Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC

LII note: The U.S. Supreme Court has now decided Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC.

Issues 

Is a provision of a maritime contract specifying which state’s substantive law applies in case of a contract dispute unenforceable if that choice is contrary to the strong public policy of another state whose law would otherwise apply?

Oral argument: 
October 10, 2023

This case asks the Supreme Court to decide whether state public policy can impact the enforcement of a choice-of-law provision in a maritime contract. Great Lakes Insurance disputed an insurance claim for Raiders Retreat’s yacht and contends that under the choice-of-law provision in their contract, federal maritime law or, alternatively, New York law applied. Great Lakes argues that such provisions are presumptively enforceable under federal maritime law unless they are contrary to federal public policy. Raiders argues that state public policy can override the presumption of enforceability of choice-of-law provisions, and the state law or Restatement provisions followed by many states should apply. The outcome of this case bears important consequences on whether federal or state law should govern questions of maritime commerce, and whether courts should prioritize uniformity of law over state sovereignty.

Questions as Framed for the Court by the Parties 

Whether, under federal admiralty law, a choice-of-law provision in a maritime contract can be rendered unenforceable if enforcement is contrary to the “strong public policy” of the State whose law is displaced.

Facts 

Raiders Retreat Realty (“Raiders”) is a company headquartered in Pennsylvania. Great Lakes Ins. SE v. Raiders Retreat Realty Co. (“Third Circuit”) at 227. Raiders owns a yacht, which has its hailing port in Pennsylvania. Brief for Respondent, Raiders Retreat Realty Co. at 5. From 2007 to 2019, Raiders insured its yacht with Great Lakes Insurance (“Great Lakes”), a company headquartered in the United Kingdom. Great Lakes Ins. SE v. Raiders Retreat Realty Co. (“E.D. Pa.”) at 582. In the insurance policy, a choice-of-law provision specified that well-established principles of federal maritime law would apply to any contractual dispute between Raiders and Great Lakes. Third Circuit at 228. In the absence of a well-established principle relevant to the dispute, however, New York law would apply. Id.

Before renewing the policy for 2016–2017, a third party examined the yacht and made a report. E.D. Pa. at 583. The report recommended fire extinguishers aboard the yacht. Id. Later, Raiders certified in a letter to Great Lakes that it had complied with that recommendation. Id. In a new provision in the policy, Raiders warranted that “[i]f the [yacht] is fitted with fire extinguishing equipment, . . . such equipment is properly installed and is maintained in good working order.” Id. Great Lakes renewed the policy for 2016–2017 and for subsequent years. Id.

In June, 2019, the yacht ran aground in Florida. Id. Raiders incurred at least $300,000 in damage and submitted an insurance claim to Great Lakes for the loss. Third Circuit at 227. After Great Lakes investigated, it concluded that Raiders failed to have the fire-extinguishing equipment recertified or inspected. Id. Great Lakes claimed that Raiders had violated its warranty and the certification in its letter, voiding the insurance policy. E.D. Pa. at 583. Therefore, Great Lakes rejected the claim and refused to pay Raiders. Third Circuit at 228.

Great Lakes then sued Raiders in the United States District Court for the Eastern District of Pennsylvania, seeking a declaratory judgment that the policy was void. Id. In response, Raiders raised five counterclaims. Id. Three of those claims relied on Pennsylvania law included breach of fiduciary duty, insurance bad faith, and unfair trade practices. Id. Great Lakes moved for judgment on the pleadings as to those three claims, arguing that New York law should apply because of the choice-of-law provision, and that New York law precludes such claims if brought under Pennsylvania law. Id. Raiders countered that it would be unjust to enforce the choice-of-law provision because Pennsylvania has a strong public policy to deter insurance companies from rejecting claims in bad faith. E.D. Pa. at 586. The court rejected that argument, granted Great Lakes’s motion, and dismissed the three claims. Id. at 588.

Raiders appealed the district court’s decision to the United States Court of Appeals for the Third Circuit. Third Circuit at 228. The Third Circuit set aside the decision and remanded the case, instructing the district court “to consider whether Pennsylvania has a strong public policy that would be thwarted by applying New York Law.” Id. at 233. According to the Third Circuit, a well-established principle in federal maritime law dictates that a choice-of-law provision is presumed enforceable unless that would be unreasonable or unjust. Id. at 230. The Third Circuit reasoned that it would be unreasonable or unjust to enforce the provision if it is contrary to the strong public policy of the forum state. Id. at 233.

