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Full Opinion
NEDLLOYD LINES B.V. et al., Petitioners,
v.
THE SUPERIOR COURT OF SAN MATEO COUNTY, Respondent; SEAWINDS LIMITED, Real Party in Interest.
Supreme Court of California.
*461 COUNSEL
Walsh, Donovan, Lindh & Keech, Charles S. Donovan, Ann S. Crownover and Elizabeth M. Miller for Petitioners.
No appearance for Respondent.
*462 Furth, Fahrner & Mason, Thomas R. Fahrner, Michele C. Jackson and Michael R. Hudson for Real Party in Interest.
OPINION
BAXTER, J.
We granted review to consider the effect of a choice-of-law clause in a contract between commercial entities to finance and operate an international shipping business. In our order granting review, we limited our consideration to the question whether and to what extent the law of Hong Kong, chosen in the parties' agreement, should be applied in ruling on defendant's demurrer to plaintiff's complaint.
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. Our conclusion rests on the choice-of-law rules derived from California decisions and the Restatement Second of Conflict of Laws, which reflect strong policy considerations favoring the enforcement of freely negotiated choice-of-law clauses. Based on our conclusion, we will reverse the judgments of the Court of Appeal and remand for further proceedings.
STATEMENT OF FACTS AND PROCEEDINGS BELOW
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. Seawinds was incorporated in Hong Kong in late 1982 and has its principal place of business in Redwood City, California. Defendants and petitioners Nedlloyd Lines B.V., Royal Nedlloyd Group N.V., and KNSM Lines B.V. (collectively referred to as Nedlloyd) are interrelated shipping companies incorporated in the Netherlands with their principal place of business in Rotterdam.
In March 1983, Nedlloyd and other parties (including an Oregon corporation, a Hong Kong corporation, a British corporation, three individual residents of California, and a resident of Singapore) entered into a contract with Seawinds to purchase shares of Seawinds's stock. The contract, which was entitled "Shareholders' Agreement in Respect of Seawinds Limited," stated that its purpose was "to establish [Seawinds] as a joint venture company to carry on a transportation operation." The agreement also provided that Seawinds would carry on the business of the transportation *463 company and that the parties to the agreement would use "means reasonably available" to ensure the business was a success.
The shareholders' agreement between the parties contained the following choice-of-law and forum selection provision: "This agreement shall be governed by and construed in accordance with Hong Kong law and each party hereby irrevocably submits to the non-exclusive jurisdiction and service of process of the Hong Kong courts."
In January 1989, Seawinds sued Nedlloyd, alleging in essence that Nedlloyd breached express and implied obligations under the shareholders' agreement by: "(1) engaging in activities that led to the cancellation of charter hires that were essential to Seawinds' business; (2) attempting to interfere with a proposed joint service agreement between Seawinds and the East Asiatic Company, and delaying its implementation; (3) making and then reneging on commitments to contribute additional capital, thereby dissuading others from dealing with Seawinds, and (4) making false and disparaging statements about Seawinds' business operations and financial condition." Seawinds's original and first amended complaint included causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing (in both contract and tort), and breach of fiduciary duty. This matter comes before us after trial court rulings on demurrers to Seawinds's complaints.
Nedlloyd demurred to Seawinds's original complaint on the grounds that it failed to state causes of action for breach of the implied covenant of good faith and fair dealing (either in contract or in tort) and breach of fiduciary duty. In support of its demurrer, Nedlloyd contended the shareholders' agreement required the application of Hong Kong law to Seawinds's claims. In opposition to the demurrer, Seawinds argued that California law should be applied to its causes of action.
In ruling on Nedlloyd's demurrer, the trial court expressly determined that California law applied to all of Seawinds's causes of action. It sustained the demurrers with leave to amend as to all causes of action, relying on grounds not pertinent to the issues before us. Nedlloyd sought a writ of mandate from the Court of Appeal directing the application of Hong Kong law. After the Court of Appeal summarily denied Nedlloyd's initial writ petition, we granted Nedlloyd's petition for review and transferred the case back to the Court of Appeal with instructions to issue an alternative writ.
After complying with our direction, the Court of Appeal denied Nedlloyd's first writ petition and discharged the alternative writ. In a published *464 opinion, the Court of Appeal upheld the application of California law to Seawinds's claims. We granted Nedlloyd's petition for review.
