The International Business Transactions Blog

U.S. Supreme Court Confirms Presumption that Choice of Law Clauses Govern Federal Maritime Contracts

By Kelsey McGillis
Law Student Editor

On February 21, 2024, the U.S. Supreme Court issued a ruling in the case of Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, emphasizing the robust enforcement of choice-of-law clauses in maritime insurance contracts. The central question in the case was whether, under federal admiralty law, a choice-of-law clause could be set aside if enforcing the clause would result in a violation of a state’s “strong public policy.”

The case involved a dispute between European insurance company, Great Lakes Insurance SE (“GLI”), and its client, Pennsylvania-based yacht owner, Raiders Retreat Realty Co., LLC (“Raiders”). The parties’ marine insurance contract contained a choice-of-law clause stating that disputes would be adjudicated according to well-established principles of U.S. federal admiralty law and, where no such precedent exists, the substantive laws of the state of New York.

Following damage to the yacht, GLI denied insurance coverage based on the fact that the yacht’s fire extinguishers had not been timely inspected and recertified.  Although no damage to the vessel was caused by fire, GLI sought a declaratory judgment of nonliability based on the claim that the misrepresentation regarding the fire equipment voided the insurance policy ab initio.  Raiders counterclaimed with various counts under Pennsylvania law, including breach of contract, breach of fiduciary duty, insurance bad faith, and unfair trade practices.  GLI rejoined that the policy’s choice-of-law clause barred Pennsylvania counterclaims.

In a unanimous opinion authored by Justice Kavanaugh, the court concluded that choice-of-law provisions in maritime contracts are presumptively enforceable under federal maritime law. The Court held that, while there are narrow exceptions, state public policy is not generally one of them.

Kavanaugh emphasized the need for strong choice-of-law enforcement to reduce uncertainty and facilitate maritime insurance. Although the opinion cited consistent decisions of federal courts of appeals, and precedents like M/S Bremen v. Zapata Off-Shore Co. and Carnival Cruise Lines v. Shute, which enforced maritime forum-selection clauses, it did not rely wholly on these precedents based on the view that choice of forum and choice of law clauses raise some different issues.

The Court rejected the proposal to use Section 187 of the Second Restatement of Conflict of Laws for deciding the enforceability of the choice-of-law clause. The Court argued that Section 187 was intended for interstate cases, not federal/state conflicts like those in maritime cases. Additionally, the Court  pointed out that applying Section 187 could be problematic for the overall development of the maritime industry, which requires predictability in the laws applicable to the agreement.  It appears that Section 187 remains good law outside the realm of maritime contracts.

The opinion concluded with Kavanaugh outlining narrow exceptions to the enforceability of choice-of-law clauses, such as contravention of a federal statute, conflict with established federal maritime policy, or the absence of a reasonable basis for the chosen jurisdiction. In this case, none of these exceptions applied, and New York law was deemed appropriate.