Equitable Estoppel in International Arbitration Disputes

by Lionel M. Schooler, FCIArb
Jackson Walker LLP1

Introduction. In Bufkin Enterprises LLC v. Indian Harbor Ins. Co. et al, ____ F.4th ____, 2024 U.S. App. LEXIS 5176 (5th Cir. 2024), the United States Court of Appeals for the Fifth Circuit addressed a rare arbitration question: the extent to which equitable estoppel applies to compel parties to arbitrate disputes that include international parties.

Background. For ease of reference, in this article the parties are referred to as “Bufkin” or “Insured” (Appellee) and “Insurers” (Appellants). The Insured (based in Louisiana) purchased surplus lines insurance coverage issued by ten Insurers, eight of which were based in the United States, and two of which were based internationally. All ten of these insurers were separately identified in the policy, each with its own policy number. The policy further stated that the overall contract was to be treated as a separate contract between the Insured and each of the insurers.

The policy further contained an arbitration clause that was designated to encompass the insurance coverage, including formation and validity. The clause declared New York as the site for arbitration, and New York law as the applicable substantive law.

A few months later, a hurricane struck Louisiana damaging the Insured’s property. The Insured submitted a proof of loss claim to the Insurers, referring to them as a group, rather than as separate entities with differing responsibilities (if any) under the policy. Eventually, the Insured claimed that the Insurers engaged in improper delay in processing the claim, withholding payments due and interrupting the Insured’s business.

As the subsequent state court lawsuit evolved, the Insured ended up filing claims against all of the Insurers, both foreign and domestic and, in essence, contending that all of the Insurers had engaged in the same wrongful conduct. After the Insured dropped the claims against the foreign Insurers, the remaining Insurers removed the case to federal court, and thereafter moved to compel arbitration pursuant to the New York Convention. The Insured contested arbitrability.

Issue Presented. Were the disputes arbitrable as arising under one agreement or separate, stand-alone agreements with the Insurers? Was the Insured equitably estopped from challenging arbitration asserted by “non-signatories?”

Lower Court’s Ruling. The District Court first ruled that the disputes were not arbitrable under the New York Convention, because the domestic Insurers were not parties to an arbitration agreement with a foreign-citizen party, given that each domestic insurer “[had] a separate contract with the insured.” The District Court further ruled that equitable estoppel could not be a basis to invoke the Convention because the Insured’s claims were asserted only against the domestic Insurers after the foreign Insurers had been dismissed from the case with prejudice.

Court’s Analysis. On appeal, the Fifth Circuit reversed and remanded, concluding that in this case, the Insured was equitably estopped from challenging arbitrability of the dispute.

The Court determined that regardless of whether the insurance contracts at issue were separable from each other, arbitration could be compelled under the New York Convention because of equitable estoppel.

The Court first noted that in determining arbitrability, the wording of the New York Convention impels a court to engage in a very limited inquiry, prescribing a four-factor test for such inquiry: (1) whether there is a written agreement to arbitrate the matter; (2) whether the agreement provides for arbitration in a Convention signatory nation; (3) whether the agreement arises out of a commercial legal relationship; and (4) whether a party to the agreement is not an American citizen.

According to the Court, if these factors are met, then a district court is obliged to compel arbitration unless it deems the agreement null and void, inoperative, or incapable of being performed.

The Court then noted that superficially, the four factors supporting arbitrability in this case pursuant to the New York Convention appeared to have been satisfied, because there was one overarching policy agreement to which all Insurers were parties, and the dispute at hand involved parties that were not American citizens.

Turning to countervailing arguments posited by the Insured concerning the existence of ten separate contracts rather than one unified agreement, the Court noted that the Insurers contended that arbitration could still be compelled because of the doctrine of equitable estoppel. Analyzing Louisiana law on the subject of equitable estoppel, both in its state and federal courts, the Court then considered arbitrability by viewing the domestic Insurers as non-signatories who sought to compel arbitration by signatories (the Insured and the foreign Insurers).

The Court chose to evaluate the issue of arbitrability by equitable estoppel by Invoking the well-known and long-standing principles on non-signatory ability to compel arbitration by equitable estoppel as described by the Fifth Circuit in Grigson v. Creative Artists Agency, LLC, 210 F.3d 524 (5th Cir. 2000). In so doing, the Court construed the existing controversy as one where a signatory (in this case, the Insured) has alleged “interdependent and concerted misconduct by both a non-signatory and one or more signatories to the contract in question.”

Under such analysis, the Court determined that arbitration could be compelled via the doctrine of equitable estoppel because the Insured had asserted claims against all of the Insurers, contending that they had engaged in interdependent conduct. Citing Pontchartrain Natural Gas Systems v. Texas Brine Co., 2018-2049 (La. App. 1 Cir. 12/30/20), 317 So. 3d 715, 744 (La. ); and Kronlage Family Ltd. Partnership v. Independent Specialty Ins. Co., 651 F.Supp.3d 832 (E.D. La. 2023), the Court rejected the contention that the Insured’s dismissal of the foreign Insurers disconnected the controversy from arbitrability, holding that Grigson taught that the allegations by a signatory to an arbitration agreement of interdependent and concerted misconduct by non-signatories (the domestic Insurers) and signatories (the foreign Insurers) impelled a conclusion of arbitrability of the claims.

Conclusion. The Fifth Circuit’s decision in Bufkin focuses upon the interstices of the New York Convention, and the significance of identifying interdependent conduct amongst defendants, even those no longer in the lawsuit. In so doing, within the context of the Convention, the Fifth Circuit has highlighted the importance of careful drafting of pleadings and of analyzing arbitrability beyond superficial alignment of the parties at the motion to compel stage.

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,1 Mr. Schooler is former Board Member of the North American Branch of the Chartered Institute of Arbitrators, and the immediate Past Chair of its Texas Chapter.