Facts
- Dutch shipping companies and Seawinds Ltd. entered a shareholders’ agreement to finance and operate a joint-venture international shipping enterprise.
- The agreement contained a clause stating it “shall be governed by and construed in accordance with Hong Kong law.”
- Seawinds was incorporated in Hong Kong but maintained its headquarters and principal place of business in Redwood City, California, where corporate meetings and operational activities occurred.
- After the parties’ relationship deteriorated and Seawinds entered Chapter 11 reorganization, Seawinds sued in California superior court.
- Seawinds alleged breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty arising out of the shareholders’ agreement.
- Defendants demurred, contending the choice-of-law clause required application of Hong Kong law; Seawinds argued California law should govern based on place of business and performance.
Issues
- Whether the shareholders’ agreement’s Hong Kong choice-of-law clause is enforceable under California conflict-of-laws rules.
- Whether the clause requires application of Hong Kong law not only to contract interpretation, but also to claims for breach of the implied covenant of good faith and fair dealing and fiduciary duties arising from the agreement.
- Whether applying Hong Kong law would be barred because it would contravene a fundamental California policy in an area where California has a materially greater interest.
Decision
- The California Supreme Court reversed the Court of Appeal and remanded.
- The court held the Hong Kong choice-of-law clause was enforceable under Restatement (Second) of Conflict of Laws § 187.
- The court directed that Hong Kong law govern Seawinds’ claims, including the implied covenant and fiduciary-duty claims to the extent they arose out of the contract.
Legal Principles
- California analyzes contractual choice-of-law clauses under Restatement (Second) of Conflict of Laws § 187.
- A choice-of-law clause will be enforced if the chosen jurisdiction has a substantial relationship to the parties or transaction (or another reasonable basis exists), and application of the chosen law does not violate a fundamental policy of a state with a materially greater interest in the issue.
- Incorporation in the chosen jurisdiction and the international commercial character of the transaction can supply a substantial relationship and a reasonable basis for the parties’ selection.
- A broadly phrased clause stating an agreement is “governed by” a jurisdiction’s law generally applies to all claims founded on, or closely related to, the contract’s rights and duties, including implied-covenant and contract-based fiduciary-duty theories.
- A party seeking to avoid the chosen law bears the burden to identify a fundamental policy of the otherwise applicable state that would be contravened by enforcing the clause.
Conclusion
The court enforced the parties’ Hong Kong choice-of-law clause and required Hong Kong law to be applied at the pleading stage to contract claims and closely related implied-covenant and fiduciary-duty claims, absent a showing that doing so would violate a fundamental California policy in an area where California has a materially greater interest.