In the meantime, the trial court overruled Nedlloyd's demurrer to Seawinds's first amended complaint, again applying California law to Seawinds's causes of action. The Court of Appeal summarily denied Nedlloyd's second writ petition challenging the order overruling the latter demurrer; we also granted review of that order and consolidated proceedings on the two writ matters so as to preserve the choice-of-law issue for review. As noted above, we have limited review in both proceedings to the choice-of-law issue.
DISCUSSION
I. The proper test
We have not previously considered the enforceability of a contractual choice-of-law provision. (1) We have, however, addressed the closely related issue of the enforceability of a contractual choice-of-forum provision, and we have made clear that, "No satisfying reason of public policy has been suggested why enforcement should be denied a forum selection clause appearing in a contract entered into freely and voluntarily by parties who have negotiated at arm's length." (Smith, Valentino & Smith, Inc. v. Superior Court (1976) 17 Cal.3d 491, 495-496 [131 Cal. Rptr. 374, 551 P.2d 1206] (Smith).) The forum selection provision in Smith was contained within a choice-of-law clause, and we observed that, "Such choice of law provisions are usually respected by California courts." (Id., at p. 494.) We noted this result was consistent with the modern approach of section 187 of the Restatement Second of Conflict of Laws (Restatement). (17 Cal.3d at p. 494.) Prior Court of Appeal decisions, although not always explicitly referring to the Restatement, also overwhelmingly reflect the modern, mainstream approach adopted in the Restatement. (Mencor Enterprises, Inc. v. Hets Equities Corp. (1987) 190 Cal. App.3d 432, 435-436 [235 Cal. Rptr. 464] [explicit reference to Rest. § 187]; Hall v. Superior Court (1983) 150 Cal. App.3d 411, 417 [197 Cal. Rptr. 757] [no explicit reference]; Ashland Chemical Co. v. Provence (1982) 129 Cal. App.3d 790, 794-795 [181 Cal. Rptr. 340] [no explicit reference]; Gamer v. duPont Glore Forgan, Inc. (1976) 65 Cal. App.3d 280, 287 [135 Cal. Rptr. 230] [explicit reference to Rest. § 187].)[1]
(2) We reaffirm this approach. In determining the enforceability of arm's-length contractual choice-of-law provisions, California courts shall *465 apply the principles set forth in Restatement section 187, which reflects a strong policy favoring enforcement of such provisions.[2]
More specifically, Restatement section 187, subdivision (2) sets forth the following standards: "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, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties."[3]
*466 Briefly restated, the proper approach under Restatement section 187, subdivision (2) is for the court first to determine either: (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties' choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties' choice of law.[4] If, however, either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California.[5] If there is no such conflict, the court shall enforce the parties' choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a "materially greater interest than the chosen state in the determination of the particular issue...." (Rest., § 187, subd. (2).) If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance we will decline to enforce a law contrary to this state's fundamental policy.[6] We now apply the Restatement test to the facts of this case.
*467 II. Application of the test in this case
A. Breach of contract
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. Rather, Nedlloyd challenged the amended complaint's breach of contract allegations only on the ground of uncertainty. (Code Civ. Proc., § 430.10, subd. (f).) In light of our order limiting review to the issue of whether Hong Kong law "should be applied in ruling on the demurrers," we need not and do not consider the correctness of the trial court's ruling on the demurrer to this cause of action. As we shall explain, however, Hong Kong law, although not asserted as a bar to Seawinds's contract cause of action at the pleading stage, does govern all causes of action pleaded in the amended complaint, including the contract cause of action.
B. Implied covenant of good faith and fair dealing
1. Substantial relationship or reasonable basis
(3) As to the first required determination, Hong Kong "the chosen state" clearly has a "substantial relationship to the parties." (Rest., § 187, subd. (2)(a).) The shareholders' agreement, which is incorporated by reference in Seawinds' first amended complaint, shows that Seawinds is incorporated under the laws of Hong Kong and has a registered office there. The same is true of one of the shareholder parties to the agreement Red Coconut Trading Co. The incorporation of these parties in Hong Kong provides the required "substantial relationship." (Id., com. f [substantial relationship present when "one of the parties is domiciled" in the chosen state]; Carlock v. Pillsbury Co. (D.Minn. 1988) 719 F. Supp. 791, 807 ["A party's incorporation in a state is a contact sufficient to allow the parties to choose that state's law to govern their contract."]; Hale v. Co-Mar Offshore Corp. (W.D.La. 1984) 588 F. Supp. 1212, 1215 [same effect].)
