*** As a reminder, since I can't shoehorn in two transcript reviews in a day most weekdays anymore, this is coming out a day after the argument was held. The argument held on 10/11 will be reviewed on 10/12 ***
The second argument of the day on Tuesday, 10/10 was an interesting case involving the intersection of maritime law, insurance law, and contract law. I say "interesting" but ... ok, that's probably a matter of perspective and individual taste. Not everyone gets as excited as I do about questions of contract interpretation and how public policy affects things, I guess (I call those people "weirdos"). Anyway, back to describing the case ...
Let's start with a story (which I have largely taken from the 3rd Circuit opinion from which this SCOTUS case derived ... although I've uh ... touched it up a bit for enjoyment). Once upon a time there was a yacht owned by a company that wanted to sound cool and called itself Raiders Retreat Realty. Unfortunately, the yacht ended up running aground, and in case you are unfamiliar with yachts, this is generally speaking a bad thing. You ... well ... you usually want to keep them well and surely in the water. Now, yachts are not easy things to ensure. They are expensive, they often have unique characteristics rather than being cookie cutter like passenger vehicles are, and they are prone to an unusual set of perils - like ... *ahem* ... running aground. As a result, insurance policies tend to be more complicated to get than most other kinds of policies. Yachts are also very expensive just as a matter of first principles. Those two things combine to make the cost of a policy particularly expensive. Historically, to keep the cost of this kind of policy down there are often very, very strict and specific rules that have to be followed for a policy to pay out if a claim is made.
Back to the yacht running aground ... what do you if you accidentally beach your yacht? Well, you file a claim on your insurance policy of course. But remember when I mentioned that there are very, very specific rules that have to be followed exactly to avoid having a claim denied, in exchange for a much lower premium than you would otherwise be able to get? Well, when the insurance adjuster came out to adjudicate this claim, it was discovered that the fire extinguishing equipment on the yacht had not been properly recertified or inspected. You might be asking yourself what fire extinguisher's have to do with running your yacht aground - and it's a logical question! However, in the world of maritime law, with these bespoke insurance plans, it doesn't matter. Any defect in the insurance requirements set out in the policy constitute grounds for denial of a claim, even if they are unconnected with the peril for which a claim was filed. The insurance company sued Raiders in pursuit of a declaratory judgment that the failure to maintain the fire extinguishing equipment rendered the policy void, releasing them from any obligation to pay out on the claim.
This decision did not please Raiders ... as you might imagine. Since Raiders is a Pennsylvania company, they chose to file five counterclaims under Pennsylvania law against the insurers - two of them under the insurance contract itself and three of them based on general Pennsylvania business law principles outside of the context of the contract. And now we get to the issue that made it to the Supreme Court.
It is a bedrock principle of contract law that to the extent possible, the parties have a right to make whatever bargain that they choose to as relates to their contract, with few exceptions. One of the - probably the - most important exceptions is contracts that in some way conflict with the public policy of the government under which they operate. To take an easy example, you cannot contract to do something that is illegal in the jurisdiction where you are located because it would very clearly be against public policy to allow people to make contracts that required them to do illegal things. Similar prohibitions exist for a variety of other situations that states or the federal government deem to be problematic - restrictive non-compete clauses, forced arbitration provisions, contracts of adhesion (i.e. "take it or leave it" deals where one party has significantly less power than the other) all have faced public policy challenges in different jurisdictions, amongst other things.
Two of the things that parties often bargain over in a contract are forum selection and choice-of-law. If you haven't dealt with contracts much this probably will seem very strange, because usually the court that you go to, and the law that applies in that court, is based on where you are located. If you're in Minnesota and get arrested, you're going to end up in a Minnesota court and be charged with violations of Minnesota law. But in a contract, there is nothing that limits the applicable forum that you choose to adjudicate any dispute in, and there is nothing that limits which contract law that court will end up applying to your case ... except for issues of public policy.
On the issue of forum selection as it relates to maritime insurance contracts, the Supreme Court has directly addressed the issue. In a case called The Bremen v. Zapata Off-Shore Co, decided in 1972, the Court decided that under federal admiralty (aka maritime) law, the forum selection clause in a maritime insurance contract is presumptively enforceable unless they violate federal maritime policy. The Supreme Court has not, however, said anything about choice-of-law provisions - which is why we are in court today. The Question Presented in this case is: "Whether, under federal admiralty law, a choice-of-law clause in a maritime contract can be rendered unenforceable if enforcement is contrary to the “strong public policy” of the state whose law is displaced."
