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Third Circuit affirms order against German company as guarantor based on contacts with Pennsylvania that developed out of agreement for subsidiary to manufacture diesel engines in Germany.

The facts of the case involved General Electric Company (hereinafter GE) and a German corporation, Deutz AG, acting as a guarantor for its subsidiary. GE, a New York corporation entered into a manufacturing contract with a German Corporation, Motoren- Werke Mannheim AG, whose obligations were guaranteed by its parent company Deutz. The contract involved the design and manufacture of high power diesel engines for locomotives. In 1997, and in the face of manufacturing difficulties,

the plaintiffs filed a suit alleging breach of contract. The District court initially held that the contact between the plaintiff and defendants was sufficient to support a finding of specific jurisdiction for purposes of invoking an arbitration provision.

While the case was pending in the District Court, Deutz sought arbitration before a panel of the International Arbitration Association (IAA) in London. Before the arbitral panel decided, in April 2000, Deutz petitioned the High Court in London to enjoin GE from further proceedings in the Pennsylvania District Court. The High Court denied the injunction. The Pennsylvania District Court then enjoined Deutz from resorting to the High Court in the future.

Deutz appeals the orders of the District Court. While this case was pending before the U.S. Court of Appeals for the Third Circuit, the arbitral panel held that GE and Deutz had not agreed to arbitrate their disputes.

The U.S. Court of Appeals for the Third Circuit affirms in part and reverses in part. The Court holds that the behavior of the German guarantor and its officials amounts to purposeful direction of business activity toward GE and rejects the argument that litigation of the case in Pennsylvania would unfairly burden the defendant.

"Unquestionably, it is less convenient for a German corporation to litigate in Pennsylvania, but [the defendant] had actively overseen the performance of the contract in that state for five years with no apparent difficulties in communication or travel. Given that the contract was performed primarily in Pennsylvania, General Electric has an obvious interest in conducting this litigation there. Deutz, [defendant] moreover, has failed to present any persuasive reason why the matter should not proceed in that forum." [Slip op. 12]. The Court thus concludes that the defendant's Pennsylvania activities supported a finding of specific jurisdiction there.

The defendant also argued that the arbitration provisions of the original contract bound itself and GE. In particular, the court notes that the defendant did not initial every page of the agreement between the two companies, specifically the portion of the agreement dealing with arbitration. GE and Motoren-Werke had initialed all pages; Deutz had not. The arbitration procedures described in the agreement describe what GE and Motoren-Werke would do in such a case, but Deutz is not mentioned. When GE argued that Deutz did not intend to be bound by the arbitration clause, Deutz countered by arguing that the arbitration provisions were intended to be part of its commitment. The District Court found that the arbitration clause was ambiguous and submitted the matter to a jury, as permitted by the Federal Arbitration Act [see 9 U.S.C. Section 4]. The jury concluded that GE and Deutz had not agreed to arbitrate their disputes.

The District Court's resolution on the issue of arbitrability was proper. Deutz notes that federal policy favors arbitration to resolve international commercial disputes. Also, federal law applies to the interpretation of arbitration agreements. Whether a particular dispute can be arbitrated and what law applies are equally matters of federal law. There is a limited exception to this rule where the question is whether the controversy is arbitrable. The U.S. Supreme Court has held in a precedent case that in such a case the presumption of arbitrability is reversed. The international nature of this case does not affect the application of these principles.

Finally, the Court considers comity as a particularly important factor in international proceedings. "The federal Courts of Appeals have not established a uniform rule for determining when injunctions on foreign litigation are justified. Two standards, it appears, have developed. Courts following the 'liberal' or 'lax' standard will issue an injunction where policy in the enjoining forum is frustrated, the foreign proceeding would be vexatious or would threaten a domestic court's in rem or quasi in rem jurisdiction or other equitable considerations, and finally, where allowing the foreign proceedings to continue would result in delay. The Courts of Appeals for the Fifth, Seventh, and Ninth Circuits generally apply this standard. [Cit.]"

"By contrast, the Second, Sixth and District of Columbia Circuits use a more restrictive approach, rarely permitting injunctions against foreign proceedings. [Cit.] These courts approve enjoining foreign parallel proceedings only to protect jurisdiction or an important public policy. Vexatiousness and inconvenience to the parties carry far less weight. Our Court is among those that resort to the more restrictive standard." [Slip op. 37-39]

Turning to the particulars of this case, the Court finds no basis for enjoining the proceedings in the English courts. This is not an aggravated case that calls for extraordinary intervention. Moreover, there was no serious threat to an important public policy simply because an essential fact finding happened to have been made by a jury rather than by a judge. The Court therefore orders that the injunction be reversed. In all other respects the orders of the district court are affirmed.

Citation: General Electric Co. v. Deutz AG, No. 00-2387 (3rd Cir. October 31, 2001).
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Publication:International Law Update
Geographic Code:4EUGE
Date:Nov 1, 2001
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