Location, Location, Location: Be Careful Where You Start A Legal War

By Charles H. Camp and Kiran Nasir Gore

An effective dispute resolution strategy is dependent on thoughtful analysis of all choices and consideration of their possible outcomes. This article draws on an important lesson-learning decision issued by the Supreme Court of the United States in June 2020 and offers insights on how the location one chooses to commence a lawsuit against a nonsignatory to a contract with an arbitration clause can have serious tactical and legal implications for all parties involved. It concludes that, before a party decides to declare legal war against another party in circumstances where an arbitration clause has even the remotest chance of being applicable, it must consider every conceivable avenue that the opposing party could use to require the dispute to be resolved through arbitration. This includes consideration of the applicability of legal doctrines existing in the place of any lawsuit to compel or avoid arbitration, which may vary vastly across legal jurisdictions.

 

INTRODUCTION

Sophisticated parties understand that where one chooses to commence an international arbitration is critical because the local laws of the place of the arbitration control numerous aspects of the arbitration. This includes whether courts or arbitrators determine arbitrability, the type of relief obtainable in the arbitration, such as punitive or treble damages, and whether and to what extent arbitral awards may be revisited and/or reconsidered by local courts.

Likewise, virtually everyone knows that where one chooses to commence a lawsuit is critical because local laws and procedures control all aspects of the lawsuit.

What sometimes is overlooked, however, is the importance of choosing a location to commence a lawsuit against a party where there is a contract with an arbitration clause that may be relevant to the dispute, thereby requiring arbitration in a foreign jurisdiction. This consideration is made more complex when that foreign jurisdiction is guided by substantive and procedural laws vastly different from the location of the lawsuit. A recent case demonstrates that this is important even where the adversary party is a “nonsignatory” to that contract.[i] 

Miscalculation appears to have guided several litigation strategy choices made by Outokumpu Stainless USA, LLC (“Outokumpu”), an Alabama-based corporation, when it commenced a lawsuit in the United States District Court for the Southern District of Alabama against GE Energy Power Conversion France SAS, Corp. (“GE France”), a French corporation and subcontractor to Outokumpu’s counter-party “Seller” on a major steel manufacturing plant construction project in Alabama.

We provide a brief overview of Outokumpu’s legal approach and the resulting recent decision of the Supreme Court of the United States (“Supreme Court”). We then distill relevant lessons for future litigants on their choice on where to file a lawsuit, whether they are involved in litigation, arbitration, or circumstances where both may come into play.

LESSONS FROM OUTOKUMPU’S STRATEGIC MISCALCULATION

Under the construction contract between Outokumpu and “Seller” (the “Contract”), all “disputes arising between both parties in connection with or in the performances of the Contract” were required to be resolved through International Chamber of Commerce arbitration in Dusseldorf, Germany applying the “substantive law of Federal Republic of Germany.” Importantly, the Contract states that, “When Seller is mentioned it shall be understood as Sub-contractors included, except if expressly stated otherwise.” Such language, however, does not make GE France an actual signatory to the Contract.

The Contract’s language can be contrasted from Professor Christopher R. Drahozal’s explanation in the Cambridge Compendium on International Commercial and Investment Arbitration (forthcoming) of how a party may manifest consent to arbitrate:

Arbitration is based on the consent of the parties to the arbitration agreement. If a person has not consented to arbitration – i.e., is not a party to the arbitration agreement – then that person cannot be required to arbitrate. Conversely, if a person has consented to arbitration – i.e., is a party to the arbitration agreement – then that person can be required to arbitrate.  As Gary Born states, ‘[i]n the vast majority of cases, the way to determine the parties to the arbitration clause is simply to look at the signature page, and/or the recitals of a contract, and see what entities are designated there.’ (internal citations omitted.)[ii]

Somewhat oddly, the Complaint filed in Alabama by Outokumpu did not assert any breach of contract claims against GE France, a sub-contractor “Seller” under the Contract, but rather only asserted various tort claims, including negligence and breach of warranty, under Alabama law. This is telling of Outokumpu’s litigation strategy: it hoped to avoid invocation of the arbitration clause in the Contract it had signed. Outokumpu only cherry-picked non – breach of contract claims for its lawsuit, which suggests that it was fully aware of, and wished to avoid, the arbitration clause in the Contract requiring arbitration in Germany under German law. Outokumpu hoped to have the benefit and comfort of resolving the dispute where it was at home in Alabama, rather than in a foreign jurisdiction that might provide a less friendly environment and less favorable procedural and substantive law.

Unfortunately, however, Outokumpu will not be able to avoid arbitration in Germany. On June 1, 2020, the Supreme Court in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC[iii] (“GE France v. Outokumpu”) issued an important, lesson-learning decision determining that nonsignatory GE France can compel Outokumpu to arbitrate its disputes because Alabama equitable estoppel doctrines permit the enforcement of arbitration agreements by nonsignatories.

Importantly, the Supreme Court held that Alabama’s equitable estoppel doctrines do not conflict with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) applicable under Chapter 2 of the United States Federal Arbitration Act (the “FAA”) to arbitration between U.S. and foreign parties.[iv] This decision aligns with prior understandings of the interaction of the New York Convention and the FAA:

In the United States (U.S.), parties seeking to . . . enforce their international arbitration agreements must rely chiefly on the Federal Arbitration Act (the “FAA”).  Chapter Two of the FAA implements the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the Convention”) and provides the principal statutory authority for U.S. courts to grant measures in aid of international arbitration. In addition, the remedies available under Chapter One of the FAA – the “domestic” federal arbitration law – are also available in international cases as long as they do not conflict with the Convention.[v]

 

Further, as the Supreme Court noted in GE France v. Outokumpu:

The ‘traditional principles of state law’ that apply under [FAA] Chapter 1 include doctrines that authorize the enforcement of a contract by a nonsignatory. . . .  For example, we have recognized that arbitration agreements may be enforced by nonsignatories through “’assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel’”. . . (quoting 21 R. Lord, Williston on Contracts Section 57:19, p. 183 (4th ed. 2001)). . . .  [W]e have recognized that Chapter 1 of the FAA permits a nonsignatory to rely on state-law equitable estoppel doctrines to enforce an arbitration agreement.