Let's take a brief aside to better understand forum selection and choice-of-law. If both parties live in Minnesota, work in Minnesota, and all of the events that led to a lawsuit happened in Minnesota it is very clear that the appropriate forum for the parties to go to court in is Minnesota. But what if you have a party from California, a party that is a company based in Florida with offices in Pennsylvania and Michigan, a piece of equipment located in New York, an insurance company from Germany ... you see where I'm going with this. And this scenario is not at all unusual or convoluted - this stuff happens in the business world all the time. As a result, it is essential that the parties agree to the forum in which they're going to adjudicate any issues that arise under the contract. Typically it is the most convenient forum for one of the two parties (this is something that they have to negotiate over, often).
Choice-of-law is a different beast, although related. Whereas forum selection is based on what physical court is convenient for the parties, choice-of-law is all about finding an appropriate set of laws that covers the needs of the parties. If a South Dakota company owns a yacht somewhere, they may very well want South Dakota to be the forum in which suits are covered - and they might negotiate for that and get that concession from the other party. However, very few people would argue that South Dakota is likely to have a well-developed set of maritime insurance contract principles in their law. As a result, such a contract may very well select New York State maritime contract law to govern the contract. This type of thing really does happen all the time - so it might seem strange, but you would have South Dakota courts applying New York law if this hypothetical scenario ever went to court.
Back to our case here. The 3rd Circuit found that while there is a presumption of enforceability regarding forum selection provisions in maritime insurance contract, there is no such presumption of enforceability for choice of law provisions. This was largely based on a case called Wilburn Boat, which stood for the proposition that unless there is a clear federal rule under federal maritime law in place (or a clear need for a federal rule to be in place), that state law should govern a maritime insurance contract. Since the Supreme Court has only explicitly found such a presumption on the forum selection issue (as noted above, with the Bremen case), and not with choice-of-law, the third circuit ruled that there was no presumption of enforceability for choice-of-law. The contract in this case specified that New York law should be applied, but the 3rd Circuit found that, absent the enforceability presumption, the state of Pennsylvania - where the yacht owner was based - had a clear public interest. As a result, it ruled that the choice-of-law provision in the contract was void, and Pennsylvania law should apply, thus opening the door to the yacht owner's counter claims against the insurance company.
The arguments at the Court largely came down to whether there was a clear federal maritime policy in favor of the presumption of enforceability on choice-of-law provisions, as there is with forum selection. The Petitioner/Insurance Company that lost in the 3rd Circuit argued that there should be, for several reasons. First, it is consistent with the forum selection rule. There is no real reason to have a rule favoring enforceability of forum selection provisions but to disfavor enforceability for choice of law - and in fact, forum selection is widely considered to be the more significant of the two issues, so if enforceability is presumed to be favored for that, it logically should be favored for choice-of-law as well. Second, while the Supreme Court hasn't weighed in on this issue, the practice of all of the lower courts since the forum selection ruling was that choice-of-law was also presumed enforceable. Finally, this approach most closely comports with federal maritime policy goals such as ensuring uniformity and clarity in maritime contracts. Since you're often dealing with parties and property that cross many different states, it is hard to determine in many cases what state would be preferable. Additionally, the parties trying to come to an agreement on a contract have very little certainty over what the rules they are dealing with will be if it could be whatever law a court is going to end up deciding later on which state's public policy is most impacted by a particular event associated with a contract. All of these factors militate toward the presumption of enforceability of choice-of-law provisions in maritime insurance contracts.
On the other side, the Respondent/Yacht owner argues largely on the basis of the Wilburn Boat case that the Supreme Court hasn't established a federal maritime rule on the choice-of-law issue, and that if a federal rule declaring federal maritime policy in this area is to be established that it is Congress and not the courts that should do it. This argument is a little odd since the defendant is relying on federal maritime common law (law made by the courts) with the Wilburn Boat case being the touchstone of his argument, and then turning around and saying the Supreme Court should defer to Congress on this issue ... but hey, he's making the best argument available, and sometimes that isn't a great argument.
You can probably tell I am in favor of the Petitioner on this one, and I think the Court is too. For one thing, it is simply undeniable that it is much easier for parties who are trying to come to an agreement on an insurance contract in a situation like this to do so knowing that there is one consistent set of laws that they will be dealing with, and that it will be the laws of the state that they choose in their contract. The alternative is very messy, would upend the assumptions that the courts have been making for half a century, and would almost certainly lead to more expensive insurance premiums for these types of contracts. That in turn would mean greater shipping risks, and likely less increased costs of maritime shipping in general. That is clearly counter to federal maritime policy. It just seems like a very bad idea to go in the direction that the 3rd Circuit - and the Respondent - want the Court to go here.
Most of the Justices seem to be pretty clearly aligned with that position. Justice Kavanaugh did give the Respondent some support during the arguments but it felt more like it was him just trying to get a full airing of the issues out, playing around with different concepts and theories, than him necessarily pushing for the Respondent's position to win the day. In the end, I think this one is going to end up a clean sweep, 9-0 in favor of the petitioner and in favor of the notion that choice-of-law clauses are presumptively enforceable in maritime insurance contracts.
