996 F.2d 1353, 61 USLW 2796,
United States Court of Appeals,
John S. ROBY; Susan B. Bolin; Amanda A. Bryan; Anne L. Bryan;
No. 870, Docket 92-9032.
Argued Feb. 5, 1993.
Decided June 2, 1993.
PREVIOUS HISTORY: Roby v. Corporation of Lloyds, 796 F.Supp. 103, Fed. Sec. L. Rep. P 96,825 (S.D. N.Y. Jun. 12, 1992) (No. 91 CIV. 7081 (MEL))
SUBSEQUENT HISTORY: Certiorari Denied by: Roby v. Corporation of Lloyds, 510 U.S. 945, 114 S.Ct. 385, 126 L.Ed.2d 333, 62 USLW 3317, 62 USLW 3319 (U.S.N.Y. Nov. 1, 1993) (No. 93-333)
Dale A. Schreiber, New York City (Minna Schrag, Steven B. Feigenbaum, Adrienne B. Koch, Proskauer Rose Goetz & Mendelsohn, New York City, of counsel), for appellants.
JUDGES: Before: MESKILL, Chief Judge, FEINBERG and WINTER, Circuit Judges.
MESKILL, Chief Judge:
Appellants, all American citizens or residents, are more than one hundred Names in the Corporation of Lloyds (Lloyds). Loosely speaking, Names are investors in Lloyds syndicates, the entities that nominally underwrite insurance risk. For convenience we will refer to the syndicates as entities; although this is a disputed issue on appeal, we affirm on a different basis and therefore need not resolve this issue. Appellant Names (Roby Names) alleged in their consolidated complaint that they have suffered severe financial loss as a result of appellees violations of the Securities Act of 1933, 15 U.S.C. §§ 77a-77bbbb (the Securities Act), the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78ll (the Securities Exchange Act), and the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (RICO). This opinion, however, addresses only the Roby Names contention on appeal that their disputes with [*1357] Lloyds and Lloyds entities should be litigated in the United States despite a host of contract clauses that appear to bind them to arbitrate in England under English law. The district court held that those contract clauses must be enforced and therefore dismissed the Roby Names complaint for improper venue. The Roby Names contend that the district court erred because (1) the clauses by their very terms do not protect certain defendants and do not cover the substance of appellants complaints, and (2) the clauses are unenforceable because they effectively waive compliance with the United States securities laws, contrary to the antiwaiver provisions of those laws and the public policy reflected by them. To understand why we disagree with the Roby Names arguments it is necessary to understand the structure and operations of Lloyds, which we discuss in some detail.
Lloyds is not a company; it is a market somewhat analogous to the New York Stock Exchange. Lloyds governing bodies, the Council and Committee of Lloyds, promulgate regulations and enforce compliance therewith. There are over 300 syndicates competing within Lloyds for underwriting business, each managed by an entity called a Managing Agent. Each Managing Agent is responsible for its own syndicates financial well-being; it tries to attract capital and underwriting business. Managing Agents owe a contractual duty to Names to manage their syndicates with reasonable care and skill. Capital comes from Names, who are represented in their dealings with Lloyds by Members Agents (also entities). Members Agents are obliged to act in the sole interest of their principal Names. By agreement, the Members Agents stand in a fiduciary relationship to their Names. Lloyds brokers broker underwriting risk to the syndicates by negotiating with the syndicates Active Underwriters, individuals appointed by the syndicates Managing Agents. Brokers, Managing Agents, and Members Agents all compete with their peers in their respective areas.
While eighty percent of Lloyds 26,000 Names are English, about 2,500, representing more than $1 billion in capital, are American. The Roby Names were solicited in the United States by various Lloyds entities and representatives. Except for a brief meeting in London--a mandatory formality--the entire process by which the Roby Names became Names took place in the United States. In order to become a Name, an individual had to pass a means test. The Roby Names assert that in 1988, by which time they had all become Names, this test required prospective Names to maintain a net worth of approximately $170,000. By contrast, Lloyds claims that Names were required to demonstrate that they were accredited investors under Regulation D, 17 C.F.R. § 230.501(a) (1992), so that any sale of securities to them would be exempt from the registration requirements of the Securities Act. See 15 U.S.C. § 77d(2); 17 C.F.R. § 230.506(b) (1992). While there is evidence that this requirement was established after 1988, Lloyds has not pointed to any proof that the requirement was in effect prior to 1988. Nevertheless, the Securities and Exchange Commission (SEC) has never insisted that Lloyds or Lloyds entities register securities.
