1992 WL 12013120 (7th Cir.)

For opinion see 999 F.2d 206

Briefs and Other Related Documents

United States Court of Appeals,

Seventh Circuit.

Dieter M. HUGEL, Gulf Coast Marine, Inc., and Ocean Marine Indemnity Company,

Plaintiff-Appellants,

v.

THE CORPORATION OF LLOYD'S, A United Kingdom corporation, Defendant-Appellees.

No. 92-2240.

August 24, 1992.

Appeal from the United States District Court for the Northern District of Illinois, Western Division, No. 90 C 20105, The Honorable Stanley J. Roszkowski Judge Presiding

Reply Brief of Plaintiff-Appellants, Dieter M. Hugel, Gulf Coast Marine, Inc.

and Ocean Marine Indemnity Company

William W. Edelman, (A Professional Law Corporation), Suite 911, 203 Carondelet Street, New Orleans, Louisiana 70130, Telephone No. (504) 523-7761, Jean Marie R. Pechette, Gordon & Glickson P.C., 444 N. Michigan Avenue, 36th Floor, Chicago, Illinois 60611, Telephone No. (312) 321-1700, Attorneys For Plaintiff-Appellants.

ORAL ARGUMENT REQUESTED

*i TABLE OF CONTENTS

TABLE OF AUTHORITIES ... ii,iii

STANDARD OF REVIEW ... 2

ARGUMENT ... 3

I. THE SCOPE OF THE FORUM SELECTION CLAUSE FOUND IN THE GENERAL UNDERTAKING DOES NOT REACH THIS LITIGATION ... 3

a. This controversy is not over the propriety of the Lloyd's investigation ... 5

b. The possible concurrent violation of a Lloyd's byelaw does not transform Plaintiffs' claims into a membership dispute ... 6

c. This lawsuit does not concern an internal Lloyd's "disciplinary" proceeding or "disciplinary" investigation ... 7

d. Hugel's Deposition testimony has been distorted as to meaning ... 8

e. Lloyd's regulatory authority is limited to membership related activity ... 14

II. THE FORUM SELECTION CLAUSE SHOULD NOT BE ENFORCED BECAUSE ENGLISH LAW OPERATES AS A PROSPECTIVE BAR TO PLAINTIFFS CLAIMS ... 19

III. THE SCOPE OF THE FORUM SELECTION CLAUSE DOES NOT COVER THE CLAIMS OF GCM AND OMI ... 22

CONCLUSION ... 25

*ii TABLE OF AUTHORITIES

STATUTES:

Lloyd's Acts 1871 - 1982 ... 5

Lloyd's Act 1982 ... 20,21,22

SUPREME COURT CASES:

M.S. Bremen v. Zapata Off-Shore Co. 407 U.S. 1, 92 S.Ct. 1907 ... 20

APPELLATE COURT CASES:

Mercury Coal & Coke v. Mannesmann Pipe & Steel, 696 F.2d 315, 318 (4th Cir. 1982) ... 2

Bense v. Interstate Battery System of America, 683 F.2d 718, 722 (2d Cir. 1982) ... 2

In re Fireman's Fund Ins. Cos., 588 F.2d 93, 95 (5th Cir. 1979) ... 2

Northwestern National Life Insurance Company v. Donovan, 916 F.2d 372 (7th Cir. 1990) ... 2

Riley v. Society and Council of Lloyd's, ____ F.2d ____, 1992 U.S. App. LEXIS 16141 (10th Cir. 1992) ... 3,20,21

Heller Financial, Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286, 1289-90 (7th Cir. 1989) ... 2

Crescent International, Inc. v. Avator Communities, Inc., 857 F.2d 943, 944 N.1 (3rd Cir. 1988) ... 14

Stewart Organization, Inc. v. Ricoh Corporation, 810 F.2d 1066 (11th Cir. 1982) ... 18

Bonny v. Society of Lloyd's, App. No. 92-1662 (Appeal pending in the Court Of Appeals For The Seventh Circuit) ... 21

Coastal Steel v. Tilghman Wheelabrator, Ltd., 709 F.2d 190, 203 (3d Cir. 1983) ... 22,23

Jennings v. Emry, 910 F.2d 1434 (7th Cir. 1990) ... 4

Western Transportation Co. v. Couzens Warehouse & Distributors, Inc., 695 F.2d 1033, 1038 (7th Cir. 1982) ... 4

*iii DISTRICT COURT CASES:

Phoenix Mutual Life Insurance Co. v. North American Company For Life And Health Ins., 661 F.Supp. 751 (N.D. Ill., E.D. 1987) ... 17

Adams v. Shulton, Inc., 747 F. Supp. 1258 (W.D. Tenn, W.D. 1990) ... 19

Clinton v. Janger, 583 F.Supp. 284, 287 (N.D. Ill. 1984) ... 23

STATE COURT CASES:

