Some Thoughts on Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC
June 29, 2023
The U.S. Supreme Court will hear oral arguments in Great Lakes Insurance SE, Petitioner v. Raiders Retreat Realty Co., LLC during the 2023 Term. This case has the potential to change the way that federal courts evaluate the enforceability of choice-of-law clauses. Over the past few decades, these provisions have become ubiquitous. One study found that three-fourths of contracts filed with the SEC by large public companies now contain choice-of-law clauses. To date, however, the Supreme Court has never articulated a test for determining when these provisions should be given effect as a matter of federal law.
In this post, I first summarize the facts and history of Great Lakes. I then discuss its potential significance. Finally, I argue — consistent with the amicus brief that I filed in the case — that the Court should adopt Section 187 of the Restatement (Second) of Conflict of Laws as the federal common law test for enforcing choice-of-law clauses in maritime contracts.
Great Lakes Insurance SE (GLI) is a corporation organized and under the laws of the Germany that is headquartered in the United Kingdom. Raiders Retreat Realty Co., LLC (Raiders) is a company organized under the laws of Pennsylvania. GLI insured a yacht owned by Raiders. The marine insurance contract signed by the parties contained the following choice-of-law clause:
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.
After the yacht ran aground in Florida and sustained significant damage, Raiders filed a claim. GLI denied the claim on the ground that the yacht’s fire-extinguishing equipment had not been recertified or inspected. Although the damage to the yacht was not caused by fire, GLI took the position that Raiders had misrepresented the vessel’s fire suppression system’s operating ability, thereby making the policy void from inception.
District Court Opinion
After denying the claim, GLI filed an action for a declaratory judgment in the U.S. District Court for the Eastern District of Pennsylvania (Judge Eduardo C. Robreno). It asked the court to hold that the policy was void due to the alleged misrepresentations by Raiders with respect to the fire extinguishers. In response, Raiders asserted five counterclaims against GLI: (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) breach of fiduciary duty, (4) bad faith liability under 42 Pa. Const. Stat. §8371, and (5) violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.
GLI moved for judgment on the pleadings with respect to the fourth and fifth counterclaims. It argued that these claims were not viable because the policy’s choice-of-law provision had designated New York as the governing law in the absence of applicable federal maritime law. Because the claims were based on Pennsylvania statutes, it argued, they were barred by the choice-of-law clause. GLI also moved for judgment on the pleadings with respect to the third counterclaim because federal admiralty law was silent on the cause of action and because New York does not recognize a cause of action for breach of fiduciary duty arising out of the alleged breach of an insurance contract. Raiders opposed this motion. It argued that the choice-of-law clause was unenforceable because it was contrary to Pennsylvania’s strong public policy of punishing insurers who deny coverage in bad faith.
The district court ruled in favor of GLI. It stated that “the public policy of a state where a case was filed cannot override the presumptive validity, under federal maritime choice-of-law principles, of a provision in a marine insurance contract where the chosen forum has a substantial relationship to the parties or the transaction.” In so holding, the district court took the position that a choice-of-law clause in a maritime insurance contract was only unenforceable when enforcement would be contrary to federal – not state – public policy. Because Raiders failed to identify any federal public policy that would be violated if the clause were enforced, the court reasoned, there was no basis for refusing to give it effect on this basis.
Third Circuit Opinion
The Third Circuit vacated the decision of the district court. It held that a choice-of-law clause in a marine insurance contract might be deemed unenforceable if it was contrary to the public policy of the state in which the suit was brought. In support of this conclusion, the Third Circuit invoked the U.S. Supreme Court’s decision in The Bremen. Although that case involved the enforcement of a forum selection clause rather than a choice-of-law clause, the court explained that “enforcing choice-of-law provisions in marine insurance contracts is not altogether separate from the choice-of-forum . . . regime set out in The Bremen.”
Relying on the framework laid down in The Bremen, the Third Circuit concluded “that a ‘strong public policy of the forum [state] in which suit is brought’ could, as to that policy specifically, render unenforceable the choice of state law in a marine insurance contract.” In so holding, the Third Circuit took the position that a choice-of-law clause in a maritime insurance contract might be unenforceable if enforcement was contrary to state – not just federal – public policy.
GLI petitioned for certiorari, which the Supreme Court granted on March 6, 2023.