Moreover, the presence of two Hong Kong corporations as parties also provides a "reasonable basis" for a contractual provision requiring application of Hong Kong law. "If one of the parties resides in the chosen state, the parties have a reasonable basis for their choice." (Consul Ltd. v. Solide Enterprises, Inc., supra, 802 F.2d 1143, 1147.) The reasonableness of choosing Hong Kong becomes manifest when the nature of the agreement before us is considered. A state of incorporation is certainly at least one government entity with a keen and intimate interest in internal corporate affairs, including the purchase and sale of its shares, as well as corporate management and *468 operations. (See Corp. Code, § 102 [applying California's general corporation law to domestic corporations].)
2. Existence of fundamental public policy
We next consider whether application of the law chosen by the parties would be contrary to "a fundamental policy" of California. We perceive no fundamental policy of California requiring the application of California law to Seawinds's claims based on the implied covenant of good faith and fair dealing. The covenant is not a government regulatory policy designed to restrict freedom of contract, but an implied promise inserted in an agreement to carry out the presumed intentions of contracting parties. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 689-690 [254 Cal. Rptr. 211, 765 P.2d 373] (Foley) ["When a court enforces the implied covenant it is in essence acting to protect `the interest in having promises performed' [citation] the traditional realm of a contract action rather than to protect some general duty to society which the law places on an employer without regard to the substance of its contractual obligations to its employee."].)
Seawinds directs us to no authority exalting the implied covenant of good faith and fair dealing over the express covenant of these parties that Hong Kong law shall govern their agreement. We have located none. Because Seawinds has identified no fundamental policy of our state at issue in its essentially contractual dispute with Nedlloyd, the second exception to the rule of section 187 of the Restatement does not apply.
C. Fiduciary duty cause of action
1. Scope of the choice-of-law clause
(4a) Seawinds contends that, whether or not the choice-of-law clause governs Seawinds's implied covenant claim, Seawinds's fiduciary duty claim is somehow independent of the shareholders' agreement and therefore outside the intended scope of the clause. Seawinds thus concludes California law must be applied to this claim. We disagree.
When two sophisticated, commercial entities agree to a choice-of-law clause like the one in this case, the most reasonable interpretation of their actions is that they intended for the clause to apply to all causes of action arising from or related to their contract. Initially, such an interpretation is supported by the plain meaning of the language used by the parties. (5)(See fn. 7.) The choice-of-law clause in the shareholders' agreement provides: "This agreement shall be governed by and construed in accordance *469 with Hong Kong law and each party hereby irrevocably submits to the non-exclusive jurisdiction and service of process of the Hong Kong courts." (Italics added.)[7]
(4b) The phrase "governed by" is a broad one signifying a relationship of absolute direction, control, and restraint. Thus, the clause reflects the parties' clear contemplation that "the agreement" is to be completely and absolutely controlled by Hong Kong law. No exceptions are provided. In the context of this case, the agreement to be controlled by Hong Kong law is a shareholders' agreement that expressly provides for the purchase of shares in Seawinds by Nedlloyd and creates the relationship between shareholder and corporation that gives rise to Seawinds's cause of action. Nedlloyd's fiduciary duties, if any, arise from and can exist only because of the shareholders' agreement pursuant to which Seawinds's stock was purchased by Nedlloyd.
In order to control completely the agreement of the parties, Hong Kong law must also govern the stock purchase portion of that agreement and the legal duties created by or emanating from the stock purchase, including any fiduciary duties. If Hong Kong law were not applied to these duties, it would effectively control only part of the agreement, not all of it. Such an interpretation would be inconsistent with the unrestricted character of the choice-of-law clause.
Our conclusion in this regard comports with common sense and commercial reality. 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. We seriously doubt that any rational businessperson, attempting to provide by contract for an efficient and business-like resolution of possible future disputes, would intend that the laws of multiple jurisdictions would apply to a single controversy having its origin in a single, contract-based relationship. Nor do we believe such a *470 person would reasonably desire a protracted litigation battle concerning only the threshold question of what law was to be applied to which asserted claims or issues. Indeed, the manifest purpose of a choice-of-law clause is precisely to avoid such a battle.
