In a unanimous decision, the United States Supreme Court recently delivered a significant opinion in maritime law. The holding in Great Lakes Insurance SE v. Raiders Retreat Realty Co, LLC, No. 22-500 stands for the proposition that choice-of-law clauses in maritime contracts are presumptively enforceable under federal maritime law, subject only to very narrow limited exceptions.
Factual Background of the Case
Raiders Retreat Realty, a Pennsylvania Business, purchased an insurance policy from Great Lakes Insurance, which was organized in Germany and headquartered in the United Kingdom. The contract between the parties provided that all disputes between the parties would be resolved pursuant to New York law. One of Raiders' boats ran aground in Florida and Raiders submitted a claim for the loss. However, Great Lakes denied coverage claiming that Raiders did not properly maintain the boat's fire suppression system. In support of the denial, Great Lakes argued that this breach of the terms voided the contract.
To seek justification for the denial, Great Lakes filed a related declaratory judgment action in the U. S. District Court for the Eastern District of Pennsylvania. Raiders responded by asserting contract claims under Pennsylvania law. Great Lakes asserted that, pursuant to the terms of the insurance policy, Pennsylvania law was not applicable, but rather, New York law must be employed. The District Court agreed and ruled in favor of Great Lakes. It found that federal maritime law governs and that choice-of-law provisions are generally valid and enforceable. On appeal, the U.S. Court of Appeals vacated the lower court's judgment. It reasoned that although maritime law governed, the court should have also considered the public policy of the state in which the suit is brought. As such, the Court of Appeals remanded the case and instructed the district court to consider whether applying New York law was in contradiction to Pennsylvania's public policy on the issue, and if so, whether Pennsylvania law should apply despite what was written in the contract and agreed upon between the parties.
The U.S. Supreme Court granted certiorari to resolve a split in the Court of Appeals on the issue of choice of law provisions in maritime contracts.
Maritime Law
The Court first discussed the importance of maintaining uniformity in maritime law and explained the underlying authority for federal courts’ application of federal common law.
Although no clear rule exists for determining when a federal maritime rule is "established,” courts have generally looked to the body of judicial decisions in making their rulings on this topic. Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 314 (1955). If no established rule exists on a particular maritime issue, federal courts may create uniform rules. Norfolk Southern R.Vo. v. James N. Kirby, Pty. Ltd., 543 U.S. 14 (2004).
This case examined whether there was an established maritime rule on the enforceability of choice-of-law provisions. It answered this question in the affirmative as well-established precedent was found supporting the conclusion that maritime contracts are presumptively enforceable. See Great Lakes Ins. SE v. Wave Cruiser LLC, 36 F. 4th 1346, 1353– 1354 (CA11 2022); Great Lakes Reins. (UK) PLC v. Durham Auctions, Inc., 585 F. 3d 236, 242–243 (CA5 2009); Triton Marine Fuels Ltd., S. A. v. M/V Pacific Chukotka, 575 F. 3d 409, 413 (CA4 2009); Chan v. Society Expeditions, Inc., 123 F. 3d 1287, 1296–1297 (CA9 1997); Milanovich v. Costa Crociere, S. p. A., 954 F. 2d 763, 768 (CADC 1992).
Although no recent case of this Court has addressed the issue, the Court has recognized that the parties to a maritime contract may select the governing law by “clearly manifesting” an intent to follow that law “when entering into the contract.” Liverpool & Great Western Steam Co. v. Phenix Ins. Co., 129 U. S. 397, 458 (1889.) Similarly, the Court has stated that “it is no injustice” to resolve disputes under the law that parties have “agreed to be bound by.” London Assurance v. Compendia de Moagens do Barreiro, 167 U. S. 149, 161 (1897). As the Court further opined in 1953: “Except as forbidden by some public policy, the tendency of the law is to apply in contract matters the law which the parties intended to apply.” Lauritzen v. Larsen, 345 U. S. 571, 588–589 (1953). Clearly, the court seeks to enforce the agreement between the parties as written, especially in cases where the language is clear and unambiguous as to the parties’ intent.
Enforcement of Choice-of-Law Clauses in Maritime Contacts Analogous to Enforcement of Forum-Selection Clauses
Settled precedent on the enforceability of forum-selection clauses in maritime contracts states that forum-section clauses are ‘“prima facie’ valid under federal maritime law and ‘should be enforced unless’ doing so would be ‘unreasonable’ under the circumstances." Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593-94 (1991). Choice-of-law and forum-selection clauses are similar in that they both seem to follow the intent of the contracting parties in resolving future disputes.
