Non-Signatories to Arbitration Agreements: The Peculiar Case of Korea Presaging Outokumpu

Author: Joe Cho*

I. Introduction

Arbitration is a creature of the parties’ meeting of minds in the form of an arbitration agreement. As has been stated in a number of district court cases, there is a “liberal federal policy favoring arbitration agreements” as evinced by the Federal Arbitration Act.[1] This policy is grounded in Section 2 of the FAA,[2] which, according to the Court, embodies “a congressional declaration” of a federal arbitration-friendly policy, “notwithstanding any state substantive or procedural policies to the contrary.”[3] Against this backdrop, an issue that frequently arises in the context of international arbitrations is if a non-signatory to an international arbitration agreement can compel a signatory to arbitrate a dispute spawning under that agreement. In this regard, in June 2020, the Court ruled in GE Energy Power Conversion Fr. SAS, Corp. v. Outokumpu Stainless U.S.[4] that nothing in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards[5] or the FAA precludes non-signatories from enforcing international arbitration agreements based on domestic equity or related principles.[6]

Interestingly, ten years predating Outokumpu, the Korean judiciary had a chance to rule on whether a non-signatory to an arbitration agreement can be compelled to arbitrate pursuant to that agreement as guided by applicable principles of domestic law. Thus, in 2009Da66723,[7] the Korean courts expressly acknowledged the possibility of a non-signatory being bound by an arbitration agreement, provided that there is consent to arbitrate between the parties involved.

The purpose of this piece is to introduce and analyze this piece of Korean jurisprudence and its implications for the realm of international arbitrations. To this end, it will first briefly go over Outokumpu for comparative purposes. Following such analysis, it will move on to discuss and analyze 66723. The piece will conclude by noting that there is in effect a jurisprudential harmonization between the United States and the Republic of Korea (“RoK”) when it comes to arbitrability of an arbitration agreement by a non-signatory provided requisite conditions are met. This can prove to a boon for claimants with the prospects of arbitration in the United States, RoK and elsewhere.

II. Outokumpu and the issue of non-signatories

In Outokumpu, plaintiff Outokumpu Stainless, LLC (“Outokumpu”), as buyer, entered into a total of three contracts with Fives (then F.L. Industries, Inc.)[8] under which Fives was obligated to provide three disparate cold rolling mills (“CRMs”) at a steel plant operated by Outokumpu in Alabama. Each of these contracts contained an arbitration clause,[9] and under each contract, the term Seller was defined to include the generic category of subcontractors as well as certain subcontractors by name, including GE Energy Conversion France SAS (“GE Energy”).[10] There was no privity of contract between Outokumpu and GE Energy.

Based on its contention that the motors supplied by the Seller’s subcontractor GE Energy were defective, Outokumpu filed tort and warranty claims against GE Energy in state court in Alabama. Being in the position of “non-signatory” to the underlying contracts, GE Energy removed the case to federal court, relying on the New York Convention. The district court issued an order compelling Outokumpu to arbitrate with GE Energy.[11] The Eleventh Circuit reversed, interpreting the New York Convention as imposing a “requirement that the parties actually sign an agreement to arbitrate their disputes” and thereby concluding in this case, “there is no agreement [to arbitrate] in writing within the meaning of the Convention.”[12]

The Supreme Court accepted certiorari and reviewed the case to resolve whether only a signatory to an international arbitration agreement could enforce its terms and additionally, if equitable estoppel may be applied in a case arising under the New York Convention.[13] In this regard, the Court examined Article II of the New York Convention and found that Article II (1) and (2) “address the recognition of arbitration agreements, not who is bound by a recognized agreement.”[14] In fact, according to the Court, the New York Convention “is simply silent on the issue of non-signatory enforcement.”[15] From the drafting history of the New York Convention, it was also discerned that: “[n]othing in the drafting history suggests that the Convention sought to prevent contracting states from applying domestic law that permits nonsignatories to enforce arbitration agreements in additional circumstances.”[16] The Court further noted that “the weight of authority from contracting states indicates that the New York Convention does not prohibit the application of domestic law addressing the enforcement of arbitration agreements.”[17] Based on these findings, the Court reversed the Eleventh Circuit by holding that “[t]he New York Convention does not conflict with domestic equitable estoppel doctrines that permit the enforcement of arbitration agreements by nonsignatories.”[18] The Court remanded to the courts below to make findings on the equitable estoppel issues.[19]