In determining that Alabama’s equitable estoppel doctrines did not conflict with the New York Convention, the Supreme Court examined the precise wording of the Convention:

Only one Article of the Convention addresses arbitration agreements – Article II – and only one provision of Article II addresses the enforcement of those agreements – Article II(3). . . .  The provision, however, does not restrict contracting states from applying domestic law to refer parties to arbitration in other circumstances [where a party is not a signatory to an arbitration agreement]. . . .   Thus, nothing in the text of the Convention ‘conflict[s] with’ the application of domestic equitable estoppel doctrines permitted under Chapter 1 of the FAA.

If Outokumpu had not sued GE France in Alabama, GE France could not have argued that, under Alabama equitable estoppel doctrines, it had a right to compel Outokumpu to arbitrate their disputes in Germany under German law, thus removing the applicability of Alabama’s tort laws to the dispute. Outokumpu’s desire to have the benefit of a hometown advantage and plaintiff-friendly Alabama courts was trumped by Alabama’s equitable estoppel doctrines, which the Supreme Court held did not conflict with the New York Convention.

If Outokumpu had chosen to sue GE France in a location adhering to strict doctrines only permitting arbitration between parties who are actual signatories to an arbitration clause – and where equitable estoppel is not recognized – Outokumpu would have had a better chance to avoid arbitration in Germany under German law, and could have resolved the dispute in court, albeit not an Alabama court, rather than through arbitration.

 

CONCLUSION

Before a party – especially a signatory to a contract containing an arbitration clause – decides to declare legal war against another party in circumstances where an arbitration clause has even the remotest chance of being applicable, it must consider every conceivable avenue that the opposing party could use to require the dispute to be resolved through arbitration. This includes consideration of the applicability of legal doctrines existing in the place of any lawsuit to compel or avoid arbitration, which may vary vastly across legal jurisdictions.

Importantly, all considerations described above apply with equal force where a party to an arbitration clause seeks to compel arbitration by a party that is a nonsignatory to a contract related to (i.e., “intertwined” with) the dispute. The biggest takeaway from the Outokumpu saga is that, where there is any likelihood that the nonsignatory will oppose arbitration, the signatory must consider the applicability of state law doctrines, such as equitable estoppel, that could be employed to compel arbitration against the nonsignatory.

Where prospective litigants must decide whether and where to file a lawsuit, as opposed to demanding arbitration, every consideration should be given to the fact that the United States does not have any treaties with any other countries providing for reciprocal enforcement of judgments. However, the United States is a party to the New York Convention and an arbitral award would be widely enforceable in the 164 other countries that are party to it, including in France (where GE France is based). Litigants should also fully considering the implications of the Supreme Court’s GE France v. Outokumpu decision determining that U.S. local equitable estoppel doctrines do not conflict with the New York Convention and, thus, are fully available in the United States to force arbitration by or against nonsignatories to an arbitration agreement.

About the Authors

Charles H. Camp is an international lawyer with over thirty years of experience representing foreign and domestic clients in international litigation, arbitration, negotiation, and international debt recovery. In 2001, Mr. Camp opened the Law Offices of Charles H. Camp, P.C. in Washington, D.C. to focus on effective, personalized representation in complex, international matters. Mr. Camp teaches international negotiations at the George Washington University Law School.

Kiran Nasir Gore is Counsel at the Law Offices of Charles H. Camp, P.C.  Her expertise is in international dispute resolution, including advocacy before U.S. courts, commercial and investment arbitration tribunals, and investigative authorities. She also draws on her professional experiences as an educator at the George Washington University Law School and New York University’s Global Study Center in Washington, D.C.

[i] William W. Park, Arbitration of International Business Disputes 300 (2d ed. 2012) (“The term ‘non-signatory’ remains useful for what might be called ‘less-than-obvious’ parties to an arbitration clause: individuals and entities that never put pen to paper, but still should be part of the arbitration under the circumstances of the relevant business relationship.”); Stavros L. Brekoulakis, Third Parties in International Commercial Arbitration 2 & n.3 (2010) (concluding that “the term ‘non-signatory’ is appropriate to describe” “parties that have failed to sign an arbitration clause, but are otherwise bound by it,” although noting that the term is “[u]sually preferred by common law scholars and lawyers”). 

[ii] Christopher R. Drahozal, “Parties and Affected Others: Signatories and Nonsignatories to International Arbitration Agreements,” in Cambridge Compendium on International Commercial and Investment Arbitration (Cambridge University Press, forthcoming), at p. 2, available at:  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3125546.

[iii] Slip Op. No. 18–1048 (June 1, 2020).

[iv] As Professor Drahozal notes, supra at p. 3, “The US Federal Arbitration Act (FAA) authorizes ‘[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration’ to seek to have a federal court compel arbitration, and permits ‘one of the parties’ to a written arbitration agreement to seek to stay a federal court action pending arbitration.  Again, the statute does not define the term ‘party.’” (internal citations omitted).

[v] Steven L. Smith, Marcus Quintanilla, et al., ‘Chapter 9: Enforcing Agreements to Arbitrate’, in Laurence Shore, Tai-Heng Cheng , et al. (eds), International Arbitration in the United States, (Kluwer Law International, 2017) pp. 189 – 208 (emphasis added).

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.