Holding There Is No Treaty-FAA Conflict, Supreme Court Permits Equitable Estoppel for International Arbitration Parties

By Russ Bleemer

Philip J. Loree and Richard D. Faulkner discuss the GE Energy v. Outokumpu Supreme Court decision with Alternatives editor, Russ Bleemer

Seeing no conflict between key international arbitration enforcement law implemented by the Federal Arbitration Act and state laws, the U.S. Supreme Court today permitted a company that was not a party to an arbitration contract to make its case in using the doctrine of equitable estoppel to enforce an arbitration agreement.

GE Energy Power Conversion France SAS Corp. v. Outokumpu Stainless USALLC, et al., No. 18-1048 (available at https://bit.ly/2XogerH), reverses and remands an Eleventh U.S. Circuit Court of Appeals decision that said that GE Energy, which provided motors to Outkumpu via a general contractor, could not use the contract between Outokumpu and the general contractor to take the case to arbitration.

A unanimous opinion written by Justice Clarence Thomas held that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (available at https://bit.ly/2ZVazuK), which is codified in United States in the FAA’s second chapter, does not conflict with domestic equitable estoppel doctrines that permit the enforcement of arbitration agreements by nonsignatories.

On remand, GE Energy will be able to use the equitable estoppel doctrine to invoke the arbitration contract between Outokumpu and the general contractor, and argue that the contract contemplates that nonparty suppliers to the general contractor may use arbitration to settle disputes.

Much of the opinion centered on the role of nonparties in invoking arbitration agreements under the international and national laws, deploying, in Thomas’s words, a “textual” analysis of the Convention and the FAA.

The predecessors and affiliates of Outokumpu, a Calvert, Ala., steel manufacturer, signed a contract for the construction of three mills. The contract contained an arbitration clause. The construction company subcontracted for nine motors to run the plants from petitioner GE Energy. When Outokumpu filed suit against GE Energy after it refused repairs on the motors, all of which failed, GE Energy asked a court to compel arbitration under the Outokumpu-general contractor agreement, also objecting to Outokumpu’s attempted federal-court joinder of foreign insurers.

GE Energy was not a party to the Outokumpu construction contract. Still, an Alabama federal district court granted GE Energy’s motion, and Outokumpu appealed to the Eleventh Circuit, which reversed and sent the case back to the trial court.

The Supreme Court today reversed again, remanding the case back for further proceedings, likely eventually to the district court, which had granted GE Energy’s motion to compel arbitration with Outokumpu and an insurer. But the lower court had granted the arbitration request because it said that, in its role as a subcontractor, GE Energy qualified as a party under the contract.

The Supreme Court today used the opinion to uphold the principle of equitable estoppel, which didn’t figure in the trial court’s decision.

The Eleventh Circuit had reversed the trial court, rejecting arbitration, because it said that the Convention required that the party actually sign an arbitration agreement, excluding nonparties’ ability to invoke the contract using a state law doctrine like equitable estoppel.

Thomas’s reasoning started with the FAA, which he wrote “permits courts to apply state-law doctrines related to the enforcement of arbitration agreements.” That would allow the application of states’ equitable estoppel doctrines. 

The opinion states, “Generally, in the arbitration context, ‘equitable estoppel allows a nonsignatory to a written agreement containing an arbitration clause to compel arbitration where a signatory to the written agreement must rely on the terms of that agreement in asserting its claims against the nonsignatory.’” 21 R. Lord, Williston on Contracts §57:19, p. 200 (2017).

The Convention, noted Thomas, focuses almost entirely on enforcement, and the short Article II on agreements “in writing,” which discusses the need for a signature, wasn’t in conflict with the FAA-backed equitable estoppel doctrines.

The opinion notes that the New York Convention is silent on the status of nonsignatories. “This silence is dispositive here,” wrote Justice Thomas, “because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”

The opinion analyzes the treaty’s “negotiating and drafting history,” and says that the Court found “Nothing in the drafting history [that] suggests that the Convention sought to prevent contracting states from applying domestic law that permits nonsignatories to enforce arbitration agreements in additional circumstances.”

The opinion also dodges the need to interpret the significance of the executive branch’s view of the treaty. The United States, which argued in the case in January, backing GE Energy, claimed that the Court should give deference and “great weight” to its amicus interpretation of the treaty, which it had  submitted in another unrelated D.C. Circuit Court of Appeals case. 

Outokumpu countered “that the Executive’s noncontemporaneous interpretation sheds no light on the meaning of the treaty, asserting that the Executive expressed the “opposite . . . view at the time of the Convention’s adoption.”

But Justice Thomas concluded,

We have never provided a full explanation of the basis for our practice of giving weight to the Executive’s interpretation of a treaty. Nor have we delineated the limitations of this practice, if any. But we need not resolve these issues today. Our textual analysis aligns with the Executive’s interpretation so there is no need to determine whether the Executive’s understanding is entitled to “weight” or “deference.”

The Court’s remand order addressed the big issue in the Eleventh Circuit about the New York Convention’s requirement that the agreement in writing needs to be signed by the parties.  Noting that the Convention provisions cited by the Eleventh Circuit address the recognition of arbitration agreements, not who is bound by the agreements, Thomas wrote, “Because the Court of Appeals concluded that the Convention prohibits enforcement by nonsignatories, the court did not determine whether GE Energy could enforce the arbitration clauses under principles of equitable estoppel or which body of law governs that determination. Those questions can be addressed on remand.”

The opinion concluded by limiting the holding to the issue of the Convention and domestic-law equitable estoppel doctrines, finding no conflict between the two.

Justice Sonia Sotomayor concurred separately, agreeing that the Convention “does not categorically prohibit the application of domestic doctrines. She noted, “however, that the application of such domestic doctrines is subject to an important limitation: Any applicable domestic doctrines must be rooted in the principle of consent to arbitrate.”

Sotomayor said that consent is foundational to arbitration practice.  “This limitation is part and parcel of the Federal Arbitration Act (FAA) itself,” she wrote.

For a discussion of the Jan. 21 oral arguments in the case, see David Chung and Russ Bleemer’s post on CPR Speaks, “Tuesday’s SCOTUS Argument: Can Non-Signatories Compel Arbitration in the United States Under the New York Convention?” (January 22) (available at https://bit.ly/2ZVqPfg). For an examination of the GE Energy parties’ and amicus’s briefs, see “The Friends Speak: Here’s What Scotus Will Decide In the GE Energy International Arbitration Case,” 38 Alternatives 2 (January 2020) (available at https://bit.ly/2TXmcO2).

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The author edits Alternatives for the CPR Institute.  CPR Institute Summer 2020 intern Heather Cameron, a second year law student at Fordham University School of Law in New York City, contributed research. 

2 thoughts on “Holding There Is No Treaty-FAA Conflict, Supreme Court Permits Equitable Estoppel for International Arbitration Parties

  1. Pingback: GE Energy Power | SCOTUS | Arbitration Decision | Nonsignatories Loree Reinsurance and Arbitration Law Forum

  2. Pingback: Osibogun and Partners - Law Firm

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