Johnson Outboards v. Industrial Commission, 394 N.E. 2d 1176, 1178 (Ill. 1979) ... 16

MISCELLANEOUS:

5 Wright, Miller & Cooper, Federal Practice And Procedure Sec. 1281 (2d ed. 1991) ... 4

Federal Rules Of Civil Procedure 8(a) and 8(e) ... 4

2A Moore's Federal Practice 12-47 (2d ed. 1991) ... 4

The Oxford English Dictionary (2d ed. 1989) ... 16

*1 Plaintiff-Appellants, Dieter M. Hugel ("Hugel"), Gulf Coast Marine, Inc. ("GCM") and Ocean Marine Indemnity Company ("OMI") (collectively the "Plaintiffs") established in their opening Brief that:

(a) The scope of the forum selection clause found in the General Undertaking does not reach this litigation.

(b) Even if the forum selection clause reaches this litigation, the clause should not be enforced because it operates as a prospective bar to the ability of Plaintiffs to pursue their claims.

*2 (c) The forum selection clause does not extend to the claims of GCM and OMI, who were not party to the General Undertaking.

The Brief of Appellee Corporation of Lloyd's (hereinafter the Lloyd's "Response") does not refute these views.

STANDARD OF REVIEW

The proper standard of review in this case is a de novo standard of review. As Lloyd's notes, (Response at 25) certain appellate courts follow an "abuse of discretion" standard while others follow a "de novo" standard of review. Plaintiffs, however, would note that additional courts have directly or implicitly adopted a "de novo" standard of review in forum selection cases. See, e.g., Mercury Coal & Coke v. Mannesmann Pipe & Steel, 696 F.2d 315, 318 (4th Cir. 1982); Bense v. Interstate Battery System of America, 683 F.2d 718, 722 (2d Cir. 1982); and In re Fireman's Fund Ins. Cos., 588 F.2d 93, 95 (5th Cir. 1979) (per curiam).

In Northwestern National Life Insurance Company v. Donovan, 916 F.2d 372 (7th Cir. 1990), the Court of Appeals for the Seventh Circuit applied an implicit de novo standard of review in reversing the District Court's refusal to enforce a forum selection clause. See also, Heller Financial, Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286, 1289-90 (7th Cir. 1989) (by implication following a de novo standard of review in its consideration of a forum selection issue). [FN1]

FN1. Contrary to Lloyd's assertion as to motive (Reply at 24), Plaintiffs' failure to address the standard of review was due to inadvertent error in failing to take note of the February 1, 1992 addition of new Circuit Rule 28(k). No tactical advantage was sought or attained. Plaintiffs have no objection if Lloyd's wishes to supplement its Response as to the Standard of Review in order to address the authorities and views cited by Plaintiffs herein.

*3 Finally, in Riley v. Society and Council of Lloyd's, ____ F.2d ____, 1992 U.S. App. LEXIS 16141 (10th Cir. 1992) (reproduced at Response Appendix, Ex. E), the Tenth Circuit recently considered whether to enforce the identically worded forum selection clause that was contained in a General Undertaking signed by another Lloyd's member. The Tenth Circuit there followed a de novo standard of review, noting (id at page (5)):

The enforceability of forum selection...provisions are questions of law which we review de novo.

Plaintiffs submit that these decisions support use of a "de novo" standard of review in this appeal.

I. The scope of the forum selection clause found in the General Undertaking does not reach this litigation.

The focus of this appeal is the scope and enforceability of a forum selection clause found in the Lloyd's membership General Undertaking signed by Mr. Hugel as a condition for maintaining his membership privileges at Lloyd's. These membership privileges allowed Mr. Hugel to personally, and passively participate, for his own individual account and benefit, in various insurance underwriting syndicates.

The forum clause brings before the English courts disputes "arising out of or relating to [Hugel's] membership of, and/or *4 underwriting of insurance benefits at, Lloyd's. [FN2] The clause does not encompass "all" disputes. Only those disputes "arising out of or relating to [Hugel's] membership" are covered. [FN3] Inclusion of the reference to "membership" is limiting. Disputes outside the membership contract or relationship are not covered by this clause.

FN2. General Undertaking, Sec. 2.2 (reproduced at Plaintiffs' Brief, Appendix Ex. C).

FN3. Lloyd's acknowledges that this dispute does not arise out of or relate to Mr. Hugels' underwriting of insurance business at Lloyd's (R-75, p. 4). ("R" references are to the District Court record and document number).

