Opinion ID: 1349036
Heading Depth: 3
Heading Rank: 4

Heading: Nature and Strength of State's Interest

Text: As I have explained, California's rule that application of the chosen law must not violate a strong policy of the state whose law would otherwise apply is similar to the Restatement Second of Conflict of Laws' fundamental policy rule. That rule provides that the law of the state chosen by the parties will be applied unless 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 [section] 188, would be the state of the applicable law in the absence of an effective choice of law by the parties. (Rest.2d Conf. of Laws, § 187, subd. (1)(b).) Under section 188 of the Restatement Second, the state of the applicable law is the state that has the most significant relationship to the transaction and the parties.... (Rest.2d Conf. of Laws, § 188, subd. (1).) In this case, the parties agree that in the absence of a choice-of-law clause, California law would apply. I assume for argument's sake that this is correct. Under the Restatement Second of Conflict of Laws, then, the task is to decide whether California's interest in determining the particular issue is materially greater than Hong Kong's interest and, if so, whether application of Hong Kong's law would be contrary to a fundamental policy of California. Because, as I explain below, California's interest in enforcing its substantive law is not materially greater than Hong Kong's, I need not reach the fundamental policy issue. I first assess the nature and strength of California's interest in applying its substantive law to the transaction at issue here. California's interests, however, are not confined to those expressed in its substantive contract rules. As I mentioned earlier, California also has a significant interest in respecting and promoting party autonomy in matters affecting the interpretation and enforcement of contracts. When the parties have by contractual stipulation chosen to have their agreement governed by a law other than California's, our state's separate interests in enforcing its substantive law and in respecting party autonomy are placed in competition with each other. Therefore, to determine California's actual interest in applying its law to override the parties' choice-of-law agreement, I analyze both of the relevant California interests, and then weigh the one against the other. First, I assess the strength of the state's interest in enforcing the legal rule at issue in this particular case. As mentioned earlier, California law deems every contract to contain an implied-in-law duty of good faith and fair dealing. Our state's law has long recognized this obligation (see, e.g., Universal Sales Corp. v. Cal. etc. Mfg. Co. (1942) 20 Cal.2d 751, 771 [128 P.2d 665]); it has also been adopted by the Restatement Second of Contracts (Rest.2d Contracts, § 205) and by the majority of American jurisdictions (see Foley v. Interactive Data Corp., supra, 47 Cal.3d 654, 683 [hereafter Foley ]). California courts have enforced the implied covenant of good faith and fair dealing in a variety of circumstances, including insurance contracts, employment contracts, contracts to sell real property, and ordinary commercial contracts. This court observed in Foley : Initially, the concept of a duty of good faith developed in contract law as `a kind of safety valve to which judges may turn to fill gaps and qualify or limit rights and duties otherwise arising under rules of law and specific contract language.' [Citations.] ( Id. at p. 684.) This court has also recognized, however, that breach of the implied covenant has legal significance that varies with the context of the contract. For example, this court has held that breach of the covenant of good faith by an insurer gives rise to tort remedies, which may include punitive damages. ( Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818-819 [169 Cal. Rptr. 691, 620 P.2d 141] (hereafter Egan ).) On the other hand, we have declined to extend tort remedies for breach of the implied covenant to breaches of employment contracts. ( Foley, supra, 47 Cal.3d 654.) In Egan, the court emphasized the inherently unbalanced relationship of insurer and insured, and observed that the adhesive nature of insurance contracts places the insurer in a superior bargaining position. ( Egan, supra, 24 Cal.3d at p. 820.) The court pointed out that insurers are purveyors of a vital, quasi-public service, and that insureds do not seek to obtain commercial advantage but protection against calamity. ( Id. at pp. 819-820.) The court also observed that `[i]nsurers hold themselves out as fiduciaries, and with the public's trust must go private responsibility consonant with that trust.' ( Id. at p. 820.) By contrast, in Foley the court reasoned that there were significant differences between employer-employee relationships and insurer-insured relationships that justified