The second argument of the day on Tuesday, 10/10 was an interesting case involving the intersection of maritime law, insurance law, and contract law. I say "interesting" but ... ok, that's probably a matter of perspective and individual taste. Not everyone gets as excited as I do about questions of contract interpretation and how public policy affects things, I guess (I call those people "weirdos"). Anyway, back to describing the case ...
Let's start with a story (which I have largely taken from the 3rd Circuit opinion from which this SCOTUS case derived ... although I've uh ... touched it up a bit for enjoyment). Once upon a time there was a yacht owned by a company that wanted to sound cool and called itself Raiders Retreat Realty. Unfortunately, the yacht ended up running aground, and in case you are unfamiliar with yachts, this is generally speaking a bad thing. You ... well ... you usually want to keep them well and surely in the water. Now, yachts are not easy things to ensure. They are expensive, they often have unique characteristics rather than being cookie cutter like passenger vehicles are, and they are prone to an unusual set of perils - like ... *ahem* ... running aground. As a result, insurance policies tend to be more complicated to get than most other kinds of policies. Yachts are also very expensive just as a matter of first principles. Those two things combine to make the cost of a policy particularly expensive. Historically, to keep the cost of this kind of policy down there are often very, very strict and specific rules that have to be followed for a policy to pay out if a claim is made.
Back to the yacht running aground ... what do you if you accidentally beach your yacht? Well, you file a claim on your insurance policy of course. But remember when I mentioned that there are very, very specific rules that have to be followed exactly to avoid having a claim denied, in exchange for a much lower premium than you would otherwise be able to get? Well, when the insurance adjuster came out to adjudicate this claim, it was discovered that the fire extinguishing equipment on the yacht had not been properly recertified or inspected. You might be asking yourself what fire extinguisher's have to do with running your yacht aground - and it's a logical question! However, in the world of maritime law, with these bespoke insurance plans, it doesn't matter. Any defect in the insurance requirements set out in the policy constitute grounds for denial of a claim, even if they are unconnected with the peril for which a claim was filed. The insurance company sued Raiders in pursuit of a declaratory judgment that the failure to maintain the fire extinguishing equipment rendered the policy void, releasing them from any obligation to pay out on the claim.
This decision did not please Raiders ... as you might imagine. Since Raiders is a Pennsylvania company, they chose to file five counterclaims under Pennsylvania law against the insurers - two of them under the insurance contract itself and three of them based on general Pennsylvania business law principles outside of the context of the contract. And now we get to the issue that made it to the Supreme Court.
It is a bedrock principle of contract law that to the extent possible, the parties have a right to make whatever bargain that they choose to as relates to their contract, with few exceptions. One of the - probably the - most important exceptions is contracts that in some way conflict with the public policy of the government under which they operate. To take an easy example, you cannot contract to do something that is illegal in the jurisdiction where you are located because it would very clearly be against public policy to allow people to make contracts that required them to do illegal things. Similar prohibitions exist for a variety of other situations that states or the federal government deem to be problematic - restrictive non-compete clauses, forced arbitration provisions, contracts of adhesion (i.e. "take it or leave it" deals where one party has significantly less power than the other) all have faced public policy challenges in different jurisdictions, amongst other things.
Two of the things that parties often bargain over in a contract are forum selection and choice-of-law. If you haven't dealt with contracts much this probably will seem very strange, because usually the court that you go to, and the law that applies in that court, is based on where you are located. If you're in Minnesota and get arrested, you're going to end up in a Minnesota court and be charged with violations of Minnesota law. But in a contract, there is nothing that limits the applicable forum that you choose to adjudicate any dispute in, and there is nothing that limits which contract law that court will end up applying to your case ... except for issues of public policy.
On the issue of forum selection as it relates to maritime insurance contracts, the Supreme Court has directly addressed the issue. In a case called The Bremen v. Zapata Off-Shore Co, decided in 1972, the Court decided that under federal admiralty (aka maritime) law, the forum selection clause in a maritime insurance contract is presumptively enforceable unless they violate federal maritime policy. The Supreme Court has not, however, said anything about choice-of-law provisions - which is why we are in court today. The Question Presented in this case is: "Whether, under federal admiralty law, a choice-of-law clause in a maritime contract can be rendered unenforceable if enforcement is contrary to the “strong public policy” of the state whose law is displaced."
Let's take a brief aside to better understand forum selection and choice-of-law. If both parties live in Minnesota, work in Minnesota, and all of the events that led to a lawsuit happened in Minnesota it is very clear that the appropriate forum for the parties to go to court in is Minnesota. But what if you have a party from California, a party that is a company based in Florida with offices in Pennsylvania and Michigan, a piece of equipment located in New York, an insurance company from Germany ... you see where I'm going with this. And this scenario is not at all unusual or convoluted - this stuff happens in the business world all the time. As a result, it is essential that the parties agree to the forum in which they're going to adjudicate any issues that arise under the contract. Typically it is the most convenient forum for one of the two parties (this is something that they have to negotiate over, often).
