Consent has always been a cornerstone of arbitration, whether it is under international treaties or state legislation. The proceedings rest fundamentally on the concept of consent and the parties' agreement to waive off the right to seek legal remedy under the court system. In other words, it operates on a principle of autonomy. Generally, a non-signatory third party to an arbitration agreement or clause could not be compelled to arbitrate. At the same time, the non-signatory third party cannot compel a signatory party to arbitrate. The law is premised on a standard principle based on the consent of the parties and their express agreement to compel or be compelled to arbitrate. However, there are times when complicated business relations and other circumstances where arbitrators have to decide whether parties who have not signed the arbitration agreement either seek to be bound by the same or are impleaded by the signatories. Such circumstances give rise to a dilemma where including a non-signatory party in the arbitration might jeopardize the process of enforcement of the award. Alternatively, not including the non-signatory might render the award practically ineffective. However, this is a general principle, and as with any standard, exceptions exist. Non-signatories to an arbitration agreement have been empowered to compel arbitration in several cases. Similarly, non-signatories may be ordered to arbitrate by courts. To compel arbitration, courts will often rely on relevant conventional common law principles of contract and equity.
This is because a non-signatory third party that sues based on a contract is subject to the terms of the same contract, including an arbitration clause.
THEORIES TO DETERMINE TREATMENT OF NONSIGNATORY IN INTERNATIONAL ARBITRATION
Tribunals use both non-consensual and consensual approaches to determine whether a non-signatory party can participate in an arbitration.1 Consensual theories aim to infer consent from the behavior of parties if an agreement is not self-evident. Estoppel, agency, and implicit consent theories, as well as the Group of Companies Doctrine, are among them. Estoppel is used to prevent a party or 'estop' them from avoiding arbitration because it has not consented to arbitrate where the dispute derives primarily from a contract mandating arbitration to which it is a party. A party is bound by agency, which is an extension of the contract law concept when the arbitration agreement is signed by the former's agent acting on its behalf. A non-implied signatory's assent is another way to bind a non-signatory to arbitration where it implies that they should reasonably expect to be bound by or benefit from an arbitration agreement signed by another party. The parties in this case do not need to be part of a business organization.
The group of businesses theory, on the other hand, is applied to firms that appear to function inside a corporate group. It precisely evaluates the nature of the parties' connection, investigates the parties' purpose at the time of contract completion, and investigates the non-signatory's role and involvement in its execution to determine whether the parties constitute a single economic reality. Non-consensual theories entail a non-signatory party in the arbitration notwithstanding an evident lack of desire to arbitrate. Such ideas include the third-party beneficiary doctrine and the veil-piercing doctrine. The third-party beneficiary theory requires the party that has directly benefited from the contract subject to arbitration to arbitrate the issue. The corporate veil is a metaphor for a corporation's autonomous legal identity. When the shareholders of a firm engage in illegal conduct in the name of the company, the court or tribunal extends accountability to those shareholders, rendering them financially liable.
THE LANDMARK CASE OF GE ENERGY POWER V. OUTOKUMPU STAINLESS
In the 2020 case of GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless, USA, LLC,2 the US Supreme Court held that a non-signatory may move to compel arbitration even when the arbitration must be conducted according to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") because it involves foreign nationals.
Three contracts between ThyssenKrupp Stainless USA, LLC and FL Industries, Inc. were signed in 2007 for the construction of cold rolling mills at the companies' Alabama-based factories.
Each of the contracts featured an arbitration clause that said that all disputes would be settled by arbitration conducted in Germany and conducted per the Rules of Arbitration of the International Chamber of Commerce. By the agreements, FL Industries and each of its subcontractors would be given the same legal standing. FL Industries and GE Energy Power Conversion France SAS, Corp entered into subcontract agreements for the design, production, and supply of motors for the cold rolling mills. After the motors were delivered in 2011 and 2012, Outokumpu Stainless USA, LLC acquired ownership of the plant. Outokumpu asserts that by the summer of 2015, all of the motors had failed, resulting in significant losses for the company. Outokumpu sued GE Energy in a state court in Alabama. Based on the arbitration agreement between ThyssenKrupp and FL Industries, GE Energy attempted to compel arbitration and removed the action to US federal district court. The district court ruled that GE Energy met the requirements to be considered a "party" for purposes of the arbitration clause and granted GE Energy 's motion to compel arbitration.
In its ruling on appeal, the US Court of Appeals Eleventh Circuit stated that the New York Convention's requirement that an agreement to arbitrate be "signed by the parties" was incompatible with the district court's decision to compel arbitration. The Court of Appeals held that GE Energy had no right to compel arbitration because GE Energy had not expressly consented to the arbitration agreement between ThyssenKrupp and FL Industries, despite the fact that the ThyssenKrupp-FL Industries agreement required FL Industries and its subcontractors, including GE Energy, to be treated equally.
