpu, 902 F.3d 1316 (11^th Cir. 2018).

GE Energy argued in its petition that a strict interpretation of the language “signed by the parties” that requires a signature by every potential participant in the arbitration as required by the Eleventh Circuit thwarts the federal policy in favor of arbitration and disadvantages international arbitration as compared to domestic arbitration in such a way as to be inconsistent with the FAA. Nor, according to GE Energy, does the language of Article II, Paragraph 2 itself require the interpretation that only signing parties may resort to arbitration.

It will be interesting to see how the arguments develop as the Supreme Court considers Outokumpu. There is considerable weight, however, to the argument that the Eleventh Circuit’s construction of “signed by the parties” disadvantages international arbitration agreements in a way that is inconsistent with the Convention, the FAA and the policy underlying them. In this context it is worth noting that UNCITRAL has adopted a recommendation that Article II, Paragraph 2 of the New York Convention be applied recognizing that the circumstances described therein are not exhaustive and that Article VII, Paragraph 1 of the Convention be applied to allow any interested party to avail itself of rights it may have under the domestic law of the country where an arbitration agreement is sought to be relied upon. (UNCITRAL Recommendation Regarding the Interpretation of Article II, Paragraph 2 and Article VII, Paragraph 1 of the New York Convention (2006), https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/a2e.pdf.)

Author: Sherman Kahn