Upon becoming a Name, an individual selects from a list of syndicates--with the aid of only very limited financial information--and decides how much he wishes to invest in each one. In making these decisions, Names rely to a great extent on the advice of their Members Agents. The profits that Names earn are in proportion to their capital contributions, and Names bear unlimited liability for their proportionate losses in each syndicate they join. Their liability is several, not joint; no Name is ever responsible for the losses of those fellow Names who comprise the syndicate. Names are required to enter directly into two agreements and indirectly into two others. [FN1] The General Undertaking is between a Name and the Lloyds governing bodies [*1358] and contains choice of forum (England) and choice of law (English) clauses. This undertaking does not contain an arbitration clause. The Members Agents Agreement is between a Name and his Members Agent and also contains choice of forum (England), arbitration and choice of law (English) clauses. The Members Agents Agreements specifically authorize the Members Agents to enter into a third agreement on behalf of the Names, called the Managing Agents Agreement. This agreement, not signed by the Names themselves, and apparently often not even signed by the Managing Agents, defines the rights and obligations of the Managing Agent of a syndicate and that syndicates Names, and also contains choice of forum (England), arbitration and choice of law (English) clauses. In turn, the Managing Agents Agreement authorizes the Managing Agents to enter, on behalf of themselves, the Names and the Members Agents, into a Syndicate and Arbitration Agreement which requires disputes related to the affairs of the particular syndicate to be arbitrated in London.
FN1. A slightly different structure existed prior to 1990, but the differences are irrelevant for purposes of this appeal and affect at most only five of the 109 appellants.
In their consolidated complaint, the Roby Names allege violations of sections 12(1) and 12(2) of the Securities Act, 15 U.S.C. § 77l (1), (2), and section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b). In addition, they allege controlling person liability under section 15 of the Securities Act, 15 U.S.C. § 77o, and section 20 of the Securities Exchange Act, 15 U.S.C. § 78t. Finally, using these securities law violations as predicate acts, the Roby Names allege several violations of RICO. Each cause of action names as defendants a different combination of the following parties: Lloyds, Lloyds governing bodies, certain Managing and Members Agents, certain individual members of these entities (the Chairs), and certain syndicates.
By order dated June 12, 1992, Judge Lasker dismissed the complaint against the syndicate defendants, finding that they had no separate existence and therefore could not be sued as entities. 796 F.Supp. 103. By subsequent order dated August 18, 1992, the judge found that the interlocking set of agreements bound the Roby Names to arbitrate or litigate their disputes in London and dismissed the complaint in its entirety for improper venue. A judgment dated August 25, 1992 was entered to this effect. The Roby Names appeal from the June 12th order and the August 25th judgment.
The Roby Names maintain that their investments in Lloyds syndicates constitute securities under the securities laws. We decline to rule on this question today, noting only that we have received little guidance from the SEC on this issue. Instead, we will assume for purposes of this appeal that the Roby Names consolidated complaint states cognizable claims under the securities laws. For the sake of precision, we note that the assumed sale of a security occurs not when an individual becomes a Name, but instead when a Name pledges capital to a syndicate. Nevertheless, we understand the Roby Names to argue that the solicitation of individuals to become Names is in fact part of the overall process of soliciting them to pledge capital (i.e., to buy securities).
The Roby Names present us with two basic arguments as to why these suits should be litigated in the United States: (1) the contract clauses, by their terms, apply neither to the substance of their claims nor to certain defendants; and (2) the clauses are unenforceable due to the public policy codified in the securities laws. We find neither of these arguments persuasive.
I. Scope of the Contract Clauses
A. Parties Covered
We believe every defendant in this action, in the words of Judge Lasker, is either protected directly by the [contract] clauses or [is an] intended beneficiar[y] entitled to enforce them. Roby v. The Corporation of Lloyds, 824 F.Supp. 336, 342 (S.D.N.Y.1992, as amended). We reject, therefore, the Roby Names arguments that neither the syndicates, the Managing Agents nor the individual Chairs of the Managing and Members Agents may assert the protection of these clauses.
[*1359] 1. Syndicates
Judge Lasker dismissed the Roby Names action against the syndicates on the ground that they had no entity existence. Although the Roby Names dispute this legal determination, we need not decide the issue because we may of course affirm the judgment of the district court on any basis that has support in the record. See I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 936 F.2d 759, 761 (2d Cir.1991). Consequently, even if we assume the syndicates do have entity existence, we would affirm the dismissal of the Roby Names complaint on the basis of improper venue.
Paragraph 2.2 of the General Undertaking states, in pertinent part: 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 [Names] membership of, and/or underwriting of insurance business at, Lloyds.
