Marc J. Goldstein Arbitrator & Mediator NYC
September 11, 2018

New US Law Uncertainty About Nonsignatories

The New York Convention mandates that an “agreement in writing,” as defined in Article II (2), shall be recognized by Contracting States, and that the court of a Contracting State shall refer the parties to arbitration when there is an action before the Court as to which such an agreement has been made. (Article II, subsections (1) and (3)). But if a US District Court has subject matter jurisdiction based on FAA Chapter Two (implementing the Convention), is an “agreement in writing” as defined in Article II the only form of arbitration agreement the Court may enforce?  A decision at the end of August of the US Eleventh Circuit Court Appeals answers “yes,” apparently at odds with what was decided, or assumed, in the decisions of other federal appeals courts over the last 20 years. (Outokumpu Stainless USA v. Converteam SAS, 2018 WL 4122807 (11th Cir. Aug. 30, 2018).

This may seem like a rather technical point, but imagine this: You chair a Miami-seated Tribunal in an ICC Rules construction case commenced against an “owner” (who signed an arbitration agreement with the general contractor) by a non-signatory subcontractor that claims it is entitled to arbitrate based on theories of estoppel and third-party beneficiary. Respondent moves to dismiss, both sides agree that the issue is properly for the Tribunal in the first instance, and Respondent urges that under the Outokumpu case an international dispute cannot be arbitrated unless there is an agreement in writing, as defined in Article II, between the parties to the arbitration. Your Tribunal rejects this argument and applies what it considers to be the correct position under US arbitration law, permitting non-signatories to enforce agreements to arbitrate against signatories based on estoppel, agency, third-party beneficiary status, alter ego, assignment and successorship, etc. But if the Respondent moves to vacate your Interim Award on Jurisdiction in the Federal District Court in Miami, will the Tribunal he found to have manifestly disregarded this new controlling law as pronounced in the Outokumpu case?

So … let’s consider what happened in Outokumpu. A German steelmaker contracted through its US subsidiary with a US general contractor (GC) to have steel mills built in Alabama, and the contract (with an ICC arbitration clause that called for a Dusseldorf-seated arbitration under German law) defined the GC broadly to include all subcontractors the GC might engage. The GC then engaged a subcontractor in France (GE Energy) to build motors, the motors failed, and the steelmaker brought suit against GE Energy in a court of the State of Alabama. GE Energy removed the action to the federal district court based on the New York Convention*, and moved to compel arbitration. Its motion was granted in the District Court.**

For the unanimous Eleventh Circuit panel, the legal analysis “start[ed] and end[ed]” with Convention Article II: without a signature on the arbitration agreement by the party seeking to compel arbitration, no order to compel arbitration is available under FAA Chapter 2 (Section 206). GE Energy could not compel arbitration based on estoppel or third-party beneficiary, the Court held, because “the Convention, as codified in Chapter 2 of the FAA, only allows the enforcement of agreements in writing signed by the parties and Congress has specified that the Convention trumps Chapter 1 of the FAA where the two are in conflict. … Although parties can compel arbitration through estoppel under Chapter 1… estoppel is only available under Chapter 1 because Chapter 1 does not expressly restrict arbitration to the specific parties to the agreement….But the Convention imposes precisely such a restriction.

The decision cites no case law precedent for this position, and does not discuss any authorities taking a different view.

As a matter of textual analysis, the Article II (1) of the Convention reads as a mandate for Contracting State enforcement of an arbitration agreement in a particular form — but not as a prohibition of the enforcement of an agreement having another form. “Each Contracting State shall recognize an agreement in writing ….” The United States in the implementing legislation might have opted to enforce only such agreements where international commerce was concerned, but the text of FAA Chapter Two gives no indication that this was done. Subject-matter jurisdiction was defined by reference to the commercial nature of the arbitration agreement and its internationality, not its form (Section 202), and no reference to a form requirement is made in the section authorizing a court to compel arbitration (Section 206). It appears that neither the Convention nor Chapter Two prohibits enforcement of an arbitration agreement that lacks the signature of the one of the parties. And the position that FAA Chapter 2 is exclusively concerned with giving effect to the Convention’s mandates, no less and no more, is answered by Section 208 declaring that Chapter 1 “applies to actions and proceedings brought under this chapter to the extent that Chapter is not in conflict with this chapter or the Convention….

