Key Points:
Choice-of-law provisions in maritime contracts are enforceable.
The U.S. Supreme Court decision in Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC helps with the uniformity of federal maritime law.
This decision helps save on costs and time if there is a future dispute to the contract.
General Overview
A choice-of-law provision is a contractual provision that would be used to specify what law will govern the contract should a future dispute arise. Choice-of-law provisions have been known to be an issue when it comes to insurance contracts. A dispute arises when there are two different states’ laws that may be applicable to a contract and the parties do not agree on which one should be applied. If the parties do not agree and cannot decide which state’s law to apply, the court must then decide. These issues ultimately arise when the parties to the contract are in different jurisdictions. In many maritime contracts, the parties are from different jurisdictions, so this issue is one that comes up frequently. Enforceability of a choice-of-law provision is governed by federal maritime law.
The Supreme Court of the United States recently applied federal maritime law in Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC, 144 S. Ct. 637, 642 (2024). Their decision has streamlined this issue by holding, when there is a choice-of-law provision in a maritime contract, the court must enforce it, except if one of the two exceptions applies. Further, the Supreme Court stated that a “[l]ongstanding precedent establishes a federal maritime rule: Choice-of-law provisions in maritime contracts are presumptively enforceable.” Before this case, the Court had not addressed this issue, but other lower courts had.
Rule on Choice-of-Law Provisions
In its unanimous decision, the Supreme Court determined that choice-of-law clauses in maritime contracts are presumptively enforceable under federal maritime law, subject to two narrow exceptions: (1) when the chosen law would contravene a controlling federal statute or an established federal maritime policy; or (2) when the contracting parties cannot show any reasonable basis for the chosen jurisdiction. With regard to the second exception, the court must apply “substantial deference to the contracting parties.”
Advantages of Rule on Choice-of-Law Provision
The Supreme Court stated: “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.” Great Lakes Ins. SE v. Raiders Retreat Realty Co., LLC, 144 S. Ct. 637, 644 (2024). Further, by allowing a choice-of-law provision to be enforceable in a contract, it will save time and money that would be expended on motions and hearings to determine which state’s law should apply to the dispute. If a maritime contract has a provision with the choice-of-law already agreed upon, there would be no dispute as to what law the court would apply to the case. Moreover, determining the choice-of-law in advance helps maritime shippers to decide on the front end “what precautions to take” on their ships (American Dredging Co. v. Miller, 510 U.S. 443, 454 (1994)) and enable[s] marine insurers to better assess risk (see Brief for American Institute of Marine Underwriters et al. as Amici Curiae, at pp. 12–13). Choice-of-law provisions, therefore, can lower the price and expand the availability of marine insurance. Should a dispute between parties arise, the court would then turn to the choice-of-law provision in the contract as the law to be applied, unless the contract falls within one of the two exceptions listed above.
The Future
The Supreme Court did not discuss the “issue of federalism in admiralty and the scope of application of state law in maritime cases...” Great Lakes Ins. SE, 144 S. Ct. at 642 (quoting 1 T. Schoenbaum, Admiralty and Maritime Law § 4:4, p. 268 (6th ed. 2018). As stated above, this rule on choice-of-law provisions applies to federal maritime law. However, if a state court is hearing a maritime case, it can apply its state laws, as long as they do not conflict with the federal maritime law.
Conclusion
This decision is favorable for insurers as these provisions will generally be upheld in future contracts. Also, by having these provisions in maritime contracts going forward, insurers will be saving time and costs on disputing these issues pre-trial. Lastly, knowing what law will apply to the contract gives the contracting parties the advance opportunity to determine what protections/precautions they should take.
*Ashley is an associate in our Casualty Department and works in our Mount Laurel, New Jersey, office.
Defense Digest, Vol. 30, No. 4, December 2024, is prepared by Marshall Dennehey to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2024 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.