Seawinds's view of the problem which would require extensive litigation of the parties' supposed intentions regarding the choice-of-law clause to the end that the laws of multiple states might be applied to their dispute is more likely the product of postdispute litigation strategy, not predispute contractual intent. If commercially sophisticated parties (such as those now before us) truly intend the result advocated by Seawinds, they should, in fairness to one another and in the interest of economy in dispute resolution, negotiate and obtain the assent of their fellow parties to explicit contract language specifying what jurisdiction's law applies to what issues.
Justice Mosk long ago cogently observed that, "Given two experienced businessmen dealing at arm's length, both represented by competent counsel, it has become virtually impossible under recently evolving rules of evidence to draft a written contract that will produce predictable results in court. The written word, heretofore deemed immutable, is now at all times subject to alteration by self-serving recitals based upon fading memories of antecedent events. This, I submit, is a serious impediment to the certainty required in commercial transactions." (Delta Dynamics, Inc. v. Arioto (1968) 69 Cal.2d 525, 532 [72 Cal. Rptr. 785, 446 P.2d 785] (dis. opn. of Mosk, J.).)
With due acknowledgment of Justice Mosk's prescience, other courts have more recently reiterated that, "While [the] rule [of easily pleaded ambiguity] creates much business for lawyers and an occasional windfall to some clients, it leads only to frustration and delay for most litigants and clogs already overburdened courts." (Trident Center v. Connecticut General Life Ins. (9th Cir.1988) 847 F.2d 564, 569; Wilson Arlington Co. v. Prudential Ins. Co. (9th Cir.1990) 912 F.2d 366, 370.) We need not envelop choice-of-law clauses in this fog of uncertainty and ambiguity.
For the reasons stated above, we hold a valid choice-of-law clause, which provides that a specified body of law "governs" the "agreement" between the parties, encompasses all causes of action arising from or related to that agreement, regardless of how they are characterized, including tortious breaches of duties emanating from the agreement or the legal relationships it creates.
2. Enforceability of chosen law as to fiduciary duty claim
Applying the test we have adopted (see pt. I, ante, at pp. 464-466.), we find no reason not to apply the parties' choice of law to Seawinds's cause of *471 action for breach of fiduciary duty. As we have explained, Hong Kong, the chosen state, has a "substantial relationship to the parties" because two of those parties are incorporated there. Moreover, their incorporation in that state affords a "reasonable basis" for choosing Hong Kong law. (See pt. II.B.1., ante, at pp. 467-468].)
Seawinds identifies no fundamental public policy of this state that would be offended by application of Hong Kong law to a claim by a Hong Kong corporation against its allegedly controlling shareholder. We are directed to no California statute or constitutional provision designed to preclude freedom of contract in this context. Indeed, even in the absence of a choice-of-law clause, Hong Kong's overriding interest in the internal affairs of corporations domiciled there would in most cases require application of its law. (See Rest., § 306 [obligations owed by majority shareholder to corporation determined by the law of the state of incorporation except in unusual circumstances not present here]; McDermott Inc. v. Lewis (Del. Super. Ct. 1987) 531 A.2d 206, 214-216 [corporate voting rights dispute governed by law of state of incorporation]; Matter of Reading Co. (3d Cir.1983) 711 F.2d 509, 517 [minority shareholder fiduciary duty claim governed by law of state of incorporation].)
For strategic reasons related to its current dispute with Nedlloyd, Seawinds seeks to create a fiduciary relationship by disregarding the law Seawinds voluntarily agreed to accept as binding the law of a state that also happens to be Seawinds's own corporate domicile. To allow Seawinds to use California law in this fashion would further no ascertainable fundamental policy of California; indeed, it would undermine California's policy of respecting the choices made by parties to voluntarily negotiated agreements.
DISPOSITION
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.
