Choice of Law and Forum Clauses and the Recognition of Foreign Country Judgments Revisited Through the Lloyd s of London Cases

• Author: Courtland H. Peterson
• Position: Nicholas Doman Professor of International Law Emeritus, University of Colorado School of Law
• Pages: 1259-1280

Page 1259

Nicholas Doman Professor of International Law Emeritus, University of Colorado School of Law.

New interest in the recognition of foreign country judgments is now manifest, not only in attempts to deal with these matters by treaty, but also most recently in a new study of the subject undertaken by the American Law Institute. In earlier times I made some modest contributions to the investigation of this field, mainly characterized by the proposal that such recognition should be tested and governed by the principles of res judicata, rather than by the ill-defined doctrine of comity of nations.¹ In the interim I have welcomed the development of several uniform laws in this area, as well as the work done in the Second Restatement of Conflict of Laws, and the growth of a substantial body of literature on the subject of recognition.² In the case law, a substantial majority of courts in this country have now evidenced a willingness to recognize and enforce the judgments of foreign countries, primarily in terms of res judicata theory.³

The policies embodied in res judicata, ideally, represent a balance between judicial efficiency and fairness in the individual case. The core concept of due process of law is the proposition that everyone must have an opportunity for a full and fair hearing in a legal controversy. Its correlative is the proposition that relitigation of issues already fairly decided is not only wasteful of judicial resources, but also can be as unfair to the victor in the earlier proceeding as denial of a hearing would have been to the loser. In the domestic context, deciding whether a litigant has already had the opportunity for a full and fair hearing is a fairly straightforward matter. Even at the next level, decision as to whether a party should be precluded by prior litigation in another state of the United States is relatively easy. A common language and shared legal heritage help to assure that tests of fairness in the adequacy of a prior hearing will have a high degree of similarity if not identity. The Full Faith and Credit Clause of our Constitution operates as a unifying force, requiring states to give the same effect to judgments of sister states as those proceedings would have in the place of origin. Failure to do so invites reversal and Page 1260 enforcement by the federal courts, as a clear expression of our concept of federalism.

International recognition of judgments is obviously much more problematic. The absence of any cognate for the Full Faith and Credit Clause, except as provided by treaty,⁴ means that each nation is free to recognize and enforce foreign judgments according to its own law, or to refuse such recognition altogether.⁵ In the United States, an additional element of diversity is added by the fact that conflict of laws is regarded as a matter of state law rather than federal, with the consequence that each state of the United States is free to make its own decision about recognition of foreign country judgments.⁶

Many countries have regulated recognition practice through either bilateral or multilateral treaties, and the United States has done so with respect to the recognition and enforcement of arbitral awards.⁷ With respect to the recognition of foreign country judgments, however, the United States has thus far not followed this route.⁸A first attempt to establish a bilateral treaty occurred in 1977, when such a proposal governing recognition between the United States and the United Kingdom received preliminary approval.⁹ Despite numerous revisions and attempted compromises final adoption of this document has never occurred, probably because of British resistance to the implementation of American tort and anti-trust law.¹⁰

Many observers, myself included, had assumed that such a treaty with the U.K. was a feasible project. A common language, shared legal traditions, and similar views of the prickly question of personal jurisdiction over transients made agreement between these two countries most promising. There even seems to be a high degree of similarity between the English and American views of res judicata.

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Moreover, few of us would have supposed that American courts were likely to be confronted with English judgments whose recognition would be seriously opposed on the grounds of public policy or on the theory that American litigants had been denied due process by the English courts. Yet, that is precisely the situation that is now unfolding in a series of cases involving Lloyd's of London, arising out of events now developing into an insurance scandal of international proportions and impacting thousands of American investors.

The purpose of this essay is to describe the broad outlines of these events and to discuss their implications for the future of American recognition practice. I will discuss some of the devices which Lloyd's has used to evade or avoid the traditional defenses to recognition, including the use of choice-of-forum and choice- of-law clauses, arbitration clauses, and the appointment of agents empowered, in effect, to confess judgment on behalf of American investors. I am concerned that the lower federal courts in the Lloyd's cases have inappropriately extended the enforceability of such clauses, and also that they have given inadequate attention to the requirement that state law apply in diversity cases. In conclusion, I will suggest that future cases, as well as the scholarly attention now being directed at recognition in this area, should explore the development of techniques which American courts might use to protect our citizens without sacrificing the benefits of a civilized recognition practice.

I The Factual Background Of The Lloyd's Cases

The main outline of the facts in these controversies do not appear to be seriously disputed, although the intentions and culpability of many individual participants are in issue. The following description is drawn from judicial opinions in some of the cases involved, from pleadings, affidavits and briefs filed in such cases, from other law review articles, and from several investigative reports concerning these matters. In addition, I have read much of the information available in a web site established by the American investors, and interested persons may also wish to consult that source for more detail or further references.¹¹ At the outset, it should be made clear that Lloyd's is not an insurance company in the sense that we have such enterprises in our system. It is rather a "society" which was established about 300 years ago, incorporated in 1871, and has historically acted as an association of individual insurers. Its primary function has been to regulate the insurance market which takes place within the association. There is a governing body drawn from the membership, which not only establishes and enforces rules by which the members must conduct themselves, as well as rules of eligibility for and withdrawal from the association, but also raises capital. To invest in underwriting Page 1262 activities in the Lloyd's market, an individual had to become a member, or a "Name," by entering into an Agency Agreement with a Member's Agent, who then invested on behalf of the Name in one or more syndicates. Each syndicate is managed by a Managing Agent and will typically specialize in a particular type of insurance. Syndicates are not themselves entities, but are merely associations of individual Names. In order to become a Name, an individual was required to prove his or her financial worth and to deposit a specified sum in the form of a letter of credit issued in favor of Lloyd's. Names are liable without limit for their shares in the syndicates in which they invest (perhaps more accurately, in the syndicates in which their Member's Agent has invested on their behalf).

Originally established to provide insurance in the maritime industry, the syndicates accepted applications for insurance risks for one year, then allowed two more years for claims to come in and be settled. Each syndicate closed its "year of account" and wound up its affairs after the end of the third year, at which time the Names received their share of the profits, or paid their share of the losses, and their liability ended. Until that closure each Name pledged his entire personal wealth to back up his share in the syndicate's policies. If all claims could not be settled by the end of the third year the syndicate had to remain "open" and the profits and losses could not be shared among the Names involved until all claims were finally settled.

This three-year cycle worked reasonably well when insurance risks were confined to the maritime business, since the outcome of any given voyage would almost certainly be known within a year and claims settled within three. As Lloyd's expanded into non-maritime insurance, however, outstanding claims meant that syndicates frequently could not close their affairs within three years. Staying open longer, however, delayed the distribution of profits, and these delays were a serious disincentive to investment. Lloyd's solution was to have each closing syndicate pass the entire portfolio of policies it had written ("book of business"), as well as reserves to cover future claims against these policies, forward to syndicates which were still active. Although not strictly speaking "reinsurance" as defined in standard insurance business practice, Lloyd's called this portfolio transfer "Reinsurance to Close" (RITC). The reserves passed on to the successor syndicate to cover claims not yet made or settled were designated as "premiums." Since the successor syndicate assumed all the liabilities of the predecessor, RITC transactions allowed the syndicates to continue the practice of...