Arbitration in the Courts

June 2020 | Vol. 3
Where Advocacy Meets Business

U.S. Supreme Court holds that New York Convention permits non-signatories to enforce arbitration agreements:

Non-signatories may enforce arbitration agreements under traditional state law principles, such as equitable estoppel.

GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, 590 U.S. ___ (2020).

In GE Energy Power, the U.S. Supreme Court resolved a split among federal Circuit Courts of Appeals over whether Article II of the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention” or “Convention”) precludes the enforcement of arbitration agreements by non-signatories under state law doctrines, such as equitable estoppel. The Eleventh and Ninth Circuits have held that the Convention only permits signatories to enforce agreements to arbitrate, while the Fourth and First Circuits, among others, have held that nonsignatories can enforce arbitration agreements falling under the Convention when permitted by ordinary state law principles, including equitable estoppel. Compare Outokumpu Stainless USA, LLC v. Converteam SAS, 902 F.3d 1316, 1326 (11th Cir. 2018), and Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996, 1001–1002 (9th Cir. 2017), with Aggarao v. MOL Ship Mgmt. Co., 675 F.3d 355, 375 (4th Cir. 2012), and Sourcing Unlimited, Inc. v. Asimco Int’l, Inc., 526 F.3d 38, 48 (1st Cir. 2008).  The Supreme Court held the Convention permits nonsignatories to enforce arbitration agreements under ordinary principles of state law.

In 2007, Outokumpu (then known as ThyssenKrupp Stainless USA, LLC) entered into a series of contracts with F.L. Industries, Inc. for the construction of cold rolling mills at Outokumpu’s steel manufacturing plant in Alabama.  Each contract contained an identical arbitration clause providing for arbitration in Germany under the Rules of the International Chamber of Commerce.  F.L. Industries subsequently executed a subcontract with GE Energy Power Conversion France SAS, Corp. (GE) to manufacture motors for the cold rolling mills.  After GE’s motors failed, causing substantial damage, Outokumpu and its insurer sued GE in Alabama state court.  GE removed the case to federal court under Section 205 of the FAA, which provides for federal removal jurisdiction over claims seeking to enforce arbitration agreements and awards governed by the New York Convention.  GE then moved to compel arbitration, citing the arbitration clause in the contracts between Outokumpu and F.L Industries.  GE first argued that it was a party to the arbitration agreements, which defined “Sellers” and “Parties” to include subcontractors. GE also claimed that it could enforce the arbitration agreement against Outokumpu under the doctrine of equitable estoppel, which permits non-signatories to enforce the arbitration agreement in a written contract against a signatory where the signatory asserts claims against the nonsignatory deriving from the contract.

The district court granted GE’s motion to compel, holding that GE qualified as a party to the arbitration agreement.  The district court therefore did not reach GE’s equitable estoppel argument.

On appeal, the Eleventh Circuit Court of Appeals reversed, holding that GE could not enforce the arbitration agreement, because it interpreted the Convention to require that “the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration.”  The circuit court based its holding on the language in Article II requiring “[e]ach Contracting State [to] recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.”  Accordingly, the Eleventh Circuit held that GE could not enforce the arbitration agreement under its terms or equitable estoppel principles because it did not sign the agreement.

The Supreme Court reversed.  Resolving the circuit split, the Court held that ordinary state law principles permitting nonsignatories to enforce arbitration agreements applied to agreements governed by the Convention.  Chapter 2 of the FAA, which implements the New York Convention, provides that Chapter 1 governing domestic arbitrations “applies to actions and proceedings brought under this chapter [2] to the extent that [Chapter 1] is not in conflict with . . . the Convention.”  The Court has previously held that Chapter 1 of the FAA permits nonsignatories to enforce arbitration agreements against signatories under “traditional principles of state law,” including the doctrine of equitable estoppel.  The question before the Court was thus whether the common law doctrine of equitable estoppel was “in conflict with” the New York Convention.  The Court held that it was not.

