Supreme Court Weighs The Reliability Of Choice-Of-Law Clauses In Maritime Contracts
The seemingly narrow question presented in Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC is whether, under federal admiralty law, a choice-of-law clause in a maritime contract is rendered unenforceable if enforcement would contradict the “strong public policy” of the state whose law is displaced.
Following a loss in which an insured vessel ran aground, Great Lakes Insurance SE determined that the vessel’s fire extinguishers had not been properly certified and tagged, as required by the policy. This breach of warranty voided the policy from the start. Great Lakes sought a declaratory judgment against its insured, Raiders Retreat Realty Co., LLC, in a Pennsylvania federal district court, seeking a declaration that Great Lakes was not responsible for indemnifying Raiders for the damages Raiders sustained when its vessel, insured by Great Lakes, ran aground. Raiders asserted five counterclaims, including three extra-contractual counterclaims arising under Pennsylvania law. The insurance policy that the parties entered into provided that New York law applies in the absence of any well-established, entrenched principles and precedents of substantive federal admiralty law.
Raiders’ counterclaims included causes of action for bad-faith breach of contract and breach of fiduciary duty, both arising under Pennsylvania law. Great Lakes filed a motion for judgment on the pleadings based on the enforcement of the election in the choice-of-law clause for the application of New York law to any issue not governed by an “entrenched” principle of federal admiralty law. Because there is no “entrenched” rule of federal admiralty law pertaining to bad-faith breach of contract and breach of fiduciary duty, and since New York law includes no bad-faith statute and does not recognize a cause of action for breach of fiduciary duty arising out of the alleged breach of a contract, the district court enforced the choice-of-law clause and dismissed the causes of action arising under Pennsylvania law.
The Third Circuit reversed, holding that Great Lakes’ choice of law might not be enforceable if its election for New York law conflicted with the “strong public policy” of the displaced state, Pennsylvania.
Why you should care about this case even if you don’t own a yacht: This case may seem cabined to federal admiralty law and choice-of-law provisions in maritime contracts, but it could set precedent more broadly for other kinds of insurance contracts and commercial contracts generally. The parties’ (and Court’s) focus on Restatement (Second) of Conflict of Laws § 187 provides a window into the potentially broader implications.
The main issue in this case is whether maritime insurance cases are primarily a federal enclave or primarily governed by state law. Petitioner Great Lakes argued that all maritime disputes have historically been governed by federal law, and choice-of-law provisions applying another country’s law were upheld unless contrary to federal maritime policy. Raiders argued that maritime insurance disputes in particular are governed mainly by state law.
In 1955, Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, allowed state law to fill gaps where no federal law or “entrenched” federal common law controlled. The result was more choice-of-law provisions in maritime contracts to avoid confusion. Yet, according to Great Lakes, federal law still governed whether presumptively enforceable choice-of-law provisions were unenforceable. The test to overcome the presumption of enforceability is to apply federal public policy, not the state’s public policy where suit is brought. Congressional guidance supports a federal-common-law rule and a single body of federal public policy comports with maritime law’s core values. Here, the test applied to the insurance contract issue renders the choice-of-law provision enforceable.
According to Raiders, there is no established federal law here. Raiders also argued that Supreme Court precedent supports the application of state law to determine enforceability. Thus, Pennsylvania law’s application of Restatement (Second) of Conflict of Laws § 187 should apply to the choice-of-law provision at issue. And under the Restatement, courts must consider a state’s public policy to determine enforcement of choice-of-law provisions. Therefore, if a federal common-law rule were to be adopted by the Court, Raiders argued that the rule should be to apply the Restatement because it makes sense to use state law principles to determine which state's law applies. In contrast, applying federal public policy to determine whether New York law or Pennsylvania law applies does not make sense.
During oral argument, the principal question raised was what the federal exception to the federal presumption would be, to which Great Lakes argued that The Bremen case utilized the correct two-prong approach under the Restatement. First, whether there was fraud in the formation of the contract and, second, whether the contract was unreasonable or unjust, meaning contrary to public policy, no substantial connection to the chosen law, or no reasonable basis for choosing that law. Justice Kavanaugh later revisited this question and asked whether the Court should also look to which state has a materially greater interest than the chosen state. Justice Kagan seemed to agree with Raiders that Wilburn Boat stands for the proposition that state law governs maritime insurance contracts, and, therefore, a strictly federal exception did not make sense when the forum was Pennsylvania. Justice Gorsuch asked why the insurance context was unique, and why that means state law would necessarily control.
Ultimately, in the context of insurance and possibly other areas, this case will test the reliability of choice-of-law provisions negotiated by sophisticated parties and whether such agreements may be outflanked through forum-shopping.
The case was argued on October 10, 2023. A decision is expected later in the term. Stay tuned for Dykema’s client alert discussing the Court’s opinion.