Call it the “Comma Clause” of the New York Convention.
Article II(1) of the Convention requires each Contracting State to recognize an “agreement in writing” for arbitration. And Article II(2) — the Comma Clause, for this discussion — states: “The term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.”
The interpretive significance of the comma in Article II (2) has divided US Circuit Courts of Appeals. The Second Circuit held in the Kahn Lucas case (186 F.3d 210 (2d Cir. 1999)) that the comma meant that the signature/letter exchange requirement applied to both an arbitration clause in a contract and independent agreement to arbitrate, as both are mentioned in the phrase preceding the comma. The Fifth Circuit in the Sphere Drake case (16 F.3d 666 (5th Cir. 1994)) held that the signature/letter exchange requirement applies only to an independent agreement to arbitrate, not to an arbitration clause in a contract, viewing the comma as merely separating the words after the comma from the object immediately preceding it. The Third Circuit — whose decisions bind federal district courts in New Jersey — has sided with the Second. (Std. Bent Glass Corp. v. Glassrobots Oy, 333 F.3d 440 (3d Cir. 2003)).
In a recent decision, a federal district judge in New Jersey refused to confirm an award made in China by an arbitration panel of the China International Economic and Trade Commission (“CIETAC”), ruling that an arbitration clause in a sales confirmation, which the buyer did not sign, failed to satisfy the “agreement in writing” requirement of the Convention. (Quanqing Cloth-Making Co. v. Pilgrim Worldwide Trading, Inc., 2010 U.S. Dist. LEXIS 64515 (D.N.J. June 29, 2010)).
In the Pilgrim case, the US buyer issued three purchase orders to a Korean trading company, and, after renegotiation of commercial terms, received a “Sales Confirmation” that “referred to” Quanqing, which the buyer understood to refer to a “subcontractor” from whom the Korean trader would obtain the goods. The Sales Confirmation — on its face between the Korean and Chinese parties — stated that it was signed by the Korean trader “on behalf of” and “for the account of” the US buyer. It provided for arbitration of disputes under CIETAC auspices. Upon receiving the Sales Confirmation, Buyer issued revised purchase orders in conformity with the commercial terms of the Sales Confirmation. The goods were shipped to buyer, and partial payments were made, some to the Korean trader and some directly to the manufacturer in China, Quanqing, as directed by the Korean intermediary.
A payment dispute arose; the Chinese producer Quanqing commenced CIETAC arbitration against the buyer; CIETAC sent a notice of the arbitration to the buyer which the buyer elected to ignore; and an award was made in favor of Quanqing.
The district court found that there was “no evidence” that the Korean trader was the US buyer’s agent or representative, and “thus there is no signed writing binding [buyer] to the Sales Confirmation or its arbitration clause.”
The district court rejected the Chinese award-holder’s argument that the US buyer was equitably estopped from denying an obligation to arbitrate. While the buyer’s purchase order “reflects that it agreed to pay” for the goods, the buyer did not “consistently maintain that any provisions of the purported contract should be enforced.” Therefore, the court held, equitable estoppel furnished no basis to enforce the arbitration clause against the buyer.
Even apart from what appears to be a very stringent application of equitable estoppel principles, arguably at odds with the pro-arbitration policy of the FAA, this decision is a curious one.
The court did not discuss whether the sequence of a sales confirmation containing an arbitration clause followed by the buyer’s revised purchase order satisfied the Convention’s “exchange of letters or telegrams” condition.
In this regard, the district court made no reference to the Third Circuit decision in the Standard Bent Glass case, cited above. In that case, the Third Circuit held that an enforceable contract containing an arbitration clause was made even though the written sales agreement was never signed by both parties, because the combination of written exchanges and performance sufficiently indicated contract formation under the Uniform Commercial Code. Further, the Third Circuit held, the same exchanges satisfied the “exchange of letters of telegrams” requirement of Article II(2) of the Convention.
On the record as described in the district court opinion in Pilgrim, it would seem quite plausible to view the sales confirmation-purchase order sequence as satisfying the exchange of letters or telegrams requirement. The distinguishing factor is that the buyer’s purchase order was apparently sent only to the Korean intermediary, leaving ambiguity about whether the buyer intended to enter into a contractual relationship with the Chinese supplier of the goods. But whereas the purchase order responded to a sales confirmation in which the Korean intermediary declared itself to be acting as agent for the US buyer in procuring goods from the Chinese supplier, common law agency principles would suggest that the Chinese party was entitled to rely on the Korean party’s apparent authority as agent for buyer after the buyer, by issuing the purchase order, appeared to ratify the agent’s dealings.
At the very least, these issues were not adequately explored in the district court’s opinion, and a CIETAC arbitration award was denied recognition under the Convention without the kind of painstaking analysis that one would expect in an ostensibly pro-arbitration forum.