Paragraph 2.1 is equally broad and provides for the application of English law. The syndicates are third-party beneficiaries of this agreement. As Professor Corbin has said, a third party will have an enforceable right if the promised performance will be of pecuniary benefit to him and the contract is so expressed as to give the promisor reason to know that such benefit is contemplated by the promisee as one of the motivating causes of his making the contract. 4 Arthur L. Corbin, Corbin on Contracts § 776, at 18 (3d ed. 1967). Here, the syndicates have a pecuniary interest in the certainty and consistency of litigating in one nations courts under one nations laws. The extremely broad language of the General Undertaking should make it clear that Lloyds intent was to benefit all Lloyds entities, particularly because potential actions against Lloyds itself are limited in nature and the broad language of paragraphs 2.1 and 2.2 otherwise would be sorely over broad. Moreover, paragraph 1, which is the only other substantive provision in the General Undertaking, requires Names to abide by the provisions of any other contract authorized by the Council (including, e.g., the Members Agents Agreement). We believe this indicates that the General Undertaking was meant to govern the Names general obligations within the entire Lloyds community.
As a fallback position, the Roby Names rightly observe that Judge Lasker refused to issue an order confirming that his decision dismissing the action against the other defendants for improper venue applied equally to the syndicate defendants. However, the judge offered no explanation for his refusal and we believe he was simply exercising cautious restraint rather than definitively ruling that the improper venue decision did not apply to the syndicates. Because we believe the reasoning of the venue decision is equally applicable to the syndicate defendants, we hold that the syndicates, if they are entities, are also entitled to the benefits of the forum selection and choice of law clauses. The General Undertaking contains no arbitration clause, and therefore we do not decide today whether the Roby Names are bound to arbitrate with the syndicates. Whether the Syndicate and Arbitration Agreement or some other agreement may be interpreted to require the Roby Names to arbitrate is a question that should be decided under English law in an English court pursuant to the General Undertaking.
2. Managing Agents
The Roby Names contend that they are not bound by the Managing Agents Agreements because neither they nor the Managing Agents ever signed them. However, the parties clearly assented to be bound by the Managing Agents Agreements. First, the Roby Names signed the Members Agents Agreements which authorize their Members Agents to enter into Managing Agents Agreements on their behalf. Second, they signed the General Undertaking which requires them to abide by all of Lloyds bylaws. Bylaw 8 prohibits any Name from underwriting insurance at Lloyds other than pursuant to the standard agreements. By underwriting insurance, the Roby Names have demonstrated their intent to be bound by the Managing Agents Agreements. Similarly, the Managing Agents, by acting in their capacity in accordance with the web of standard agreements, clearly have [*1360] demonstrated their intent to abide by the provisions of the Managing Agents Agreements.
3. Individual Chairs
The Roby Names next contend that the individual Chairs of the Members and Managing Agents are neither signatories to nor third-party beneficiaries of any agreement with the Roby Names and therefore that they must litigate in federal court. We agree with the district court, however, that the individual Chairs are entitled to rely on the contract clauses incorporated into their employers agreements.
Courts in this and other circuits consistently have held that employees or disclosed agents of an entity that is a party to an arbitration agreement are protected by that agreement. See, e.g., Nesslage v. York Securities, Inc., 823 F.2d 231, 233-34 (8th Cir.1987); Scher v. Bear Stearns & Co., 723 F.Supp. 211, 216-17 (S.D.N.Y.1989); Brener v. Becker Paribas, Inc., 628 F.Supp. 442, 451 (S.D.N.Y.1985). The Roby Names argue that, unlike those cases, the complaints against the individual Chairs are distinct from those against their employers. They contend that the Chairs have not been sued for acts carried out on behalf of the Members and Managing Agents (Agents) or in violation of the Agents contractual obligations to the Roby Names. Instead, they have been sued as controlling persons under the securities laws.
We believe that this is a distinction without a legal difference. The complaints against the individual Chairs are completely dependent on the complaints against the Agents. Whether the individual Chairs are disclosed agents or controlling persons, their liability arises out of the same misconduct charged against the Agents. If the scope of the Agents agreements includes the Agents misconduct, it necessarily includes the Chairs derivative misconduct. Moreover, we believe that the parties fully intended to protect the individual Chairs to the extent they are charged with misconduct within the scope of the agreements. If it were otherwise, it would be too easy to circumvent the agreements by naming individuals as defendants instead of the entity Agents themselves.
