October 09, 2020 DISPUTE RESOLUTION MAGAZINE

Supreme Court Rules

Domestic Contract
Law Can Be Applied in
International Cases
Lionel M. Schooler

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In Dispute involving New York Convention, US Supreme Court

Considers whether Domestic Contract Law Rules can be Applied in
International Cases

The US Supreme Court issued a major international construction

arbitration ruling this term in its much-anticipated decision in GE Energy
Power Conversion France SAS, Corp. v. Outokumpu Stainless
USA, LLC. Focusing its attention on the Convention on the Recognition
and Enforcement of Foreign Arbitral Awards of 1958 (the New
York Convention) for the first time since 2014, the Court decided an
unresolved procedural question pertaining to international arbitration
disputes: may a domestic court applying the Convention approve a non-
signatory’s motion to compel a signatory to arbitrate a dispute of
international scope arising under the applicable agreement? The Court
evaluated the terms of the Convention and decided that the answer was
yes.

Underlying agreement

In 2007, a predecessor to Outokumpu Stainless Steel, a US subsidiary of a

Finnish stainless-steel producer, signed an agreement with an
engineering company that, among other things, called for fabrication and
installation of cold rolling mill units to be used to manufacture stainless
steel at the steel-producer’s Alabama plant. The agreement contained a
list of mandatory subcontractors to be used, including GE Power
Conversion France SAS, a French subsidiary of General Electric (GE
Energy). It also required arbitration of any disputes pertaining to contract
performance to be conducted in Dusseldorf, Germany, under German
law, utilizing the Arbitration Rules of the International Chamber of
Commerce. The plant owner and the engineering firm were the only
signatories to the agreement.

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Subcontractor agreement

The engineering firm then entered into a subcontract agreement with the
designated subcontractors, one of whom was GE Energy. This
subcontract called for GE Energy to manufacture and install nine electric
motors to be used in the cold rolling units, which GE Energy delivered in a
timely manner. The subcontract did not contain an arbitration clause, and
GE Energy was not a signatory of any agreement between Outokumpu
Stainless or its predecessor and the engineer.

The rolling mills manufactured by GE Energy allegedly failed. Outokumpu

Stainless sued GE Energy in an Alabama state court over this failure,
alleging negligence and breach of warranty. GE Energy removed the case
to federal court, pursuant to the removal clause of the New York
Convention. Even though GE Energy had not been a party to and had not
signed any agreement containing an arbitration clause, it sought to
compel Outokumpu Stainless to arbitrate the dispute in the underlying
lawsuit on the basis of the common-law doctrine of equitable estoppel,
that is, on the theory that Outokumpu Stainless, as a signatory to a written
agreement containing an arbitration clause, was “equitably estopped”
from blocking an effort by a non-signatory to compel arbitration when
the signatory’s claim against the non-signatory relied upon the terms of
that agreement. GE Energy contended that this doctrine had long been
recognized as viably used in domestic arbitrations.

Ruling by the lower courts

Based upon the landmark Supreme Court decision in Mitsubishi Motors

Corp. v. Soler Chrysler-Plymouth, 1 courts of the United States are
authorized pursuant to the New York Convention to require arbitration in
disputes involving foreign parties. Since GE Energy was a foreign party, its
motion to compel was governed by the New York Convention rather than
by the “domestically focused” provisions of Chapter 1 of the Federal
Arbitration Act (FAA).

The United States District Court for the Southern District of Alabama
granted the motion to compel and dismissed the lawsuit, 2 finding that
there was an “agreement in writing” within the meaning of the
Convention’s Article II 3 based on the existence of the requisite written
agreement between Outokumpu Stainless and the engineer that specified
GE Energy as an approved/required subcontractor and the
corresponding status of GE Energy as suitably identified within the
arbitration contract’s definitions of “Buyer” and “Seller.”

The United States Court of Appeals for the Eleventh Circuit reversed this
decision and rejected GE Energy’s effort to invoke arbitration. The
Eleventh Circuit acknowledged the propriety of invoking the equitable
estoppel doctrine in domestic arbitrations, citing Arthur Andersen LLP v.
Carlisle. 4 However, it construed that decision as endorsing equitable
estoppel in a domestic arbitration only because Chapter 1 of the FAA 5
does not expressly restrict arbitration to the signatories to an agreement.
It accordingly ruled that such a restriction existed in the New York
Convention, with the result that only a party to an arbitration agreement
could invoke the arbitral process. Since GE Energy lacked this status as a
non-signatory, the Eleventh Circuit concluded that GE Energy could not
rely upon Alabama equitable estoppel principles to override the New
York Convention’s signatory requirement. 6

Supreme Court review

The Supreme Court granted certiorari and unanimously reversed the

Eleventh Circuit’s ruling. The Court held that the New York Convention
does not conflict with or bar a non-signatory’s invocation of domestic
equitable estoppel doctrines to compel arbitration by a signatory.
Equitable estoppel in domestic arbitrations

Referring to its earlier decision in Arthur Andersen, 7 the Court noted

that in domestic arbitrations, the FAA does not bar the application of
underlying state contract law principles that include doctrines, such as
equitable estoppel, authorizing contract enforcement by a non-signatory.
It then characterized the scope of equitable estoppel in the arbitration
context as “allow[ing] 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.” 8

Equitable estoppel under the New York

Convention

Turning to a consideration of the New York Convention, which the Court

characterized as a “multilateral treaty addressing international
arbitration” that focuses “almost entirely on arbitral awards,” the Court
noted that ordinary tools of treaty interpretation governed analysis of the
impact of the Convention on the question presented.

