On 1 June 2020 the US Supreme Court unanimously held that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) does not prohibit US courts from applying the domestic law doctrine of equitable estoppel when determining whether an international arbitration clause can be enforced by a non-signatory to compel arbitration.
In 2007 ThyssenKrupp Stainless USA, LLC and FL Industries, Inc entered into three contracts, under which FL Industries agreed to construct cold rolling mills at ThyssenKrupp's steel manufacturing plant in Alabama. Each contract contained an identical arbitration clause requiring arbitration seated in Germany. Each contract also defined 'seller' and 'parties' as including subcontractors.
FL Industries then entered into a subcontract with GE Energy Power Conversion France SAS, under which GE Energy agreed to design, manufacture and supply nine motors for the cold rolling mills. Soon thereafter, Outokumpu Stainless USA, LLC acquired ownership of the plant from ThyssenKrupp. In 2015 Outokumpu alleged that GE Energy's motors had failed and caused substantial damages.
In 2016 Outokumpu and its insurers filed a claim against GE Energy in an Alabama state court. GE Energy removed the case to federal court and then filed a motion to compel arbitration, relying on the arbitration clauses in the contracts between FL Industries and ThyssenKrupp, even though GE Energy was not a signatory to those contracts.
In early 2017 the district court held that GE Energy, the subcontractor, qualified as a party under the arbitration clause because the contracts included subcontractors in the definitions of 'seller' and 'parties'. In holding as such, the district court declined to address GE Energy's argument that the arbitration agreements were enforceable under the domestic law doctrine of equitable estoppel. Accordingly, the district court granted GE Energy's motion to compel arbitration. Outokumpu appealed.
In 2018 the 11th Circuit reversed the district court's order, holding that:
- the New York Convention requires that agreements with arbitration clauses be signed by the enforcing party;
- GE Energy was prevented from enforcing the arbitration clauses because it had not signed the original agreements; and
- GE Energy could not enforce the arbitration clauses under the doctrine of equitable estoppel because the doctrines conflicted with the New York Convention's Article II(2) requirement that an arbitration agreement be "signed by the parties".
GE Energy filed a petition for review by the US Supreme Court, which was granted.
Under the Federal Arbitration Act and federal common law, courts are permitted to apply state-law doctrines when determining whether to enforce domestic arbitration agreements. One such doctrine is that of equitable estoppel, which, in the arbitration context, generally allows a non-signatory to a written agreement with an arbitration clause to compel arbitration if a signatory to the same agreement would be able to enforce the agreement against the non-signatory. In Arthur Andersen LLP v Carlisle (556 US 624 (2009)), the US Supreme Court recognised that Chapter One of the Federal Arbitration Act permits a non-signatory to rely on the doctrine of equitable estoppel to enforce an agreement for domestic arbitration.
As the case between GE Energy and Outokumpu involves an agreement for international arbitration in Germany, it is governed by Chapter Two of the Federal Arbitration Agreement, the implementing legislation of the New York Convention. Thus, the US Supreme Court was asked to determine whether the doctrine of equitable estoppel permitted under US domestic arbitration law conflicted with the New York Convention's requirement that an arbitration agreement be "signed by the parties".
The US Supreme Court analysed the New York Convention's text, its negotiation and drafting history and the post-ratification conduct of its signatory states. The court found that the convention is silent on whether non-signatories may enforce arbitration agreements under domestic law doctrines and that this silence could not be read as a prohibition against the application of such doctrines. It found that Article II(3) of the New York Convention provides that arbitration agreements must be enforced in certain circumstances; however, Article II(3) does not contain exclusionary language preventing the application of domestic law doctrines that are more generous in enforcing arbitration agreements. The court also found that Article II of the New York Convention contemplated the use of domestic law doctrines to fill in gaps of the New York Convention.
In looking at the convention's negotiation and drafting history, the US Supreme Court further found that nothing suggested a limit or prohibition of the application of domestic law doctrines when determining whether a non-signatory may enforce an arbitration agreement. In addition, in interpreting the post-ratification conduct of signatory states, the court found that the weight of the authority indicated that the New York Convention does not prohibit the application of domestic law doctrines to address the enforcement of arbitration agreements.
On this basis, the US Supreme Court reversed and remanded for further proceedings on whether, based on the facts of this case, the doctrine of equitable estoppel permitted GE Energy to enforce the arbitration clauses and thereby compel arbitration.(1)
In doing so, the court effectively extended the holding in Arthur Andersen LLP to international arbitrations under Chapter 2 of the Federal Arbitration Act. As a result, US courts are now permitted to apply the state-law doctrine of equitable estoppel when determining whether a non-signatory can enforce international arbitration agreements.
In light of this decision, on 9 June 2020 the US Supreme Court vacated and remanded for reconsideration the 9th Circuit's decision in Shrinivas Sugandhalaya LLP v Setty, a case which may also present an issue of whether a non-signatory may stay US litigation pending an ongoing international arbitration.
Endnotes
(1) The 11th Circuit had held that Articles II(1) and II(2) of the New York Convention require that parties "actually sign" an agreement to arbitrate. However, the US Supreme Court found that both Articles II(1) and II(2) address the recognition of agreements to arbitrate, not which party is bound by a recognised agreement to arbitrate. Because the three contracts between FL Industries and ThyssenKrupp were in writing and signed, the US Supreme Court expressly left open the question of whether Article II(2) of the New York Convention requires a signed agreement.
