Shell v. R.W. Sturge, Ltd.

• Citation: 55 F.3d 1227
• Decision Date: 08 June 1995
• Docket Number: No. 94-3119,94-3119
• Parties: West SHELL, Jr.; and Andrew C. Hauck, III, Plaintiffs-Appellants, Herbert A. Middendorff, Plaintiff, v. R.W. STURGE, LTD.; the Council of Lloyd's; the Society of Lloyd's; and the Corporation of Lloyd's, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 1227

55 F.3d 1227

63 USLW 2804

West SHELL, Jr.; and Andrew C. Hauck, III, Plaintiffs-Appellants, Herbert A. Middendorff, Plaintiff, v. R.W. STURGE, LTD.; the Council of Lloyd's; the Society of

Lloyd's; and the Corporation of Lloyd's,

Defendants-Appellees.

No. 94-3119.

United States Court of Appeals,

Sixth Circuit.

Argued May 1, 1995.

Decided June 8, 1995.

John L. Campbell (argued and briefed), Kohnen, Patton & Hunt and Virginia C. Whitman, White, Getgey & Meyer, Cincinnati, OH, for plaintiffs-appellants.

Charles J. Faruki (argued and briefed), Faruki, Gilliam & Ireland, Dayton, OH, for defendants-appellants.

Before: KENNEDY and SUHRHEINRICH, Circuit Judges; HILLMAN, District Judge. ^*

KENNEDY, Circuit Judge.

Plaintiffs, investors in the Society of Lloyd's, brought this diversity action against defendants R.W. Sturge, Ltd., the Society of Lloyd's, the Council of Lloyd's and the Corporation of Lloyd's seeking to rescind their investment contracts under Ohio securities law. Defendants filed a motion to dismiss for improper venue under Rule 12(b)(3) of the Federal Rules of Civil Procedure on the grounds that forum selection clauses in the investment contracts gave exclusive jurisdiction to the English courts. The District Court granted the motion to dismiss and plaintiffs now appeal, arguing that the forum selection clauses deprive them of their substantive rights under the Ohio securities laws and that Ohio public policy outweighs the policies served by enforcing the forum selection clauses. For the following reasons, we affirm.

I.

The Society of Lloyd's, or Lloyd's of London ("Lloyd's"), is not an insurance company, but rather is an insurance marketplace in which individual Underwriting Members, or Names, join together in syndicates to underwrite a particular type of business. The Corporation of Lloyd's ("Corporation"), which was created by an Act of Parliament, regulates the Lloyd's insurance market. The Corporation itself does not underwrite any insurance, but provides facilities and services to assist underwriters. The Corporation is managed by the Council of Lloyd's ("Council") which controls the admission and discipline of Names, sets the Names' reserve requirements and establishes standards for Lloyd's policies.

To become a Name, one must apply and be sponsored by an existing member. Applicants must pass a means test to determine that they possess sufficient assets to satisfy claims. Those accepted as Names are required to obtain a letter of credit in favor of Lloyd's to serve as a security. The amount of the letter of credit, as well as a Name's means, determines the premium limit for each Name.

A Name cannot conduct insurance business directly, but instead enters into an Agency Agreement with a Members' Agent who acts on the Name's behalf. Names typically belong to several syndicates in order to spread their risks and the Members' Agents assist the Names in selecting the syndicates to join. Each Name is responsible for his or her proportionate share of a syndicate's losses up to his or her entire net worth.

Plaintiffs Andrew Hauck and West Shell are representatives of a putative class of Cincinnati-area individuals who invested in Lloyd's as Names. Each plaintiff executed a General Undertaking Agreement ("General Agreement") with Lloyd's to become a Name. These General Agreements contain both a forum selection and a choice of law clause. The forum selection clause provides:

Each party hereto irrevocably agrees that the courts of England shall have exclusive jurisdiction to settle any dispute and/or controversy of whatsoever nature arising out of or relating to the Member's membership of, and/or underwriting of insurance business at, Lloyd's....

The choice of law clause states:

The rights and obligations of the parties arising out of or relating to the Member's membership of, and/or underwriting of insurance business at, Lloyd's and any other matter referred to in this Undertaking shall be governed by and construed in accordance with the laws of England.

Each plaintiff also executed an Agency Agreement with R.W. Sturge, Ltd. ("Sturge") appointing Sturge as his Members' Agent. The Agency Agreements contain choice of law and forum selection clauses: ¹

23. ENGLISH LAW:

This Agreement shall be read and construed and take effect in all respects in accordance with English Law.

