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Arbitration: The New York Convention vs. U.S. Domestic Law – The Supreme Court Will Consider Reconciliation

The U.S. Supreme Court has granted certiorari to review a decision concerning arbitration that hinges on the interaction of (i) the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “NY Convention”), (ii) the Federal Arbitration Act (“FAA”), and (iii) domestic judicial doctrine. See, GE Energy Power Conversion France SAS Corp. v. Outokumpu Stainless USA LLC, No. 18-1048 (U.S. Sup. June 28, 2019). GE Energy’s petition presented the following question: “Whether the [NY Convention] permits a non-signatory to an arbitration agreement to compel arbitration based on the doctrine of equitable estoppel?” The Circuits have split in that regard, with the First and Fourth Circuits holding in the affirmative, and the Ninth and Eleventh Circuits holding in the negative.

Importantly too, the Supreme Court’s eventual decision in this regard may also affect whether, conversely, a non-signatory of an arbitration agreement can be compelled to arbitrate, when the NY Convention applies, on the basis of traditional contract or agency principles or the like. Heretofore, that has been uncontroversial.

The Eleventh Circuit Court of Appeals had to consider an arbitration agreement between a buyer (Outokumpu) of three cold rolling mills (“CRMs”) and its vendor (FLI), where that arbitration agreement was invoked by a third party non-signatory – a subcontractor (GE Energy) of the vendor. FLI had subcontracted to GE Energy to supply motors for three CRMs. The motors failed. Outokumpu filed suit against GE Energy in Alabama state court; GE Energy removed it to federal court; Outokumpu moved to remand; and GE Energy moved to dismiss the suit and to compel arbitration. The District Court granted GE Energy’s motions. The Court of Appeals, reviewing de novo, reversed. See Outokumpu Stainless USA LLC vs. Converteam SAS (c/k/a GE Energy Power Conversion France SAS Corp.), No. 17-10944, 2018 WL 4122807 (11th Cir. Aug. 30, 2018). (The basis for the appeal in the circumstances, where a motion to compel arbitration was granted, was unclear.)

The Eleventh Circuit considered the subcontractor’s motion to compel arbitration with reference to 9 U.S.C. § 206 and a four-factor test that had been articulated in Bautista v. Star Cruisers, 396 F.3d 1289 (11thCir. 2005).

Under Bautista, a party may compel arbitration under the NY Convention if (i) there is an agreement in writing within the meaning of the NY Convention; (ii) the agreement provides for arbitration in the territory of a signatory of the NY Convention; (iii) the agreement arises out of a commercial legal relationship; and (iv) a party to the agreement is not an American citizen or the commercial relationship has some reasonable relation with one or more foreign states. See Bautista, 396 F.3d at 1294 n.7. The first Bautista factor was determinative.

The Eleventh Circuit determined that, under the NY Convention, an arbitration agreement is enforceable if it is in writing, see NY Convention art. II(1), and “signed by the parties or contained in an exchange of letters or telegrams,” id. art. II(2).

The NY Convention art. II(1) provides that

“[e]ach 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 to a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.” (Emphasis added.)

An “agreement in writing” includes “an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” Id. art. II(2).

The Court of Appeals held that since there was no agreement in writing between the parties before the Court, Slip Op. at 15, and GE Energy was “undeniably not a signatory” to an arbitration agreement with Outokumpu, there was no basis for GE Energy to compel arbitration with Outokumpu. That is, GE Energy “was a stranger to the Contracts” in question.

Furthermore, the Eleventh Circuit opined that

“[p]rivate parties … cannot contract around the Convention’s requirement that the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration.” Id. at 16 (emphasis in original).

The Court furthermore opined that such theories as estoppel and third-party beneficiary could not be asserted by GE Energy in order to compel arbitration, as it might have if FAA ch. 1 had governed, because “Congress … specified that the [NY] Convention trumps Chapter 1 of the FAA where the two are in conflict,”id. at 18; see 9 U.S.C. § 208. Hence, according to the Court, the Convention’s requirement that the agreement in writing be signed by the parties in effect trumps the potentially broader provision of FAA ch. 1, which “does not expressly restrict arbitration to the specific parties to an agreement,” id. at 18.

But one must wonder about the basis for the Eleventh Circuit’s view that the NY Convention and/or the FAA excludes other bases to compel arbitration. On its face, Article II of the Convention is mandative but not exclusive. For example, an “agreement in writing” expressly includes, but is not expressly limited to, one signed by the contentious parties.

Moreover, the NY Convention is generally not self-executing, and it is therefore implemented in the U.S. by the provisions of ch. 2 of the FAA, 9 U.S.C. §§ 201, et seq. They are not relevantly exclusive either. FAA § 202 provides that

“[a]n arbitration agreement … arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a … contract, or agreement described in section 2 of this title [i.e., 9 U.S.C. § 2] falls under the Convention.”

In turn, 9 U.S.C. § 2 provides that

“[a] written provision in … a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract …, … or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

Notably, too, “[c]hapter 1 [of the FAA] applies to actions and proceedings brought under [ch. 2 of the FAA] to the extent that [ch. 1 of the FAA] is not in conflict with [ch. 2] or the Convention….” FAA § 208, 9 U.S.C. § 208.

Finally, FAA § 206, 9 U.S.C. § 206, provides that:

“A court having jurisdiction under [FAA ch. 2] may direct that arbitration be held in accordance with the agreement….”

The ultimate task for the Supreme Court is the sensible reconciliation of the NY Convention and FAA ch. 2 with judicial doctrine concerning contract, agency, estoppel, etc., that have traditionally protected arbitration agreements and/or third-party non-signatories to such contracts where appropriate. Does the NY Convention and/or FAA ch. 2 exclude or prohibit the application of U.S. domestic legal theories such as estoppel, third-party beneficiary, alter ego, successor in interest, agency, assignment, etc., as bases to compel arbitration between a signatory and a non-signatory of a written arbitration agreement? The Supreme Court gets to tell us next term.

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume IX, Number 184

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Every significant enterprise must deal with disputes, and most businesses encounter them regularly. Our team's extensive experience in arbitrations, mediations, and other methods of alternative dispute resolution gives us an edge — helping us devise creative solutions to any tactical and strategic problems we encounter along the way. That's why multiple financial services claimants came to Mintz seeking to recover more than $120 million plus interest from Egyptian nationals in an international arbitration and ancillary arbitration concerning a defaulted Eurobond.