III. Korean jurisprudence on the arbitrability of an international arbitration agreement involving a non-signatory

In 66723, the Korean courts[20] had a chance to determine on if a non-signatory to an international arbitrational agreement may be compelled to arbitrate under the New York Convention and under the law governing such agreement and related principles of local law. In what follows, then, the case history of 66723 will be addressed coupled with each court’s treatment of the issues involved in the case.

A. Facts of 66723

The plaintiff, a Korean entity, sued Defendant 1, a Korean entity engaged in marine transportation services, and Defendant 2, a Panama entity owning a vessel named DK No. 1 (“Subject Ship”).[21] The plaintiff imported a total of 348 steel slabs (“Cargoes”) from Dongguk Corporation, a Japanese entity, on a Free on Board (“FOB”) basis, and for the shipment of these Cargoes, entered into a voyage contract with DK S& Co., Ltd. for the contract period of May 3, 2007 to April 30, 2008. DK S& Co., Ltd., in turn, sub-chartered the voyage contract to Defendant 1.

As soon as the Cargoes got loaded onboard, the Japan-based broker of Defendant 1 (i.e. Sun Ocean Corp.) issued a total of three Bill of Ladings (“B/L”) (numbered MIP0150-01, MIP0150-02, and MIP0150-03, respectively) to Dongguk Corporation, that they could be each provided to: the Shipper being Dongguk Corporation; the Consignee being Korean Development Bank’s nominee; and the Notify Party being the plaintiff. Each B/L was issued under the name of Defendant 1. Meanwhile, while en route to the port of Pohang, Korea, the Subject Ship encountered adverse weather conditions, and, as a result, 99 of the Cargoes fell off the deck and vanished into the depths of the ocean. Each B/L in this case was purchased by the Bank of Japan along with the relevant shipping documentation and then sold to the Korea Development Bank, the bank that opened the letter of credit. The plaintiff, who was the B/L holder at the time of suit, acquired each B/L from the KDB.

Meanwhile, Article 1 of all B/Ls noted that the term “Sub-Contractor includes owners and operators of the vessels and space provider (other than the Carrier), stevedores, terminal and groupage operators, their respective servants and agents, and anyone assisting the performance of the carriage whomsoever,” while Article 5 Paragraph 2 of each B/L stipulated as follows: “[i]f an action is brought against any servants, agent or Sub-Contractor of the Carrier, such person shall be entitled to avail himself of the defences and limits of liability which the Carrier is entitled to invoke under this Bill of Lading.” The plaintiff brought breach of contract and tort claims against each defendant in Busan, Korea. The defendants sought to dismiss the plaintiff’s suit on the ground that their dispute was to be arbitrated as per the B/L, as opposed to litigated.

B. Court of first instance[22]

The trial court noted that Article 3, Paragraph 2 of the terms and conditions printed on the back of each B/L set forth as follows:

Any dispute arising from this Bill of Lading shall be referred to arbitration in Tokyo by the Tokyo Maritime Arbitration Commission (TOMAC) of the Japan Shipping Exchange, Inc., in accordance with the Rules of TOMAC and any amendments thereto, and the award given by the arbitrators shall be final and binding on both parties.[23]

Based on this provision, the court noted that there was an arbitration agreement of an international character between the parties, which affected not only the contract itself in which the arbitration agreement was embedded, but also any dispute directly or closely related to the formation, performance and validity of the underlying contract.[24] Under these circumstances, the court noted that where the same set of facts give rise to concurrent contractual and tort liability, any dispute over the existence of such liability is intimately tied to the performance of contract. The dispute was thereby subject to the arbitration agreement.[25]

