(English) US Supreme Court Holds that New York Convention Does Not Bar Invocation of Arbitration Agreements by Non-Signatories

2020-06-04

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(English)

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.

The Eleventh Circuit reversed the district court.  In reaching this result, the Eleventh Circuit focused on language from Article II, Paragraph 2 of the New York 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. 

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 with the First and Fourth Circuits having held that non-signatories may compel arbitration under the New York convention and the Ninth and Eleventh Circuits having held that they may not.  c.f. Sourcing Unlimited v. Asimco Int’l, Inc. 526 F.3d 38 (1^st Cir. 2008), and 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), and Outukumpu, 902 F.3d 1316 (11^th Cir. 2018).

The Supreme Court granted GE Energy’s petition and resolved the Circuit split by deciding that non-signatories may compel arbitration under the New York Convention based upon domestic arbitration law.  However, the Supreme Court did not base its decision on Article II, Paragraph 2.  Instead, the Supreme Court based its decision on Article II, Paragraph 3, which provides “[t[he 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.”  The Supreme Court reasoned that the New York Convention is primarily directed to the recognition and enforcement of arbitral awards with only Article II, Paragraph 3 providing for enforcement of arbitration agreements.  The Court found that because Article II, Paragraph 3 does not restrict contracting states from applying domestic law to refer parties to arbitration in other circumstances, it does not bar the application of equitable estoppel and other domestic law that may enable non-signatories to invoke arbitration.

The Supreme Court also briefly addressed the negotiation and drafting history of the New York Convention and found nothing to displace the application of local law doctrines to enable arbitration by non-signatories.  The Supreme Court similarly found that the weight of authority regarding post-ratification understanding of other contracting states suggests that the New York Convention does not prohibit the application of domestic law addressing the enforcement of arbitration agreements.

The Supreme Court remanded the case for further proceedings to determine whether GE Energy could enforce the agreement under principles of equitable estoppel or which body of law governs that interpretation.  In a concurrence, Justice Sotomayor noted that the application of domestic non-signatory principles might be unnecessary because the contract at issue defined sub-contractors, including GE Energy’s predecessor in interest, as party of the Seller, a contracting party.

Author: Sherman Kahn