Seawinds's action is now proceeding based on its first amended complaint, which will be the focus of further proceedings applying Hong Kong law to resolve the parties' differences. Therefore, the judgments of the Court of Appeal in the consolidated proceedings (Court of Appeal Nos. A049718 and A050535) are reversed, and the matters are remanded to the Court of Appeal with instructions to issue a peremptory writ of mandate directing the *472 trial court to reconsider its ruling on Nedlloyd's demurrer to Seawinds's first amended complaint in light of applicable Hong Kong law.
Lucas, C.J., Arabian, J., and George, J., concurred.
PANELLI, J., Concurring and Dissenting.
I generally concur in the majority opinion's explanation of the standards controlling when a contractual choice-of-law provision will be honored by the courts of this state and with the majority's application of these standards to Seawinds's cause of action for breach of the covenant of good faith and fair dealing. I write separately to express my disagreement with the majority's conclusion, based on the record before us, that the choice-of-law clause in this case governs Seawinds's cause of action for breach of fiduciary duty. In my view, the majority's analysis of the scope of the choice-of-law clause is unsound.
The choice-of-law clause in this case reads in pertinent part: "This agreement shall be governed by and construed in accordance with Hong Kong law...."[1] The majority determines that the scope of the choice-of-law clause, which was incorporated into the first amended complaint by attachment, extends to related, noncontractual causes of action, such as Seawinds's breach of fiduciary duty claim. In so doing, the majority opinion adopts the rule that "[w]hen two sophisticated, commercial entities agree to a choice-of-law clause like the one in this case, the most reasonable interpretation of their actions is that they intended for the clause to apply to all causes of action arising from or related to their contract." (Maj. opn., ante, at p. 468.) Without citing any authority, the majority opinion announces a binding rule of contractual interpretation, based solely upon "common sense and commercial reality." (Id. at p. 469.)
The problem with the majority's approach is that it ignores controlling California law. On demurrer, a pleading must be liberally construed. (Code Civ. Proc., § 452.) The accepted rule of contractual construction on demurrer is that "[w]here a written contract is pleaded by attachment to and incorporation in a complaint, and where the complaint fails to allege that the terms of the contract have any special meaning, a court will construe the language of the contract on its face to determine whether, as a matter of law, the contract is reasonably subject to a construction sufficient to sustain a cause of action...." (Hillsman v. Sutter Community Hospitals (1984) 153 Cal. App.3d 743, 749-750 [200 Cal. Rptr. 605]; accord Beck v. American *473 Health Group Internat., Inc. (1989) 211 Cal. App.3d 1555, 1561 [260 Cal. Rptr. 237].) In this case, the language of the incorporated contract easily can be read to apply only to contractual causes of action: "This agreement shall be governed... by Hong Kong law."
In my view, the majority's mistaken construction of the choice-of-law clause is clear when the language used in the present contract is compared, as Nedlloyd urges us to do, with the language construed by this court in Smith, Valentino & Smith, Inc. v. Superior Court (1976) 17 Cal.3d 491 [131 Cal. Rptr. 374, 551 P.2d 1206]. In that case, this court determined that claims for unfair competition and intentional interference with advantageous business relationships were governed by a choice-of-forum clause as "`actions or proceedings instituted by... [Smith] under this Agreement with respect to any matters arising under or growing out of this agreement. ...'" (Id. at p. 497, italics in the original.) In contrast to the language used by Nedlloyd and Seawinds in their agreement, the contractual language, "arising under or growing out of this agreement," which was used in Smith, explicitly shows an intent to embrace related noncontractual claims, as well as contractual claims. Although similar language was readily available to them, the sophisticated parties in the present case did not draft their choice-of-law clause to clearly encompass related noncontractual causes of action.[2] Therefore, on demurrer and in the absence of parol evidence, I cannot fairly construe the contractual language at issue here to be consistent with the interpretation proposed by Nedlloyd and adopted in the majority opinion. To do so would violate the statutory canon of contract interpretation that "[t]he language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity." (Civ. Code, § 1638.)
Finally, the majority's rule effectively subordinates the intent of the contracting parties to the need for predictability in commercial transactions. The majority strikes this balance despite the fact that our Legislature has commanded otherwise. Under California law, "[a] contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful." (Civ. Code, § 1636.) In contrast to this legislative command, the majority conclusively presumes that choice-of-law clauses entered into between or among commercial entities apply to related noncontractual causes of action regardless of whether the intent of the parties or the contract language (as in this case) shows otherwise. I believe that the departure by the majority from *474 established California law is unwarranted and is unnecessary to further the goals of predictability in the enforcement of contracts and protection of the justified expectations of contracting parties. These goals can be adequately protected within the framework of the current law governing contractual interpretation by enforcing choice-of-law clauses in a manner consistent with the language of the contract and the intent of the parties.