While noting that the underlying voyage contract was governed by Japanese law, the court noted that under Article 13.2 of the Japanese Arbitration Act (“JAA”):

The arbitration agreement shall be in the form of a document signed by all the parties, letters or telegrams exchanged between the parties (including those sent by facsimile device or other communication device for parties at a distance which provides the recipient with a written record of the transmitted content), or other written instrument.[26]

Under this statutory rubric, each B/L in this case was deemed to constitute “other written instrument[s]” within the meaning of Article 13.2 of the JAA. Accordingly, the court affirmatively found an arbitration agreement between the plaintiff and the defendants and rejected the plaintiff’s denial of such an agreement.[27]

C. Appellate Court[28]

On appeal, on the issue of whether the arbitration provision on each B/L in this case bound the ship owners (i.e., Defendant 2) and the B/L holder (i.e., the plaintiff), the Busan High Court suggested that such issue be determined with reference to the governing contract law. It took note of the following clause under the B/Ls at issue:

This Bill of Lading shall have effect subject to the International Carriage of Goods by Sea Act 1957 of Japan, as amended 3 June, 1992 giving effect to the Protocol to amend the International Convention for the Unification of Certain Rules relating to Bills of Lading, Brussels, February 23, 1968 (Visby Rules) and the Protocol to amend the International Convention for the Unification of Certain Rules relating to Bills of Lading (August 25, 1924, as amended by the Protocol of February 23, 1968), Brussels, December 21, 1979 (8.D.R. Protocol).[29]

Under the pertinent provisions of the International Carriage of Goods by Sea Act 1957 of Japan, the holder of a duly issued B/L is entitled to request delivery of cargoes pursuant to the terms of a contract between the shipper and the carrier and, in the event of a breach, to claim damages emanating from such breach.[30] As such, where, as in this case, a carrier had issued a valid B/L including an arbitration clause to a shipper, it was adjudged that there existed an arbitration agreement between them.[31] And if a B/L holder, who acquired rights embodied in the B/L through the ensuing process of endorsement and delivery, should assert such rights against the carrier, that assertion presupposes an arbitration agreement between them.[32]

Furthermore, where, as in the present case, the ship owner is entitled to assert the defenses available to the carrier under the B/L by virtue of its terms and should choose to avail herself of such defenses, then an arbitration agreement will be deemed to be in place between the ship owner (in this case, Defendant 2) and the B/L holder (in this case, plaintiff).[33] In so holding, the appellate court also affirmed the trial court’s finding that the arbitration clause in each B/L qualified as an “other written agreement” within the JAA’s meaning.

The appellate court also made determinations under the New York Convention, to which both the Republic of Panama and the Republic of Korea are signatories. The court noted that while under Article 2 of the  New York Convention, “(t)he term ‘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,” no inference could be drawn from this provision that the element of writing is somehow confined to such signed contract or arbitration agreement that may be contained in an exchange of letters or telegrams.[34] Rather, the court stated that both Japan[35] and Korea[36] envisaged in their arbitration enactments other forms of written arbitration agreements in addition to those explicitly set forth in the  New York Convention.[37] Based on these considerations, the court rejected the plaintiff’s claim that there was no arbitration agreement in the absence of a duly executed and delivered written agreement.

D. Korean Supreme Court[38]

Guided by the established jurisprudence that deference to the applicable foreign jurisdictions’ law and practice is in order when it comes to construing and confirming the elements of foreign law in the context of private international law proceedings, the highest court of Korea ruled in favor of the defendants by affirming the lower courts’ findings that: (a) under Article Paragraph of the Japanese Arbitration Act, an arbitration agreement need not be confined to any written agreement exchanged between the parties; and (b) there is an arbitration agreement between the plaintiff and each defendant in this case despite the lack of contractual privity between them. In arriving at these findings, the Korean Court (re)endorsed the legal principles adopted by the lower courts.

