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Second Circuit: Test Applies Whether a Non-Signatory is Bound by Foreign Award (Web)

Sarhank Group v. Oracle Corporation (2d Cir. 4/14/2005) U.S. law determines whether arbitration agreement signed by wholly owned foreign subsidiary binds its U.S. parent.  District Court’s confirmation of Egyptian award vacated.
On April 14th, 2005, the Second Circuit held that the enforceability of an arbitration clause against a non-party would be limited based on U.S. law despite the parties’ agreement that Egyptian law governed the contract.  The decision vacates last year’s confirmation of the international arbitral award by the Southern District of New York.
The case concerned a contract between Sarhank and Oracle Systems, a wholly owned subsidiary of Oracle Corporation established under the laws of Cyprus.  The agreement was to be performed in Egypt and contained an Egyptian choice of law clause.  After a different Oracle subsidiary notified Sarhank of Oracle’s intent to terminate, Sarhank served a demand for arbitration against Oracle Systems and Oracle Corporation.   The arbitral panel held defendants jointly and severally liable for nearly $2 million in damages.
After the award was upheld by the Egyptian Supreme Court, Sarhank petitioned the U.S. District Court to confirm and enforce the award against Oracle Corp. based on the New York Convention.  Oracle Corporation argued that the Convention did not apply and therefore the district court lacked subject matter jurisdiction.  It also contended that the district court should decline to enforce against Oracle Corp. on the ground that Oracle was not a party to the contract; that the arbitrators lacked jurisdiction to determine arbitrability; that the case was not ripe; and that enforcement of the award would be contrary to U.S. public policy.  After losing on all points in the District Court, Oracle appealed.
The Second Circuit panel vacated the arbitral award because under U.S. law the arbitration agreement signed by Oracle Systems does not bind Oracle Corporation.  Although recognizing that a different result occurs under Egyptian law, Judge Brieant, sitting by designation,  wrote that “Article V(2) of the [New York] Convention provides that a United States court is not required to enforce an agreement if its subject matter is not capable of arbitration in the United States… An American nonsignatory cannot be bound to arbitrate in the absence of a full showing of facts supporting an articulable theory based on American contract law or American agency law.”
In recognizing that “[t]he practice of dealing through a subsidiary is entirely appropriate and essential to our nation’s conduct of foreign trade,” the court reasoned that under U.S. law “arbitrability is not arbitrable in the absence of the parties’ agreement…[and] an Agreement between Sarhank and [Oracle] Systems which does not mention Oracle [Corporation] does not evidence a ‘clear and unmistakable’ intent by Oracle [Corporation] to arbitrate or to permit the arbitrator to decide the issue of arbitrability.”
Since the arbitration panel had determined whether it could arbitrate the dispute between Sarhank and Oracle Corporation, the Second Circuit vacated the district court confirmation of the award and “remanded to the district court to find as a fact whether Oracle [Corporation] agreed to arbitrate, by its actions or inaction, or by reason of any action of [Oracle] Systems [gave Oracle Systems apparent or actual authority based on U.S. law to consent to arbitration].”
The Second Circuit’s opinion can be found at 2004 WL 3267566 (2nd Cir. (N.Y.) 2005).