The United States Supreme Court granted Great Lakes’s petition for certiorari on March 6, 2023. Brief for Petitioner, Great Lakes Ins. SE at 4.

Analysis 

ENFORCEABILITY AS A MATTER OF FEDERAL OR STATE LAW

Great Lakes argues that federal law governs the enforceability of choice-of-law provisions in maritime contracts. Brief for Petitioner, Great Lakes Ins. SE (“Great Lakes”) at 15. Great Lakes claims that federal statutes and common law have historically governed maritime contracts. Id. at 16−17. Great Lakes also contends that federal courts generally enforced choice-of-law provisions unless they were contrary to federal public policy. Id. at 18. Great Lakes posits that the presumption of enforcing choice-of-law-provisions is a settled principle of federal maritime law. Id. at 19.

Great Lakes notes the Supreme Court’s holding in Wilburn Boat Co. v. Fireman’s Fund Ins. Co. that courts should apply state substantive law to maritime issues only when there are no settled principle of federal maritime law and no federal interest in making a new federal-common-law rule. Id. at 19. Great Lakes infers that state substantive law has a gap-filling role and contends that the presumption of enforceability as a settled principle of federal maritime law means that state law does not apply to the enforceability of choice-of-law. Id.

Great Lakes further contends that Raiders’s argument that state law applies should be waived or forfeited because Raiders has not raised it before in this case. Reply Brief for Petitioner, Great Lakes Ins. SE at 3−5. Great Lakes also maintains that after the Wilburn Boat holding, federal courts enforced maritime forum-selection clauses and maritime choice-of-law provisions are similar enough that federal law should also enforce them. Id. at 5. Great Lakes contends that the only remaining issue is whether federal or state public policy can rebut the presumption of enforceability. Id. at 12.

Raiders counters that under Wilburn Boat, it is state law that governs the enforceability of choice-of-law provisions in maritime contracts. Brief for Respondent, Raiders Retreat Realty Co. (“Raiders”) at 13. Raiders contends that Wilburn Boat affirms the historical arc of judicial case law and legislative decisions that state law should govern the contracts of the maritime insurance industry. Id. at 17−18. Under Wilburn Boat, Raiders states, state law applies to maritime insurance contracts unless there is a “well-established, specific federal [maritime] rule that governs.” Id. at 15. And Raiders asserts that Wilburn Boat sets an “exceptionally high” standard for finding an “established federal rule” and that Great Lakes has failed to meet that standard. Id. at 20. Raiders argues that Great Lakes only cites cases in which choice-of-law provisions favored another country’s law over federal law, but not any case involving a choice of federal law over state law. Id. at 21. Raiders supports its position by citing maritime cases in which state law governed the question of whether choice-of-law provisions were enforceable. Id. at 23−25.

Raiders also notes that the Supreme Court adopted state choice-of-law rules in Cassirer v. Thyssen Bornemisza Collection Found. in spite of the “uniquely federal interest[]” at issue—foreign affairs. Id. at 29. Raiders posits that state law should similarly apply in this case because the unique federal interests in maritime law do not necessitate that federal law replace state law. Id. at 30. Raiders further argues that federal interests in this issue are small because should they have been significant, substantive federal maritime law would apply under Wilburn Boat. Id. at 41–42.

ENFORCEABILITY AS A MATTER OF FEDERAL OR STATE PUBLIC POLICY

Great Lakes argues that it is federal public policy that applies to the question of whether the choice-of-law provision is enforceable. Brief for Petitioner at 16. Great Lakes contends that after Wilburn Boat, maritime contracts more often included choice-of-law provisions. Id. at 20. According to Great Lakes, courts analyzed those provisions under choice-of-law principles that they tailored to the maritime context. Id. at 20. The Fifth Circuit, Great Lakes emphasizes, has enforced choice-of-law provisions unless they conflict with the “fundamental purposes of maritime law.” Id. at 22. Great Lakes adds that the Ninth Circuit has refused to let conflicting state public policy prevail over “federal public policy as supplied by federal maritime law.” Id. at 23. Great Lakes further claims that district courts have similarly given the most weight to federal public policy. Id. at 24.

