Supreme Court Overturns Rule that Only Signatories Can Compel International Arbitration

By overruling the Ninth and Eleventh Circuit Courts of Appeals’ bright-line rule that only the parties who “actually sign” the agreements can compel international arbitration, the Supreme Court expanded the scope of international arbitration enforcement in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC. Justice Sotomayor penned a separate concurrence highlighting that the decision opens up a litany of new legal issues over who can force who to go to international arbitration.

The Dispute

In this case, Outokumpu Stainless USA, LLC (Outokumpu USA) entered into three contracts with FL Industries to construct three steel mills in Alabama. Each contract had an arbitration clause. FL Industries sub-contracted out the installation of motors for the steel mills to GE Energy Power Conversion France SAS (GE France). After those motors failed, Outokumpu USA sued GE France in Alabama state court. GE France sought to move the case to arbitration under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a 1958 treaty signed by 163 countries.

Text of the New York Convention and Circuit Courts of Appeals’ Interpretation

Article II of the New York Convention discusses arbitration agreements. Article II(1) states that “[e]ach Contracting State shall recognize an agreement [to arbitrate] in writing.” Article II(2) defines “agreement in writing” to include “an arbitral clause in a contract or an arbitration agreement, signed by the parties, or contained in an exchange of letters or telegrams.” Article II(3) states courts of signatory nations “shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.” (Emphasis added).

The Ninth and Eleventh Circuit Courts of Appeal both interpreted Article II(2)’s definition of arbitration agreement including “signed by the parties, or contained in an exchange of letters or telegrams” to prohibit non-signatory enforcement of arbitration agreements.[1][2]

The Supreme Court’s Analysis

In interpreting the text, the Supreme Court first observed that the New York Convention is silent on the issue of non-signatory enforcement.[3] It noted that the Ninth and Eleventh Circuit’s reliance on Article II(2)’s language requiring “signed by the parties” was misplaced since Article II(2) deals with “the recognition of arbitration agreements, not who is bound by a recognized agreement.”[4] It thus abrogated the Ninth and Eleventh Circuit’s bright-rule that only the parties who “actually sign” the international arbitration agreements can enforce those agreements.[5]

Turning to enforcement, the Supreme Court agreed with GE France that a non-signatory could rely on Alabama state law equitable estoppel doctrine, permitted by the Federal Arbitration Act (“FAA”), to compel international arbitration.[6] Article II(3), which addressed the enforcement of international arbitration agreements, did not conflict with the use of state law doctrines to fill in enforcement gaps, because Article II(3) used non-exclusive language.[7] It went on to note the FAA permits non-signatories to use other state-law theories, like assumption, corporate veil piercing, alter ego, incorporation by reference, third-party beneficiary theories, and waiver.[8]

Finally, the Supreme Court found that using state law doctrines to fill in enforcement gaps was consistent with both the text of the treaty and the post-ratification understanding of the treaty in other signatory nations.[9] Although the Supreme Court did not cite any examples, there are many. Hong Kong and Canada also bind non-signatories to international arbitration agreements on equitable estoppel grounds.[10][11] India binds non-signatories to international agreements based on alter ego theory.[12] France, Spain, and Portugal all bind non-signatories to international arbitration agreements on various formulations of implied consent.[13][14][15] Israel binds non-signatories to international arbitration under a test similar to third-party beneficiary theory.[16] China binds non-signatories to international arbitration when it shares a special-agency relationship with the signatory. [17]

Implications of the Decision

While the Supreme Court’s decision in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA LLC resolves the narrow issue of treaty interpretation, it leaves in its wake a host of new legal issues posed by non-signatory enforcement. This includes the potential of coercive enforcement and its effect on non-signatories’ right to jury trials.

A unanimous court, led by Justice Thomas, resoundingly rejected Outokumpu USA’s plea for the Court to read into the New York Convention a “rule of consent” based on snippets from people in the 1950s negotiating and wrangling over the terms of the treaty.[18] The text of the treaty only mentioned the word “consent” once in an unrelated context, and the Supreme Court would not rely on “Cherry picked ‘generalization[s]’ from the negotiation and drafting history” to read into treaty something that simply isn’t in its text.[19] In an early portion of the opinion, the Supreme Court cited the late Justice Scalia’s guide to interpretation: “a matter not covered is to be treated as not covered” – a principle “so obvious that it seems absurd to recite it.”[20]

However, even if the New York Convention does not address consent issues with non-signatory enforcement, federal and state law might, as noted by Justice Sotomayor’s concurrence.[21] Justice Sotomayor took a few steps into these murky waters and noted there is a principle under the Federal Arbitration Act that “arbitration… is a matter of consent not coercion.”[22] She noted that this principle could “constrain” any contrary state law doctrine.[23] However, she cautioned it would be “difficult to articulate [in] a bright-line test.”[24] Additionally, Justice Sotomayor noted that domestic non-signatory doctrines vary from jurisdiction to jurisdiction and could lead to different results.