IV. Analysis and conclusion

From Outokumpu and 66723, it is noteworthy that both the judiciaries of the United States and of the Republic of Korea ruled that nothing in the New York Convention prevents non-signatories from enforcing or being bound by valid arbitration agreements. In this regard, the Court relied on the New York Convention’s silence on the issue of non-signatory enforcement, which enabled the unanimous Outokumpu Court to find that non-signatories are permitted to enforce arbitration agreements based on application of domestic law. Similarly, in 66723, the Busan High Court found that since the term “agreement in writing” under Article 2 of the New York Convention is not confined to a written agreement exchanged between the parties, an arbitration agreement was found to exist between the plaintiff and each defendant—even in the absence of direct privity of contract between them.

It is also worthwhile to note that in supporting arbitrability by a non-signatory of a dispute under an arbitration agreement, both judiciaries espoused application of applicable domestic legal principles. Towards this end, the Court relied on estoppel or third-party beneficiary arguments, provided that “[a]ny applicable domestic doctrines must be rooted in the principle of consent to arbitrate.”[39] Likewise in 66723, the courts relied on the germane contractual language as well as provisions of the JAA and of the International Carriage of Goods by Sea Act 1957 of Japan to ascertain an agreement to arbitrate between the litigants.

In practice, as was definitively affirmed in Outokumpu and in 66723, the holding that a non-signatory is entitled to enforce an arbitration agreement based on domestic legal or equitable principles, has been a boon for certain non-US claimants faced with the prospects of arbitration in the United States and elsewhere.[40] That being said, a common judicial stance in both jurisdictions in favor of non-signatories should be welcomed. It is anticipated that these trends will certainly go a long way towards nurturing a dispute resolution environment that is conducive to the freedom to arbitrate across civil and common law jurisdictions. Meanwhile, it is hoped that the courts in both countries continue to hand down decisions that are consistent with Outokumpu and in 66723, on a case-specific basis.

* Joe Cho is a South Korea-based lawyer specialized in international arbitrations as well as in the shipping and defense industries. He is also a doctoral candidate at the Seoul National University School of Law. He can be reached at htclcc@daum.net. This publication is in loving memory of the author’s late father who was a devout fan of the late Luciano Pavarotti.

[1] Federal Arbitration Act, 9 U.S.C. §§ 1-14 (the “FAA”). See, e.g., McCallan v. Hamm, 11-cv-784, 2012 WL 1392960 (M.D. Ala. Apr. 23, 2012); Hooks v. Acceptance Loan Company, Inc., 10-CV-999, 2011 WL 2746238 (M.D. Ala. Jul. 14, 2011); Achievable, Inc. v. Hamm, 11-cv-678, 2012 WL 1392950 (M.D. Ala. Apr. 23, 2012); Williams v. Navient Solutions, LLC (In re Williams), 564 B.R. 770 (Bankr. S.D. Fla. 2017); and AmeriCorp, Inc. v. Hamm, 11-cv-677-MEF, 2012 WL 1392927 (M.D. Ala. Apr. 23, 2012).

[2] 9 U.S.C. § 2. This provision provides that, in principle with, limited exceptions, an agreement to arbitrate “shall be valid, irrevocable, and enforceable.”

[3] Moses H. Cone Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).

[4] GE Energy Power Conversion Fr. SAS, Corp. v. Outokumpu Stainless U.S., 140 S. Ct. 1637 (2020).

[5] The Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958, 21 U.S.T. 2519 (the “New York Convention”).

[6] Outokumpu, 140 S. Ct. at 1648.

[7] Daebeobwon [S. Ct.], Jul. 15, 2010, 2009Da66723 (S. Kor.) (hereinafter “66723”).

[8] Outokumpu Stainless USA LLC v. Converteam SAS, 16-00378, 2017 WL 401951, at *1 (S.D. Ala. Jan. 30, 2017). These contracts were entered into by Outokumpu’s predecessor ThyssenKrupp Stainless USA LLC.

[10] Id. at *6.

[11] Id. at *7.

[12] Outokumpu Stainless U.S., LLC v. Converteam SAS, 902 F.3d 1316, 1336, 1325 (11th Cir. 2018).

[13] Outokumpu, 140 S. Ct. at 1640.

