In Kahn Lucas Lancaster, Inc. v. Lark International, Ltd. (2d Cir. 7/29/99), the U.S. Court of Appeals for the Second Circuit declined to enforce an arbitration clause under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, where the clause was on a purchase order that was not signed by the party who was resisting arbitration.
The parties to the case were Kahn Lucas, a New York corporation engaged in reselling imported clothing to retailers, and Lark, a Hong Kong corporation that acted as a purchasing agent for businesses seeking to buy and import clothing manufactured in Asia. Kahn Lucas would issue purchase orders to Lark, which would arrange for the manufacture of the clothing. Kahn Lucas would then receive an invoice from the manufacturer for the clothing and an invoice from Lark for its commission. Each purchase order provided for arbitration in New York, but none of the purchase orders were signed by Lark.
When a dispute arose, Kahn Lucas brought suit in a New York federal district court and asked the court to compel Lark to arbitrate the dispute in accordance with the arbitration clause in the purchase orders. The only basis for jurisdiction in the federal court was the Convention on Recognition and Enforcement of Foreign Arbitral Awards. In order to be enforceable under the Convention, an arbitration agreement must be "an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams."
The district court enforced the arbitration clause. It reasoned that Lark had agreed to the terms of the arbitration clause by performing under the purchase orders, even though it had not signed them.
The Second Circuit reversed. Based on its analysis of the text of the Convention in the other languages in which the Convention was written, as well as in the English version, the court concluded that Lark could not be bound to the arbitration clause under the Convention because it had not signed the purchase orders. Accordingly, the court denied and dismissed Kahn Lucas's action to compel arbitration.
The Kahn Lucas decision demonstrates that the courts may, in determining enforceability of an international arbitration clause governed by the Convention, apply standards that are different from those that would apply to a domestic clause governed by the Federal Arbitration Act. For example, the Federal Arbitration Act requires that an arbitration agreement be in writing, but does not expressly require that it be signed by a party to be enforceable against that party. Drafters of contracts used in international transactions should consider possible differences in their drafting.
Court Upholds Pre-Dispute Agreement on Location for Arbitration Hearing
In KKW Enterprises, Inc. v. Gloria Jean's Gourmet Coffees, (1st Cir. 7/19/99), the U.S. Court of Appeals upheld an arbitration clause in a franchise agreement that required the arbitration hearing to be held in Chicago, Illinois. In its ruling the Court of Appeals reversed the district court, which had declined to enforce the clause for disputes arising under the Rhode Island Franchise Investment Act, because that Act prohibited parties to franchise agreements from agreeing upon venue or jurisdiction outside Rhode Island. The Court of Appeals ruled that the Rhode Island statute was contrary to the Federal Arbitration Act's requirement that arbitration agreements be enforced according to their terms, and therefore enforced the agreement.