Next, Great Lakes argues that Congressional action should be interpreted to favor federal public policy. Id. at 31. Great Lakes asserts that Congress has a general policy promoting freedom of contract and party autonomy in maritime commerce, including for choice-of-law provisions. Id. Great Lakes further notes that Congress has enacted a narrow exception to the general policy only in cases where enforcing the general policy would be against federal public policy. Id. at 31, 33. Great Lakes states that Congress has similarly recognized broad freedom of contracting in other areas of federal law, such as the federal arbitration laws applying to maritime contracts. Id. at 33. Great Lakes concludes that states should not be allowed to contravene congressional intent by imposing their own public policy and restricting freedom of contract. Id. at 33−34.

Raiders counters that it is Pennsylvania’s public policy, and not that of the United States, that applies to the question of whether the choice-of-law provision is enforceable. Brief for Respondent at 32, 34. Raiders contends that because state law governs that question, the Court should look to the choice-of-law rules of the forum state as it does in diversity cases. Id. at 32. According to Raiders, Pennsylvania applies section 187 of the Restatement (Second) of Conflict of Laws. Id. Raiders asserts that under section 187, a choice-of-law provision is unenforceable if it conflicts with the strong public policy of a state that has a “materially greater interest” in the dispute and whose law would apply without the provision. Id. at 34. Raiders argues that here, Pennsylvania has a materially greater interest in the dispute than New York does, and Pennsylvania law would apply absent the choice-of-law provision. Id. at 34−35, 36.

Raiders argues that in case the Supreme Court does decide to make a federal rule—instead of applying state law—it should adopt the Restatement’s test. Id. at 35−36. Raiders posits that the test balances the need for common legal outcomes regardless of the forum and protection for deference to state law. Id. at 37. Raiders maintains that all states either already apply the Restatement’s test or a similar test, as have federal courts sitting in admiralty. Id. at 37, 39. Raiders further asserts that Great Lakes proposes a test for enforceability that “plucks one-half of the Restatement’s test, and then mangles the second half” by replacing the forum’s public policy by federal public policy. Id. at 40-41.

DIFFERENT JUDICIAL INTERPRETATIONS OF THE BREMEN AND CARNIVAL CRUISE

Great Lakes argues that two leading Supreme Court cases support its position that federal public policy applies: M/S Bremen v. Zapata Off-Shore Co. (“The Bremen”) and Carnival Cruise Lines, Inc. v. Shute.(“Carnival”). Brief for Petitioner at 21−22, 26−29. Great Lakes contends that in The Bremen, the Supreme Court adopted a test for forum-selection clauses that resembles the test for choice-of-law provisions: presumption of enforceability unless unreasonable and unjust, such as when there is a conflict with a strong public policy of the forum. Id. at 21. Great Lakes adds that in maritime cases, the applicable forum and public policy are federal so that state public policy cannot impact the decision. Id. at 21−22.

Great Lakes next argues that the Supreme Court upheld The Bremen’s test in Carnival, which involved a forum selection of one state over another. Id. at 29. Great Lakes points out that the Supreme Court considered whether the forum-selection clause conflicted with federal law or policy, not state policy in Carnival. Id. Further, Great Lakes contends, the Fifth, Ninth, and D.C. Circuits all follow that interpretations of The Bremen and Carnival. Id. at 22–24.

Raiders counters that the two Supreme Court cases instead support Raiders’s position. Brief for Respondent at 30. Raiders notes that in The Bremen, the Supreme Court analyzed a forum-selection clause in a maritime contract that chose one country over another and that incidentally “served as a choice-of-law provision.” Id. at 30, 31. Raiders emphasizes that the Supreme Court “opened the door” to rendering such a forum-selection clause unenforceable if it conflicts with the strong public policy of the forum. Id. at 31.

Raiders further contends that the Supreme Court kept that door open in Carnival, where the forum choice was between two states. Id. at 30−31. Raiders argues that because the case at hand also involves a choice between two states, the Third Circuit, relying on The Bremen and Carnival, correctly concluded that the district court should consider whether there is a strong public policy of the forum—Pennsylvania—that may render the choice-of-law provision unenforceable. Id. at 31.

