US Supreme Court holds that non-signatories to arbitration agreement subject to New York Convention can compel arbitration
Miller Nash Graham & Dunn, United States
Miller Nash Graham & Dunn, United States
On 1 June 2020, the United States Supreme Court issued its opinion in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC (GE Energy), holding that non-signatories to an arbitration agreement can compel arbitration of agreements that are subject to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention or simply ‘Convention’) by relying on traditional legal and equitable principles.
The Court handed down its decision after petitioners in two separate cases– GE Energy and Shrinivas Sugandhalaya LLP v. Balkrishna Setty, et al. (Shrinivas) – sought review by petitions for writ of certiorari of separate Eleventh and Ninth Circuit Court of Appeals opinions, holding that the New York Convention only allows enforcement of an arbitration agreement by actual blue-ink signatories to the agreement. Because the petitioners in both cases had not signed the arbitration agreements they were seeking to enforce, the Eleventh Circuit (in GE Energy)and the Ninth Circuit (in Shrinivas) held the petitioners could not compel arbitration. The Supreme Court reversed the decisions from those circuits.
The petitioner in Shrinivas (a citizen of India) also sought review of a second issue: whether a foreign defendant’s right to stay litigation under the US Federal Arbitration Act (FAA) is conditioned on that defendant’s right to compel arbitration. At the district court level, the petitioner attempted to stay litigation based on the arbitration agreement at issue in the case, but the court denied its request. On appeal, the Ninth Circuit affirmed, holding that a foreign defendant’s right to stay litigation under the FAA is conditioned on its right to compel arbitration. Because the petitioner could not compel arbitration, it likewise could not stay litigation in favor of arbitration. The petitioner appealed this holding to the Supreme Court.
After the Supreme Court issued its ruling in GE Energy, it granted certiorari in Shrinivas, vacating the Ninth Circuit’s opinion and remanding to the Ninth Circuit for further consideration of the issue in light of GE Energy.
The New York Convention is a multilateral treaty that addresses international arbitration and provides standards for the enforcement of foreign arbitration agreements and arbitral awards when all countries concerned are parties to the Convention. The US is a party to the Convention, as is India and at least 163 other nations. Under Article II of the New York Convention, parties to the Convention are required to recognise and enforce ‘an agreement in writing under which the parties undertake to submit to arbitration’. The Convention defines an ‘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’.
In the US, the New York Convention is implemented by the FAA, which is federal legislation that provides for judicial facilitation of private dispute resolution through arbitration. Chapter 1 of the FAA applies generally to domestic arbitration agreements and arbitral awards, and makes written arbitration agreements ‘valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract’. In doing so, the FAA incorporates ‘background principles of state contract law regarding the scope of agreements (including the question of who is bound by them)’. In other words, Chapter 1 of the FAA permits enforcement of wholly domestic arbitration agreements by third parties – ie, nonsignatories – if state contract legal and equitable principles would themselves permit enforcement. Beyond this, Chapter 1 permits federal district courts to stay litigation when the litigation involves issues that are ‘referable to arbitration’ under a written arbitration agreement, including arbitration agreements that are subject to the New York Convention.
Chapter 2 of the FAA pertains to international arbitration agreements and gives federal courts jurisdiction over actions governed by the New York Convention. Chapter 2 also incorporates the state law background principles adopted in Chapter 1, providing that Chapter 1 of the FAA ‘applies to actions and proceedings brought under [Chapter 2] to the extent that [Chapter 1] is not in conflict with [Chapter 2] or the Convention’.
But the question left open was whether the FAA’s recognition of state law principles that permit enforcement of arbitration agreements by non-signatories conflicted with the New York Convention’s requirement that contracting states recognise and enforce written arbitration agreements (defined as those signed by the parties or contained in an exchange of letters or telegrams).US Circuit Courts of Appeals had answered this question differently. The Eleventh and Ninth Circuits had held that allowing non-signatories to use common law principles (such as estoppel or ratification) to create in themselves a right to enforce an arbitration agreement they had not signed conflicted with the New York Convention such that only signatories could compel arbitration of agreements governed by the Convention. The First and Fourth Circuits, however, had held the opposite. But the Supreme Court’s opinion in GE Energy settled the dispute.
The Supreme Court’s ruling in GE Energy
Applying traditional tools of treaty interpretation, the Supreme Court held in GE Energy that the New York Convention does not conflict with state law or domestic principles permitting enforcement of arbitration agreements by non-signatories. The Court primarily reached this conclusion because the Convention itself does not address whether non-signatories can enforce arbitration agreements under domestic doctrines. When a treaty is silent on an issue, the Court assumes that the ‘matter not covered is to be treated as not covered,’ ‘a principle “so obvious that it seems absurd to recite it”’.
