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Keywords

appealtrialfiduciaryfiduciary dutygood faithbreach of fiduciary duty
contractbreach of contractplaintiffjurisdictionfiduciarybankruptcygood faith

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Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 834 P.2d 1148, 11 Cal.Rptr.2d 330, 1994 A.M.C. 531

Facts

Seawinds Limited, a shipping company incorporated in Hong Kong, entered into a shareholders' agreement with Nedlloyd Lines B.V. and other parties in 1983 to establish a joint venture for transportation operations. The agreement included a choice-of-law clause stating that it would be governed by Hong Kong law. In 1989, Seawinds sued Nedlloyd, alleging breaches of the agreement, including interference with business operations and failure to contribute capital. The trial court ruled that California law applied to the case, which led to multiple appeals and petitions for review regarding the choice-of-law issue.

Plaintiff and real party in interest Seawinds Limited (Seawinds) is a shipping company, currently undergoing reorganization under chapter 11 of the United States Bankruptcy Code, whose business consists of the operation of three container ships.

Issue

Whether the choice-of-law clause in the shareholders' agreement, which stated that the agreement would be governed by Hong Kong law, was enforceable and applicable to the claims for breach of the implied covenant of good faith and fair dealing and breach of fiduciary duties.

We conclude the choice-of-law clause, which requires that the contract be 'governed by' the law of Hong Kong, a jurisdiction having a substantial connection with the parties, is fully enforceable and applicable to claims for breach of the implied covenant of good faith and fair dealing and for breach of fiduciary duties allegedly arising out of the contract.

Rule

The court applied the principles set forth in Restatement section 187, which favor the enforcement of freely negotiated choice-of-law clauses, provided that the chosen state has a substantial relationship to the parties or the transaction.

In determining the enforceability of arm's-length contractual choice-of-law provisions, California courts shall apply the principles set forth in Restatement section 187, which reflect a strong policy favoring enforcement of such provisions.

Analysis

The court determined that Hong Kong law was applicable because the parties had a substantial relationship with Hong Kong, as Seawinds was incorporated there. The court found no fundamental policy of California that would be offended by applying Hong Kong law to the claims, including those for breach of fiduciary duty. The choice-of-law clause was interpreted broadly to encompass all causes of action arising from the agreement.

When a rational businessperson enters into an agreement establishing a transaction or relationship and provides that disputes arising from the agreement shall be governed by the law of an identified jurisdiction, the logical conclusion is that he or she intended that law to apply to all disputes arising out of the transaction or relationship.

Conclusion

The Supreme Court reversed the judgments of the Court of Appeal and remanded the case for further proceedings, directing that Hong Kong law be applied to the claims made by Seawinds.

By a choice-of-law clause in a fully negotiated commercial contract, the parties have chosen Hong Kong law to apply to their dispute in this case, including each of the causes of action asserted by Seawinds.

Who won?

Nedlloyd Lines B.V. prevailed in the Supreme Court's decision, as the court upheld the enforceability of the choice-of-law clause favoring Hong Kong law, which was beneficial to Nedlloyd.

Nedlloyd did not assert in its second demurrer that the amended complaint failed to state a cause of action under Hong Kong law for breach of contract.

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