1. Can a Non-Signatory Compel Arbitration?
On June 28, 2019, the United States Supreme Court (“Supreme Court”) agreed to resolve a key issue in international arbitration agreements: whether the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Foreign Arbitral Award Convention”) permits a non-signatory to an arbitration agreement to compel arbitration against a signatory to arbitration based on the doctrine of equitable estoppel. (GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048). The question has split the circuit courts with the First and Fourth Circuits answering in the affirmative and the Ninth and Eleventh Circuits answering in the negative – – in other words right now the answer to the question depends on where in the United States the dispute is being litigated.
Though the U.S. Supreme Court will not decide this case for months, its decision will have a substantial impact on dispute resolution for foreign companies doing business in the United States and for domestic companies doing business internationally. This is because nearly every leading manufacturing country in the world (except Taiwan) is a signatory to the Foreign Arbitral Award Convention. The Convention has over 150 state parties including Bangladesh, Cambodia, Canada, China, Germany, Indonesia, Japan, Laos, Malaysia, Mexico, Pakistan, Philippines, Poland, Portugal, Spain, Sri Lanka, Thailand, Turkey, Ukraine, United Kingdom, United States, and Vietnam. (Note: Several of these countries are signatories “with reservations”).
2. Basic Principles of Arbitration and Equitable Estoppel
To understand the importance of the Supreme Court’s decision, let’s unpack some of the basic principles of arbitration and equitable estoppel:
- The Federal Arbitration Act (“FAA”), codified at 9 U.S.C § 1 et seq., provides for contractual agreements to arbitrate and enforceable.
- Chapter 1 of the FAA makes written arbitration agreements “valid, irrevocable, and enforceable” in nearly all circumstances.
- The Supreme Court and other U.S. federal courts liberally interpret the FAA, and view the FAA as reflecting a liberal federal policy favoring arbitration.
- In laymen’s terms this means that if your company signed a contract that has an arbitration clause and the other side seeks to arbitrate a dispute, U.S. courts will nearly always compel you to arbitration.
- Chapter 2 of the FAA implements the Foreign Arbitral Award Convention.
- The Foreign Arbitral Award Convention is a key instrument in international arbitration. It concerns the recognition and enforcement of foreign arbitral awards and the referral by a court to arbitration.
- Generally speaking, the Foreign Arbitral Award Convention provides that an arbitration award issued in any contracting state (e.g. China, Germany, Spain, etc.) may be enforced in any other contracting state (e.g. the United States, Canada, Mexico, etc.). There are a few limited defenses.
- In laymen’s terms the practical effect of the Foreign Arbitral Award Convention is that if your company is a party to an international agreement that includes an arbitration provision, U.S. courts will enforce the agreement to arbitrate and they will also enforce the arbitration award issued by the international arbitrator.
- As a general rule, a party cannot be required to submit a dispute to arbitration unless the party agreed to do so.
- The doctrine of equitable estoppel comes into play when a non-signatory to a contract with an arbitration clause seeks to compel a signatory to arbitrate. (There are other scenarios in which the doctrine may apply, but we will set these aside for this now).
- The doctrine of equitable estoppel holds that when a dispute arises out of a contract containing an arbitration clause, a non-signatory to the contract may in some circumstances compel a signatory to the contract to arbitrate the dispute.
- The underlying notion is one of fairness; since the signatory agreed to arbitrate disputes arising from the contract, U.S. Courts will permit a non-signatory to enforce this provision against the signatory and require the signatory to arbitrate a dispute where it would be “equitable” to do so.
The petition asking the Supreme Court to review the decision of the lower court nicely summarizes the issue arising under the Convention:
Sometimes, a signatory to a contract may sue a non-signatory for claims that arise out of the contract. When that happens, is the signatory bound by the arbitration clause it agreed to in the contract? For domestic arbitration agreements, the answer is yes: Equitable estoppel allows the non-signatory to enforce the arbitration clause. But the Eleventh Circuit held that a non-signatory cannot compel arbitration if one of the parties is a foreign entity.
The Eleventh Circuit relied on the the text of Chapter 2 of the FAA (which implements the Foreign Arbitral Award Convention), which states that an arbitration agreement must be “signed by the parties” to be valid. The Eleventh Circuit interpreted this provision to mean that a non-signatory could not rely on equitable estoppel to compel a signatory to arbitrate – as it could have done under Chapter 1 of the FAA.
3. Practical Impacts
When might the scenario described in the petition arise? It happens all the time. Consider the underling facts of the case before the Supreme Court: The respondent (Outokumpu) entered into contracts with “Fives” to purchase equipment that contained an arbitration provision. Fives then subcontracted with a foreign corporation (GE Energy) to provide parts for the equipment. Outokumpu and GE Energy were not parties to a contract with an arbitration provision. The parts provided by GE Energy allegedly failed and Outokumpu sued GE Energy, the subcontractor, in Alabama state court. Had GE Energy been a domestic corporation, GE Energy compelled Outokumpu to arbitrate the dispute under Chapter 1 of the FAA and the doctrine of equitable estoppel. But because GE Energy was a foreign corporation – meaning Chapter 2 of the FAA / the Convention applied – the Eleventh Circuit concluded GE Energy could not compel Outokumpu to arbitrate the dispute. Our law firm’s international arbitration lawyers see similar situations all the time.
So if you are a foreign company doing subcontract work in the United States you cannot compel the principal contracting parties to arbitrate unless you are a signatory to an agreement with that party to arbitrate — at least in the Eleventh and Ninth circuits.
The National Association of Manufacturers (“NAM”), as amicus curiae, submitted a brief that highlights several concerns of manufacturers if the Eleventh Circuit’s decision is not reversed by the Supreme Court. The central thesis of NAM’s brief is that international commerce will suffer if non-signatories cannot enforce international arbitration agreements. NAM contends that reversing the Ninth and Eleventh Circuits and permitting foreign entity non-signatories to rely on the doctrine of equitable estoppel to compel arbitration will (i) remove uncertainty from international commerce, (ii) allay the fears of a foreign company that a dispute will not be heard before a neutral decision-maker, (iii) provide an efficient, low-cost resolution of the dispute, (iv) protect IP, and (v) make enforcement of awards easier. Respondent’s brief which asked the Supreme Court not to resolve this issue is not terribly persuasive. Respondent contends there is no circuit split and that the issue is of little importance. It seems the Supreme Court did not agree, as evidenced by its decision to decide the issue.
As lawyers who regularly advise and represent companies in complex international mediations and arbitrations, we are glad to see the Supreme Court take up this issue and we are predicting that it will rule that non-signatories can enforce international arbitration agreements. We will keep you posted when the result comes down, so stay tuned.