Whereas over many decades case law under Chapter 1 has established the enforceability of arbitration agreements by or against non-signatories under certain conditions, what is the conflict with the Convention or Chapter Two that prevents such enforceability when subject-matter jurisdiction is based on Chapter Two? I see none. And the Eleventh Circuit panel in Outokumpu finds such a conflict only by construing Article II (1) of the Convention, against its plain meaning, as an exhaustive description of the arbitration agreements a US court is allowed to enforce when its jurisdiction is based on the Convention and Chapter Two.

Other US appellate case law, none of it cited in Outokumpu, supports the position taken here. In the Second Circuit’s Smith/Enron Cogeneration decision of 1999 (198 F.3d 88), the grant of a petition to compel arbitration under Chapter Two Section 206 was affirmed where arbitration was sought by non-signatory assignees of the written agreement to arbitrate and the signatory was estopped based on its conduct. In the Fifth Circuit’s Bridas/Turkmenistan decision of 2003 (345 F.3d 347), where jurisdiction to enforce the award was (necessarily but not expressly) based on the Convention and Chapter Two, the Court reviewed de novo the Tribunal’s determination that non-signatory Government of Turkmenistan was a proper party to the arbitration, and stated that “federal courts have held that so long as there is some written agreement to arbitrate, a third party may be bound to submit to arbitration.” In the First Circuit’s InterGen case from 2003 (344 F.3d 134), the Court held that in a case before the Court based on the Convention and FAA Chapter Two, it would decide whether the written agreement was binding on a nonsignatory by applying federal common law principles of estoppel, agency, third-party beneficiary, and alter ego. (And see also the First Circuit’s Sourcing Unlimited case from 2008, 526 F.3d 38). In the Fourth Circuit’s International Paper decision from 2000 (206 F.3d 411) the Court expressly rejected the proposition, adopted by the Eleventh Circuit in Outokumpu, that Convention Article II(1) precludes enforcement by or against nonsignatories (206 F.3d at 418 n. 7). In the Fifth Circuit’s Steamship Mutual case of 2010 (601 F.3d 329), the Court expressly held that in a case under the Convention, just as in a case under Chapter 1, the district courts should “rel[y] on the same common law contract and agency principles to determine whether  nonsignatories must arbitrate.” (Id. at 334).

Is there a possibility for reconsideration by the Panel or en banc in the Eleventh Circuit? Whereas none of the above-mentioned cases is cited in the Court’s opinion, there is reason to think the Outokumpu case was not adequately briefed and argued. (This comment is made without having taken initiative to read those briefs). There are serious practical consequences to such a flat proscriptive rule against enforcement in FAA Chapter Two Cases by or against nonsignatories. For example, would it not harm the core objectives of the Convention and Chapter Two if arbitration could be avoided by a signatory by bringing a lawsuit against collateral nonsignatories like officers or employees or agents of the signatory party? That gambit, often attempted, has been repeatedly foiled by courts judiciously invoking applicable common law principles to require arbitration with nonsignatories in suitable circumstances.

The Outokumpu case is one to be watched, and worried over, as applicable time limits for reconsideration or certiorari approach.

 

 

*US proceduralists may wonder why this was an appealable order before the arbitration took place, as the FAA generally does not permit this. The opinion does not explain. But let’s assume there was appellate jurisdiction, perhaps based on a certified question from the district court concerning whether the arbitrability issue was sufficiently “related to” the arbitration agreement between the signatories to have permitted removal of the case from the Alabama court. The removability issue, resolved in favor of the removal in this decision, is not the subject of this post.

 

**US proceduralists will also note that removal was based, alternatively, on diversity of citizenship, with GE Energy arguing that Outokumpu had fraudulently joined US insurance carriers as defendants in the Alabama state court action, to defeat diversity-based removal to the federal court. But GE Energy did not press the matter of diversity of citizenship, nor did it advance the argument that if there was diversity, it could move to compel arbitration under FAA Chapter 1 and invoke US law as to non-signatory arbitrability without regard to the Convention’s “agreement in writing” provision.

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