24. ENGLISH JURISDICTION:

Subject to Clause 22 hereof [permitting arbitration in London] the parties hereto irrevocably and unconditionally submit for all purposes of and in connection with this Agreement to the exclusive jurisdiction of the English Courts.

In most years, plaintiffs received profits, but in recent years they suffered losses. Although the outcome of their investments with Lloyd's is as yet undetermined, plaintiffs believe that their total losses will far exceed their profits.

On November 1, 1993, plaintiffs filed this action in the Court of Common Pleas in Hamilton County, Ohio, alleging that defendants Sturge, Lloyd's, the Corporation, and the Council violated Ohio securities law by selling unregistered and non-exempt securities in violation of chapter 1707 of the Ohio Revised Code. Under Ohio Rev.Code Sec. 1707.43, "[e]very sale or contract for sale made in violation of Chapter 1707. of the Revised Code, is voidable at the election of the purchaser." Plaintiffs sought to rescind the contracts and be returned to their original positions, offering to return any benefits which they had received from their investments with Lloyd's.

Defendants removed the action to the United States District Court for the Southern District of Ohio and filed a motion to dismiss for improper venue. Defendants have stipulated for purposes of their motion to dismiss that this action involves a security under Ohio securities law. A magistrate judge, following a hearing, recommended that the motion to dismiss for improper venue be granted. The District Court adopted this recommendation on December 22, 1993. Plaintiffs now appeal.

II.

The enforceability of a forum selection clause is a question of law which we review de novo. Bonny v. Society of Lloyd's, 3 F.3d 156, 159 (7th Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 1057, 127 L.Ed.2d 378 (1994); Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953, 956 (10th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 658, 121 L.Ed.2d 584 (1992). The parties do not address the issue of whether federal or state law applies in determining the enforceability of forum selection clauses in a diversity action. However, we need not decide this issue because both Ohio and federal law treat these clauses in a similar manner. General Electric Co. v. G. Siempelkamp GmbH & Co., 29 F.3d 1095, 1098 n. 3 (6th Cir.1994); Interamerican Trade Corp. v. Companhia Fabricadora de Pecas, 973 F.2d 487, 488-89 (6th Cir.1992).

A forum selection clause in an international agreement "should control absent a strong showing that it should be set aside." Interamerican Trade Corp., 973 F.2d at 489; The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972). "The correct approach [is] to enforce the forum clause specifically unless" plaintiffs "[can] clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching." Bremen, 407 U.S. at 15, 92 S.Ct. at 1916. The presumptive validity of the forum selection clause may also be set aside if plaintiffs can show that "trial in the contractual forum will be so gravely difficult and inconvenient that [they] will for all practical purposes be deprived of [their] day in court," id. at 18, 92 S.Ct. at 1917, or if "enforcement would contravene a strong public policy" of the forum state. Id. at 15, 92 S.Ct. at 1916.

In Bremen, the Supreme Court emphasized the importance of upholding forum selection and choice of law clauses in international contracts. Bremen involved a contract for towing a drilling rig from Louisiana to Italy with a provision for judicial resolution of disputes in England. The Court observed:

The expansion of American business and industry will hardly be encouraged if, notwithstanding solemn contracts, we insist on a parochial concept that all disputes must be resolved under our laws and in our courts.

Bremen, 407 U.S. at 9, 92 S.Ct. at 1912.

Subsequently, in Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974), the Court considered the validity of clauses providing for arbitration in France under Illinois law in a contract for the sale of several German businesses. In upholding the clauses, the Court stated:

[U]ncertainty will almost inevitably exist with respect to any contract touching two or more countries, each with its own substantive laws and conflict-of-laws rules. A contractual provision specifying in advance the forum in which disputes shall be litigated and the law to be applied is, therefore, an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction.

Id. at 516, 94 S.Ct. at 2455. The Scherk Court also discussed the danger of ignoring contractual dispute resolution provisions:

A parochial refusal by the courts of one country to enforce an international arbitration agreement would not only frustrate these purposes, but would invite unseemly and mutually destructive jockeying by the parties to secure tactical litigation advantages.

Id. at 516-17, 94 S.Ct. at 2456. Given this background, we will now examine the enforceability of the forum selection provisions at issue in this appeal.

Plaintiffs contend that the clause is unenforceable because, together with the choice of law clause, it deprives investors of their substantive rights under Ohio securities law. Plaintiffs argue that they are entitled to a remedy based on what they classify as a "merit review" process under Ohio Rev.Code Sec. 1707.13. Section 1707.13 permits the ...