I am keenly aware of the need for predictability in the enforcement of commercial contracts. Nevertheless, although courts and litigants may wish the law were otherwise, not every issue can be conclusively determined at the pleading stage. On the present record, the scope of the choice-of-law clause must be construed in favor of Seawinds.
Mosk, J., concurred.
KENNARD, J., Concurring and Dissenting.
Fueled by advances in technology, communications and global cooperation, trade across state and international borders is vastly greater than in decades past. California occupies a leading position in the field of international trade, and this leadership is of vital importance to the welfare of the state and its residents. As commerce across borders expands, novel legal problems arise, and familiar issues assume renewed significance.
This case involves the effect of a choice-of-law clause in a contract between multinational parties to conduct an international shipping business. I agree with the majority that the parties' agreement, calling for the contract to be interpreted according to Hong Kong law, should be applied by the California courts in determining whether plaintiff, a Hong Kong corporation, has stated a cause of action for breach of the implied covenant of good faith and fair dealing. I disagree, however, with the majority's conclusion that the choice-of-law clause, which provides only that the contract shall be governed by Hong Kong law, unambiguously extends to related noncontractual causes of action and therefore should be applied by the trial court in determining whether the plaintiff has stated a cause of action for breach of fiduciary duty.
I. BACKGROUND
Defendants and petitioners Nedlloyd Lines B.V., Royal Nedlloyd Group N.V., and KNSM Lines B.V. (hereafter collectively Nedlloyd) are interrelated shipping companies based in Rotterdam, the Netherlands. Plaintiff and real party in interest Seawinds Limited (hereafter Seawinds) is a shipping company that was incorporated in Hong Kong in late 1982, with its principal place of business in Redwood City, California.
*475 In 1983, Nedlloyd Lines B.V. entered into a contract to purchase shares in Seawinds. The other parties to the contract were an Oregon corporation, a Hong Kong corporation, a British corporation, three individual residents of California, a resident of Singapore, and Seawinds itself.[1] The agreement's stated purpose was "to establish [Seawinds] as a joint venture company to carry on a transportation operation." The contract contained this choice-of-law provision: "This agreement shall be governed by and construed in accordance with Hong Kong law and each party hereby irrevocably submits to the non-exclusive jurisdiction and service of process of the Hong Kong courts."
Seawinds engaged in the shipping business from April 1983 until October 1984, when it commenced bankruptcy proceedings that are apparently still pending in federal court.
In January 1989, Seawinds sued Nedlloyd,[2] alleging that Nedlloyd had detrimentally interfered with its business, reneged on promises to make capital contributions, and falsely disparaged its operation. The original complaint set forth three causes of action: (1) "Breach of Contract; Breach of Implied Covenant of Good Faith and Fair Dealing"; (2) "Tortious Breach of Implied Covenant of Good Faith and Fair Dealing"; and (3) "Violation of Fiduciary Duties."
Nedlloyd demurred to the complaint on the ground that under Hong Kong law the complaint failed to state a cause of action for breach of the implied covenant, tortious breach of the implied covenant, and breach of fiduciary duties. Nedlloyd also demurred to the second cause of action on the ground that "many of the necessary elements of tortious breach of contract are not pled." With respect to the third cause of action, Nedlloyd demurred on the basis that the complaint failed to allege that Nedlloyd was a majority shareholder, and that, "[i]n addition, if Hong Kong law applies, any fiduciary duties of majority shareholders run only to other shareholders, not to the corporation itself."
The trial court ruled broadly that "California law shall apply in this case." But the court sustained Nedlloyd's demurrer with leave to amend as to all three causes of action, ruling that: (1) the first cause of action should be split into two causes of action; (2) the second cause of action had not alleged a sufficient special relationship; and (3) "no controlling interest sufficient to *476 establish a fiduciary relationship" had been alleged in the third cause of action.