Plaintiffs, in their Brief, cited numerous references in the record (many of which were supplied by Lloyd's), to properly document the wholesale absence of causation and lack of relationship between this litigation and Hugel's membership, summarized as follows: [FN4]

FN4. Plaintiffs' Complaint, as amended, fulfills the 'notice pleading' requirements of Fed. R. Civ. Proc. 8(a) and 8(e). See, 5 Wright, Miller & Cooper, Federal Practice And Procedure Sec. 1281 (2d ed. 1991) and Jennings v. Emry, 910 F.2d 1434 (7th Cir. 1990). The supplementation

of that Complaint with affidavit-sourced fact allegations is entirely proper in light of and in response to Lloyd's Motion To Dismiss. See, 2A Moore's Federal Practice 12-47 (2d ed. 1991) and Western Transportation Co. v. Couzens Warehouse & Distributors, Inc., 695 F.2d 1033, 1038 (7th Cir. 1982).

a. The Lloyd's investigation focused on private commercial conduct of GCM, not Hugel. (R-104, at pp. 3-5).

b. The Lloyd's investigators contacted the Louisiana Commissioner Of Insurance (R-98, Ex. 3; R-98, Ex. 2, Par. 6).

*5 c. Hugel's membership did not encourage, facilitate or benefit the corporate transactions which were investigated by Lloyd's. The transactions were not taken under color of Hugel's membership and in no respect benefitted that membership. (R-104, pp. 3-5).

d. The assurances of confidentiality arose independent of Hugel's membership. (R-1; R-65).

e. The outcome of this case will have no impact on Hugel's membership. Plaintiffs claims do not present substantive issues which require interpretation of the General Undertaking, the Lloyd's Acts 1871-1982, or any Lloyd's byelaw.

The Lloyd's Response to Plaintiffs' arguments proceeds along three avenues, each of which is fundamentally unsound:

(a) That this appeal is an "ill-defined boundless referendum on the propriety of the Corporation's investigation".

(b) That this dispute necessarily involves Hugel's membership since there are Lloyd's byelaws which might have been violated if Plaintiffs fact allegations were proven.

(c) That this suit is over a "disciplinary" investigation and a "disciplinary proceeding" conducted by Lloyd's.

a. This controversy is not over the propriety of the Lloyd's investigation.

Lloyd's first sounds the alarm (Response at 6) that Plaintiffs seek to "transform this appeal into some ill-defined, boundless referendum on the propriety of the Corporation's investigation". Lloyd's, on this basis, then submits that any such determination should be made by an English court. Lloyd's sounds a false alarm with this claim.

*6 The "propriety" of the investigation is a non-issue. The Plaintiffs' references to the investigation are for a singular purpose - to illustrate how the investigation was of private commercial conduct, wholly unrelated to any act undertaken by Hugel in his capacity as, by reason of, or under color of his Lloyd's membership.

The lack of relationship between (a) what was investigated and (b) Hugel's membership vitiates any claim by Lloyd's that any claimed breaches of confidentiality arose in the context of a membership-related investigation of Hugel and membership-related assurances of confidentiality. There is no purpose to invite judicial scrutiny or criticism of the decision to investigate or the propriety of the investigation.

b. The possible concurrent violation of a Lloyd's byelaw does not transform Plaintiffs' claims into a membership dispute.

Another tactic employed by Lloyd's (See, e.g. Response at 6) is to take Plaintiffs' allegations of fact and then locate a provision in the Lloyd's byelaws which might have been violated if the allegation of fact were proven. The conclusion forwarded by Lloyd's then becomes that (a) since there is a parallel Lloyd's byelaw which might have been violated if Plaintiffs' fact allegations were true, it then follows that (b) this dispute necessarily involves Lloyd's byelaws and (c) necessarily presents a membership dispute, internal to Lloyd's and its members. While the outer crust of this approach initially may seem appealing, the inside is severely undercooked.

*7 In essence, Lloyd's asserts that the concurrent availability of a remedy under its byelaws transforms this into a membership dispute. This argument places the cart before the horse. The possible existence of a concurrent violation of and/or remedy under Lloyd's byelaws has no bearing on whether or not Hugel's claims are membership-related. Disputes which do not "aris[e] out of or relat[e] to [Hugel's] membership" are beyond the scope of the General Undertaking and its forum selection clause. The membership-relatedness of Hugel's claims is tested by: (a) the circumstances which gave rise to the inquiry, which (even as portrayed by Lloyd's) in no respect involved Hugel's membership activities; (b) the assurances of confidentiality, which were given independent of any Lloyd's byelaws; and (c) whether resolution of those claims requires or invites consideration of any law, byelaw, or agreement governing Hugel's membership at Lloyd's.

Lloyd's suggestion to the contrary is simply wrong. The investigation was of private commercial conduct; the assurances of confidentiality were independently sought and obtained; and resolution of these claims do not require interpretation of any act, byelaw or agreement regulating Hugel's membership.

c. This lawsuit does not concern an internal Lloyd's "disciplinary" proceeding or "disciplinary" investigation.

