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Arbitration - USA

Parties to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, known as the New York Convention, undertake to recognize an agreement in writing to submit a dispute to arbitration.(1) Although Article II(2) of the convention clarifies that an “‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams”, US courts still grapple with the question of what constitutes an agreement in writing for this purpose. In AGP Industries SA (Peru) v JPS Elastromerics Corp(2) a federal court in Massachusetts stayed arbitration proceedings on the basis that there was no arbitration agreement in writing within the meaning of the convention.

 

Facts

 

JPS Elastromerics Corp supplied interlayer films to AGP Industries SA (Peru), American Glass Products de Brazil, LTDA and AGP de Colombia (collectively, AGP), which used the films to manufacture bullet-resistant and safety glass. The parties' contractual relationship involved a classic 'battle of the forms'. AGP submitted a series of purchase orders without an arbitration clause and JPS responded with standard-form invoices, on the back of which, among several other clauses, was an arbitration provision requiring that all disputes be arbitrated in Boston, Massachusetts. After a dispute arose about the quality of the goods, JPS initiated arbitration. AGP claimed that it had previously been unaware of the arbitration provision and commenced suit in a federal court in Massachusetts, seeking to have the arbitration proceedings stayed on the grounds that there was no valid and binding arbitration agreement. The court granted the stay, deciding that the arbitration clause in question was unenforceable, as it did not constitute an agreement in writing for purposes of the convention.

 

Decision

 

After concluding that the enforceability of the arbitration clause was governed by the convention, the court considered whether the arbitration clause was contained in an agreement in writing within the meaning of the convention.(3) The court addressed the apparent ambiguity of Article II(2) and adopted the interpretation articulated by the Court of Appeals for the Second Circuit:(4) an arbitration agreement, whether a clause within a larger contract or a standalone agreement, must be signed by the parties or contained in an exchange of letters or telegrams.(5) The court held that there was no valid and enforceable arbitration agreement because: (i) a mere exchange of forms did not involve the necessary level of interchange implied by the phrase ‘exchange of letters or telegrams’ and the sheer number of invoices which JPS sent did not create such an interchange; and (ii) pre-printed arbitration terms on the back of a form that is not signed by both parties do not constitute an agreement in writing for purposes of the convention.(6) Therefore, the court granted AGP’s motion to stay the arbitration.(7)

 

Comment

 

Although this decision reflects the majority view that the convention’s requirement of a signature or exchange of correspondence applies to both an arbitration clause in a contract and an arbitration agreement,(8) the court’s strict application of Article II(2) is not followed universally. For example, other US cases interpreting the convention have analyzed whether an arbitration clause could be enforced by applying general principles of contract law applicable to the merits of the dispute (eg, using the principle of incorporation by reference).(9) A similar approach is taken in several foreign jurisdictions with a record of supporting international arbitration, such as England(10) and France.(11) Chapter 1 of the Federal Arbitration Act, which applies in the first instance to domestic arbitration, also applies only to arbitration agreements in writing,(12) but does not require that the agreement be signed.(13)

 

For further information on this topic please contact James Hosking or Yasmine Lahlou at Clifford Chance by telephone (+1 212 878 8000) or by fax (+1 212 878 8375 ) or by email (james.hosking@cliffordchance.com or yasmine.lahlou@cliffordchance.com).

 

Endnotes

(1) Article 2(1) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature on June 10 1958, 21 UST 2517 , enacted in 9 USCA Sections 201 to 208.

(2) CA 07-30034-MAP, 2007 WL 2737043 (D Mass, September 20 2007).

(3) In Ledee v Ceramiche Ragno, 684 F 2d 184, 187-87 (1st Cir 1982), the Court of Appeals for the First Circuit, which includes Massachusetts, held that when faced with a request to refer a dispute to arbitration under the convention, “the court must consider four preliminary questions: Is there a written agreement to arbitrate the subject of the dispute? Does the agreement provide for arbitration in the territory of a signatory of the convention? Does the agreement arise out of a commercial relationship? Is a party to the agreement not an American citizen or does the commercial relationship have some reasonable relation with one or more foreign states?"

(4) See Kahn Lucas Lancaster Inc v Lark International Ltd, 186 F 3d 210 (2nd Cir 1999).

(5) AGP Industries at *2. For an opposing opinion, see the minority view of the Court of Appeals for the Fifth Circuit that the requirement of the parties’ signature or the exchange of letters applies only to arbitration agreements, not to arbitration clauses in a contract. (See Sphere Drake Insurance plc v Marine Towing Inc, 16 F 3d 666 (5th Cir 1994)).

(6) AGP Industries at *2. See also Kahn Lucas at 218 on the point that an arbitration agreement printed on the back of the buyer’s purchase orders and signed only by the buyer does not constitute an agreement in writing.

(7) AGP Industries at *2. The court issued a declaration that the parties are not bound to arbitrate their dispute and issued a permanent injunction staying the arbitration.

(8) See Standard Bent Glass Corp v Glassrobots Oy, 333 F 3d 440, 449 (3d Cir 2003); Chloe Z Fishing Co, Inc v Odyssey Re (London) Ltd, 109 F Supp 2d 1236, 1247 (SD Cal, 2000).

(9) In Standard Bent an appeals court applied state law to determine that an arbitration clause contained in industry guidelines annexed to the sales contract was incorporated into the contract. It then decided that incorporation by reference of the arbitration clause into an exchange of letters satisfied the convention’s requirement of an agreement in writing. See Standard Bent at 448 and Astor Chocolate Corp v Mikroverk Ltd, 704 F Supp 30, 33 (EDNY, 1989) (“While federal law governs the issue of the scope of an arbitration clause, state law governs the issue of whether or not the [arbitration] clause is part of the contract”). In Chloe Z Fishing, a federal court in California determined that English law, being the law of the place of the parties’ conduct, governed the issue of whether the parties’ conduct leading to the inclusion of an arbitration clause in an insurance policy constituted an 'exchange of letters' satisfying the convention requirement. See Chloe Z Fishing at 1249.

(10) See Section 6(2) of the Arbitration Act 1996: “The reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.”

(11) French courts apply general principles of contract law to determine whether the parties consented to the arbitration agreement purportedly incorporated by reference. See Paris, November 13 1980, Coopérative de déshydratation de la région de Soulaines v Hindrichs, 1982 Rev Arb 283, and P Lepoittevin's note; CA Paris, January 20 1988, VSK Electronics v Sainrapt et Brice International, 116 JDI 1032 (1989), and E Loquin's note; 1990 Rev Arb 651 and the commentary by Oppetit.

(12) 9 USC Section 2.

(13) Fox v Merrill Lynch & Co, 453 F Supp 561 (SDNY 1978); Fisser v Doornum, 282 F 2d 231, 233 (2d Cir 1960).

 

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