Historically, courts have favored choice-of-law clauses versus forum-selection clauses. Milanovich v. Costa Crociere, S.p.A., 954 F.2d 763 (D.C. Cir. 1992). This is because forum-selection clauses can be inconvenient for parties as they force litigation in a particular location, whereas choice-of-law provisions simply provide what state’s law must be utilized in resolving arising disputes regardless of the physical location of the proceedings. This is paramount in maritime matters where ships travel across state boundaries regularly. “By identifying the governing law in advance, choice-of-law provisions allow parties to avoid later disputes—as well as ensuing litigation and its attendant costs,” Cf. Carnival Cruise, 499 U. S., at 593–594. Choice-of-law provisions also discourage forum shopping, further cutting the costs of litigation. Further, as also noted by the Court, utilizing choice-of-law provisions allows vessel owners to decide “what precautions to take” on their vessels, “and enable marine insurers to better assess risk.” American Dredging Co. v. Miller, 510 U.S. 443, 454 (1994); see also Brief for American Institute of Marine Underwriters et al. as Amici Curiae, 12–13.
Raiders, on the contrary, asserted that there is not an established maritime rule governing choice-of-law provisions and that issues of the same should be examined under state law, rather than federal law. To support its claim, Raiders argued that the 1955 decision in Wilburn Boat Co. v. Fireman’s Fund Insurance Co., 348 U. S. 310, precluded a uniform federal presumption of enforceability for choice-of-law provisions in maritime contracts. The Court found this unpersuasive, however, and explained that Wilburn Boat did not involve a choice-of-law provision. Instead, Wilburn Boat involved a warranty question, and since there was no federal admiralty rule governing warranty issues, state law was applied as a gap-filler. As such, Wilburn Boat only provided that state law could be used as gap filler in the "absence of a uniform federal maritime rule on a warranty issue." 348 U.S. at 314-316. Further, the court in Wilburn Boat “declined to create a federal maritime rule on that question, both because states historically regulated insurance and because federal courts were poorly positioned to ‘unify insurance law on a nationwide basis.’” Wilburn Boat at 316–320.
In the case at hand, however, there is no gap. A uniform federal rule governs the enforceability of choice-of-law clauses in maritime contracts. In addition, Wilburn Boat did not prevent the Court from concluding as a matter of federal maritime law that forum selection clauses are presumptively enforceable. See The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972); see also Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593–594 (1991). Therefore, Wilburn Boat does not preclude a uniform federal presumption of enforceability for choice-of-law provisions in maritime contracts. The Court also disagreed that Wilburn Boat in any way recognized state law as applicable specifically to marine insurance contracts. The Court further emphasized that “in the forum-selection context, Zapata Off-Shore Co. and Shute apply to marine insurance contracts as well as to other maritime contracts.” See Shute, 499 U. S., at 593–595; Zapata Off-Shore Co., 407 U. S., at 10–14. The Court stated that there was “no good reason” to treat choice-of-forum and choice-of-law selection clauses differently.
Notably, Justice Thomas, in his concurring opinion, criticized the Wilburn Boat decision and explained that the decision rested in “flawed premises” and is “at odds with the fundamental precept of admiralty law.” Justice Thomas specifically noted that the conclusion in Wiburn Boat – “that there was no established federal admiralty rule requiring literal compliance with express warranties” – was “indefensible.” He also pointed out and explained how Wilburn Boat “has been met with universal criticism over the past 70 years.” Justice Thomas noted that the case at issue rightly eroded Wilburn Boat’s foundation. However, he expressed his disagreement with the fact that the Raider’s decision as well as some other “courts continue to understand Wilburn Boat to require application of state law in circumstances far different from the inherently local dispute at issue there.” Justice Thomas concluded his concurrence by explaining that “[l]itigants and courts should heed our instruction that general maritime law applies in maritime contract disputes unless they ‘so implicate local interests as to beckon interpretation by state law.’” Kirby, 543 U.S., at 27, 125 S.Ct. 385. “Wilburn Boat reaches no further.”
Exceptions to the Presumption of Enforceability
Though exceptions do exist, these exceptions as to when a choice-of-law clause is presumptively enforceable are limited and are identified via case law as follows:
- When a chosen law would contravene a controlling federal statute. Knott v. Botany Mills, 179 U.S. 69,77 (1900).
- The presumption conflicts with an established federal maritime policy. The Kensington, 183 U.S. 263, 269-271 (1902).
- Courts may also disregard a choice-of-law clause when parties can furnish “no reasonable basis” for the chosen jurisdiction." Cf. Carnival Cruise, supra 499 U.S. at 594-595. This is also referred to as the "unreasonable basis" exception and must be applied with "substantial deference" to the parties for the reason that the parties may, at times, decide to choose the law of a specific jurisdiction because that jurisdiction has “well developed, well known, and well regarded” body of maritime law.
In the current case, Raiders did not contend that any of the named exceptions would be applicable to this set of facts. It neither argues that any federal statute or established maritime law prevents the enforcement of the choice-of-law provision in the contract, nor that the use of New York law was in any way unreasonable.
