U.S. Supreme Court holds that New York Convention allows nonsignatories to enforce arbitration agreement based on domestic doctrines

On June 1, 2020, the Supreme Court of the United States in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, 590 U.S. __ (2020) ruled that the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (the “New York Convention”) does not prevent nonsignatories to an arbitration agreement from compelling arbitration against signatories based on  domestic doctrines (such as, in this case, equitable estoppel).  In so holding, the Supreme Court resolved a circuit split between the U.S. Court of Appeals for the Eleventh Circuit (from whose decision the Supreme Court appeal was taken) and the Ninth Circuit on the one hand and the Fourth and First Circuits on the other hand. (Compare Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F.3d 1316 (11th Cir. 2018) and Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996 (9th Cir. 2017) with Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355 (4th Cir. 2012) and Sourcing Unlimited, Inc. v. Asimco Int’l, Inc., 526 F.3d 38 (1st Cir. 2008))

As background, GE had acted as subcontractor for the production of motors in relation to cold rolling mills that a main contractor had agreed to supply to a manufacturing plant. The main contract contained an arbitration clause. Upon (alleged) failure of the motors, Outokumpu and its insurers filed suit against GE. The District Court held that GE qualified as a party to the arbitration clause and made an order compelling arbitration. The Eleventh Circuit reversed that order on the basis that (i) as a non-signatory to the underlying arbitration agreement, GE lacked standing to compel arbitration (as, in its view, the New York Convention contained a requirement that parties actually sign an arbitration agreement in order to compel arbitration); and (ii)  domestic law doctrines of equitable estoppel conflicted with that requirement.

The Supreme Court unanimously reversed, finding that nonsignatories may compel arbitration on equitable grounds under domestic law doctrines, as the application of these equitable doctrines was not prohibited (or incompatible) with the New York Convention.

Domestic Law Doctrines and the New York Convention

Under domestic law doctrines of equitable estoppel, generally, parties may not benefit from a contract that they have signed without agreeing to abide by its terms. Therefore, if a party has agreed to arbitrate disputes arising out of a contract, it must arbitrate such a dispute even if it involves enforcing that contract against a third party who did not sign the underlying arbitration agreement. The Supreme Court observed that “[t]he text of the New York Convention does not address whether nonsignatories may enforce arbitration agreements under domestic doctrines such as equitable estoppel.” According to the Court, because the New York Convention is silent on this issue, there is nothing in it (or the Federal Arbitration Act (the “FAA”), which is the federal statute implementing the New York Convention in the US), that could be read as prohibiting their application. In fact, Article II(3) of the New York Convention, which addresses the enforcement of arbitration agreements, “does not restrict contracting states from applying domestic laws to refer parties to arbitration in other circumstances.” The Court noted that the New York Convention was drafted against the backdrop of domestic law and therefore, reading Article II(3) as displacing domestic doctrines in the absence of exclusionary language would be “unnatural.” The Court therefore held that nothing in the New York Convention prevents contracting states from applying domestic laws such as equitable estoppel doctrines, which are “more generous in enforcing arbitration agreements.”

The Court remanded the case for further determination as to whether GE could enforce the arbitration clauses under principles of equitable estoppel or which body of law governs such determination.

Conclusion

The Supreme Court’s decision brings a greater degree of certainty to the circumstances in which the US courts will allow nonsignatories to compel arbitration. But also, importantly, by ruling that domestic equitable estoppel doctrines can apply in international arbitration disputes, this decision underscores the importance of the parties’ choice of governing law in their arbitration agreements. Both the main opinion and Justice Sotomayor’s concurring opinion highlight the availability of nonsignatory doctrines in “traditional principles of state law” under the FAA and direct the lower court to determine which body of law governs the parties’ dispute and whether such governing law would allow enforcement of the arbitration clause on equitable grounds.

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