Missed Opportunities in Great Lakes
September 5, 2023
In the 1994 film, Clerks, the main character works at a quick-stop grocery store in New Jersey. On his day off, he gets a call from his boss asking him to cover the shift of another employee. As he grapples with a stream of difficult customers during the course of this unexpected shift, he keeps muttering the same thing: “I’m not even supposed to be here today.”
The same thing might be said of the U.S. Supreme Court when it hears oral argument in Great Lakes Insurance SE v. Raiders Retreat Realty Company, LLC, on October 10, 2023. The issue presented in Great Lakes is whether a choice-of-law clause in a maritime insurance contract is enforceable when enforcement is contrary to the “strong public policy” of the state whose law is displaced. Prior posts discussing this case can be found here and here and here. The simple fact of the matter, however, is that Great Lakes should never have come before the Court. Purely as a matter of contract interpretation, the choice-of-law clause here at issue is not drafted broadly enough to cover the tort and statutory counterclaims asserted.
Some choice-of-law clauses are drafted narrowly. These clauses merely select the contract law of the chosen jurisdiction. Other clauses are drafted broadly. These clauses select the contract, tort, and statutory law of the chosen jurisdiction. At the outset of any dispute involving a choice-of-law clause, therefore, it is important to examine the language in the clause to determine its scope.
The choice-of-law clause in Great Lakes reads as follows:
It is hereby agreed that any dispute arising hereunder shall be adjudicated according to well established, entrenched principles and precedents of substantive United States Federal Admiralty law and practice but where no such well established, entrenched precedent exists, this insuring agreement is subject to the substantive laws of the State of New York.
Does this clause merely select the contract law of New York? Or does it also select the tort and statutory law of New York? The answer is important because the counterclaims asserted by Raiders are non-contractual. If the choice-of-law clause does not sweep broadly enough to cover these counterclaims, then it is inapplicable.
The New York Rule
To determine the scope of a choice-of-law clause, one must first identify what law should be used to interpret it. The answer to this question is straightforward. The courts should always apply the law chosen by the parties to interpret the language in the choice-of-law clause. The clause here at issue directs the court to apply established and entrenched federal admiralty law whenever possible. So far as I am aware, there is no “established” and “entrenched” rule of federal admiralty law that addresses the scope of a choice-of-law clause. In the absence of such a rule, the clause directs the courts to apply New York law.
Under New York law, a choice-of-law clause does not select the non-contract law of a state unless it contains language specifically indicating that the parties intended as much. As I explained in a 2017 paper:
The seminal case is Knieriemen v. Bache Halsey Stuart Shields , in which the New York Appellate Division held that a choice-of-law clause stating that “[t]his contract shall be governed by the laws of the State of New York” did not encompass claims for negligence, fraud, and punitive damages … In 1984, a federal court in the Southern District of New York was asked to determine whether a clause stating that a contract was to be “governed by” the laws of the State of New York swept broadly enough to encompass a cause of action for common law fraud. Invoking Knieriemen, the court concluded that it did not because “it has been held in New York that a contractual choice of law provision governs only a cause of action sounding in contract.” … The federal courts in New York would go on to render dozens of decisions interpreting the scope of generic choice-of-law clauses under New York law. In all of these cases, these courts concluded that the clauses did not apply to tort and statutory claims and that it was necessary to perform a separate conflict-of-laws analysis to identify the law to govern these claims.
When a clause merely states that the contract shall be “governed by” New York law, the courts in New York have consistently held that the clause does not select that state’s tort and statutory law. When a clause states that New York law shall apply to claims “relating to” the contract or “arising in connection with” the contract, by comparison, these courts have held that the clause covers tort and statutory claims with some connection with the contract.
Applying the New York Rule
With this rule in mind, let us now turn to the clause in Great Lakes. That provision stipulates that “this insuring agreement is subject to the substantive laws of the State of New York.” This language in no way suggests that the parties intended to select the tort and statutory law of New York. It merely states that the “insuring agreement” will be “subject” to New York law. It does not refer to non-contractual claims that “relate” to that agreement or to claims that “arise in connection with” it. Under the canons of construction followed by the New York courts, this clause does not sweep broadly enough to cover tort and statutory claims.
This is a problem because the claims on appeal all sound in either tort or statute. The first counterclaim – breach of a fiduciary duty – is a tort. The second counterclaim – bad faith liability under 42 Pa. Const. Stat. §8371 – is a statutory claim. The third counterclaim – violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law – is also a statutory claim. None of these claims are covered by the choice-of-law clause. If these claims are not covered, then there is no need to determine whether that clause is enforceable.
The first missed opportunity to address this disconnect was at the drafting stage. Great Lakes Insurance SE is an insurance company based in Munich, Germany. It maintains permanent offices in London, Dublin, Milan, and Sydney. It is the epitome of the sophisticated contract drafter. And yet the choice-of-law clause that it wrote into its policy was not drafted in such a way to select the tort and statutory law of New York. In prior work, I have shown that insurance companies frequently fail to take advantage of their drafting power to draft broad choice-of-law clauses. The clause prepared by Great Lakes is a good example of this trend.
The second missed opportunity occurred at the outset of litigation. If Raiders had raised the issue of interpretation before the district court, there would have been no need for that court to decide whether the clause was enforceable. Instead, that court almost certainly would have held that the clause was drafted too narrowly to apply to the counterclaims asserted by Raiders. In declining to make this interpretative argument to the district court, however, Raiders waived it, thereby forcing the courts to reach the enforceability question at the center of the current appeal.
The end result of these missed opportunities is that the U.S. Supreme Court is being asked to evaluate the enforceability of a choice-of-law clause with respect to claims to which it does not apply.
“I’m not even supposed to be here today” is a mantra for anyone who has been called into work on a day when they hadn’t planned to come in. In Great Lakes Insurance SE v. Raiders Retreat Realty Company, one could forgive the Justices if they are heard muttering this phrase to themselves as they take the bench.