Beyond this, the Court determined that nothing in the Convention could be read to prohibit the application of state law or domestic principles permitting enforcement of arbitration agreements by non-signatories. While the Convention provides that an arbitration agreement must be enforced under certain circumstances – when a signatory to a written arbitration agreement requests referral to arbitration – it does not say that this is the only circumstance in which an arbitration agreement can be enforced. Because the Convention was ‘drafted against the backdrop of domestic law,’ the Court determined it would be ‘unnatural to read [it] to displace domestic doctrines in the absence of exclusionary language,’ especially given the fact that the Convention otherwise contemplates the use of domestic doctrines to gap fill.
Given all this, the Court held that the Convention does ‘not conflict with the application of domestic legal principles permitting non-signatories to arbitration agreements to compel arbitration under the FAA’.
Grant of certiorari in Shrinivas
Following this ruling, the Court granted certiorari in Shrinivas, vacating the Ninth Circuit’s opinion and remanding to the Ninth Circuit for further consideration of the outstanding issue in Shrinivas: whether a foreign defendant’s ability to stay litigation under the FAA should also be conditioned on that defendant’s right to compel arbitration.
In its petition for certiorari in Shrinivas, the petitioner argued that even if a foreign non-signatory to an arbitration agreement is unable to compel arbitration on the basis of domestic legal or equitable principles, the plain text of the FAA indicates that it should still be able to stay litigation if it can show that the litigation involves an ‘issue that is referable to arbitration’ (ie, an issue that the opposing party is required to arbitrate). In so arguing, the petitioner pointed to prior Supreme Court precedent holding as much for domestic litigants.
While GE Energy did not address this issue, its holding affirmed that domestic legal and equitable principles that apply under the FAA and do not conflict with the New York Convention likewise apply to arbitration agreements governed by the Convention. Because the Court has previously held that domestic parties need not be able to compel arbitration in order to stay litigation under the FAA, the Court’s grant of certiorari in Shrinivas and remand to the Ninth Circuit suggests that it agrees foreign non-signatories should be able to stay litigation on the basis of arbitration agreements that are subject to the New York Convention, regardless of whether or not they can compel arbitration.
Where the future battle will now lie is over whose law should apply in determining whether the non-signatory can compel arbitration. Should a US federal court apply federal common law or state contract law to determine whether the non-signatory can enforce the agreement? Should it apply the law (possibly of a foreign jurisdiction) that otherwise governs the contract? Should there be some form of international common law developed under the New York Convention that should apply in these instances? Now that it is clear that non-signatories can enforce arbitration agreements subject to the Convention, courts will have to grapple with these issues.
Outokumpu Stainless USA, LLC v Converteam SAS, 902 F3d 1316, 1326 (11th Cir 2018), cert granted sub nom GE Energy Power Conversion France SAS, Corp v Outokumpu Stainless USA, LLC, 139 S Ct 2776, 204 L Ed 2d 1156 (2019), and rev'd and remanded sub nom GE Energy Power Conversion France SAS, Corp, 140 S Ct 1637; Setty v Shrinivas Sugandhalaya LLP, 771 Fed Appx 456, 456–57 (9th Cir 2019), cert granted, judgment vacated, No 19-623, 2020 WL 3038281 (US June 8, 2020).
Setty v Shrinivas Sugandhalaya LLP, No 2:17-CV-01146-RAJ, 2018 WL 3064778, at *3 (WD Wash June 21, 2018), aff'd, 771 Fed Appx 456 (9th Cir 2019), cert granted, judgment vacated, No 19-623, 2020 WL 3038281 (US June 8, 2020).
New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, 21 UST 2517, TIAS No 6997 [hereinafter ‘New York Convention’]; Johnson Controls, Inc v Edman Controls, Inc, 712 F3d 1021, 1025–26 (7th Cir 2013).
Ibid at 631. For example, the state contract law principle of equitable estoppel sometimes permits a non-signatory to an arbitration agreement to compel arbitration on the basis of the agreement when a signatory to the agreement must rely on the agreement when asserting claims against the non-signatory. R Lord, Williston on Contracts s 57:19, p 183 (4th ed 2001). Additional state law principles that authorise enforcement of an arbitration agreement by a nonsignatory include ‘assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel’. Arthur Andersen, 566 US at 631 (quoting Williston on Contracts s 57:19).
For instance, in the Shrinivas case, the parties are all citizens of India, and the arbitration agreement expressly states it is governed by the Indian Arbitration Act. Under both Indian common law and the current version of the Indian Arbitration Act, non-signatories explicitly have the right to enforce arbitration agreements so long as they can show they are a ‘person claiming through or under’ a signatory. The Indian Arbitration and Conciliation (Amendment) Act, 2015, s 4; see also Chloro Controls India (P), Ltd. v. Severn Trent Water Purification, Inc. (2013) 1 SCC 641, paragraph 167 (Indian Supreme Court decision holding that ‘[e]ven non-signatory parties to [arbitral] agreements can pray and be referred to arbitration’). It would be an anomalous outcome for a US federal court to apply domestic law to determine the parties’ rights when the agreement and its arbitration clause are expressly governed by Indian law.