A third technique utilized by Lloyd's is to subtley checker its Response with references to Lloyd's "disciplinary proceedings" and "disciplinary investigation". This represents *8 an effort to recast Plaintiffs' claims as reflecting a dispute over the manner in which a Lloyd's disciplinary proceeding was conducted. This is not the case. This is not a "disciplinary" matter simply because it is so labeled by Lloyd's. Plaintiffs' Complaint does not involve any claimed impropriety in any Lloyd's disciplinary proceeding. Moreover, Plaintiffs submit that this "investigation" could not have been "disciplinary" in nature, as it centered upon private commercial conduct, not involving Hugel's membership; and not subject to regulation by Lloyd's. The "disciplinary" label that Lloyd's tries to apply to the investigation and this case simply does not stick.

d. Hugel's Deposition testimony has been distorted as to meaning.

Lloyd's (Response at 25-26) relies heavily on the July 23, 1991 deposition testimony of Dieter M. Hugel in building its case that this lawsuit arises out of and relates to Mr. Hugel's membership at Lloyd's, which (Lloyd's submits) brings it within the coverage of the forum selection clause. [FN5] (This deposition testimony also was heavily relied upon by the District Court.) However, the deposition testimony cited by Lloyd's is excerpted, taken out of context and glaringly distorted as to meaning.

FN5. References to the transcript of this deposition are noted as "Tr.", followed by the page number. The transcript appears in the record at R-76 (Exhibit A) and R-105 (Exhibit A).

The first instance is evident at Response, p. 26, where Lloyd's asserts that "Mr. Hugel concedes that disputes concerning disciplinary proceedings -- like those present in this case -- *9 are disputes relating to membership." This is flat untrue. The underscored language represents the interjected view of the Lloyd's. Ncwhere does Mr. Hugel suggest that this case is a dispute over a "disciplinary proceeding". The deposition exchange cited by Lloyd's in this instance clearly was over whether hypothetically and as a general proposition a "disciplinary proceeding" would involve a membership matter (Tr. 80):

Q. I am just trying to find a common ground that we can move from and just see if we could agree that disciplinary proceedings, as a general matter, would be an issue relating to a member's membership. That's what I am trying to uncover, whether or not that's a common ground we can work from.

A. I am sorry. Was that a question?

Q. It was.

A. If you put it that way, then the answer would probably be yes.

This lawsuit is not over the conduct of disciplinary proceedings. It is a suit over disclosures which occurred during an investigation -- not during any disciplinary proceedings Moreover, a review of pages 77-80 of the Transcript clearly shows that Mr. Hugel resisted Lloyd's efforts to draw him into stating that this lawsuit constituted a complaint about the Lloyd's disciplinary proceeding. Indeed, at Tr. 77-78, Mr. Hugel directly rejected any such implication:

MR. MAGGIO: Q. Irrespective of the issues which arise in this lawsuit, and we can get back to those later, would you agree or disagree that Lloyd's *10 investigation and disciplinary proceedings against you would fall within the phra in 2.2 arising out of or relating to the member's membership?

MR. EDELMAN: I am going to object. That calls for a legal interpretation by my client, and he is not a lawyer. I will be more than happy to answer that.

MR. MAGGIO: Q. You can go ahead and answer the question.

MR. HUGEL: A. Irregardless of Mr. Edelman's opinion, I would definitely say that it does not come under that. (emphasis added).

Lloyd's next proclaims (Response p. 26) that "Mr. Hugel also concedes that the complaint in this action centers around his displeasure with how the disciplinary proceedings were conducted." Lloyd's again cites the deposition testimony of Mr. Hugel (Tr. 60-61) as evidence of that "concession".

This reliance again is misplaced. The deposition testimony of Mr. Hugel cited by Lloyd's (Response at 26) is taken out of context and wholly misconstrued. There is no basis for the implication sought to be created by Lloyd's. Specifically, Lloyd's counsel (Mr. Maggio) started the cited exchange with a request that Mr. Hugel confirm that his legal complaint in this case relates to alleged disclosures during the Lloyd's investigation (Tr. 60):

Q. Turning for a moment to the present litigation in which we are taking this deposition, am I correct that the heart of your complaint in this matter focuses on alleged disclosures of the existence of an investigation by the Corporation *11 of Lloyd's, as well as the alleged disclosures of information that you and/or the other entity plaintiffs gave to the Corporation of Lloyd's in the course of that investigation? (emphasis added).

Mr. Hugel then protested that Mr. Maggio's question posed some "highly technical legal points" which he did not feel qualified to answer. (Tr. at 60):

A. You are asking me some highly technical legal points, and I don't believe that I am qualified to really answer them.

Mr. Hugel then digressed momentarily and utilized the deposition as a forum to lodge protest and vent his personal views and frustrations to Mr. Maggio over the entire manner of his treatment by Lloyd's. (Tr 60-61):

But I will say this much: That the complaint that I have with Lloyd's is not only the disclosure that you are referring to, but also the general way that Lloyd's appears to have handled this entire case, and disseminated the information regarding this case to people that operate in the market, and then finally how this has really affected me personally in my reputation and also in my business.

