Non-Signatory Enforcement of Arbitration Agreements Under the New York Convention: the U.S. Supreme Court Weighs In

On June 1st, 2020, the United States Supreme Court (“the Court”) issued a unanimous decision in G.E. Power Conversion France SAS Corp. v. Outokumpu Stainless USA, LLC, holding that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or the “Convention”) does not prohibit non-signatories from enforcing international arbitration agreements under the doctrine of equitable estoppel. The Court’s decision adds to a global body of case law that has affirmed the ability of non-signatories to enforce arbitration agreements, and its approach largely mirrors a 2006 Recommendation issued by the United Nations Commission on International Trade Law (UNCITRAL) on the proper interpretation of the Convention.

However, the Court avoided addressing contentious choice-of-law questions and the role of the principle of consent in establishing the scope of arbitration agreements. These issues remain to be taken up by lower courts.

Background

Outokumpu USA is a U.S.-based subsidiary of a Finnish steel company that operates a stainless-steel plant. In 2007, Outokumpu entered into a series of contracts with F.L. Industries (“Fives”), pursuant to which Fives was to supply Outokumpu with heavy machinery. The contracts contained an arbitration clause referring disputes to arbitration in Germany, subject to German substantive law.

GE Energy is a French company which sub-contracted with Fives to supply motors for Outokumpu’s steel plant. After the motors allegedly failed, Outokumpu sued GE Energy, who then successfully moved to compel arbitration pursuant to the arbitration clause in the Outokumpu-Fives contracts.

The U.S. Court of Appeals for the Eleventh Circuit reversed the decision compelling arbitration, holding that Article II of the New York Convention “require[s] that the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration” (emphasis in original). In a footnote, the Eleventh Circuit affirmed that an agreement may be “signed by the parties” when it is “signed by a party’s privy or incorporated by reference in an arbitration agreement.” However, the doctrine relied upon by GE Energy to compel arbitration – “equitable estoppel” – did not fall within this carve-out and therefore conflicted with Article II’s signature requirement. The Eleventh Circuit therefore ruled that GE Energy could not compel arbitration.

The New York Convention and Relevant Law

The New York Convention, whose 164 parties include all major world economies, aims to encourage recognition and enforcement of both arbitration agreements and awards, as well as to promote greater uniformity among national laws on arbitration. The Convention helps to ensure that parties’ referral of disputes to arbitration will be respected and that any resulting award will be enforced, regardless of the parties’ home jurisdictions. Efforts to achieve a similar degree of predictability with respect to enforcement of foreign court judgments are still in nascent stages. The recently-concluded Hague Judgments Convention, which aims to establish uniform rules for the transnational recognition and enforcement of certain civil and commercial judgments, is not yet in force, and has been signed by only Uruguay and Ukraine.

The New York Convention’s rules regarding arbitration agreements are set forth in Article II. Paragraph 1 requires States to “recognize an agreement in writing” pursuant to which the parties undertake to submit certain disputes to arbitration. Paragraph 2 provides that an agreement in writing “shall include” an arbitration clause “signed by the parties”. Finally, paragraph 3 provides that a national court shall, at the request of one of the parties, refer the parties to arbitration “when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article,” subject to narrow exceptions.

Within the U.S., arbitration is governed by the Federal Arbitration Act (“FAA”), Chapter 1 of which governs domestic arbitration, while Chapter 2 implements the New York Convention and applies to international arbitration. One key provision of Chapter 2 specifies that Chapter 1 applies to international arbitration agreements as well, but only to the extent it does not conflict with the New York Convention.

It is settled that, under Chapter 1, “background principles of state contract law” may apply to extend domestic arbitration agreements to non-signatories. Prior to Outokumpu, it remained uncertain whether the same could be said for international arbitration agreements under the Convention and Chapter 2.