Choice of Law Clause and the Public Policy of the State With the Most Interest in the Case
Raiders final argument was that an additional exception should be created to account for the instance where enforcing a choice-of-law clause contravenes the public policy of the state with the most interest in the case. The Court, however, was not persuaded by this argument and stated, "[a] federal presumption of enforceability would not be much of a presumption if it could be routinely swept aside based on 50 States’ public policy determinations. The ensuing disuniformity and uncertainty caused by such an approach would undermine the fundamental purpose of choice-of-law clauses in maritime contracts: uniform and stable rules for maritime actors." The Court reiterated that it had never invalidated a choice-of-law provision in a maritime contract on the basis that it would violate state law. The Court also confirmed that neither has the Court attempted to apply state law in forum-selection cases, and went on to address the comment in Zapata Off-Shore Co., in which it stated that “contractual choice-of-forum clause should be held unenforceable if enforcement would contravene a strong public policy of the forum in which suit is brought.” 407 U. S., at 15. The Court explained that this notation “was referring to the possibility of a conflict between federal maritime law and a foreign country’s law.” See ibid.
Conclusion
In conclusion, the Court established that choice-of-law provisions within maritime contracts are generally upheld under federal maritime law, with limited exceptions. In the specific context of this case, no exception to this presumption applies. As such, the Court of Appeals judgment was therefore reversed.
Commentary Regarding Impact on Seafarer Employment Agreements
The U.S. Supreme Court decisions in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) and Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) create precedents upholding contractual choice-of-forum provisions. Subsequently, in 1985, the Supreme Court also enforced both choice-of-law and forum-selection clauses in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985). The Mitsubishi Court observed that prior precedents of Bremen and Scherk established “a strong presumption in favor of enforcement of freely negotiated contractual choice-of-forum provisions,” that this presumption was “reinforced by the emphatic federal policy in favor of arbitral dispute resolution,” and this federal policy applied “with special force in the field of international commerce.” Id. at 631.
As the Court emphasized, uniformity is one of the most important aspects of the maritime law because of “the great interests of navigation and commerce” and maintaining the United States’ “diplomatic relations.” 3 J. Story, Commentaries on the Constitution of the United States § 1666, p. 533 (1st ed. 1833); see also Norfolk Southern, 543 U.S., at 28, 125 S.Ct. 385; Exxon Corp. v. Central Gulf Lines, Inc., 500 U.S. 603, 608, 111 S.Ct. 2071, 114 L.Ed.2d 649 (1991). As such, it is important that the Court maintained the uniformity with maritime choice-of-law and choice-of-forum cases. In Zapata Off-Shore Co. and Schute, the Court has previously held that forum-selection clauses in maritime contracts are “prima facie valid” under federal maritime law and “should be enforced unless” doing so would be “ ‘unreasonable’ under the circumstances.” Zapata Off-Shore, 407 U. S. 1, 10, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972); see also Schute, 499 U.S. 585, 593–594, 111 S.Ct. 1522, 113 L.Ed.2d 622 (1991).
This decision will have an impact on the enforcement of crew-member employment agreements as these types of contracts often include both, choice-of-law, and choice-of forum selection provisions. Importantly, the court also cited Zapata Off-Shore Co. stating, “[l]ike choice-of-law provisions, forum-selection clauses respect “ancient concepts of freedom of contract.” Zapata Off-Shore, 407 U. S., at 11, 92 S.Ct. 1907. This further cements the enforceability aspect of such provisions. As conflicts arise, it is common that the crew-members argue that the choice-of-law and choice-of-forum clauses should not be enforced. Often, the argument is that the forum should be in the United States and the law of the United States should apply. The United States Supreme Court has previously denied certiorari review of enforcement of the terms of a Seafarer Agreement. In that case, the Eleventh Circuit Court of Appeals affirmed the district court’s order and rejected the argument United States law should apply on a public policy basis. Pysarenko v. Carnival Corp., 2014 WL 1745048 (S.D. Fla. 2014); Pysarenko v. Carnival Corp., 581 Fed, Appx 844 (11th Cir. 2014).
The Great Lakes decision importantly confirms and solidifies that such clauses contained within seafarer employment contracts are enforceable.
It is also important to note that the exceptions outlined by the Court are very narrow and limited, allowing a maritime choice-of-law contract to not be enforced only when the law agreed upon in the contract conflicts with an established federal statute or maritime policy. Further, the "unreasonable basis" exception must be applied with "substantial deference" to the parties for the reason that the parties may at times decide to choose the law of a specific jurisdiction because that jurisdiction has “well developed, well known, and well regarded” body of maritime law. This will also greatly apply to crew-member employment contracts as often-times these contracts select the forum and governing law to solve conflicts as the flag state of the vessel, such as Panama and Malta.
In addition to the fact that these countries have “well developed, well known, and well regarded” bodies of maritime law, there are also practical and legal reasons to enforce the designation of flag state law to govern seafarers’ claims. The international maritime treaties impose the duty upon the flag states to domesticate and implement treaty regulations and enforce those regulations on the ships within their control. To facilitate compliance, shipowners need certainty in the application of law as they sail across the globe between jurisdictions. Applying flag state law to all seafarers on board also provides uniform treatment and rights of the crew, whom hail from many different nations. It is customary within the maritime industry for the ship’s flag state law to govern such disputes. Therefore, substantial deference to the "unreasonable basis" exception is an important nuance of this exception, further assuring the enforcement of such contracts.