Hugel, a layman, simply was broadly expressing his anger and frustration over the entire experience. He was not attempting to explain, enlarge or interpret or delineate the legal complaint which initiated these proceedings and which speaks for itself as to the basis for this lawsuit. This is confirmed by Mr. Maggio's next question and Mr. Hugel's answer (Tr. at 61):

*12 Q. I understand.

And so I can understand a bit more, when you refer to "in this case" are you referring to the investigation and then the subsequent disciplinary proceedings brought by the Corporation of Lloyd's?

A. That is correct.

Lloyd's is stretching interpretation of these remarks beyond reason. Notably, the "in this case" reference is not to the Complaint. Very clearly, Mr. Maggio's initial question confirmed Lloyd's own understanding that the "heart of [Plaintiffs'] complaint in this matter focuses on alleged disclosures of existence of an investigation" and alleged information disclosures occurring "in the course of that investigation". This is not a dispute over the separately existing disciplinary proceedings (which concluded with no finding of wrongdoing on the part of Mr. Hugel). (See also, R-98, Ex. 2, Affidavit of Dieter M. Hugel)).

These out of context comments in no way support Lloyd's claim that this lawsuit, which makes no reference to the disciplinary proceedings, somehow involves the conduct of those proceedings. Mr. Hugel may well have frustration over the handling of those disciplinary proceedings, but he did not file suit over it. Lloyd's attempt to create the contrary impression is a diversion, without substance.

Lloyd's further exaggerates when it claims (Response at 6, 11, 27) that Hugel's deposition (Tr. 66) establishes that the assurances of confidentiality at issue in this lawsuit were given *13 and accepted under the Lloyd's byelaws. Hugel's remarks only indicate that he was told that Lloyd's investigators operated under an internal code of conduct standard which required that their investigation be conducted in a confidential manner. [FN6] These remarks do not establish or concede that Hugel accepted or chose to rely upon this representation or that the representation forms the basis for this lawsuit.

FN6. This is another display of the Lloyd's effort (noted in this Reply at 6-8) to utilize the presence of a parallel byelaw (which might have been violated if the Plaintiffs allegations are proven) as the basis for labeling Plaintiffs' claims as membership-sourced. Once again, the label fails to stick.

Plaintiffs' Complaint, as amended, does not claim misrepresentation or assert violation of any byelaws. (See, Response, Appendix Ex. A). Plaintiffs substantive claims are that Plaintiffs independently sought and obtained wholly separate assurances of confidentiality from the Lloyd's investigators. (See, Tr. 66-71, in which Hugel refers to certain four separate instances of these independent assurances of confidentiality, not at all involving Lloyd's byelaws). See also, R-98, Ex. 2, (Affidavit of Dieter M. Hugel), (Par's. 12, 13 and 15, making note of Hugel's attempts to have Lloyd's enter into a written confidentiality agreement).

Lloyd's highly touted, but distorted references to Mr. Hugel's testimony exist as a substitute for the inability of Lloyd's to demonstrate how this lawsuit implicates Hugel's membership when: (a) the investigation was of private commercial *14 conduct, not involving Hugel's membership; (b) the assurances of confidentiality were independently sought and obtained; (c) Plaintiffs' substantive claims do not invite judicial consideration of any law, byelaw or instrument governing Hugel's membership; (d) the outcome of this litigation will have no effect of Hugel's rights, obligations or status as a member of Lloyd's; and (e) Plaintiffs' Complaint presents no substantive issue as to the scope or manner of Lloyd's regulation of its membership.

e. Lloyd's regulatory authority is limited to membership related activity.

Implicit in the entire Lloyd's argument is a view that membership at Lloyd's invites the possibility of scrutiny, in the name of membership, of the member's personal and business life. This, it implicitly is argued, is true even if the conduct at issue was private commercial conduct or, (carrying matters to their logical limit) private personal conduct.

A forum selection clause will govern a dispute only if (a) the claims asserted (a) "arise out of the contractual relation" and (b) "implicate the contract's terms." Crescent International, Inc. v. Avator Communities, Inc., 857 F.2d 943, 944 n.1 (3rd Cir. 1988).

This dispute did not "arise out of" Hugel's membership-sourced activities or any of his personal member-investment activities. Hugel's membership constituted him as a passive investor in various insurance syndicates which operate at Lloyd's. His membership played no role in the matters which *15 brought about the investigation. No membership investment activities or other membership-sourced activities are listed in the Lloyd's explanation of the circumstances which prompted its investigation (R-104, pp. 3-5). Hugel's membership in no way will be affected by the outcome of this lawsuit. Internal membership disputes do not involve the Louisiana Commissioner of Insurance, as did this investigation. (R-98, Ex. 3; R-98, Ex. 2, Para. 6). The District Court erred when it chose to accept the Lloyd's view that the forum selection clause governed this dispute.

