Binding Non-Signatories to Service-of-Process Clauses

Image by Tony Cordaro from Pixabay

I have previously blogged about attempts to bind non-signatories to choice-of-law clauses and forum selection clauses via the closely-related-and-foreseeable doctrine. My general take is that while it is sometimes appropriate to rely on this doctrine in cases involving forum selection clauses, it is never appropriate to rely on it to bind a non-signatory to a choice-of-law clause.

In a recent case, the U.S. District Court for the District of Kansas (Judge Daniel D. Crabtree) was asked to apply this doctrine to bind a non-signatory to a service-of-process clause in a case involving a foreign defendant. The court rightly refused to do so. In this post, I provide an overview of the court’s reasoning and defend its decision not to expand the scope of the closely-related-and-foreseeable doctrine.

Facts

The facts of Clear Spring Property and Casualty Company v. Arch Nemesis, LLC, bear an uncanny resemblance to those of the Great Lakes case scheduled to be heard by the U.S. Supreme Court next week. Both cases involve sunken yachts, declaratory judgments, and attempts by insurers to have policies they issued declared void.

Jamie and Kimberly McAtee, residents of Kansas, purchased a yacht to use in Cabo San Lucas, Mexico, via an entity named Arch Nemesis LLC (“Arch Nemesis”). The McAtees then worked with Concept Special Risks Limited (“Concept”), an underwriting agent based in United Kingdom, to procure an insurance policy for the yacht from Clear Spring Property & Casualty Company (“Clear Spring”), an insurance company headquartered in Illinois. Having successfully insured the yacht through Arch Nemesis—or so they believed—the McAtees twice sailed on it in Mexico without incident. After the McAtees returned to Kansas, the boat’s designated captain took the yacht out without permission, ran into a rock, and sank it.

Arch Nemesis filed an insurance claim with Clear Spring. It was denied. The insurer took the position that the policy was void from inception because the owners had failed to address certain recommendations raised in a prior survey of the yacht. Clear Spring filed an action for a declaratory judgment in federal court in Kansas and asked the court to declare that it owed nothing to Arch Nemesis under the policy. Arch Nemesis filed a counterclaim against Clear Springs. It also filed a third-party claim against Concept, the UK underwriting agent that had helped the McAtees procure the policy in the first place.

Service of Process

Concept argued that the third-party claim against it should be dismissed because it had not been properly served with process pursuant to the Hague Service Convention (HSC). Arch Nemesis responded that the insurance contract between Arch Nemesis and Clear Spring clearly stated that Arch Nemesis could serve process upon “any senior partner in the firm of Mendes & Mount, LLP,” a law firm in New York City, and that the firm’s partners were “authorized and directed to accept service of process on behalf of Underwriters.” Since it had served a designated agent of the foreign defendant in the United States, Arch Nemesis argued, the HSC was inapplicable and Concept’s motion to dismiss for lack of proper service should be denied.

Concept countered that this contractual provision was irrelevant because it was not a party to the insurance contract between Arch Nemesis and Clear Springs. It further argued that even if it was a party to this contract, the service-of-process clause did not apply to it because Concept was not an “Underwriter.” It was merely the underwriting agent. The court addressed these arguments in reverse order. It first considered whether Concept was an “Underwriter.” It then considered whether Concept was bound by the contract notwithstanding the fact that it hadn’t signed it.

“Underwriter”

The court first considered whether the term “Underwriter” could be reasonably construed to include an insurance broker such as Concept. As a threshold question, the court had to identify the body of contract law to govern the interpretive inquiry. Somewhat surprisingly, none of the litigants briefed the court on this issue. As it explained:

The parties neglect to provide an Erie analysis or a conflict of laws analysis in their briefs. The parties also fail to demonstrate any rigor or consistency in selecting applicable case law to cite. First, to interpret the contractual term “Underwriters,” the parties cite to federal law from the Supreme Court and various circuits—five different circuits by the court’s count, and none of them are the Tenth Circuit. Without an Erie analysis that explains why the court should look to federal law to interpret a contract in a tort case, the parties’ briefing is of little help.

