1999 was not so very long ago. And over the last dozen years some areas of the law have necessarily moved rapidly to keep pace with developments in technology and their impact on how business is conducted. That has not necessarily been the case in every corner of the law of international commercial arbitration.
Until a few weeks ago, counsel looking for guidance in US law on the “agreement in writing” requirement of the New York Convention could read, unhelpfully, a 1999 decision of the US Second Circuit Court of Appeals in Kahn Lucas Lancaster, Inc. v. Lark International, Ltd., 186 F.3d 210 (2d Cir. 1999). That case dated from an era in which international contracting often involved use of the fax machine – e mail was mostly with us, but transmission of sizeable documents via e mail in digitally compressed scanned electronic files was not.
The Court in Kahn Lucas held that the phrase “signed by the parties or contained in an exchange of letters or telegrams” (Convention Art. II) stated a condition for an enforceable agreement to arbitrate under the Convention, whether the agreement was based on (in the Convention’s words) “an arbitral clause in a contract” or a separate “arbitration agreement.” There was no enforceable agreement to arbitrate, the Kahn Lucas court held, because the arbitration clause in the buyer’s purchase order was not signed by the seller nor was it adopted by the seller in an exchange of letters or telegrams – notwithstanding that the parties did enter into a contract for the sale of goods.
But until this year, there was little guidance to the application of the “agreement in writing” requirement to the contracting methods characteristic of contemporary international goods and commodities procurement – typically involving innumerable e mail exchanges, PDFs of contracts, e-mailed expressions of assent in lieu of signatures, e-mailed amendments and counteroffers, and – notably in both cases discussed below – sellers’ “General Terms and Conditions” that, because they contain formal legal detail rather than commercial terms, often receive little or no direct attention in the e mail exchanges.
Glencore Ltd. v. Degussa Engineered Carbons L.P., 2012 WL 223240 (S.D.N.Y. Jan. 24, 2012)
In Glencore v Degussa, the contract, made by email, was for sale and delivery of feedstock oil at the buyer’s Texas and Louisiana chemical plants. The buyer and its insurer brought suit in a Texas court claiming damages resulting for oil deliveries that did not meet specifications. Seller Glencore (a Swiss company) commenced arbitration on the same claims, against the buyer and insurer, relying on a provision in its “General Terms and Conditions” for AAA arbitration in New York. Buyer and insurer refused to participate in the arbitration or to withdraw the court action, and Glencore petitioned to compel arbitration.
The question presented was whether the Glencore General Terms and Conditions (“GTCs”), seen by buyer only in late stages of the negotiations and received without comment, nevertheless were part of an “agreement in writing” between the Parties by virtue of the sequence and content of their e mail exchanges. The Court held that this was indeed the case, and granted the motion to compel arbitration.
Glencore had sent its standard sales contract by e mail. It did not include the GTCs but rather only a reference to them. The contract stated that the GTCs would govern, and that if this was contrary to buyer’s understanding then buyer should respond immediately by fax with specific points of disagreement. Buyer did not so, but instead two weeks later after Christmas-New Year holidays replied by e mail asking Glencore for only one change: to state its corporate name accurately. In ensuing e mail exchanges, Buyer asked for and received the GTCs, and did not comment.
Additional contracts were made for feedstock oil supply for ensuing calendar quarters. The contract process followed the same pattern: after delivery of seller’s standard contract, buyer requested minor changes, none of which referenced the GTCs.
The District Court considered that there were two separate analytical steps concerning formation of the arbitration agreement. First, there needs to be contract formation “under ordinary state law contract principles.” (The quotation comes from First Options v Kaplan, a domestic arbitration case, and so in its original context it refers to the applicable law of a state of the United States. But if the parties have different nationalities, this could readily mean the applicable contract law of a foreign State). Second, if there is an arbitration contract, it must in addition satisfy the “agreement in writing” requirement of the New York Convention.
As to the first, “state law,” contract inquiry, the Court found an agreement to arbitrate on two different theories — each under Texas’s version of the Uniform Commercial Code (“UCC”), which it found applicable based on a traditional grouping of contacts choice of law approach. Under the UCC, the buyer had objectively manifested its assent to the seller’s contract including the General Terms. Alternatively, under UCC §2-207(2) which concerns proposed additional terms to an existing contract between merchants, the arbitration clause became part of the contract because it did not “materially alter” the commercial agreement — under a legal standard that treats as a “material alteration” a term that would “impose surprise or hardship” were it included in the contract without having been specifically discussed.
Turning next to the question whether the Convention’s “agreement in writing” requirement was satisfied, the Court first observed that this requirement imposes a more stringent test that the UCC standards of contract formation. To illustrate this point, the Court noted that incorporation of additional terms under UCC 2-207(2) is essentially presumptive absent special circumstances, and that the presumptive inclusion does not satisfy the Convention’s alternative criteria of signature of “an exchange of letters of telegrams.”
