Article

Note: Contractor, Kaiser Netherlands B.V., contracted with Owner, Nova Hut a.s., to construct a steel mill in the Czech Republic. The contract contained an arbitration clause. To assure Contractor's performance, a guarantee from its Parent Corporation, Kaiser Group International, Inc., was obtained and Contractor was required to post a US$11.1 million performance standby payable to Owner. The guarantee did not contain an arbitration clause.

To induce First Union Bank to issue the standby, Parent deposited US$11.1 million with Issuer. Subsequently, Owner drew on the standby, contending that Contractor "failed to renew the letter of credit within thirty days of its expiration and failed to provide a mini-mill that met the contractual standards... ." Issuer honored and Parent filed for protection under Chapter 11 (reorganization) of US Bankruptcy law.

Claiming that the drawing was wrongful, Parent sued Owner in a Bankruptcy action. Owner moved to stay the proceedings pending arbitration, to compel arbitration, and to dismiss the complaint. The US Bankruptcy Court for the District of Delaware, Katz, J., denied Owner's motions, finding that Owner had waived its right to arbitration by its failure to invoke the clause earlier.

On appeal, the U.S. District Court, Farnan, J., reversed the orders of the Bankruptcy Court that denied Owner's motions to stay and compel arbitration, remanded to the Bankruptcy Court for further proceedings, and denied Owner's motion for dismissal. On appeal, Parent argued that it was not subject to arbitration since it was not a party to the contract. Parent also argued that Owner had waived its right to arbitration by filing a proof of claim in the bankruptcy proceeding and commencing legal actions against Contractor in the Netherlands and Czech Republic. The appeals court noted that in order to avoid arbitration on those grounds prejudice must be shown. It indicated that because there was no long delay in requesting arbitration and no discovery conducted in the course of litigation, the Debtor could not demonstrate actual prejudice on the part of Owner.

In light of public policy favoring arbitration, the nature of the claims in the parties' agreements, Parent's conduct in embracing the agreements, and their expectation of benefit, the appeals court ruled that the doctrine of equitable estoppel applied in requiring the Parent to arbitrate.

[JEB/rdhf]

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