Because the Convention was silent on the issue of nonsignatory enforcement, it did not conflict with the “traditional principles of state law” that apply to the enforcement of arbitration agreements by non-signatories under Chapter 1.  In particular, the Court held that, although Article II(3) requires that a contracting state “shall . . . refer the parties to arbitration” when the parties have entered into a written agreement to arbitrate, it “does not state that arbitration agreements shall be enforced only” if there is a signed agreement between the parties, and “does not restrict contracting states from applying domestic law to refer parties to arbitration in other circumstances.”  Thus, the Convention “does not prevent the application of domestic laws that are more generous in enforcing arbitration agreements.”  That is, the “nonexclusive language” of Article II does not “set a ceiling that tacitly precludes the use of domestic law to enforce arbitration agreements,” and “nothing in the text of the Convention ‘conflicts with’ the application of domestic equitable estoppel doctrines permitted under Chapter 1 of the FAA.”

Although it determined that the Convention’s text was sufficient to reach this conclusion, the Court found that its interpretation was buttressed by the drafting history of the Convention, which suggested that the drafters intended only to “impose baseline requirements on contracting states,” and decisions from the courts of other contracting states permitting nonsignatories to enforce arbitration agreements.

Read the court’s full decision here.


Fifth Circuit holds arbitrator determines the scope of institutional rules governing reconsideration of awards:

Arbitrator’s interpretation of institutional rules adopted by the parties is entitled to deference.

Communications Workers of America., AFL-CIO v. Southwestern Bell Telephone Company, 953 F.3d 822 (5th Cir. 2020).

Most institutional rules provide arbitrators with some authority to correct or amend their awards.  In Communications Workers, the Fifth Circuit Court of Appeals addressed how to determine whether an arbitrator violates such a rule in changing his award. The Fifth Circuit held that, so long as the arbitrator is making an effort to interpret the rules, the court must defer to the arbitrator’s interpretation of the scope of his authority under the rules.

Communications Workers of America (CWA) filed a grievance against Southwestern Bell alleging that the company violated the parties’ collective bargaining agreement (CBA) by assigning fiber optic cable-splicing work to one group of workers, Premises Technicians.  When the grievance could not be resolved, CWA initiated arbitration under the Labor Arbitration Rules of the American Arbitration Association (AAA), as provided for in the CBA.

During the arbitration, Southwestern Bell relied on a prior settlement agreement between the parties, which permitted the company to “assign Premises Technicians all work from and including the Serving Terminal up to and including the customer premises for IP enabled products and services.”  The company argued that the broad right to assign “all work” to Premises Technicians included cable splicing.

Over Southwestern Bell’s objection, CWA introduced an exhibit detailing “specific agreements” between a Southwestern Bell affiliate and a different CWA bargaining unit over the tasks assigned to Premises Technicians.  Relying on that exhibit, the arbitrator issued an award finding that Southwestern Bell had violated the CBA by assigning cable-splicing work to Premises Technicians.  The arbitrator agreed with Southwestern Bell that the settlement agreement permitted the assignment, but found, based on the exhibit, that the “past practice” of the parties required formal negotiation to add cable splicing to the job duties of Premises Technicians.  In the award, the arbitrator specifically stated that he “would be inclined to find that no violation of the [CBA] occurred” but for the exhibit, which demonstrated the “clear practice that the parties have chosen to abide by.”

Shortly after the issuance of the award, Southwestern Bell filed a motion for reconsideration under Rule 40 of the AAA Labor Rules, which permits the arbitrator to “correct any clerical, typographical, technical, or computational errors in the award.”  The Rule, however, provides that an arbitrator is “not empowered to redetermine the merits of any claim already decided.” Southwestern Bell argued that the arbitrator erred in relying on the exhibit because it “was a different union’s summary of a different bargaining unit having a different collective bargaining agreement.”  The arbitrator agreed and issued a new award, this time finding in favor of Southwestern Bell.  The arbitrator classified his reliance on the exhibit as a “technical error,” and thus concluded that reversing his initial award did not run afoul of the Rule’s prohibition on redetermination of the merits.

The parties subsequently filed cross petitions for enforcement of their respective awards.  Opposing enforcement of the second award, CWA argued that the arbitrator had exceeded his authority because the second award amounted to a reconsideration of the merits of the claims, in violation of Rule 40.  The district court disagreed and enforced the arbitrator’s second award in favor of Southwestern Bell and CWA appealed.  The Fifth Circuit affirmed.  The court held that it “must affirm an arbitral award as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority.”  Because the parties’ CBA incorporated the AAA Labor Arbitration Rules, the arbitrator’s interpretation of Rule 40 was entitled to the same deference as his interpretation of any other provision in the contract.  The court concluded that “the arbitrator’s determination that he had committed a ‘technical’ error was an arguable interpretation of the contract.”  The arbitrator was not required to explain the reasoning behind his interpretation.  Rather, the court was able to “discern a possible rationale” for the arbitrator’s decision that his error in relying on the exhibit was “technical” because the new award “did not alter the merits framework from his first award,” and was consistent with his initial reasoning that he would have found in favor of Southwestern Bell but for the exhibit.

