OF INTERNATIONAL COMMERCIAL ARBITRATION, NON-SIGNATORIES, AND AMERICAN FEDERALISM: THE CASE FOR A FEDERAL EQUITABLE ESTOPPEL RULE.

• Author: Meshel, Tamar

1. Equitable Estoppel: Origins and Development in the Arbitration Context 128 II. Equitable Estoppel and Non-Signatories to International Commercial Arbitration Agreements: Jurisprudential Divisions in the United States 132 III. The Case for a Federal Equitable Estoppel Rule 141 INTRODUCTION

   One of the main goals of international commercial arbitration is to provide a measure of certainty--in terms of the governing laws, procedures, and forum--to the resolution of international commercial disputes. (1) American courts have long recognized international comity, respect for foreign tribunals, and the need for predictable dispute resolution as rationales for enforcing international commercial arbitration agreements. (2) Yet with arbitration becoming ubiquitous in international commercial practice, difficult legal questions increasingly arise before domestic courts.' Consider, for instance, the following scenario: party A, an American entity, and party B, a foreign entity, sign a commercial contract containing a dispute resolution clause that provides for international arbitration. Party C, a sub-contractor for party B and a non-signatory to the contract, is sued by party A in court. Party A's claims against party C arise out of and relate directly to its contract with party B. Party C applies to compel party A to arbitrate its claims pursuant to the arbitration clause in the contract that party A signed but party C did not. Since party A's claims depend on the contract, argues party C, it should be equitably estopped from evading the arbitration clause contained within that same contract. Party A responds that since it did not consent to arbitrate its dispute with party C, the latter cannot compel it to do so. How should the court decide the matter? On the one hand, it seems warranted that party A's reliance on the underlying contract in making its claims against party C should estop it from evading the obligation to arbitrate contained in the very same contract. (4) After all, party A, who did sign the contract, should not be allowed to rely on some of its terms but escape others. On the other hand, since arbitration is a consensual and contractual dispute resolution mechanism, party A can only be estopped from denying the applicability of the arbitration clause if the dispute falls within its scope. Since party C did not sign the contract, party A's claims against it are not covered by the arbitration clause. (5) Further complicating this determination is the international nature of the arbitration--should the court apply a different equitable estoppel standard to non-signatories to international vs. domestic commercial arbitration agreements? Should federal or state law dictate this standard? Finally, would the analysis change if the non-signatory party C was suing signatory party A in court, and the latter applied to compel the former to arbitrate the dispute? Federal circuit courts have long grappled with these questions but have produced inconsistent answers, while the Supreme Court of the United States has provided only partial resolution.

   The starting point for any discussion of international commercial arbitration in the United States is the Federal Arbitration Act ("FAA" or "the Act"). (6) Chapter 2 of the FAA incorporates the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention" or "Convention"). (7) A central goal of the Convention, and "the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and... enforced in the signatory countries." (8) The Convention therefore requires each contracting state to "recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences ..." (9) and to "refer the parties to arbitration.'" (10) It defines the term "agreement in writing" to "include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams."" Chapter 1 of the FAA, which governs domestic arbitration agreements, also applies to actions brought under Chapter 2 and the Convention "to the extent that the two are not in conflict." (12)

   The Supreme Court has consistently interpreted the FAA as embodying

   a "liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary ... " (13) and as creating "a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate" (14) applicable in both federal and state courts. (15) This body of federal substantive law requires, for instance, that courts "place [arbitration] agreements upon the same footing as other contracts.'" (16) It also establishes that the enforceability of arbitration agreements cannot be limited under state law, (17) since the FAA has a "broad reach ... unencumbered by state law constraints." (18) Ultimately, therefore, a state statute that conflicts with the FAA must give way under the Supremacy Clause. (19)

   At the same time, the Supreme Court has reserved an important role for state law in determining arbitration-related questions, at least in the context of domestic arbitration agreements falling under Chapter 1 of the FAA. The Court has found that under this chapter, an agreement to arbitrate is "valid, irrevocable, and enforceable, as a matter of federal law" (20) but that "the interpretation of an arbitration agreement is generally a matter of state law." (21) Therefore, courts are to "apply ordinary state-law principles that govern the formation of contracts" to the enforcement of domestic arbitration agreements."

   As for issues surrounding non-signatories to such domestic agreements, in its 2009 decision in Carlisle the Supreme Court held that the FAA does not purport

   to alter background principles of state contract law regarding the scope of agreements (including the question of who is bound by them)... 'traditional principles' of state law allow a contract to be enforced by or against nonparties to the contract through 'assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel,'...[Furthermore,] no federal law bars the State from allowing [non-parties to arbitration agreements] to enforce the arbitration agreement.. .[Thus,] a litigant who was not a party to the relevant arbitration agreement may invoke [the FAA] if the relevant state contract law allows him to enforce the agreement. (23) Despite such guidance in the domestic arbitration context, confusion persists in the context of non-signatories to international commercial arbitration agreements, particularly with respect to the doctrine of equitable estoppel. (24)

   In this article I set out to resolve this confusion and promote clarity and consistency in cases involving non-signatories to international commercial arbitration agreements and the commonly used, albeit contentious, doctrine of equitable estoppel. (25) Part 1 briefly introduces the origins of the doctrine and examines its development internationally and in the United States in the context of non-signatories to arbitration agreements. In Part II, I explore two areas of disagreement emerging from decisions of the circuit courts regarding equitable estoppel: (1) whether the doctrine is available at all in cases involving non-signatories to international commercial arbitration agreements, and, if so, (2) whether state or federal law should govern its application. I also assess this jurisprudence against the internationally accepted interpretation of the Convention and general practice in international commercial arbitration. In Part III, I argue that the application of the equitable estoppel doctrine by or against non-signatories to international commercial arbitration agreements should be considered a matter of federal statutory interpretation informed by the pro-enforcement policy of the FAA. Accordingly, I propose a federal equitable estoppel rule of statutory interpretation to be applied across the federal courts in order to ensure both certainty and compliance with international commercial arbitration norms. This federal equitable estoppel rule has three interrelated elements. First, it makes equitable estoppel uniformly available under the FAA in cases involving non-signatories to international commercial arbitration agreements. (26) Second, it provides that federal, rather than state law, governs the application of equitable estoppel in these cases. Third, it guides such application and sets out its limits. Finally, Part IV concludes that the split among the circuit courts on some of these questions runs afoul of the goals and spirit of both the New York Convention and the FAA and undermines the United States' position as a pro-arbitration jurisdiction. In order to prevent contradictory decisions in the future, equitable estoppel should be uniformly applied as a matter of federal law in international commercial arbitration cases involving non-signatories.

1. EQUITABLE ESTOPPEL: ORIGINS AND DEVELOPMENT IN THE ARBITRATION CONTEXT

   Historically, the doctrine of estoppel, with its "kaleidoscopic varieties," (27) was used by Common Law courts as a device to promote "confidence in business transactions" and discourage fraud. (28) The purpose of estoppel was to create a "bar that prevents one from asserting a claim or right that contradicts what one has said or done before or what has been legally established as true." (29) Since the 18th century, equitable estoppel has been applied in situations where, for instance, A "had previously so conducted himself in relation to [B] as would make it 'fraudulent', 'inequitable', or 'unconscionable' ... to occasion the consequences...