The Lloyd's position (which essentially was accepted by the District Court) is reflected at Response 28-29:

If Mr. Hugel were not a Member, there would have been no investigation and, accordingly, no dispute. The dispute in this case not only relates to Mr. Hugel's membership but also, in fact, arises out of the "business relationship" created by the General Undertaking. Accordingly, the dispute in this case is subject to the forum selection clause contained in the General Undertaking.

This syllogistic approach fails because its premise - that there would have been no investigation if Hugel were not a member - is flawed. Objective consideration of the circumstances which gave rise to the investigation shows that the matter was investigated because of concern over the presence of an unexplained accumulation of surplus funds of GCM at the account of a London broker. To claim that these circumstances were investigated only because Hugel was a member is to utilize the coincidental presence of Hugel's status as a passive member/investor and transform it into the causative factor for *16 the whole investigation. The causative factor, by Lloyd's own admission, was the discovery of what, at the time, was an unexplained surplus accumulation of GCM funds in the trust account of its affiliated London insurance broker. (See, R-104, pp. 3-5). This was private commercial conduct, corporately undertaken (by GCM) without invoking, benefitting from, mentioning, or being facilitated by Hugel's membership and without offering any benefit to Hugel in his capacity as a Lloyd's member. By Lloyd's own account, no member-investment or other membership-sourced activity of Hugel was involved, examined or targeted by the investigation. (R-104, at pp. 3-5).

The terms "arising out of" and "relating to" as employed in the General Undertaking are specific in meaning, and are not meant to embrace every possible dispute or controversy that might arise between Lloyd's and an individual, who by coincidence also happens to be a member. The Oxford English Dictionary (Third Ed 1989) defines "arise" (n.17), in relevant part, as meaning "to spring, originate or result from." The term suggests a causative connection. Compare, Johnson Outboards v. Industrial Commission, 394 N.E. 2d 1176, 1178 (Ill. 1979) where the Illinois Supreme Court concluded that the term "arising out of" implies a "causal connection". The term "relate" is defined in the Oxford English Dictionary, in relevant part, (nn. 4(a), 5(a) and 5(b) as "to refer to" or "to bring...into relation" or "to connect, to establish a relation between". There must be a causative *17 relation between Hugel's membership and the substantive claims presented in this lawsuit. None is present in this case.

Use of an approach similar to that offered by Lloyd's was rejected in Phoenix Mutual Life Insurance Company v. North American Company For Life And Health Insurance, 661 F. Supp. 751 (E.D. Ill. 1987), where the Court adopted a non-expansive interpretation of a clause contained in a reinsurance treaty (agreement) which provided for arbitration of "all disputes and differences". The defendant claimed the issue in dispute (relating to the selection of legal counsel) was arbitrable, and presented the following argument (id at 753):

1. Each reinsurance treaty specifically says "all disputes and differences" or "all differences" are to "be decided by arbitration".

2. Phoenix and North American Companies "differ" or "dispute" with each other as to whether Kilpatrick & Cody can represent North American Companies.

3. Therefore whether Kilpatrick & Cody can in fact provide such representation must be decided by arbitration....

The District Court rejected this approach, with the following reply (id):

Though that syllogistic statement is impeccable in Aristotelian terms, its flaw lies in the oversimplification of language.

That may best be illustrated by posing a different factual situation (deliberately farther afield than the one before this Court). Assume a Phoenix-owned vehicle and a North-American-owned vehicle were involved in a collision at an intersection, generating a "difference" or "dispute" as to which company was at fault. Despite the all-encompassing language of the provisions quoted earlier (which are certainly broad enough literally to cover that controversy), no one would claim seriously that the parties had to arbitrate the liability and *18 damages issues of that "difference" or "dispute", rather than calling on the judicial system for that purpose.

The relationship between Hugel's membership and the investigation (and alleged disclosures of and during the investigation) must be one of cause and effect -- not one of coincidence. In other words, the controversy must arise out of or relate to Hugel's membership-sourced activities.

Lloyd's (Response at 21) overstates the import of Stewart Organization, Inc. v. Ricoh Corporation, 810 F.2d 1066 (11th Cir. 1987); aff'd on other grounds, 487 U.S. 22, 108 S.Ct. 2239 (1988) to support expanded application of the forum clause. In Stewart, the Court looked at whether the "business relationship" was the causative element in the plaintiffs' claims, which involved claims of breach of contract (i.e. the underlying agreement), breach of warranty, fraud and anti-trust law violations. These claims were sourced in the underlying contract. The District Court had enforced the forum clause as to the breach of contract claim. Stewart simply held that the other claims should not be segregated from the underlying contract claim. [FN7] It does not stand for the proposition that the coincident existence of a *19 business relationship brought "all" disputes within the scope of the forum clause.