Read the court’s full decision here.

New York Court of Appeals finds “partial final award” not “final” for purposes of functus officio doctrine:

Arbitrators could revisit partial award absent “express, mutual” agreement that award would be final.

American International Specialty Lines Insurance Company v. Allied Capital Corporation, No. 23 (N.Y. Apr. 30, 2020).

While the Fifth Circuit in Communications Workers (953 F.3d 822, discussed above) determined an arbitrator’s power to revise an award under institutional rules, the New York Court of Appeals recently considered the issue under New York common law.  The common law doctrine of functus officio – Latin for “performed one’s office” – provides that “arbitrators relinquish all powers over the parties to the arbitration upon issuance of a final award and, therefore, are precluded from modifying or reconsidering that award.”  Under New York arbitration law, only “final” awards trigger the application of the doctrine of functus officio.  Thus, arbitrators generally have the inherent authority to revisit and change non-final awards. In a decision of first impression, New York’s Court of Appeals, the state’s highest court, addressed the much-debated question of whether partial awards may be “final.”  The Court determined that the Partial Final Award at issue was not “final” because the parties did not reach an “express, mutual agreement” to treat it as such.

In American International, two putative insureds initiated an arbitration against American International Specialty Lines Insurance Company (AISLIC), to recover defense costs and indemnification relating to litigation and a subsequent settlement to resolve claims against the insureds under the Federal False Claims Act.  AISLIC opposed their claim for coverage on the grounds that the settlement did not constitute a “loss” within the meaning of the insurance policies and that the defense costs arose, in part, from unrelated legal work not covered by the policies.

The insureds and AISLIC both moved for summary disposition on the issue of liability.  The insureds contended that they were entitled to an award on liability, and factual issues concerning the quantum of recoverable defense costs could be the subject of a separate evidentiary hearing if the tribunal found AISLIC liable for those costs.  At oral argument on the parties’ summary disposition applications, the panel inquired whether a “partial summary disposition [was] in the cards.” Counsel for the insured expressed that such an award would “make the most sense”; AISLIC’s counsel “never directly commented” on whether it agreed to a partial summary disposition.

The tribunal then issued a “Partial Final Award” holding that the settlement did not constitute a covered loss under the applicable insurance policy, but that one of the insureds was entitled to defense costs, to be quantified following an evidentiary hearing.  After the insureds moved for reconsideration of the Partial Final Award, the tribunal reversed course and issued a “Corrected Partial Final Award,” this time finding that the settlement did constitute a covered loss. Following the evidentiary hearing to determine the amount of defense costs, the tribunal issued a “Final Award” awarding the insureds indemnification and defense costs.

AISLIC petitioned in state court to vacate the Corrected Partial Final Award and Final Award and reinstate the original Partial Final Award.  The trial court denied AISLIC’s petition but the Appellate Division reversed, holding that under New York’s “functus officio doctrine,” the tribunal exceeded its authority when it reconsidered its initial Partial Final Award on liability.

The Court of Appeals reversed, holding that a tribunal is only functus officio after it renders a “final” award—that is, an award that is “coextensive with the issues submitted to the arbitrators by the parties” or “one that resolves the entire arbitration.”

The Court acknowledged that federal courts in New York “have consistently recognized that partial determinations may be treated as final awards where the parties expressly agree both that certain issues submitted to the arbitrators should be decided in separate partial awards and that such awards will be considered to be final.”  See, e.g., Trade & Transp., Inc. v. Nat. Petroleum Charterers Inc., 931 F.2d 191 (2d Cir. 1991).  Without reaching the question, the Court suggested that, under appropriate circumstances, a tribunal could be functus officio with respect to a partial award where the parties, by “express, mutual agreement,” agree that a partial award will be “final” as to the matters determined thereby.