B. Disputes Covered
[A] party cannot be required to submit to arbitration any dispute which he has not agreed so to submit. AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986). The Roby Names contend essentially that the forum selection and arbitration clauses apply only to disputes arising from the conduct of the defendants as managers, representatives or regulators. Because this conduct can occur only after the securities have been sold, the Roby Names claim that they did not agree to arbitration of, or English jurisdiction over, complaints pertaining to the sale of those securities. They present two basic arguments: (1) because the choice of law clauses require the application of English law, the Roby Names United States statutory claims cannot possibly be covered under the agreements, and (2) resolution of their claims does not require the construction of the agreements because the Roby Names have not alleged any breach of contract, and the language of the arbitration and forum selection clauses is not broad enough to cover their claims. We reject both arguments.
1. Application of English Law
It defies reason to suggest that a plaintiff may circumvent forum selection and arbitration clauses merely by stating claims under laws not recognized by the forum selected in the agreement. A plaintiff simply would have to allege violations of his countrys tort law or his countrys statutory law or his countrys property law in order to render nugatory any forum selection clause that implicitly or explicitly required the application of the law of another jurisdiction. We refuse to allow a partys solemn promise to be defeated by artful pleading. See Coastal Steel Corp. v. Tilghman Wheelabrator Ltd., 709 F.2d 190, 203 (3d Cir.), cert. denied, 464 U.S. 938, 104 S.Ct. 349, 78 L.Ed.2d 315 (1983). In the absence of other considerations, the agreement to submit to arbitration or the jurisdiction of the English courts [*1361] must be enforced even if that agreement tacitly includes the forfeiture of some claims that could have been brought in a different forum.
2. Scope of the Agreements
Of course, the Roby Names are quite right that if the substance of their claims, stripped of their labels, does not fall within the scope of the clauses, the clauses cannot apply. However, they must make this argument in the face of strong public policy in favor of forum selection and arbitration clauses. See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985); The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15, 92 S.Ct. 1907, 1916, 32 L.Ed.2d 513 (1972). Indeed, an order to arbitrate should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83, 80 S.Ct. 1347, 1352-53, 4 L.Ed.2d 1409 (1960).
There is ample precedent that the scope of clauses similar to those at issue here is not restricted to pure breaches of the contracts containing the clauses. The Managing and Members Agents Agreements speak, with respect to the arbitration clauses, in terms of dispute[s], difference[s], question[s] or claim[s] relating to the agreements and, with respect to the forum selection clauses, in terms of submission for all purposes of and in connection with the agreements (emphasis added). In Bense v. Interstate Battery System of America, 683 F.2d 718, 720 (2d Cir.1982), we held that a forum selection clause that applied to causes of action arising directly or indirectly from [the agreement] covered federal antitrust actions. Similarly, the Supreme Court in Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270, rehg denied, 419 U.S. 885, 95 S.Ct. 157, 42 L.Ed.2d 129 (1974), held that controversies and claims arising out of a contract for the sale of a business covered securities violations related to that sale. Id. 417 U.S. at 519-20, 94 S.Ct. at 2457. We find no substantive difference in the present context between the phrases relating to, in connection with or arising from. We therefore reject the Roby Names contention that only allegations of contractual violations fall within the scope of the clauses.
In the instant case the conduct surrounding the underwriting activities at Lloyds is integrally related to the sale of Lloyds securities because the security is essentially equivalent to the underwriting of risk or the pledging of capital. In order to underwrite risk, a Name is required by Lloyds bylaws to enter into the Managing and Members Agents Agreements. He may not underwrite risk otherwise; that is, he may not buy the security otherwise. Misconduct with respect to the sale of these securities necessarily relates to these required agreements.
It is perhaps even more persuasive that the agreements are in fact not limited to the conduct of business but also cover the raising of capital. Thus, for instance, the agreements contain certain disclosure requirements. In addition, they establish certain duties of the Agents with respect to the Name and because the agreements are entered into prior to the underwriting of risk, these duties are owed with respect to the raising of capital. We believe the agreements are clearly intended to, and in fact do, govern the relationships between Agents and Names with respect to the purchase and sale of Lloyds securities. Because the gist of the Roby Names allegations relates to the sale of those securities, we hold that their claims relate to the Agents Agreements.
Similarly, and even more forcefully, the broad language of the forum selection clause of the General Undertaking covers the Roby Names claims at least against Lloyds governing bodies. Those claims are undoubtedly related to the Roby Names membership of, and/or underwriting of insurance business at, Lloyds.