FN7. Compare, e.g., Clinton v. Janger, 583 F.Supp. 284, 287 (N.D. Ill. 1984) (presence of contract claim resulted in forum clause being extended to include related tort claim) See also, Coastal Steel v. Tilghman Wheelabrator, Ltd., 709 F.2d 190, 203 (3d Cir. 1983) (involving contract and tort claims; noting that the "contract is the basis source of [Defendant's] duty to Coastal").

Adams v. Shulton, Inc. 747 F. Supp. 1258 (W.D. Tenn, W.D. 1990) considered analogous issues of interpretation in the context of determining whether an employee's claim of defamation resulting from an employer's investigation 'arose out of' a breach of a collective bargaining agreement. The Court noted that Section 301 of the Labor Management Relations Act (29 U.S.C. § 185 (1978) preempts any state law claim "if the resolution of the claim depends upon the meaning of a collective bargaining agreement". It then concluded that the defamation claim was not preempted (id at 1260):

Although the same set of facts that must be analyzed to determine whether plaintiffs were defamed or fired for just cause, the defamation claim can be resolved without interpreting the collective bargaining agreement. Plaintiffs' defamation claims are independent of any claim under the agreement and are not preempted by Section 301. Therefore Shulton's motions for summary judgment are denied. (emphasis added).

Application of similar reasoning here demonstrates that the forum selection clause does not reach this lawsuit. Plaintiffs independent claims can be resolved without addressing or interpreting any statute, bye-law or agreement pertaining to Hugel's membership.

II. The forum selection clause should not be enforced because English law operates as a prospective bar to Plaintiffs claims

Absent proof of bad faith, it is clear (as demonstrated in Plaintiffs' Brief at 25-33) that Hugel's claims if brought in *20 England would be barred by Section 14 of Lloyd's Act of 1982. The Lloyd's Response does not refute this likelihood. Instead, Lloyd's (Response 43-44) talks of England as not being an "inconvenient" forum.

"Inconvenience" is not the issue. The issue here is whether, as The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 17-18 (1972) noted:

[T]rial in the contractual forum will be so gravely difficult and inconvenient that he will for all practical purposes be deprived of his day in court...

The English grant of immunity to Lloyd's under Sec. 14 of the Lloyd's Act of 1982 will deprive Plaintiffs of their day in an English court.

Lloyd's, however, cites The Bremen, supra, for the proposition that even a bar to recovery in England will not prevent enforcement of a forum selection clause. The Bremen, however, represents no such holding. In The Bremen, a bargained for, specific 'exculpation from liability' clause in the litigants' contract was at issue. The Supreme Court noted that the English courts would uphold that contractual provision. The case did not address nor does its holding extend to circumstances where, as here, English law, standing alone, would bar any recovery.

Riley v. Society And Council Of Lloyd's, ___ F.2d ___, 1992 U.S. App. LEXIS 16141 (10th Cir. 1992) (reproduced at Response Appendix, Ex. E), considered the General Undertaking and the enforceability of its forum clause in the context of securities *21 fraud claims made against Lloyd's by one of its members. An analogous argument was presented -- that English law does not allow securities fraud claims. Riley, sustained enforcement of this same forum selection clause. However, enforcement was upheld on the basis of the Court's finding that English law did afford the plaintiff (Riley) a remedy, and that Lloyd's did not have statutory immunity from Riley's security fraud claims (id. at P. 7):

Riley suggests that enforcement of the choice of forum and law provisions is unreasonable because he effectively will be deprived of his day in court. The basis underlying this contention is his perception that recovery will be more difficult under English law than under American law. Riley will not be deprived of his day in court. He may, though, have to structure his case differently than if proceeding in federal district court...English law does not preclude Riley from pursuing an action for fraud and we agree with the Defendants that the Lloyd's Act does not grant statutory immunity for such claims. See Lloyd's Act, 14(3)...(emphasis added).

A comparable methodology was followed with respect to the similarly presented securities fraud claims of another Lloyd's member in Bonny v. Society of Lloyd's, 784 F. Supp. 1350 (N.D. Ill. 1992) (on appeal to the Court of Appeals For The Seventh Circuit, Consolidated Docket Nos. 92-1662 and 92-2771).

The present case raises no securities fraud claims. However, Plaintiffs submit that both Riley, and Bonny are relevant with respect to the methodology they adopted in addressing the claims of English statutory immunity and its impact upon enforcement of the identical forum selection clause. Use of this same methodology yields a finding that the statutory *22 immunity of Section (14) of the Lloyd's Act of 1982 operates as a prospective bar to Hugel's claims. This finding, in turn, mandates that the forum selection clause not be enforced.

