U.S. SUPREME COURT PAVES THE WAY FOR NON-SIGNATORIES TO ENFORCE ARBITRATION AGREEMENTS UNDER DOMESTIC EQUITABLE ESTOPPEL PRINCIPLES

On 1 June 2020, the U.S. Supreme Court unanimously held in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC[1] that the New York Convention does not preclude non-signatories from enforcing arbitration agreements based on the application of domestic equitable estoppel doctrines.

However, the Supreme Court did not decide whether the equitable estoppel principles justify the non-signatory’s invocation of the arbitration agreement. Instead, the Supreme Court remanded the case to the Eleventh Circuit U.S. Court of Appeals, paving the way for the federal court to decide whether GE can enforce the arbitration clauses under equitable estoppel principles and which body of law would govern that determination.

Generally in the arbitration context, as the Court noted, “equitable estoppel allows a non-signatory to a written agreement containing an arbitration clause to compel arbitration where a signatory to the written agreement must rely on the terms of that agreement in asserting its claims against the nonsignatory.”[2]

Facts

ThyssenKrupp Stainless USA, LLC, entered into three contracts with F. L. Industries, Inc., for the construction of cold rolling mills at ThyssenKrupp’s steel manufacturing plant in Alabama. The contracts provided for arbitration in Dusseldorf under German law.

GE—as F.L.’s sub-contractor—built and installed motors for these mills. Later, Outokumpu Stainless USA acquired ownership of the mills. When the motors failed, Outokumpu sued GE.

Since there was no privity of contract between Outokumpu and GE, Outokumpu brought tort and warranty claims in Alabama state courts. GE—as a non-signatory—applied to remove the case to federal court, and then moved to dismiss and compel arbitration.

The Eleventh Circuit’s decision

The federal district court found that even as a non-signatory, GE should be able to compel Outokumpu to arbitrate its dispute. The court held that GE qualified as a party under the arbitration clauses because the contracts defined the terms “Seller” and “Parties” to include subcontractors. This is a fact which seems to have received little attention from the Supreme Court. However, it was noted that because the district court concluded that both Outokumpu and GE Energy were parties to the contracts, it did not address GE’s argument that the agreement was enforceable under equitable estoppel.[3]

The Eleventh Circuit Court of Appeals reversed this decision, finding that GE could not compel arbitration as a non-signatory. The court interpreted the New York Convention as imposing a “requirement that the parties actually sign an agreement to arbitrate their disputes.”[4] According to the Court of Appeals, GE could not rely on state-law equitable estoppel doctrines to enforce the arbitration agreement as a non-signatory because equitable estoppel conflicts with the Convention’s signatory requirement.[5]

The Supreme Court accepted certiorari, noting that the Eleventh Circuit’s decision conflicted with other Circuit Courts of Appeals’ findings.[6] The Supreme Court reversed the judgment of the Court of Appeals and remanded the case for further proceedings to the Eleventh Circuit.

Key arguments on appeal

GE argued that (i) the New York Convention did not prevent a party from relying on domestic principles in construing whether a non-signatory was a party to the arbitration agreement; (ii) longstanding tradition under U.S common law included the doctrine of equitable estoppel; and (iii) the Court had in previous cases decided that equitable estoppel should apply in cases under the Federal Arbitration Act (“FAA”).

In contrast, Outokumpu argued that (i) consent was necessary to enforce an arbitration agreement; (ii) the New York Convention prohibited the application of domestic equitable estoppel principles; and (iii) since the applicable substantive law (German law) did not recognise equitable estoppel, it would not be appropriate to apply equitable estoppel in this case.

The U.S. Government submitted an amicus brief, stating the Executive branch’s opinion that the Eleventh Circuit was wrong to read into the writing requirement of Article II of the New York Convention a categorical prohibition on compelling international arbitration on the basis of estoppel principles, on two bases: (i) the Convention as a whole only ever requires contracting states to enforce arbitration agreements; it never prohibits them from doing so; and (ii) Article II(2) does not address who may be bound or who may invoke those agreements.