It is easy to see how, in certain factual contexts, non-signatory enforcement can become coercive. In this case, coercion was likely not an issue because the party being compelled to go to arbitration – Outokumpu USA – signed the arbitration clause, and the contract specified that non-signatories like GE France were parties to the contract, even though they never signed it.

But imagine, instead of filing suit in Alabama state court, Outokumpu USA sought to initiate an arbitration against GE France – who had never signed an arbitration clause. Outokumpu USA could assert another state law theory to compel arbitration, like a third-party beneficiary theory. This potentially violates the FAA’s consent principle. Worse yet, it potentially infringes on GE France’s Seventh Amendment right to a jury trial for breach of contract claims arising in the United States. Even if Outokumpu USA was the intended third party beneficiary of GE France’s agreement with FL Industries, that does not necessarily mean GE France waived its constitutional rights given that it never agreed to arbitrate disputes.

More perplexingly, if Outokumpu USA cannot compel arbitration against GE France, a tactical asymmetry emerges. On the one hand, GE France can forum shop between the state and federal courts or international arbitration. Outokumpu USA, however, can only choose the courts.

There are many examples of bringing in a non-signatory to an arbitration agreement. The main theories have been those of alter ego and agency. In these instances, it is analytically defensible to include those non-signatories because they are extensions of the signatory. If the evidence exists that the non-signatory is an agent of or alter ego of a signatory, joining them to the arbitration does not stretch the reach of the New York Convention and is well within it. When other theories are used, such as equitable estoppel, one begins to see the boundaries where anomalies occur in the analysis is less justified. Arbitrators typically focus on consent in making findings during an arbitration proceeding. Since the parties “consented to arbitration,” they must’ve consented to everything that follows. So it is analytically defensible to claim that a third-party, who has not signed in the arbitration agreement, can sue a signatory because the latter has consented. On the other hand, a signatory, attempting to bring in the non-signatory to an arbitration (other than on alter ego or veil piercing grounds) does not meet the same analytical test of consent.

These are just some of the considerations future litigants will have to consider. As noted by Justice Sotomayor, the application of these state law doctrines, and the effect of federal authorities, shall be decided on a case-by-case basis – and they will likely be highly fact-specific inquiries. What is clear is that the Supreme Court’s decision invariably broadens the scope of who can enforce an international arbitration. Who exactly remains to be seen.

[1] Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996, 1001 (9th Cir. 2017).

[2] Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F.3d 1316, 1327 (11th Cir. 2018).

[3] GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048, 2020 WL 2814297, at *5 (U.S. June 1, 2020)

[4] Id. at *7.

[5] Id.

[6] Id. at *5.

[7] Id.

[8] Id.

[9] Id. at *6-7.

[10] Jiangxi Provincial Metal and Minerals Import and Exp. Corp. v. Sulanser Company Ltd., High Court MP 887, 6 April 1995, 2 HKC 373 [1995] (Hong Kong) .

[11] CE Int’l Res. Holding v. Yeap Soon Sit, (2013 BCSC 1804) (Canada).

[12] GMR Energy Ltd. v. Doosan Power Sys. India Private Ltd. et al., Bombay High Court (XX/XX/2017) (India).

[13] Judgment of 28 November 1989, 1990 Rev. arb. 675 (Paris Cour d’appel) (non-signatory’s performance of signatory’s contract obligations implied consent).

[14]Dima Distribution Integral, S.A., y Gelesa Gestion Logistica, S.L. v. Logintegral 2000, S.A.U., Superior Court of Justice of Madrid (68/2014, 16 December 2014) (Spain) (same).

[15] DD, S.A.E. & EE, CO v. BB, S.A. & CC, S.A., Supreme Court of Justice of Portugal, Case No. 28/14.3TBOHP. C1.S1, 15 January 2019 (commercial realities revealed implied consent to arbitrate).

[16] Simin Ltd. v. Int’l Trade Exch. Ltd., Ctrl. Magis. Ct. of Israel, 31228-06-13 (Nov. 5, 2014).

[17] 2019 Hu 01 Min Zhong No. 5542, (China)

[18] 2020 WL 2814297 at *6.

[19] Id.

[20] Id. at *5.

[21] Id. at *8.

[22] Id.

[23] Id.

[24] Id.