II. Application of the Securities Laws
The Roby Names argue that the public policy codified in the antiwaiver provisions of the securities laws renders unenforceable any agreement that effectively eliminates [*1362] compliance with those laws. The Securities Act provides that [a]ny stipulation binding any person acquiring any security to waive compliance with any provision of this subchapter shall be void. 15 U.S.C. § 77n. Similarly, the Securities Exchange Act states, [a]ny stipulation binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder shall be void. 15 U.S.C. § 78cc(a). According to the undisputed testimony of a British attorney, neither an English court nor an English arbitrator would apply the United States securities laws, because English conflict of law rules do not permit recognition of foreign tort or statutory law. From this, the Roby Names conclude that the contract clauses work to waive compliance with the securities laws and therefore are void.
We note at the outset that Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), has been squarely overruled. See Rodriguez de Quijas v. Shearson/American Express, 490 U.S. 477, 484, 109 S.Ct. 1917, 1921, 104 L.Ed.2d 526 (1989); see also Shearson/American Express v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185, rehg denied, 483 U.S. 1056, 108 S.Ct. 31, 97 L.Ed.2d 819 (1987) (asserting that the assumptions underlying Wilko are no longer valid). Wilko held that an agreement to arbitrate future controversies was void under the antiwaiver provision of the Securities Act. We do not doubt that judicial hostility to arbitration has receded dramatically since 1953 and that the arbitral forum is perfectly competent to protect litigants substantive rights. In the words of the Mitsubishi Court, quoted by both the Rodriguez and McMahon Courts, [b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum. 473 U.S. at 628, 105 S.Ct. at 3354. If the Roby Names objected merely to the choice of an arbitral rather than a judicial forum, we would reject their claim immediately, citing Rodriguez and McMahon. However, the Roby Names argue that they have been forced to forgo the substantive protections afforded by the securities laws, not simply the judicial forum. We therefore do not believe that Rodriguez and McMahon are controlling and must look elsewhere to determine whether parties may contract away their substantive rights under the securities laws.
The Tenth Circuit recently addressed this exact issue in a similar context in Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953 (10th Cir.), cert. denied, 506 U.S. 1021, 113 S.Ct. 658, 121 L.Ed.2d 584 (1992). Relying primarily on four Supreme Court precedents, Carnival Cruise Lines v. Shute, 499 U.S. 585, 111 S.Ct. 1522, 113 L.Ed.2d 622 (1991); Mitsubishi, 473 U.S. 614, 105 S.Ct. 3346; Scherk, 417 U.S. 506, 94 S.Ct. 2449; The Bremen, 407 U.S. 1, 92 S.Ct. 1907, the Riley Court concluded that [w]hen an agreement is truly international, as here, and reflects numerous contacts with the foreign forum, the Supreme Court has quite clearly held that the parties choice of law and forum selection provisions will be given effect. 969 F.2d at 957; see also Bonny v. Society of Lloyds, 784 F.Supp. 1350, 1353 (N.D.Ill.1992) (drawing the same conclusion). While we agree with the ultimate result in Riley, we are reluctant to interpret the Supreme Courts precedent quite so broadly.
A. Presumption of Validity
The Supreme Court certainly has indicated that forum selection and choice of law clauses are presumptively valid where the underlying transaction is fundamentally international in character. See, e.g., The Bremen, 407 U.S. at 15, 92 S.Ct. at 1916. [FN2] In The Bremen, the [*1363] Court explained that American parochialism would hinder the expansion of American business and trade, and more generally, interfere with the smooth functioning and growth of global commerce. Id. at 9, 92 S.Ct. at 1912. Forum selection and choice of law clauses eliminate uncertainty in international commerce and insure that the parties are not unexpectedly subjected to hostile forums and laws. Moreover, international comity dictates that American courts enforce these sorts of clauses out of respect for the integrity and competence of foreign tribunals. See Mitsubishi, 473 U.S. at 629, 105 S.Ct. at 3355. In addition to these rationales for the presumptive validity of forum selection and choice of law clauses, the Court has noted that contracts entered into freely generally should be enforced because the financial effect of forum selection and choice of law clauses likely will be reflected in the value of the contract as a whole. Carnival Cruise Lines, 499 U.S. at ----, 111 S.Ct. at 1527.
FN2. The analysis is no different for the arbitration clauses. Indeed, an arbitration clause is merely a specialized type of forum selection clause. See Scherk, 417 U.S. at 519, 94 S.Ct. at 2457. We might have referred to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature June 10, 1958, 21 U.S.T. 2517 (United States entered on December 29, 1970), reprinted in 9 U.S.C. §§ 201-08 (the Treaty), for further support with respect to the arbitration clauses; however, because we are not entirely persuaded that the Treaty applies in the securities context, we prefer to rest our decision on different grounds. Because we understand the Roby Names to complain primarily that the United States securities laws will not be applied and not that the arbitration forum is particularly inappropriate in their case, we do not believe a detailed analysis of the Treaty is necessary.