US Supreme Court’s decision

The Supreme Court unanimously held that “[t]he New York Convention does not conflict with domestic equitable estoppel doctrines that permit the enforcement of arbitration agreements by nonsignatories.”[7]

First, the Court examined the New York Convention, in particular Article II, and found that the New York Convention “is simply silent on the issue of nonsignatory enforcement”.[8] Those provisions only address the recognition of arbitration agreements, but not “who is bound by a recognized agreement”.[9] The Court referred to the drafting history of the New York Convention and concluded that:

“Nothing in the drafting history suggests that the Convention sought to prevent contracting states from applying domestic law that permits nonsignatories to enforce arbitration agreements in additional circumstances.” (at 9)

Accordingly, the Court found that the New York Convention does not address whether non-signatories may enforce arbitration agreements under domestic doctrines such as equitable estoppel. The Court then found that “silence is dispositive here because nothing in the text of the Convention could be read to otherwise prohibit the application of equitable estoppel doctrines.” [10]

Second, the Court found support in citations to cases from numerous New York Convention contracting states’ courts that had permitted enforcement of arbitration agreements by non-signatories.[11]

The Court reasoned that Chapter 1 of the FAA “permits courts to apply state-law doctrines related to the enforcement of arbitration agreements.” Section 2 of Chapter 1 provides that an arbitration agreement in writing “shall be . . . enforceable, save upon such ground as exist at law or in equity for the revocation of any contract.” It therefore concluded that Article II(3) of the New York Convention provides that arbitration agreements must be enforced under some conditions “but it does not prevent the application of domestic laws that are more generous in enforcing arbitration agreements.”[12]

Finally therefore, domestic law could be used to fill in any gaps left by the New York Convention.[13] The gaps could be filled with “background principles of state contract law regarding the scope of agreements (including the question of who is bound by them)”. Thus, “traditional principles of state law” in Arthur Andersen LLP v. Carlisle including doctrines that “authorize the enforcement of a contract by a nonsignatory” could continue to apply.[14]

It is also interesting to note that Justice Sotomayor authored a solo concurring opinion, cautioning that while equitable estoppel would be available as a basis to compel arbitration, “[a]ny applicable domestic doctrines must be rooted in the principle of consent to arbitrate.”[15]

Conclusion

It is important to consider the principle expressed by Justice Sotomayor in light of the varying elements of the doctrine of equitable estoppel across different states. Courts in the United States have recognized that arbitration agreements may be enforced by non-signatories through assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel.[16]

The Supreme Court’s decision aligns the regime for enforcement of international arbitration agreements under the New York Convention with the regime for enforcement of domestic arbitration agreements under the Federal Arbitration Act, which permits parties to use equitable estoppel and other state-law doctrines to extend arbitration agreements to non-signatories. As the Supreme Court directed however, when deciding whether a non-signatory can enforce the arbitration clauses under equitable estoppel principles, lower courts in the United States should first determine the law applicable to that question.

For more information, please contact Christian Leathley, Partner, Amal Bouchenaki, Partner, Liang-Ying Tan, Senior Associate, Christine Sim, Associate, or your usual Herbert Smith Freehills contact

[1]        GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, U.S. Supreme Court Case No. 18–1048, Slip. Op. 590 U. S. (June 1, 2020) (“GE v Outokumpu”).

[2]        Ibid, at 4.

[3]        Outokumpu Stainless USA, LLC v. Converteam SAS, No. CV CA 16-0378-KD-C, 2016 WL 7423406, at *9 (S.D. Ala. Nov. 21, 2016), report and recommendation adopted, No. CV 16-0378-KD-C, 2016 WL 7422675 (S.D. Ala. Dec. 22, 2016), aff'd in part, 902 F.3d 1316 (11th Cir. 2018), rev'd and remanded sub nom.

[4]        Emphasis original, Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F. 3d 1316, 1326 (2018).

[5]        Ibid, at 1326-1327.

[6]        Compare 902 F. 3d 1316, 1326 (CA11 2018), and Yang v. Majestic Blue Fisheries, LLC, 876 F. 3d 996, 1001–1002 (CA9 2017), with Aggarao v. MOL Ship Mgmt. Co., 675 F. 3d 355, 375 (CA4 2012), and Sourcing Unlimited, Inc. v. Asimco Int’l, Inc., 526 F. 3d 38, 48 (CA1 2008)).

[7]        GE v Outokumpu, at 11.

[8]        Ibid, at 6.

[9]        Ibid, at 11.

[10]      Ibid, at 5.

[11]      Ibid, at 9.

[12]      Emphasis added, ibid, at 7.

[13]      See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 639, n. 21 (1985).

[14]      556 U.S. 624, 631-632, 640 (2009).

[15]      GE v Outokumpu, Concurring Opinion of Justice Sotomayor, at 1.

[16]      GE v Outokumpu, at 4.