Nedlloyd petitioned the Court of Appeal for a writ of mandate to overturn the trial court's choice-of-law ruling. The Court of Appeal denied the writ petition.[3] It held that the trial court had properly decided to apply California law because Hong Kong, the state whose law was chosen by the parties, had no substantial relationship with the parties or their claims, and because enforcement of the choice-of-law clause would "ero[de] a California law protective of its citizens' rights" in that "Hong Kong law does not recognize the concept of an implied covenant of good faith and fair dealing in contracts whereas California implies such a covenant in every contract." The Court of Appeal also concluded: "Under Hong Kong law, shareholders seemingly owe no fiduciary duties to the company; instead, a majority shareholder might owe a fiduciary duty to another shareholder. In contrast, California law imposes a fiduciary duty on a majority of shareholders or a controlling shareholder to the minority shareholders and the company." This court granted Nedlloyd's petition for review.
Meanwhile, in the trial court, Seawinds had filed an amended complaint, alleging causes of action for: (1) "Breach of Contract"; (2) "Breach of Implied Covenant of Good Faith and Fair Dealing"; and (3) "Violations of Fiduciary Duties." Nedlloyd demurred to the amended complaint on four grounds: (1) the breach of contract cause of action was uncertain; (2) the breach of implied covenant cause of action failed under Hong Kong law; (3) the breach of implied covenant cause of action failed "because the necessary elements of such breach are not pled"; and (4) the cause of action for breach of fiduciary duty "fails to allege any duty or breach."
The trial court overruled the demurrer to the amended complaint, and Nedlloyd once again petitioned the Court of Appeal for a writ of mandate. Upon the Court of Appeal's denial of this second writ application (contemporaneous with its opinion on the first petition), this court granted Nedlloyd's separate petition for review and consolidated it with the related proceeding.
As will be explained, in substance two distinct issues are before us: (1) whether the choice-of-law clause requires the application of Hong Kong law to the implied covenant cause of action; and (2) whether the choice-of-law clause requires the application of Hong Kong law to the breach of fiduciary duty cause of action. I will discuss each issue separately.
*477 II. BREACH OF THE IMPLIED COVENANT
A. Existence of a Conflict
The first step in the analysis of an asserted conflict of laws is to determine whether a choice of law by the court is actually required. In the context of a contractual choice-of-law clause, a conflict is presented only if there is a material difference between the law of the chosen state and the law of the state whose law would apply in the absence of an effective choice by the parties. In this case, the parties agree that if Hong Kong law does not apply, the law of California does.
In its original complaint, Seawinds pleaded two theories of liability breach of contract and breach of the implied covenant of good faith and fair dealing as part of the same cause of action. In the amended complaint, Seawinds separated these theories, pleading each as a cause of action. I analyze them separately.
In its demurrer to the amended complaint, Nedlloyd did not assert that the amended complaint failed to state a cause of action for breach of contract under Hong Kong law. Rather, Nedlloyd challenged the amended complaint's breach of contract allegations only on the ground of uncertainty (Code Civ. Proc., § 430.10, subd. (f)). Thus, the breach of contract cause of action presents no choice-of-law issue at this time.
Seawinds' second theory of liability in the amended complaint is breach of the implied covenant of good faith and fair dealing. In its demurrer, Nedlloyd asserted that this theory of liability fails because Hong Kong law governs the contract and, unlike California law, does not recognize an implied covenant of good faith and fair dealing. Accordingly, this theory of liability does present a choice-of-law issue, but only if, as Nedlloyd asserts, there is a material difference between the relevant law of Hong Kong and California. (See Hurtado v. Superior Court (1974) 11 Cal.3d 574, 580 [114 Cal. Rptr. 106, 522 P.2d 666]; Bos Material Handling, Inc. v. Crown Controls Corp. (1982) 137 Cal. App.3d 99, 105 [186 Cal. Rptr. 740]; New Linen Supply v. Eastern Environmental Controls, Inc. (1979) 96 Cal. App.3d 810, 817, fn. 2 [158 Cal. Rptr. 251].)
Under California law, every contract contains an implied covenant of good faith and fair dealing. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683 [254 Cal. Rptr. 211, 765 P.2d 373].) This implied covenant requires "that neither party do anything which will deprive the other of the benefits of the agreement" (Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) *478 36 Cal.3d 752, 768 [206 Cal. Rptr. 354,