When the Supreme Court hears Great Lakes, it will address a narrow issue of federal maritime law. That issue is whether a choice-of-law clause in a maritime insurance contract may be deemed unenforceable if it is contrary to a strong public policy of an individual U.S. state. In resolving this issue, however, the Supreme Court will likely have to articulate – for the first time – a rule for evaluating when choice-of-law clauses are enforceable as a matter of federal law. In the long run, this rule is likely to prove more consequential than any public policy exception. Rules articulated by the Supreme Court in the exercise of its admiralty jurisdiction have a tendency to migrate to other areas of law. This is especially true with respect to contract provisions relating to dispute resolution.
Consider The Bremen, which was decided in 1972. That decision stated a test for determining when forum selection clauses are enforceable as a matter of federal admiralty law. It is not binding on state courts or the lower federal courts outside of the admiralty context. Over the past fifty years, however, the test has migrated to other areas of U.S. law. Today, a majority of the states have incorporated the test from The Bremen into state law and rely on it to determine whether a forum selection clause is enforceable in non-admiralty cases. The lower federal courts similarly rely on that test to determine whether forum selection clauses are enforceable in cases that had nothing to do with admiralty. These courts also sometimes rely on the test to resolve issues having nothing to do with forum selection clauses. In Great Lakes, for example, the Third Circuit looked to The Bremen for guidance as to whether it should give effect to a choice-of-law clause.
U.S. Supreme Court decisions, in short, have a powerful gravitational pull. It seems likely that any test established by the Court relating to enforcement of choice-of-law clauses in Great Lakes will eventually migrate outside of admiralty law. It is essential, therefore, that the court adopt a test that is well suited to the task.
A Federal Rule for Enforceability
With all of this in mind, I worked with Andy Hessick, Rick Simpson, and students in the Supreme Court Program at the University of North Carolina School of Law to prepare an amicus brief in this case. The brief was filed in late May on behalf of myself and Kim Roosevelt, the Reporter for the Restatement (Third) of Conflict of Laws. It urges the Court to adopt the test laid down in Section 187 of the Restatement (Second) of Conflict of Laws to determine when a choice-of-law clause is enforceable as a matter of federal common law. The brief is available here.
We argue that Section 187 provides the correct doctrinal framework for three reasons. First, the test set forth in Section 187 has been around for decades. Its continued acceptance through the years teaches that the test is workable and produces sound results. Second, the lower federal courts regularly apply Section 187 as a matter of federal common law, both in suits involving admiralty and in other contexts. Section 187 has been cited in hundreds of federal cases over the past fifty years, including by every federal circuit court of appeals. Third, and finally, the test set forth in Section 187 has been widely embraced by the states. Twenty-six states have expressly or effectively adopted Section 187. Many other states and the District of Columbia follow a test that is similar to it. Section 187 is routinely followed even in states that do not follow the Restatement (Second) in other respects.
We also argue that the Court should not look to the test laid down in The Bremen to determine whether a choice-of-law clause is enforceable. Although they are sometimes grouped together, forum selection clauses and choice-of-law clauses serve different purposes. Designating a forum creates certainty for the parties about where they will be litigating, the procedures that will control litigation, and the logistics and costs for producing evidence and witnesses. It may prevent duplicative litigation in other forums. Enforcing a forum selection clause designating a court other than the one in which suit is brought may also affect the distribution of work in the federal judiciary. The enforcement of choice-of-law clauses implicates none of these considerations. Enforcing a choice-of-law clause results only in a court applying one body of law instead of another. It does not result in the court declining to exercise jurisdiction, and it does not force parties to bear the costs of litigating in another forum. Nor does the enforcement of a choice-of-law clause affect the distribution of work in the judicial system. Instead, enforcing such a clause simply determines the law that the forum court must apply.
In light of the foregoing, we argue that the Third Circuit erred when it applied the test from The Bremen to determine the enforceability of choice-of-law clauses in maritime contracts. Instead, we believe that Section 187 of the Restatement (Second) of Conflict of Laws, which was designed specifically to account for the interests at stake in the enforcement of choice-of-law provisions, provides the appropriate test.
In the coming weeks, I will have more to say about the petitioner’s brief and the briefs filed by amici in support of the petitioner. (The respondent’s brief is due on July 31.) These posts will focus on the issue of whether a choice-of-law clause in a maritime contract is unenforceable if contrary to the public policy of an individual U.S. state. At the end of the day, however, it is essential to recognize that the resolution of this issue will affect a relatively narrow slice of cases in a relatively narrow band of contracts. The more important question is what test the Court chooses to adopt with respect to the enforcement of choice-of-law clauses. History suggests that any such rule will have an impact well beyond the narrow confines of maritime law.