Supreme Court to Decide Important International Arbitration Question

The United States Supreme Court has accepted for review the question of whether, under the New York Convention on the Recognition and Enforcement of Foreign Judgments (the “New York Convention”), a non-signatory to an arbitration agreement can compel arbitration based on the doctrine of equitable estoppel.

Sometimes, a signatory to a contract may sue a non-signatory for claims that arise out of the contract. This often happens in the context involving subcontracting, distribution chains and employment relationships. When this happens, is the signatory bound by the arbitration clause in the underlying agreement?

In the case before the Court, GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, the respondent, Outokumpu, had entered into a contract to purchase equipment with Fives St. Corp. (“Fives”). That contract required arbitration of disputes in Germany. Fives subcontracted with GE Energy to provide parts for the equipment. GE Energy is alleged to have failed to deliver working parts and Outokumpu sued GE Energy, the subcontractor, in Alabama state court. GE Energy removed the action to federal court and then moved to dismiss and to compel arbitration of Outokumpu’s claim under Chapter 2 the Federal Arbitration Act (“FAA”), which implements the New York Convention. In opposing GE Energy’s motion to compel arbitration, Outokumpu argued that there was no agreement to arbitrate as between itself and GE Energy.

The district court granted GE’s motion to compel arbitration, ruling that under equitable estoppel Outokumpu was required to arbitrate GE’s claims.  The Eleventh Circuit Court of Appeals, however, reversed, holding that the New York Convention, as implemented by Chapter 2 of the FAA, does not permit the application of equitable estoppel. The Court held that, while  equitable estoppel applies to strictly domestic arbitrations (which are governed by Chapter 1 of the FAA), the express language of Chapter 2 requires that the agreement to arbitrate be “signed by the parties” to be enforceable, which, in this case meant Outokumpu and GE Energy.

As of now there is a split among the Circuit Courts as to the applicability of equitable estoppel to non-domestic agreements to arbitrate. The First and Fourth Circuits permit a non-signatory to compel arbitration as against a signatory based on equitable estoppel principles; the Ninth and Eleventh Circuits do not. The Supreme Court has accepted review to resolve the conflict.

Notably, the case itself presents a “conflict” of sorts between two trends in the Supreme Court’s  recent jurisprudence. On the one hand, the Court has been highly receptive to arguments in favor of arbitration generally; on the other, the Court’s majority has insisted on adhering to the express language of the statute, which, in the case of Chapter 2 of the FAA, requires a signature of the “parties.”