By Deborah Slattery-Pereira

How U.S. Courts Treat Non-Signatories

Parties will subject their disputes “to arbitration if, and only if, [they] actually agree to arbitrate those disputes.” Complex commercial disputes often involve multiple international contracts with different parties, but usually, only two parties sign the arbitration agreement. Because arbitral proceedings depend on a consensual agreement, generally, a party will not engage in arbitration without its consent. This leads to arbitrability disputes, involving “whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.”

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The New York (NY) Convention addresses arbitrability in Article II(3), providing that courts should send the parties to arbitrate their disputes unless they do not have a valid arbitration agreement. Under Article V(1)(a), courts can refuse to enforce an arbitral award if the arbitration agreement is not valid under the jurisdiction where the parties seek enforcement or under the jurisdiction where they seated the arbitration. Finally, under Article V(2)(a), courts can refuse to enforce an award if the subject-matter cannot be arbitrated. These provisions, however, do not deal with how to treat non-signatories.

Because the NY Convention is silent on the issue of the enforcement of an arbitration agreement against a non-signatory, U.S. courts developed methods to include actors who did not sign the contract, relying on common law principles. In GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, the Supreme Court applied domestic contract law, allowing a third-party to enforce an arbitration agreement under the principle of equitable estoppel. Similarly, a party can enforce an arbitration agreement against a non-signatory under the third-party beneficiary rules. Therefore, deciding whether the non-signatory has an intended beneficiary status in the arbitration agreement depends on state contract law.

In Various Insurers v. General Electric International, a dispute arose from a catastrophic turbine failure at a power plant owned by Shariket Kahraba Hadjret (SKH) and operated by SNC-Lavalin Constructeurs (SNC). SNC operated the plant on SKH’s behalf pursuant to a management agreement, and SNC signed a service contract with General Electric (GE), which had an arbitration agreement. The Eleventh Circuit addressed whether SKH should arbitrate a dispute with GE, considering the arbitration agreement between SNC and GE.

The Eleventh Circuit found that SKH must arbitrate the dispute with GE despite not being part of the arbitration agreement because the language of the contract made SKH an intended beneficiary. Specifically, the contract between SNC and GE expressly referred to SKH and gave SKH not only access to operational reports, but also power to intervene in the operation of the plant. The Court distinguished its decision from First Circuit precedents, clarifying that SKH’s intended beneficiary status was not based solely on a corporate relationship or tenuous rights. Hence, a party can enforce an arbitration agreement against a non-signatory if the language of the contract makes the third-party an intended beneficiary, who has rights under the contract and obtains benefits from it.

However, in Posada v. Cultural Care, the First Circuit developed another view on whether a non-signatory qualifies as intended beneficiary. The Court stated that a non-signatory could enforce an arbitration agreement only if the agreement clearly establishes that the parties intended that the third-party would benefit from it. The dispute arose from a contract between a group of foreign nationals and Cultural Care (CC) who agreed to provide them work in the U.S. The workers signed a contract for recruiting services with International Care Ltd. (ICL), which had an arbitration agreement.

The First Circuit found that CC could not enforce the arbitration agreement between ICL and the workers even though CC had a corporate relationship with ICL and enjoyed non-exclusive benefits under ICL’s contract with the workers. The contract had no provision authorizing CC to enforce the arbitration clause. Conversely, a third-party can enforce the arbitration agreement only if the language of the contract shows “with special clarity” that the signatories intended that the non-signatory could benefit specifically from the arbitration agreement.

“Parties signing on to an arbitration agreement should remain vigilant of non-signatory ties, the seat of arbitration implications, and the governing law as these rules affect not only the scope of the arbitration, but also the application of domestic contract law.”

Deborah Slattery-Pereira

How U.S. Courts Decide Which Claims Will Procced to Arbitration

In Various Insurers, the Eleventh Circuit addressed whether arbitrators could determine the scope of their jurisdiction, i.e., which claims the parties would arbitrate. The Court concluded that this decision would go to the arbitrators because the arbitration agreement incorporated the International Chamber of Commerce (ICC) Arbitration Rules. The parties agreed that the arbitrators would decide their jurisdiction by incorporating these arbitral institutional rules, delegating arbitrability to the arbitrators. The Court reaffirmed its precedent, holding that the adoption of arbitral institution rules meant that “the parties clearly and unmistakably agreed that the arbitrator should decide [according to those rules].”

The Eleventh Circuit followed First Options of Chicago, Inc. v. Kaplan, a Supreme Court precedent stating that parties may delegate the scope of the arbitration to arbitrators and the arbitrators’ decision binds courts, so long as the parties make a clear delegation in the agreement. The Supreme Court warned that courts should not interpret “silence or ambiguity” as a delegation of jurisdiction to arbitrators. In the absence of a clear agreement, courts should presume that the parties meant that arbitrability would stay with courts. Further, in BG Group PLC v. Republic of Argentina, the Court found that arbitrators can decide disputes involving “the application of procedural preconditions to arbitration, including claims of waiver, delay, defense to arbitrability, time limits, notice, laches, or estoppel.”

Similarly, in Posada v. Cultural Care, the First Circuit held that, if the parties make a “clear and unmistakable delegation of the question of arbitrability, the courts must respect the parties’ decision as embodied in the contract and leave to the arbitrator to decide whether the arbitration agreement applies to the particular dispute.” In Various Insurers, the Eleventh Circuit took one step further because the arbitration agreement had no delegation clause and instead adopted the ICC Rules. The D.C. Circuit agreed with that extra step, holding that “a clear and unmistakable delegation can exist where the arbitration agreement incorporates a set of rules authorizing the arbitrators to determine arbitrability.”

U.S. courts’ reasoning may sound unfamiliar to foreign companies and legal professionals working in other jurisdictions, where courts usually have the final word on arbitrability, even if the arbitrators already decided those issues. Parties and counsel should be careful in selecting the seat of the arbitration because that jurisdiction can deny enforcing the award if the court disagrees with the arbitrators’ decision regarding the scope of the arbitration. For example, if the procedural law of the arbitration is French law, arbitrators can decide their jurisdiction, but their decision is subject to “review by the court having jurisdiction over challenges against the award.”

Conclusion

Parties and counsel should be attentive to two important points in complex commercial disputes involving international arbitrations in the U.S. First, because the NY Convention does not address enforcement against non-signatories, U.S. courts decide whether a third-party will participate in an arbitration by applying state contract law, which depends on the specific jurisdiction. Second, arbitrators have the final word regarding arbitrability when the agreement clearly delegates jurisdictional questions to arbitrators or when it incorporates arbitral institutional rules delegating those questions to arbitrators.

Companies conducting business in the U.S. and legal professionals should carefully consider the impact of an arbitration agreement when drafting complex international commercial contracts. Parties signing on to an arbitration agreement should remain vigilant of non-signatory ties, the seat of arbitration implications, and the governing law as these rules affect not only the scope of the arbitration, but also the application of domestic contract law.