Here, the Court held, the “exchange” requirement of the Convention was satisfied because the arbitration clause was incorporated by reference in the contract when it was sent, the buyer replied asking for other changes but not mentioning the GTCs, the buyer further confirmed that the seller’s contract was the agreement by referring to it as such in e mail communications about its parent company’s payment guaranty, and, finally, there was a specific request for delivery of the GTCs and delivery of same followed by no comment and contract discussions for new contracts in subsequent calendar quarters.
Copape Produtos de Petroleo Ltda. v. Glencore Ltd., 2012 WL 398596 (S.D.N.Y. Feb. 8, 2012)
Copape v Glencore involved some different twists in the contract negotiations, and ultimately some differences in the Court’s approach (which notably included no reference to the Glencore-Degussa decision). Here the buyer was a Brazilian company that contracted with Glencore in Brazil through a Glencore affilate in Brazil. The contract at issue was the fifth between the parties, and in each of the four prior contract negotiations by e mail Glencore had sent it standard contract referencing the Glencore GTCs, without buyer ever requesting a copy. The fifth contract’s negotiation began with an indicative offer by Glencore that referenced its standard contract. The buyer replied that the contract would be governed only by the Glencore GTCs insofar as buyer specifically approved them. As the exchange of e mails t progressed, Glencore eventually sent the standard contract that referenced its GTCs. But buyer never requested a copy of the GTCs, and in the final exChange of e mails Glencore wrote “Other terms and conditions remain unchanged” and buyer replied “OK.”
After buyer allegedly breached the contract, buyer commenced suit in Brazil. Glencore commenced an ICDR arbitration, buyer moved in federal court in New York to enjoin the arbitration, and Glencore cross-moved to compel arbitration.
In contrast to the two-level approach taken in Glencore-DeGussa, the distrIct court in Glencore-Copape considered that, even though jurisdiction was based on the New York Convention, the court was presented with only “a single question — whether Copape ever became bound by the arbitration clause…” and that the law governing this question was “the federal law of arbitrability,” law which the court said includes “general principles of contract law including the Uniform Commercial Code.”
This brought into play, as in Glencore-Degussa, Section 2-207(2) of the UCC.
As we have seen, the approach of that Section is to avoid having an acceptance that contains proposed additional terms operate as a counter-offer only. And it further provides for presumptive incorporation of the proposed additional terms unless the party who made the original offer shows that one of three situations exist: the offer strictly prohibited additional terms, or the additional terms make a material alteration, or objection to the added terms is made within a reasonable time.
Thus an arbitration clause could readily become binding under the UCC without either the signature or the “exchange of letters or telegrams” required by the New York Convention. If the clause is contained in a set of proposed additional terms, and no timely objection is made in response, the UCC recognizes the silence as acquiescence, while the Convention evidently does not.
Whereas the court in Glencore-Copape did not discuss the potential divergence between UCC and Convention criteria for a binding agreement to arbitrate, it is helpful to note that the further e mails dispatched by Copape with reference to Glencore’s GTCs would appear to satisfy the “exchange” requirement of the Convention. Critically: (i) Copape raised objections to certain other provisions of the Glencore standard contract but did not object to the provision incorporating by reference the GTCs; (ii) when Glencore e mailed what were intended at the time as final commercial terms, it wrote “other terms and conditions remain unchanged” and asked Copape to “reconfirm by return,” and (iii) Copape replied “OK.”. And while the court states that this would have been sufficient to find a duty to arbitrate, the court then noted that after further exchanges about business terms and timing, Glencore revised and re-sent the standard contract and Copape confirmed acceptance of it (presumably be e mail).
Although the Glencore-Copape decision, unlike Glencore-DeGussa, fails to take note of the Convention’s “agreement in writing” requirement as a separate and distinct prerequisite to finding an enforceable agreement to arbitrate in a case falling under the New York Convention, Copape does not in the final analysis stretch the limits of “exchange of letters or telegrams” to include the kind of silent acquiescence/contract by estoppel that is permitted by UCC 2-207(2). This is simply a case of incorporation of the arbitration clause by reference to General Terms and Conditions, with a responsive e mail expressly accepting the contract that references the General Terms, among which is the agreement to arbitrate that the buyer could have, but elected not to, become specifically aware of.
It is evident from the two decisions that the Convention’s requirement that the arbitration agreement be “contained in” a written exchange, as understood in New York federal courts, does not require that arbitration be mentioned in the communications, but only that arbitration be part of the documentation referenced in the communication. What is however troublesome in the Glencore-Copape decision is that it may be read to imply that in a US federal court the “agreement in writing” requirement presents an issue of federal common law of contracts derived from uniform state law, i.e. the UCC. That should not be the case. The Convention’s “agreement in writing” requirement, and the term “contained in an exchange of letters or telegrams,” as treaty language, should have a uniform whas applied to particular facts, using established principles of treaty interpretation, and taking into consideration decisions of foreign and international tribunals, the opinions of leading commentators, and transnational sources of commercial principles.
An examination of the “agreement in writing” requirement under such transnational principles is beyond the modest scope of the post. But US courts should not fail to consider them. There is no indication in the New York Convention that Contracting States are meant to reference only their own domestic law of contractual consent when deciding whether an “agreement in writing” to arbitrate exists in proceedings to compel arbitration.