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The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which would be the state of the applicable law in the absence of an effective choice of law by the parties. This is a rule providing for incorporation by reference and is not a rule of choice of law.
Plaintiff Seawinds Limited, a shipping company incorporated in Hong Kong with its principal place of business in California, entered into a contract with three other shipping companies, incorporated, and with their principal place of business, in the Netherlands. The contract contained a choice-of-law clause providing that the contract was to be governed by Hong Kong law. Plaintiff brought an action against the other corporations which included causes of action for breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty. Defendant corporations demurred to the complaint. Applying California law, the trial court sustained the demurrer with leave to amend. The Court of Appeal , First Dist., Div. One, No. A049718, denied defendants' petition for a writ of mandate seeking the application of Hong Kong law to the ruling on the demurrer. Subsequently, the trial court overruled defendants' demurrer to plaintiff's first amended complaint, again applying California law. The Court of Appeal, First Dist., Div. One, Nos. A049718 and A050535, summarily denied defendants' second writ petition challenging the order overruling the demurrer. Defendant corporations petitioned for review.
Did the lower courts err in applying California law to the ruling on the demurrer?
The Supreme Court reversed the judgments of the Court of Appeal and remanded to that court with instructions to issue a peremptory writ of mandate directing the trial court to reconsider its ruling on defendants' demurrer in light of applicable Hong Kong law. It held that the choice-of-law clause, which required that the contract be "governed by" the law of Hong Kong, was 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, since Hong Kong was a jurisdiction having a substantial connection to the parties. The Court further held that plaintiff's incorporation in the chosen state provided a reasonable basis for the clause and that Hong Kong law was not contrary to any fundamental policy of California.