[14] Id. at 1648.

[15] Id. at 1645.

[16] Id. at 1646.

[17] Id. at 1646.

[18] Id. at 1648.

[19] Outokumpu, 140 S. Ct. at 1648.

[20] They include the trial court (Busan District Court), the appellate court (Busan High Court), and the Korean Supreme Court.

[21] The facts underlying 66723 are laid out in the trial court judgement. See infra note 22.

[22] Busan Jibangbeobwon [Busan Dist. Ct.], Oct. 8, 2008, 2007Gahap20559 (S. Kor.).

[23] Id. at 2.Ga. (2)

[24] Id.

[25] Id.

[26] Id. at 3. Na. (2) (Ga) (emphasis added).

[27] Id.

[28] Busan Godeungbeobwon [Busan High Ct.], Jul. 8, 2009, 2008Na17090 (S. Kor.) (hereinafter “High Court”).

[29] Id. at 422–23.

[30] Id. at 423.

[31] Id. at 423–24.

[32] Id. at 424.

[33] Id.

[34] Id. Article II of the Convention provides as follows:

“1. Each Contracting State shall 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.

2. The term ‘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.
3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”

[35] See supra note 24.

[36] Under the South Korean Arbitration Act, the term “arbitration agreement” is defined as an agreement between the parties to settle by arbitration all or some disputes which have already arisen or might arise in the future in respect of defined legal relationships, whether contractual or not. Jungjaebeob [Arbitration Act] art. 3 (S. Kor.) (“KAA”). In this regard, not unlike the Japanese counterpart, art. 8.3 of the KAA provides as follows on the form of arbitration agreement:

“(3) In any of the following cases, a written arbitration agreement shall be deemed made:

1. Where terms and conditions of an arbitration agreement have been recorded, regardless of whether

such agreement was made orally, by conduct, or by any other means;

2. Where parties’ intentions communicated by telegram, telex, facsimile, electronic mail, or any other

means of communication contain an arbitration agreement: Provided, That the cases where terms and

conditions of such arbitration agreement are not verifiable shall be excluded herefrom;

3. Where either party asserts that an application or a written answer exchanged between the parties

contains an arbitration agreement, and the other party does not deny such assertion.”

Jungjaebeob [Arbitration Act] art. 8 (S. Kor.) (emphasis added).

[37] High Court, supra note 26, at 424.

[38] See supra note 6.

[39] Outokumpu, 140 S. Ct. at 1648.

[40] See, e.g., Integr8 Fuels Inc. v. Daelim Corp., 2017 WL 1483326 (S.D.N.Y. Apr. 25, 2017). There, Daelim Corp., a RoK corporation engaged in chartering ships for use in international trade, contracted with Grace Young Int’l Ltd (“Grace”) for the provision of a bunker stem to its chartered vessel MT DL NAVIG8. After a series of subsequent contracts (Grace–Hitec–Dynamic Oil Trading (Singapore) Pte. Ltd. [“Dynamic”]), Dynamic contracted with plaintiff Integr8 Fuels Inc. to fuel MT DL NAVIG8 in Hong Kong. In November 2014, Dynamic’s parent company filed for bankruptcy, resulting in a payment dispute between Dynamic and Integr8. In 2016, Integr8 had MT DL NAVIG8 arrested in Dubai. The vessel owners Korea Line Corporation notified Daelim that they would seek damages. In 2017, Daelim commenced arbitration against Integr8. The United States District Court for the Southern District of New York denied Integr8’s request for a temporary restraining order and preliminary injunction enjoining Daelim from pursuing arbitration. In support of this finding, Judge Swain noted that lntegr8 “is unquestionably a sophisticated party” and itself drafted “a broad arbitration clause that purports to obligate a broad range of parties with interests in their transactions to arbitrate a broad range of issues touching on lntegr8’s transactions.” Id. at *3. The clause forming part of Integr8’s General Terms and Conditions “explicitly embraces disputes that are merely ‘incidental to’ the [DL NAVIGS] contract in addition to those ‘arising under’ the contract.” Id.