Discussion 

THE TENSION OVER MARITIME COMMERCE AND FEDERALISM

New England Legal Foundation (“NELF”), in support of Great Lakes, argues that the federal interest in a harmonious system of maritime commerce should override the competing interests of states. Brief of Amicus Curiae New England Legal Foundation, in Support of Petitioner at 6. NELF asserts that adopting a federal rule to determine the enforceability of choice-of-law provisions would allow parties to predict when a choice-of-law clause would be enforced and which state’s laws would govern, thus facilitating maritime commerce. Id. at 8.

Chamber of Commerce of the United States of America and American Property Casualty Insurance (“Chamber of Commerce”), in support of Great Lakes, argues that allowing state public policy to void a maritime contract would undermine federal authority by creating the problem of forum-shopping. Brief of Amici Curiae Chamber of Commerce, in Support of Petitionerat 19. For example, Chamber of Commerce points out that only some states have adopted the doctrine of uberrimae fidei, or “utmost good faith,” which imposes strict duty on insured individuals to accurately represent and disclose material facts, failure of which results in the policy becoming void. Id. at 13. Chamber of Commerce asserts that this difference incentivizes litigants to shop for jurisdictions in states that have more favorable rules for their claims. Id. at 19. Chamber of Commerce argues that forum-shopping “serves no useful purpose” and has long been recognized under the Erie Doctrine as being unfair. Id. at 20.

The States of Louisiana, Mississippi, and Pennsylvania (“States”), in support of Raiders, counter that the Constitution does not endow any federal branch of government with maritime lawmaking power. Brief of Amici Curiae of Louisiana, et al., in Support of Respondent at 5. States argue that Southern Pacific Co. v. Jensen is the seminal case establishing that maritime common law has federal status, rather than Wilburn Boat Co. v. Fireman’s Fund Ins. Co. as cited by Great Lakes. Id. at 2–3. States assert that Jensen misinterprets the Constitution and is inconsistent with the Erie Doctrine, which is also derived from Article III, but disallows federal judges sitting in diversity jurisdiction from displacing state law. Id. at 5–7. States contend that affirming Jensen would run contrary to the Framer’s intent. Id. at 9. For example, States argue that in Federalist No. 80, Alexander Hamilton only viewed federal judicial power over maritime causes as restricted to cases of ship capture and not the broader category of private maritime litigation. Id. at 10–11. States also contend that George Mason was a known supporter of states’ rights, and yet did not protest Article III’s provision for admiralty jurisdiction. Id. at 11–12. Furthermore, States argue that affirming Jensen would be contrary to historical practice because English admiralty courts and pre-ratification state admiralty courts did not have jurisdiction over private maritime claims; moreover, federal courts did not consider the common law they were applying to be “federal,” for purposes of preempting state law, in pre-Jensen maritime cases. Id. at 14–18.

United Policyholders, in support of Raiders, argue that refusing to consider a state’s public policy exceptions would negatively affect policyholders by removing the scrutiny provided by states against insurance claims they consider “harsh,” “evil” and otherwise unenforceable. Brief of Amicus Curiae United Policyholders, in Support of Respondent at 11. United Policyholders point out that state public policy considerations play a mitigating role in protecting policyholders, who are citizens of the state, against unilateral clauses that run afoul of the forum state’s public policy. Id. at 15–17. Furthermore, United Policyholders contend that refusing to consider a state’s public policy exceptions would intrude on Pennsylvania’s authority to protect its own policyholders from unfair claims practices. Id. at 18.

THE NEED FOR UNIFORMITY IN MARITIME LAW

NELF, in support of Great Lakes, argues that considering state interests against a choice-of-law provision would undermine the uniformity of general maritime law. Brief of NELF at 13. NELF contends that if state interests were to govern choice-of-law provisions, federal courts could subject parties to unanticipated liability from the law of third-party states, based on the court’s assessment of that state’s public policies, which in turn would undermine legal uniformity. Id. at 14–15.

States, in support of Raiders, counter that the lack of uniformity resulting from adopting state public policy that Great Lakes predicts is a feature of federalism, rather than a flaw. Brief of States at 19. The States point out that uniformity is no more an important matter in maritime commerce than international finance transactions, interstate trucking or air commerce. Id. The States contend that Congress, and not the courts, could simply enact legislation if it believes there are areas of maritime law where complete national uniformity is necessary. Id.

Conclusion 

Acknowledgments 

The authors would like to thank Professor Diogo Magalhães for his insights into this case.

Additional Resources