In this case, however, the Court concluded that the tribunal’s Partial Final Award was not final because AISLIC never agreed to bifurcate the proceeding and treat any resulting partial decision as a “final” award.  And “neither the parties nor the arbitrators ever discussed or otherwise demonstrated a mutual understanding regarding whether the proposed severance of the calculation of the defense costs would result in a final partial award.”  Because the parties did not agree that the Partial Final Award would be final, the functus officio doctrine did not apply to that award, and the tribunal did not exceed its authority by reconsidering that decision.

Read the court’s full decision here.

Res judicata effect of prior arbitration award is a question for the arbitrators:

Second tribunal determines the preclusive effect of prior awards.

Certain Underwriters at Lloyd’s, London v. Century Indemnity Company, No. 18-CV-12041 (D. Mass. Mar. 6, 2020).

Under the doctrine of res judicata, a final judgment on the merits precludes a party from re-litigating issues that were or could have been raised in the first action.  Res judicata applies with “equal force to arbitration.”  In this case, the United States District Court of the District of Massachusetts concluded that the question whether a prior arbitration award has res judicata effect in a subsequent arbitration is a question for the arbitrators in the second arbitration—not the court—to decide.

In Lloyd’s, Century Indemnity Company (Century) purchased treaty reinsurance from Certain Underwriters at Lloyd’s, London (Lloyd’s) from 1963 through 1970.  For over 30 years, including the period in which Century held reinsurance from Lloyd’s, Century issued insurance policies to the Boy Scouts of America.  Beginning in the 1990s, the Boy Scouts sought coverage under the policies for sexual molestation claims against individuals associated with the organization.  Century and the Boy Scouts entered a settlement agreement providing that all indemnity and defense costs for each molestation claim would be covered under the Century policy in effect on the date when the first act of molestation had occurred.

In accordance with the settlement terms, Century paid the Boy Scouts’ claims and then sought indemnification from Lloyd’s under reinsurance contracts covering the Boy Scouts’ policies.  Pursuant to the settlement agreement, Century allocated payments for each molestation claim to the policy in effect at the time of the first encounter.  For each policy, Century aggregated all molestation claims into a single loss occurrence under the applicable reinsurance contract.

Lloyd’s denied reinsurance coverage on the ground that Century’s allocation of payments under the Boy Scouts settlement and its aggregation of all molestation claims into a single loss occurrence were not binding on the reinsurer.  Lloyd’s and Century proceeded to arbitration and in May 2018 the panel issued a one-page award holding that Lloyd’s reinsurance did not cover Century’s billings because Century’s allocation agreement with the Boy Scouts was not the product of a “reasonable and business-like investigation.”  Lloyd’s subsequently petitioned for confirmation of the award in federal district court, which the court granted.

Three months after the arbitration, in August 2018, Century submitted new billings to Lloyd’s.  This time, however, Century spread its payments to the Boy Scouts across each of its policies in effect during the entire period of abuse instead of allocating claims to the policy year in effect at the first encounter.  But, as before, Century aggregated all payments under each policy into a single loss occurrence under the applicable reinsurance contract.

Lloyd’s again denied Century’s claims and sought clarification from the arbitral panel on the scope of its award.  The panel issued a Clarification Award explaining that Century’s claim for payment depended on the approval of two steps: allocation of claims to the first date of abuse and accumulation of those claims within a given policy year.  The panel further explained that it had rejected Century’s claims on the ground that its allocation was impermissible and therefore did not reach the question of whether aggregation into a single loss occurrence was permissible.

Lloyd’s thereafter denied Century’s revised billings. In November, 2018 Century commenced a second arbitration challenging Lloyd’s denial of the new billings.  When Lloyd’s refused to arbitrate, Century filed a petition in the district court to compel arbitration.  Lloyd’s then moved to dismiss the petition on the ground that, inter alia, Century’s demand for arbitration was a collateral attack on the previous arbitral award and barred by the doctrine of res judicata.  Century argued that the previous award did not decide the propriety of its new billings and that, in any event, whether the prior award should be accorded preclusive effect was a question for the second arbitration panel.

The district court, citing authority from federal courts across the country, agreed that whether the prior award was entitled to res judicata effect in the second arbitration was a question for the second panel. The court therefore granted Century’s motion to compel because “[t]he issue here is not whether Century is seeking to attack the proceedings that resulted in the [first] Arbitration Award, but whether the Arbitration Award precludes arbitration regarding the August 2018 billings.”

Read the court’s full decision here.

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