“Equitable estoppel,” a judicially created doctrine rooted in concerns of equity and good faith, is a principle of state contract law that had been found applicable to domestic arbitration. U.S. courts have held that a signatory to a contract who has relied upon the contract in filing court claims against a non-signatory is precluded (or “estopped”) from subsequently denying the applicability of the contract’s arbitration provision. This doctrine has at times been applied expansively and has attracted criticism.

The key issue before the Supreme Court in Outokompu was thus whether the text of the New York Convention – particularly Article II’s requirement of an agreement in writing “signed by the parties” – conflicts with Chapter 1 and precludes the application of contract-law doctrines like equitable estoppel to bind non-signatories to arbitration agreements.

The Supreme Court’s Decision

Justice Clarence Thomas wrote an opinion for a unanimous court, ruling in favor of GE Energy and holding that the New York Convention does not conflict with domestic equitable estoppel doctrines that permit the enforcement of arbitration agreements by non-signatories.

The Court found that the “Convention is simply silent on the issue of nonsignatory enforcement” and that:

“[t]his silence is dispositive here because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”

The Court endorsed an open-ended reading of Article II(3) of the Convention – the only provision explicitly dealing with enforcement of arbitration agreements – by holding that it requires enforcement “in certain circumstances, but it does not prevent the application of domestic laws that are more generous”.

The Court also referred to the context of Article II(3), finding that other parts of Article II contemplate the use of domestic law to “fill gaps in the Convention.” For instance, Article II(1) refers to disputes “capable of settlement by arbitration,” but leaves this category of disputes to be delineated in accordance with domestic law. In the Court’s view, this showed that Article II was not meant to displace relevant provisions of domestic law.

In a particularly striking passage, the Court opined that nothing in the text of the Convention establishes a “rule of consent” that displaces domestic law, nor could the text of the Convention be read as allowing for some non-signatory enforcement doctrines but not others.

The Court proceeded to examine the negotiating and drafting history of the Convention to bolster the above conclusions. The Court found that the drafting history “shows only that the drafters sought to impose baseline requirements on contracting states,” but did not seek to “prevent contracting states from applying domestic law that permits nonsignatories to enforce arbitration agreements in additional circumstances.”

Finally, the Court considered “the postratification understanding of signatory nations,” as well as the 2006 UNCITRAL Recommendation (which had supported an open-ended interpretation of Article II’s requirement of an “agreement in writing”). The Court observed that “the weight of authority from contracting states” as expressed in judicial decisions and national arbitration legislation supported its interpretation of the Convention.

Justice Thomas’ opinion concluded by remanding the case to the Eleventh Circuit so that the lower court could address whether GE Energy was entitled to rely on the doctrine of equitable estoppel, as well as “which body of law governs that determination.”

Justice Sonia Sotomayor appended a brief concurring opinion, taking the position that :

“[p]arties seeking to enforce arbitration agreements under Article II of the Convention…may not rely on domestic nonsignatory doctrines that fail to reflect consent to arbitrate.”

Notably, Justice Sotomayor relied upon U.S. arbitration law – the FAA – in advancing this position and did not attempt to ground her arguments in the text of the New York Convention. Justice Sotomayor acknowledged difficulties in determining whether a non-signatory doctrine reflects consent to arbitrate, particularly given that the content of such doctrines varies across jurisdictions. Nonetheless, she urged lower courts to adopt a case-by-case analysis of whether “applying a domestic nonsignatory doctrine would violate the FAA’s inherent consent restriction.”

Treaty Interpretation Methodology

While the United States is not a party to the Vienna Convention on the Law of Treaties (“VCLT”), lower federal courts have at times relied upon it as “an authoritative guide to the customary international law of treaties” (see, e.g., Fujitsu Ltd. v. Federal Express Corp., 247 F.3d 423 (2d Cir. 2001)). The Supreme Court, however, continued its longstanding practice of avoiding references to the VCLT when construing international conventions. The “familiar tools of treaty interpretation” referred to in Justice Thomas’ opinion were all drawn from prior U.S. Supreme Court decisions.