In doing so, the Eleventh Circuit explicitly rejected GE Energy's claim that the law of equitable estoppel should be applied to compel Outokumpu to arbitrate the issue. While the doctrine of equitable estoppel is conceptually broader, in the case of GE Energy, the doctrine stood for the proposition that a non-signatory (e.g. GE Energy) to a written agreement that contains an arbitration clause, may compel arbitration when a signatory (e.g. Outokumpu) brings a claim arising out of the agreement against the non-signatory.
The US Supreme Court ruled unanimously that the equitable estoppel concept and the New York Convention did not contradict. The Court stated in its decision that "the NY Convention's text does not address whether non-signatories may enforce arbitration agreements under domestic laws such equitable estoppel. On the subject of enforcement by non-signatories, the Convention is essentially silent. Nothing in the wording of the Convention could be interpreted to otherwise forbid the adoption of domestic equitable estoppel theories, according to the Court, so "this silence is dispositive here." The NY Convention was never intended to impose a limit that would make it impossible to employ domestic law to enforce arbitration agreements, according to the Court's reasoning. For example, even though article II (3) of the Convention requires that written arbitration agreements be enforced, article II (3) does not prevent courts from upholding arbitration agreements in other situations. The Court argued that in those situations, the Convention was written in a way that would allow domestic contract law to "fill gaps in the Convention." Two important conclusions can be drawn from the US Supreme Court's ruling, as was already mentioned. First of all, GE Energy is important for multi-tiered business structures that depend on networks of general and subcontractor/supplier agreements. In those situations, GE Energy allows a larger number of parties to resolve complicated disputes (typically multiparty conflicts) through a single international arbitration as opposed to through many, potentially inconsistent hearings. Consequently, GE Energy ought to be advantageous for some industries, such as building, where parties depend on broad networks for subcontract and supplier agreements to carry out complicated technical projects. Second, the ruling makes it clear that US domestic law concepts are crucial in deciding issues brought before international arbitration. While the Court's ruling makes it apparent that other US domestic doctrines like assumption, piercing the corporate veil, and alter ego would apply in comparable circumstances, GE Energy is concerned with the application of equitable estoppel. By doing this, the Court aligns the US's view of the New York Convention with that of other significant arbitral countries.
Aside from the theories that assist determine whether a non-signatory can compel or be compelled to arbitrate, there are various additional procedural and regulatory hurdles. First, the subject arbitrations are challenged based on the New York Convention's requirement of 'agreement in writing' and the necessary signature of the parties involved. However, several governments, like the United Kingdom and New Zealand, reduce the obligation, resulting in a strained and ambiguous relationship with the Convention. Second, the question of applicable law arises in the international realm, where the tribunal frequently determines the applicable law to the various contracts and parties independently. Finally, the tribunal, as well as the intervening Courts, vary in such inclusion owing to the procedural issues arising from the same such as the appointment of the tribunal, arbitration costs, timelines, etc.
There are several ways for non-signatories to become engaged in arbitrations, either voluntarily or accidentally. The extent to which an adjudicator would go to uncover evidence of the required consent and purpose would determine whether a non-signatory may compel or be compelled. This would be determined by the jurisdictional and factual distinctions outlined above. It is a matter of parity and the nature of authority and application. The US Supreme Court's ruling in Outokumpu put an end to a long-running controversy over the availability of equitable estoppel to non-signatories invoking international commercial arbitration agreements under the New York Convention. It reinforces what other countries and international commercial arbitration practices have long held: the capacity to enforce a genuine international arbitration agreement does not necessitate a signature on the dotted line. However, the Court left unaddressed both antecedent and subsequent questions surrounding its decision. Is it necessary for parties to sign the New York Convention to demonstrate a legitimate international arbitration agreement? Finally, what law controls the use of equitable estoppel in situations involving non-signatories to international commercial arbitration agreements, and what is the doctrine's specific formulation? The Court deferred answering these questions until another day.
A noted critic stated that if the only reason for withholding assent to arbitration was that the third party had not signed the arbitration agreement, justice does not appear to be served. The application of the aforementioned ideas contributes to the achievement of equitable justice. This must be done judicially since once the arbitration process begins and the award is issued, the margin for appeal within the restricted statutory grounds is quite tight.
1. Dodge, Jaime L. and Pollman, Elizabeth, "Arbitration, Consent and Contractual Theory: The Implications of EEOC v.Waffle House" (2003). Faculty Scholarship at Penn Carey Law. 2566. https://scholarship.law.upenn.edu/faculty_scholarship/2566
2. Supreme Court Case No. 18–1048, Slip. Op. 590 U. S. (June 1, 2020)
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