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United States

Choice of forum clause upheld

Last summer, the Lloyd's of London restructuring plan came under attack by a large group of US names (as individual investors are referred to in the Lloyd's market). The US names charged Lloyd's with various fraudulent practices and violations of US securities laws.

On August 23 1996, a US district court in Richmond, Virginia sustained the names' claims and issued a preliminary injunction prohibiting Lloyd's from forcing US names to decide whether or not to participate in the restructuring. This decision imperiled the entire Lloyd's restructuring plan because without the US names Lloyd's might not have been able to obtain the consent of the necessary percentage of names.

Lloyd's took an immediate appeal to the US Court of Appeals for the Fourth Circuit. Four days later, on August 27, following oral argument before the appellate court, the Fourth Circuit reversed the district court decision and lifted the injunction (Allen v Lloyd's of London 94 F.3d 923 (4th Cir 1996)). The reversal by the Fourth Circuit permitted the Lloyd's restructuring to proceed as planned.

Why did the Fourth Circuit dismiss the case brought by the US names? The agreements that names sign with Lloyd's provide for resolution of disputes under English law in English courts. The Fourth Circuit held that these contractual provisions as to choice of law and choice of forum should be enforced and therefore the US names had to seek redress from Lloyd's in the English courts.

Under US law, choice of forum clauses are accorded presumptive validity and will be enforced unless they were induced by fraud or would deprive the complaining party of his day in court "because of the grave inconvenience or unfairness of the selected forum". The names did not challenge the Lloyd's contractual provisions on either of these grounds, but rather argued that enforcement of these provisions would contravene a strong public policy of the US. In the view of the US names, this public policy was the protection afforded US investors by American securities laws.

The Fourth Circuit rejected this argument, holding that "British law not only prohibits fraud and misrepresentations as do the United States securities laws, but also affords Names adequate remedies in the United Kingdom". Further, the court found that Congress did not intend that the disclosure requirements of the US securities laws be exported to markets in other countries. Thus Lloyd's was under no duty to make US securities law disclosures regarding its restructuring plan.

Finally, the court noted that "significant United States and foreign interests would be adversely affected if we were to insist that Lloyd's insurance underwriting syndicates comply with United States disclosure requirements".

Those US names that did not agree to the restructuring plan are free to sue Lloyd's in the English courts. In such a proceeding, the English courts would apply English law as provided in the names' agreements with Lloyd's. However, it is understood that as a consequence of the Fourth Circuit's decision in Allen, most US names have accepted the restructuring plan.

Curiously, the US Securities and Exchange Commission (SEC) did not participate in this proceeding before the Fourth Circuit. In May 1996, the SEC had filed an amicus curiae brief in another suit against Lloyd's, Richards v Lloyd's of London (on appeal before the Ninth Circuit).

In its brief, the SEC argued that if the English choice of law and forum clauses were enforced, the US names "would have no remedy under the federal securities laws to compensate them for their losses". The SEC also asserted that "the protections afforded [under English law] are not adequate to provide the plaintiffs with remedies equivalent to what they enjoy under the United States law".

The Fourth Circuit's holding in the Allen case would seem to be inconsistent with the SEC's position in Richards. It remains a mystery why the UK government filed an amicus curiae brief in Allen (presumably in support of Lloyd's of London), while the SEC did not.


Bank pay order may be letter of credit

What is a 'bank pay order'? In 25 years of law practice, this writer has never seen one. Nevertheless, in May 1996, Citibank issued such an instrument in support of a consultancy agreement in Saudi Arabia. Several years later, this 'bank pay order' became the subject of lengthy litigation in the US which recently resulted in a decision by the US Court of Appeals for the Second Circuit, Bouzo v Citibank NA 1996 WL 526194 (2nd Cir NY).

Bouzo, a citizen of Saudi Arabia, had entered into a consultancy agreement with a US oil company whereby he agreed to assist the oil company in obtaining a contract with the Saudi Ministry of Petroleum and Mineral Resources (Petromin). The agreement required the oil company to provide an unconditional, unlimited, and irrevocable guarantee to support its compensation obligations to Bouzo.

To satisfy this obligation, the oil company's bank, Citibank, issued two letters: the first was a confirmation that Citibank would issued an irrevocable bank guarantee in favour of Bouzo, and the second was the 'bank pay order'. The relevant text of the bank pay order provided as follows:

"We [Citibank] are pleased to confirm that we will issue an unconditional, irrevocable bank pay order ... Such bank pay order shall immediately be released for payment in full within twenty (20) days after the presentation to us of a duplicate original of the signed contract between Petromin and [the US oil company]."

Following execution of the Heads of Agreement between Petromin and the US oil company, Bouzo requested payment from Citibank, but was refused. Bouzo thereupon sued Citibank in Federal court in New York seeking payment under the bank pay order.

Bouzo based his claim on the theory that the bank pay order was a letter of credit and that by presenting the Heads of Agreement he had complied with its terms. The US District Court for the Southern District of New York rejected this theory, holding that the bank pay order failed to qualify as a letter of credit under Section 5-103 of the New York Uniform Commercial Code.

On appeal before the Second Circuit, the appellate court concluded that Citibank's undertaking to "issue an unconditional, irrevocable bank pay order" could be construed as an "engagement...[to]...honour...[a] demand for payment" within UCC Section 5-103(1)(a). The court acknowledged that a bank pay order "is not a commonly used commercial term, and we have no clear guidance as to its meaning".

However, the court found that the words 'pay order' might be read to refer to a draft directing that payment be made to Bouzo or the bank pay order might be a cashier's cheque (a common form of negotiable instrument in which a bank draws a cheque on itself). If so, Citibank's bank's pay order might be the equivalent to a promise to honour a demand for payment.

Accordingly, the Second Circuit reversed the District Court and ordered further proceedings to allow Bouzo to establish the meaning of Citibank's bank pay order.

Robert Rendell

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