Choice-of-law is a different beast, although related. Whereas forum selection is based on what physical court is convenient for the parties, choice-of-law is all about finding an appropriate set of laws that covers the needs of the parties. If a South Dakota company owns a yacht somewhere, they may very well want South Dakota to be the forum in which suits are covered - and they might negotiate for that and get that concession from the other party. However, very few people would argue that South Dakota is likely to have a well-developed set of maritime insurance contract principles in their law. As a result, such a contract may very well select New York State maritime contract law to govern the contract. This type of thing really does happen all the time - so it might seem strange, but you would have South Dakota courts applying New York law if this hypothetical scenario ever went to court.
Back to our case here. The 3rd Circuit found that while there is a presumption of enforceability regarding forum selection provisions in maritime insurance contract, there is no such presumption of enforceability for choice of law provisions. This was largely based on a case called Wilburn Boat, which stood for the proposition that unless there is a clear federal rule under federal maritime law in place (or a clear need for a federal rule to be in place), that state law should govern a maritime insurance contract. Since the Supreme Court has only explicitly found such a presumption on the forum selection issue (as noted above, with the Bremen case), and not with choice-of-law, the third circuit ruled that there was no presumption of enforceability for choice-of-law. The contract in this case specified that New York law should be applied, but the 3rd Circuit found that, absent the enforceability presumption, the state of Pennsylvania - where the yacht owner was based - had a clear public interest. As a result, it ruled that the choice-of-law provision in the contract was void, and Pennsylvania law should apply, thus opening the door to the yacht owner's counter claims against the insurance company.
The arguments at the Court largely came down to whether there was a clear federal maritime policy in favor of the presumption of enforceability on choice-of-law provisions, as there is with forum selection. The Petitioner/Insurance Company that lost in the 3rd Circuit argued that there should be, for several reasons. First, it is consistent with the forum selection rule. There is no real reason to have a rule favoring enforceability of forum selection provisions but to disfavor enforceability for choice of law - and in fact, forum selection is widely considered to be the more significant of the two issues, so if enforceability is presumed to be favored for that, it logically should be favored for choice-of-law as well. Second, while the Supreme Court hasn't weighed in on this issue, the practice of all of the lower courts since the forum selection ruling was that choice-of-law was also presumed enforceable. Finally, this approach most closely comports with federal maritime policy goals such as ensuring uniformity and clarity in maritime contracts. Since you're often dealing with parties and property that cross many different states, it is hard to determine in many cases what state would be preferable. Additionally, the parties trying to come to an agreement on a contract have very little certainty over what the rules they are dealing with will be if it could be whatever law a court is going to end up deciding later on which state's public policy is most impacted by a particular event associated with a contract. All of these factors militate toward the presumption of enforceability of choice-of-law provisions in maritime insurance contracts.
On the other side, the Respondent/Yacht owner argues largely on the basis of the Wilburn Boat case that the Supreme Court hasn't established a federal maritime rule on the choice-of-law issue, and that if a federal rule declaring federal maritime policy in this area is to be established that it is Congress and not the courts that should do it. This argument is a little odd since the defendant is relying on federal maritime common law (law made by the courts) with the Wilburn Boat case being the touchstone of his argument, and then turning around and saying the Supreme Court should defer to Congress on this issue ... but hey, he's making the best argument available, and sometimes that isn't a great argument.
You can probably tell I am in favor of the Petitioner on this one, and I think the Court is too. For one thing, it is simply undeniable that it is much easier for parties who are trying to come to an agreement on an insurance contract in a situation like this to do so knowing that there is one consistent set of laws that they will be dealing with, and that it will be the laws of the state that they choose in their contract. The alternative is very messy, would upend the assumptions that the courts have been making for half a century, and would almost certainly lead to more expensive insurance premiums for these types of contracts. That in turn would mean greater shipping risks, and likely less increased costs of maritime shipping in general. That is clearly counter to federal maritime policy. It just seems like a very bad idea to go in the direction that the 3rd Circuit - and the Respondent - want the Court to go here.
Most of the Justices seem to be pretty clearly aligned with that position. Justice Kavanaugh did give the Respondent some support during the arguments but it felt more like it was him just trying to get a full airing of the issues out, playing around with different concepts and theories, than him necessarily pushing for the Respondent's position to win the day. In the end, I think this one is going to end up a clean sweep, 9-0 in favor of the petitioner and in favor of the notion that choice-of-law clauses are presumptively enforceable in maritime insurance contracts.