Applying such tools, the Court held that only one Article in the
Convention, Article II, even addresses arbitration agreements and, further,
that the Convention does not address at all the potential role of a non-
signatory in attempting to enforce an arbitration agreement. It construed
this “silence” to support dispositively the use of the “domestic” doctrine of
equitable estoppel in an international arbitration case. It held that nothing
in the Convention’s text excludes application of such a doctrine or
displaces application of domestic doctrines. It accordingly ruled that a
state law equitable estoppel doctrine does not conflict with §208 of the
Convention. 9

To bolster its decision, the Court took into consideration the drafting
history of the Convention. It found little guidance from the treaty’s choice
of language in Article II, noting only that “the drafters sought to impose
baseline requirements on contracting states.” 10 It specifically stated
that “nothing in the drafting history suggests that the Convention sought
to prevent contracting states from applying domestic law that permits
non-signatories to enforce arbitration agreements in additional
circumstances.” 11

Result of the decision: remand to court of

appeals

The Court concluded by noting that the Eleventh Circuit had not
determined whether GE Energy could compel arbitration using the
equitable estoppel doctrine, and that as a result, the Court of Appeals
could address this issue on remand. The case therefore returns to that
court for a consideration of Alabama’s doctrinal law.

Concurrence

In a concurring opinion, Justice Sonia Sotomayor focused upon what she

characterized as the “foundational” principle of “consent to arbitrate.” 12
She invoked the Court’s 2010 decision in Stolt Nielsen SA v. AnimalFeeds
International Corp. 13 as support for the basic precept that arbitration
is a matter of consent, not coercion. She utilized this precept as a
springboard to the broader point that there is no one version of
“equitable estoppel” and accordingly no explicit demonstration that the
use of the doctrine automatically reflects consent to arbitrate. She thus
forecast that lower courts would have to determine whether application
of a domestic non-signatory doctrine would comport with the FAA’s
consent restriction. 14

Aftermath

As with many US Supreme Court decisions, the ruling in GE Energy does

not conclude this particular battle over arbitrability. The parties return to
Atlanta to have the Eleventh Circuit (or the District Court in Alabama)
determine the proper application of Alabama’s equitable estoppel
doctrine.

This dispute’s international nature is important. Although GE Energy

performed its contractual obligations in Alabama and Outokumpu
Stainless filed suit over such performance in Alabama, the underlying
contracts do not mention Alabama as the appropriate site for resolution
of this dispute, and they do not designate Alabama law as the substantive
law governing resolution of the dispute. Rather, the agreement in
question calls for arbitration that is governed by the procedural and
substantive law of Germany, with an arbitration to be conducted in
Dusseldorf.

On remand, therefore, a domestic court will assess whether GE Energy

can legitimately invoke Alabama’s equitable estoppel doctrine to compel
Outokumpu Stainless to arbitrate. If Outokumpu Stainless is compelled to
arbitrate its dispute with GE Energy, the terms of the applicable
agreement will present to an arbitral tribunal in Germany the need to
consider the extent to which GE Energy can present its claims and
defenses through invocation of the doctrine of equitable estoppel. 15

The GE Energy v. Outokumpu Stainless decision marks the first foray of

the Supreme Court into a consideration of whether domestic contractual
law principles frequently invoked in domestic arbitrations can
correspondingly be applied in international cases. The Court
unanimously supports such an application in this case, empowering non-
signatories in appropriate circumstances to take advantage of the arbitral
process to resolve complex international construction and business
disputes.

Going forward, courts confronted with motions to compel arbitration

similar to the one submitted by GE Energy in this case will probably have
to scrutinize the extent to which there is an appropriate equitable
estoppel doctrine to apply and, if so, the breadth of that doctrine’s scope.
The GE Energy decision also highlights the challenges confronting
construction law practitioners seeking to devise an efficient and effective
system of dispute resolution essential to maintaining the orderly process
of construction in large international projects.

On one hand, a party to such a dispute may want to avoid massive

arbitration proceedings involving multiple project participants. Taking
such an approach may require creative ways to restrict participation in
dispute resolution proceedings. On the other hand, considering all the
many potential participants in a project – such as subcontractors,
distributors, vendors, guarantors and customers – a client might prefer to
control venue and applicable law of a dispute through an all-
encompassing arbitration clause, even if this results in numerous parties
being compelled to join the proceeding.

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ENTIT Y:

SECTION OF DISPUTE RESOLUTION

TOPIC:

ALTERNATIVE DISPUTE RESOLUTION, CONSTRUCTION

Endnotes

Authors

American Bar Association |

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be-applied-in-international-cases