Nevertheless, as has been noted with respect to past cases, the Supreme Court’s methodology broadly aligns with Articles 31 and 32 of the VCLT. Justice Thomas’ opinion begins with the text of Article II(3) and its context, and bolsters its conclusions by reference to the “postratification understanding” of the parties (VCLT Art. 31(3)(b)) and the negotiating and drafting history (VCLT Art. 32).

The Court’s cautious approach to other international and foreign sources is noteworthy. With respect to the 2006 UNCITRAL recommendation, the Court explained that it had “not previously relied on UN recommendations to discern the meaning of treaties,” and appeared to consider it of little value in determining “the original shared understanding of the treaty’s meaning.”

Significance of the Court’s Findings on Consent

The Court ultimately adopted an open-ended interpretation of the New York Convention, generally aligning itself with the 2006 UNCITRAL Recommendation, as well as the decisions of other national courts. However, by declining to see in the Convention any “rule of consent” that could displace relevant provisions of domestic law, it may amplify existing concerns about non-signatory enforcement doctrines.

In particular, the Court declined to address specific criticisms of the equitable estoppel doctrine which had been raised both by Outokumpu and its amici. Some have argued that equitable estoppel represents too great of a departure from the principle of consent, particularly since some U.S. courts consider it applicable to force a signatory to arbitrate against a non-signatory simply because the signatory raises allegations of “substantially interdependent and concerted misconduct” by the non-signatory and another signatory to the contract.

Concerns about the effects of the equitable estoppel doctrine were evident in the U.S. government’s amicus submission in support of GE Energy, in which it argued that “any attempt to bind a nonsignatory sovereign nation to an arbitration agreement would raise unique concerns that support the conclusion that doctrines such as equitable estoppel and asserted third-party beneficiary status should not apply absent the sovereign’s clear expression of consent” (p. 12). Non-signatory disputes involving States are far from unprecedented (e.g., Dallah, Khan Resources v. Mongolia, Bridas v. Turkmenistan), and courts and arbitral tribunals do not appear to apply substantially different standards in such cases. However, given the particularly controversial nature of the equitable estoppel doctrine, the rule proposed by the U.S. government may yet find favor in future cases.

Choice of Law

Outokumpu contended before the Supreme Court that questions concerning the scope of the arbitration agreement should be governed by German law, as any arbitration was to be seated in Germany and subject to German substantive law. The Court expressly left this question to be dealt with by the Eleventh Circuit on remand. Given the important role the Court sees for domestic law in determining the scope of arbitration agreements, the answer to this question is crucial.

Proposed answers vary considerably, including the application of transnational principles of international arbitration or the adoption of an in favorem validitatis principle that would lead to the application of the most arbitration-friendly body of law available (e.g. Article 178 of the Swiss Private International Law Act).

The England and Wales Court of Appeal recently made an important contribution to the discussion of choice of law in arbitration, ruling that the law governing an arbitration agreement is, as a general rule, the law of the seat of arbitration in the absence of any powerful reasons to the contrary.

The U.S. Supreme Court’s silence on this matter leaves these choice of law questions to be argued over in U.S. lower courts for the time being.

Conclusion

In sum, the U.S. Supreme Court’s decision in GE Energy v. Outokumpu is notable both for what it says and for what it doesn’t say.

In rejecting the Eleventh Circuit’s relatively narrow construction of the New York Convention, the Supreme Court brought the U.S. largely into line with other jurisdictions in its approach to Article II of the Convention. However, its decision may stoke further debate about the role of the principle of consent and choice-of-law with respect to non-signatory issues.

The Eleventh Circuit’s handling of these issues on remand might provide an insight into the direction U.S. law will take with respect to nonsignatory enforcement of arbitration agreements and could give rise to another Supreme Court appeal in the years to come.

Note: The views expressed in this post are personal to the author and do not necessarily reflect those of the International Court of Justice.