The failure of the parties to address the choice-of-law issue is all the more surprising in light of the fact that the insurance policy contained a choice-of-law clause. That clause stipulated that the policy was to be interpreted under principles of entrenched federal admiralty law and, in the absence of such principles, under New York law. The court nevertheless found that the litigants failed to consistently invoke New York law in their briefing. Instead, the parties cherry-picked law from many different jurisdictions to advance their respective arguments.

Since neither party had, in the court’s view, adequately pled the choice-of-law clause, the court turned to Kansas choice-of-law rules. It held that Kansas law governed the issue of contract interpretation because the contract was made in Kansas and because neither party had made a clear showing that another state’s law applied. (This is yet another example of a case where the parties effectively waived the choice-of-law issue by failing to brief it.) Under Kansas contract law, the court concluded that the term “Underwriter” referred only to Clear Springs. It noted that Black’s Law Dictionary defined “underwriter” to mean an “insurer.” Clear Springs was the insurer. It also noted that the signature line in the contract referred to Clear Springs as “Underwriter/Insurer.” In light of these findings, the court concluded that Concept was not an “Underwriter” for purposes of the service-of-process clause.

Binding Non-Signatories

The court could have stopped there. If Concept is not an “Underwriter,” then it seems clear that Arch Nemesis could not invoke the service-of-process clause in the insurance agreement. The court proceeded, however, to consider whether Concept was bound by the service-of-process clause as a non-signatory under two separate theories. The first was the closely-related-and-foreseeable doctrine. The second was incorporation by reference.

The Closely-Related-and-Foreseeable Doctrine

The closely-related-and-foreseeable doctrine seeks to promote litigation efficiency by ensuring that claims against related defendants are heard in the same forum. It posits that a non-signatory to a contract containing a forum selection clause is bound by the clause if the non-signatory is so “closely related” to the contract signatory that it is “foreseeable” that it would be bound. The purpose of the test is to prevent fragmented litigation proceedings by making it easier to bring non-signatory defendants within the scope of a forum selection clause.

The closely-related-and-foreseeable test has an important role to play in preventing fragmented litigation proceedings with respect to forum selection clauses. There is, however, no justification for applying the test to service-of-process clauses because these clauses do not select courts. They merely identify a method by which service of process may be effectuated. The act of enforcing a service-of-process clause will never lead to the sort of fragmented litigation proceedings that the closely-related-and-foreseeable test was created to avoid.

Although the court in Clear Spring did not clearly articulate this rationale in its opinion, it nevertheless refused to apply the closely-related-and-foreseeable doctrine to bind Concept to the service-of-process clause because the Kansas courts had never recognized the doctrine. In so holding, the court reached the correct result.

Incorporation by Reference

Arch Nemesis also argued that the service-of-process clause was binding on Concept because it had been incorporated by reference in a separate privacy notice delivered alongside the policy. This privacy notice allegedly identified Concept as an “Underwriter.” Since the privacy notice was delivered contemporaneously with the insurance contract, Arch Nemesis argued that the contract incorporated the notice by reference and served to bind Concept to the clause. The court rejected this argument. Under Kansas law, it held that the contract only could incorporate the privacy notice if it (1) referred explicitly to the privacy notice, or (2) the two documents were executed simultaneously. Because Arch Nemesis did not allege that the contract contained a clear reference to the privacy notice, and because it did not allege that the two documents were executed simultaneously, the court held that the doctrine of incorporation by reference provided no help to Arch Nemesis.

Conclusion

The closely-related-and-foreseeable doctrine has a role to play in modern U.S. jurisprudence. That role should, however, be confined to cases involving forum selection clauses where one litigant is actively seeking to be covered by the clause. The doctrine should not be used to bind foreign non-signatories to choice-of-law clauses, service-of-process clauses, or any other contract provision that is not a forum selection clause.