III. The scope of the forum selection clause does not cover the claims of GCM and OMI

Lloyd's argues (Response at 35-42), contrary to its cited case authorities, that a forum selection clause will reach non-parties to a contract even if not third party beneficiaries, so long as it is "foreseeable" that they would be involved in the contract performance. Certain observations are in order.

The first is that Lloyd's evidently cannot or will not respond at all to Plaintiffs' claim that GCM and OMI were not third-party beneficiaries of the General Undertaking. Lloyd's has offered no argument or fact allegation to dispel Plaintiffs' claims that neither corporation directly or indirectly received (or anticipated receiving) benefit from Hugel's personal decision to make a personal investment (and personal profits) by joining Lloyd's and participating as a passive member-investor in various Lloyd's insurance underwriting syndicates.

The "foreseeability" test that Lloyd's urges upon the Court does not independently regulate a non-party's exposure to being held subject to the terms of a contract. Rather, "foreseeability" is a consequence of the required predicate finding that the non-party (e.g. GCM and OMI) first be found to have been a third-party beneficiary of the General Undertaking. This was illustrated in Coastal Steel Corp. v. Tilghman Wheelabrator, Ltd., 709 F.2d 190, 203 (3rd Cir. 1983):

*23 Introducing into the common law of enforceability of forum selection clauses a third-party beneficiary exception would be inconsistent with that rationale. It would moreover, be inconsistent with the law of contracts, which has long recognizes that third-party beneficiary status does not permit the avoidance of contractual provisions otherwise enforceable...Coastal chose to do business with Farmer Norton, an English firm, knowing that Farmer Norton would be acquiring components from other English manufacturers. Thus it was perfectly foreseeable that Coastal would be a third-party beneficiary of an English contract, and that such a contract would provide for litigation in an English court. Reliance on Coastal's third-party beneficiary status as a reason for disregarding such a clause was an error of law.

There is no independent, self-sustaining test of "foreseeability", as Lloyd's asserts. Whether expressly or implicitly, the relevant case authorities consistently apply a third-party beneficiary test in these circumstances. See, e.g., Clinton v. Janger, 583 F.Supp. 284, 290 (N.D. Ill. 1984) (citing Coastal Steel, supra, and holding non-party subject to forum clause where "the non-party is a third party beneficiary of the disputed contract and it is foreseeable that dispute resolution would occur in a foreign jurisdiction"). The "foreseeability" test refers to anticipated performance under and/or acceptance of the benefit of the contract by the non-party. [FN8]

FN8. Lloyd's (as did the District Court) cites (Response at 39) the "closeness" of the relationship between Hugel and GCM and OMI as justifying application of the forum selection clause to their claims. This approach oversimplifies even the "foreseeability" test which Lloyd's asserts is to apply here. Mere closeness of relationship is not sufficient for it to be "foreseeable" that a non-party to a contract will or might become subject to its terms. The issue is one of anticipated participation, performance and benefit.

*24 Before it can subject GCM and OMI to the Lloyd's regulatory structure, Lloyd's must show that a likelihood, expectation or predictability existed of some degree of participation, performance or benefit by these two corporations - one, a marine insurance broker - the other, a marine insurance carrier - with respect to the rights, obligations and benefits associated with Hugel's membership at Lloyd's. None has been shown by Lloyd's - and none exists.

GCM and OMI did not sign the General Undertaking. Nowhere does the General Undertaking (or any other byelaw, agreement or legal provision cited by Lloyd's) invite, contemplate or even address performance by GCM or OMI. The General Undertaking (Section 2.1) speaks to 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" (emphasis added). Neither GCM nor OMI is a "party" to this agreement. [FN9]

FN9. Moreover, Hugel signed the agreement (Sect on (2)) on behalf of himself and his legal and personal representatives and successors". Clearly, Lloyd's (which drafted the General Undertaking) could have made reference to "affiliated entities" if participation, performance or benefit to GCM or OMI were envisioned.

Lloyd's has its regulatory limits - it can regulate membership-sourced investments and ?? members. In this instance, it chose to stray beyond those limits when it elected to investigate the GCM transactions. It again seeks to exceed the express limitations of its regulatory authority with its attempt to bring GCM and OMI within the reach of the General *25 Undertaking and the Lloyd's regulatory structure. Taken to its logical extreme, this same line of reasoning could justify total regulatory supervision by Lloyd's of each and every business transaction of GCM and OMI, all because Hugel (through his membership) obtained the right to make personal, passive investments in various Lloyd's insurance syndicates. This is not the case. However well intentioned, Lloyd's has not been constituted as the World's omnipresent insurance regulator.

CONCLUSION

For the reasons set forth herein and in Plaintiffs' Brief, the District Court's order of dismissal should be reversed and this case remanded to the District Court for further proceedings.

Hugel v. Corp. of Lloyd's

1992 WL 12013120