Opinion analysis: Justices reject limitations on enforcement of arbitration agreements by nonsignatory businesses
on Jun 2, 2020 at 10:59 am
GE Energy Power Conversion France SAS v Outokumpu Stainless USA is a bit different from the typical Supreme Court arbitration case. Most of those cases involve a predispute arbitration agreement between a consumer and a business, in which a lower court has found some reason to allow the consumer to evade arbitration and the Supreme Court considers whether the Federal Arbitration Act justifies compelling arbitration. This case, by contrast, involves a dispute between two businesses over an international contract. The relevant body of law for that dispute is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention. That treaty (to which the United States and about 160 other nations are signatories) obligates nations to enforce arbitration agreements between businesses of member states.
The specific question before the court was whether it is consistent with the obligations of the United States under the New York Convention for federal courts to apply traditional doctrines of equitable estoppel that permit the enforcement of an arbitration agreement by a business that did not sign the agreement.
The factual background starts with contracts between the predecessor of respondent Outokumpu Stainless USA (the U.S. subsidiary of a large Finnish stainless-steel producer) and F. L. Industries (an affiliate of a French engineering group) to construct steel mills at a plant in Alabama. When motors failed at the Alabama facility, F. L. Industries disclaimed responsibility, arguing that any fault lay with its subcontractor, petitioner GE Energy Power Conversion France (a French subsidiary of General Electric that had built and installed the motors). Outokumpu and its insurers responded by suing GE France in Alabama. Because Outokumpu had agreed to arbitrate any disputes with F. L. Industries, GE France argued that the common law doctrine of equitable estoppel should compel Outokumpu and its insurers to present their claims in arbitration, even though GE France had not signed the contracts that contained the arbitration agreement.
The equitable estoppel doctrine is notoriously malleable, so the court of appeals might have held that GE France’s role in performing the original contracts on behalf of F. L. Industries, the French company that signed the contracts, should allow GE France to claim the benefit of the arbitration clause. Instead, however, the court of appeals held that the New York Convention categorically prohibits application of any doctrine that would permit a nonsignatory to a cross-border commercial arbitration agreement to use the Convention to compel arbitration. On that narrow question, the justices unanimously reversed the court of appeals.
Writing for the court, Justice Clarence Thomas explained that the New York Convention “focuses almost entirely on arbitral awards” and “contains only three provisions, each one sentence long,” that “addres[s] arbitration agreements.” Those three sentences, Thomas explained, obligate courts to “recognize” written arbitration agreements, including arbitral clauses in longer contracts, and then refer the parties to those agreements to arbitration upon request.
With so little of the New York Convention focused on the problem of arbitration agreements, it was easy for Thomas to conclude that the “text of the New York Convention does not address whether nonsignatories may enforce arbitration agreements [because t]he Convention is simply silent on the issue.” Thomas pointed out that the Convention’s only substantive statement that relates to agreements requires courts to “refer the parties to arbitration.” For him, that “provision, however, does not restrict contracting states from applying domestic law to refer parties to arbitration in other circumstances.” Rephrasing, he explained: “[The Convention] provides that arbitration agreements must be enforced in certain circumstances, but it does not prevent the application of domestic laws that are more generous in enforcing arbitration agreements.”
Turning from the text, Thomas next considered whether three aspects of the Convention’s history and context shed any light on the question before the court. The first is the negotiation and drafting history of the treaty, an “interpretive aid” that federal courts often have employed. For Thomas, that history “shows only that the drafters sought to impose baseline [enforcement] requirements on contracting states,” not “that the Convention sought to prevent contracting states from applying domestic law that permits nonsignatories to enforce arbitration agreements.”
Second, he turned to the “post-ratification understanding” of other countries, noting that the Supreme Court previously has looked to the decisions of other nations’ courts when interpreting treaties. On that point, Thomas noted that “numerous contracting states permit enforcement of arbitration agreements by entities who did not sign an agreement” and that “at least one contracting state” had adopted legislation to that effect. Thomas acknowledged that the post-ratification materials are “not without their faults,” in part because they “occurred decades after the finalization of the New York Convention’s text in 1958,” which “diminishes the value of these sources as evidence of the original shared understanding of the treaty’s meaning.” But the weakness of the materials did not change his view that “any weight” at all given to those materials tended to “confir[m] our understanding.”
Third and finally, Thomas turned to the question whether the lower courts should have given “great weight” to the amicus brief filed by the United States. Thomas disposed of that point quickly, noting that because the court’s “textual analysis aligns with the Executive’s … there is no need to determine whether the Executive’s understanding is entitled to ‘weight’ or ‘deference.’”
The opinion closed by emphasizing that the lower courts are free on remand to consider whether any estoppel doctrine in fact would permit GE France to enforce the arbitration agreement. That closing passage might hold the key to the unanimity of the decision. I noted in my post on the argument that the justices seemed divided about the propriety of enforcing arbitration here, with Chief Justice John Roberts and Justice Ruth Bader Ginsburg quite dubious about GE France’s estoppel claim and Justice Sonia Sotomayor quite receptive to it. By leaving that question to the lower courts and deciding the case on the narrow basis that the Convention permits the application of estoppel doctrines (whatever those might say), Thomas seems to have brought all nine votes together.