Contract Interpretation

The U.S. District Court for the Southern District of Texas recently compelled arbitration against insurers but not brokers related to a commercial insurance dispute.

After Hurricane Harvey decimated Houston, an insured sought coverage under its commercial insurance policy. The insurers, several of whom were foreign, denied coverage. The insured filed suit against the insurers based on the denial and an alleged failure to investigate. It also sued the brokers who developed the policy on the theory that the brokers had failed to disclose that the policy contained an allegedly “unique and extremely onerous” arbitration clause.

The insurers and brokers sought to compel arbitration under that clause. The district court granted the insurers’ motion but denied the brokers’ motion and stayed the action.

The court concluded that the requirements of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards were met with respect to the insurers and rejected the insured’s argument that the Convention’s exception where the arbitration agreement is “null and void” applied. The insured contended that the arbitration agreement was “unconscionable” under Texas law because it required arbitration to occur in and be subject to the law of New York, set strict limitations on damages, and required the tribunal to comprise senior underwriters or claims handlers. The court explained that the “null and void” exception “is limited to standard breach-of-contract defenses capable of being applied neutrally on an international scale – such as fraud, mistake, duress, waiver, and the like.” There was no evidence of that here.

With respect to the broker defendants, the court noted that they were not signatories to the insurance agreement and its arbitration clause and that non-signatories could compel arbitration in limited circumstances. The court rejected the contention that “intertwined-claims estoppel” applied, explaining that the insured’s complaint did not establish a sufficiently close relationship between the insurers and the brokers for that doctrine to apply. The court also rejected “direct-benefits estoppel,” explaining that the doctrine was not applicable because the insured’s claims against the brokers related to alleged misrepresentations and omissions in the insurance contract’s development and did not assert breaches of the insurance policy. “[N]o interpretation of the insurance policy [was] necessary to adjudicate the misrepresentation claims” against the brokers.

The court nevertheless stayed court proceedings pending completion of the arbitration.

5556 Gasmer Management LLC v. Underwriters at Lloyd’s, London, No. 4:19-cv-00974 (S.D. Tex. May 29, 2020).

The petitioner challenged an arbitration award on the basis that it conflicted with public policy. “[T]he Third Circuit has explained that this exception does not … sanction a broad judicial power to set aside arbitration awards as against public policy.” Thus, the limited public policy exception applies only when “the arbitration decision and award create an explicit conflict with an explicit public policy.” For example, the court referenced numerous situations in which arbitration awards were vacated on public policy grounds where the safety of the general public is implicated, such as vacating an arbitration award that reinstated a pilot who flew while intoxicated or overruling an award that reinstated an employee who violated a public safety regulation at a nuclear power plant. Here, citing various labor laws, the petitioner argued that his employment contract’s forfeiture provision deprived him of wages that he earned based on his performance at Wells Fargo Advisors, and he was prevented from working off his loan obligations because he was discharged without cause. The court found that the petitioner’s dispute was a private contractual relationship between him and Wells Fargo Advisors and did not implicate public policy or public harm.

The petitioner also argued that the panel manifestly disregarded the law, as Wells Fargo Advisors encouraged the panel to resolve the dispute based on “industry practice” instead of the applicable law and that “representations that Wells Fargo Advisors advanced during the proceedings, in conjunction with the [a]ward which it received, raise an inference that the law was ignored.” The court’s review of the record indicated that the panel “was neither encouraged nor directed to disregard the law in resolving the parties’ dispute” and that support for the award can be derived from the terms and provisions of the petitioner’s employment contract.

Lastly, the petitioner argued that the panel excluded certain evidence during the hearings, which would have established that he was discharged from Wells Fargo Advisors without cause. The court found such evidence would have been irrelevant, as the petitioner’s letter offer stated that he was hired on an at-will basis, providing Wells Fargo Advisors a right to terminate the petitioner’s employment at any time, with or without advance notice and with or without cause.

The arbitration award was confirmed.

Caputo v. Wells Fargo Advisors, LLC, No. 3:19-cv-17204 (D.N.J. May 29, 2020).

The U.S. Supreme Court has held that equitable estoppel doctrines can be invoked by non-signatories seeking to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

ThyssenKrupp Stainless USA contracted with F.L. Industries Inc. to build cold rolling mills at ThyssenKrupp’s steel plant in Alabama. The contracts between ThyssenKrupp and F.L. contained arbitration clauses. F.L. subcontracted with GE Energy Power Conversion France SAS Corp. for motors for the mills. After GE Energy delivered the motors, Outokumpu Stainless USA acquired the plant from ThyssenKrupp. Shortly thereafter, the motors allegedly failed. Outokumpu sued GE Energy, which sought to compel arbitration under the arbitration clauses in the ThyssenKrupp-F.L. contracts.

The district court granted GE Energy’s motion. It concluded that the ThyssenKrupp-F.L. contracts included subcontractors within the definition of the terms “seller” and “parties” and that Outokumpu and GE Energy were therefore parties to the ThyssenKrupp-F.L. contracts. The court therefore declined to reach GE Energy’s alternate argument that the arbitration clauses were enforceable under equitable estoppel principles even if the litigants were not parties.

The Eleventh Circuit reversed. It concluded, in relevant part, that the Convention required parties to sign arbitration agreements, that GE Energy had indisputably not signed the ThyssenKrupp-F.L. contracts, and that GE Energy could therefore not rely on equitable estoppel because that doctrine conflicted with the Convention’s signatory requirement.

The Supreme Court granted certiorari to resolve a circuit split and held that equitable estoppel doctrines can allow non-signatories to compel arbitration under the Convention.

The court explained that chapter 1 of the Federal Arbitration Act (FAA) “permits a nonsignatory to rely on state-law equitable estoppel doctrines to enforce an arbitration agreement” and that the Convention in turn provided that chapter 1 of the FAA applies to proceedings brought pursuant to the Convention’s implementing legislation “to the extent that [chapter 1] is not in conflict with [the implementing legislation] or the Convention.” Thus, the court needed to determine whether applying equitable estoppel principles conflicted with the Convention.

The court concluded it did not. It explained that the Convention was “silent” on the issue and that that “silence [was] dispositive … because nothing in the text of the Convention could be read to otherwise prohibit the application of domestic equitable estoppel doctrines.”

The court also explained that the relevant section of the Convention did not contain exclusionary language stating that arbitration agreements could only be enforced in the circumstances identified. In addition, the Convention “contemplate[s] the use of domestic doctrines to fill gaps in the Convention,” its drafting history supported the conclusion that domestic law could apply, and a majority of the courts of other signatory countries to analyze the issue had concluded that the Convention “does not prohibit the application of domestic law.”

The Supreme Court, therefore, remanded the case to the Eleventh Circuit to consider the merits of GE Energy’s equitable estoppel argument.

GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048 (U.S. June 1, 2020).

A customer argued that he is not bound to the arbitration clause included in Amazon’s conditions of use since August 2011 because he never received notice of the clause or manifested his assent to it. Nonetheless, the customer had made at least 27 purchases through Amazon.com since he received notice of the arbitration clause through this litigation, conduct that “a reasonable person would understand to constitute assent.” The circuit court found it irrelevant that the customer denied ever reading the terms and conditions that included the arbitration clause in connection with his purchases because to be bound “an internet user need not actually read the terms and conditions or click on a hyperlink that makes them available as long as [he] has notice of their existence.” The district court’s ruling compelling the parties to arbitration was affirmed.

Nicosia v. Amazon.com, Inc., No. 19-1833 (2d Cir. June 4, 2020).