Article

Lloyd's Names; Fraud; Choice of Law.

Note:This case is another in the long line of cases resulting from failed investments in Lloyd's insurance syndicates. Lloyd's is a market of underwriting agencies or "syndicates" in which the syndicates compete for insurance underwriting business. The syndicates raise capital to finance the underwriting through private investors or "names". To become a member or "name" in the Society of Lloyd's, investors had to provide proof of financial resources, post a letter of credit in favor of Lloyd's, and travel to London to sign a General Undertaking containing choice of law and choice of forum provisions (both of which chose England).

After many of the syndicates with American investors suffered dramatic losses, some of those investors sued Lloyd's in the United States. The plaintiffs in Richards claimed that Lloyd's fraudulently concealed information regarding the potential risk to their investments and deliberately exposed them to massive liabilities. Lloyd's, however, argued that the U.S. court could not reach the merits of the case due to the valid choice of law and choice of forum provisions in the General Undertaking. The names argued that enforcement of those choice provisions would violate the antiwaiver provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, would violate the strong public policy of preserving investor remedies and that the provisions were invalid because they were obtained by fraud.

After originally issuing a ruling in favor of the names and against the enforcement of the choice provisions, (see 107 F.3d 1422) the court reversed itself in this opinion and upheld the enforcement of the provisions.

The court first noted that it would examine the validity of the clauses under the rationale expressed inThe Bremen v. Zapata Off-Shore Co.,407 U.S. 1 (1972) which stated a strong preference for the enforcement of such provisions in "freely negotiated private international agreements." The court then noted that while the express terms of the securities laws' antiwaiver provisions would require their application, to hold such, would create a situation where U.S. securities laws would extend to many foreign transactions, "no matter how remote form the United States."

In applying The Bremen, the court noted that choice provisions would be set aside if they were the product of fraud, they would deprive a party of his day in court or they contravened a strong public policy. The court then noted that English law would provide the names with sufficient protection, and many U.S. courts had already enforced such provisions; as such, and as this was a truly international transaction where the primacy of U.S. law could not be asserted, the court found that no strong public policy was contravened by enforcing the provisions. The court next found English law would not deprive the names of their day in court as Lloyd's did not have immunity for actions taken in bad faith. Finally, the court found that, while the names had asserted fraud in the transaction, they had not asserted that the provisions were fraudulently inserted into the contract and the court upheld the choice provisions.

The dissent argued that the antiwaiver provisions were unambiguous and applied to this situation as the names had been recruited in the United States. Moreover, the dissent argued, English law afforded Lloyd's with a significant amount more protection than U.S. securities laws and that the majority's decision would now allow foreign entities to side-step laws designed for the protection of U.S. investors.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.