allowing tort remedies in the one context but not the other. ( Foley, supra, 47 Cal.3d at p. 689.) The court recognized, among other considerations, that the role of the employer differs from that of the `quasi-public' insurance company because the employer is not providing a public service. ( Id. at p. 692.) The court stressed that, as compared to the insurance situation, the interests of employer and employee are most frequently in alignment, and thus the need to place [additional] disincentives on an employer's conduct ... simply does not rise to the same level as that created by the conflicting interests at stake in the insurance context. ( Id. at p. 693.) And the court underscored that predictability of the consequences of actions related to employment contracts is important to commercial stability. ( Id. at p. 696.) These distinctions indicate that although the state has an interest in enforcing the implied covenant of good faith and fair dealing in every contract, the state's interest is stronger when the covenant acts to protect weaker parties in an inherently unbalanced relationship  typically a relationship in which one party enjoys a superior bargaining position so that it is able to dictate the terms of the agreement  and the weaker party seeks not profit but an essential service. Conversely, the state's interest in enforcing the implied covenant is less compelling when the parties are sophisticated business entities of apparently equal bargaining power that have struck a bargain that is tailored to their particular needs, evidently negotiated and drafted by experienced counsel, and made for no motive other than profit. This case concerns a contract between multiple sophisticated business entities engaged in transoceanic shipping; the shareholders' agreement is not a standard form contract, but on its face is drawn to meet the particular needs of the parties, who contemplated large-scale capital investment; commercial advantage was the entire motive behind the contract; and Seawinds seeks damages of $50 million in lost profits for the alleged breaches of the contract's express terms and the implied covenant. Under these circumstances, I have no difficulty concluding, even at the pleading stage, that California's interest in enforcing the implied covenant of good faith and fair dealing is considerably less compelling here than in those contexts in which the covenant acts to protect parties with little bargaining power who seek advantages other than profit. But this does not end the inquiry into California's interest. There is another interest of California that is implicated: respecting and enforcing party autonomy. As I have shown, the value served by enforcing a choice-of-law provision is that of party autonomy. Party autonomy itself serves the important and closely related goals of protecting the parties' justified expectations, and promoting predictability. Generally, these goals are important in every type of contract. But they are not of equivalent importance in every type of contract. Predictability has special importance in the commercial context. This court observed in Foley : [P]redictability about the cost of contractual relationships plays an important role in our commercial system. ( Foley, supra, 47 Cal.3d at p. 683.) Nedlloyd argues that the needs for predictability and protection of the justified expectations of the parties possess even greater force in the international business context. The United States Supreme Court has endorsed this position in a closely related context, stating that a choice-of-forum provision is an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction. ( Scherk v. Alberto-Culver Co. (1974) 417 U.S. 506, 516 [41 L.Ed.2d 270, 279, 94 S.Ct. 2449]; accord The Bremen v. Zapata Off-Shore Co. (1972) 407 U.S. 1, 9, 15-16 [32 L.Ed.2d 513, 519-520, 523-524, 92 S.Ct. 1907].) As the high court has observed: The expansion of American business and industry will hardly be encouraged if, notwithstanding solemn contracts, we insist on a parochial concept that all disputes must be resolved under our laws and in our courts.... We cannot have trade and commerce in world markets and international waters exclusively on our terms.... ( The Bremen v. Zapata Off-Shore Co., supra, 407 U.S. at p. 9 [32 L.Ed.2d at pp. 519-520.) Similarly, due respect by California courts for contractual choice-of-law provisions will assist California's resident businesses and industries to expand and prosper. The desirability of recognizing the international aspects of commercial transactions is underscored when one considers the accelerating frequency of such transactions. In the past few decades, there has been a dramatic increase in the volume and complexity of transactions with transactional elements, especially business and commercial activity.... [T]ransactions with international elements are now routine. (Chow, Limiting Erie in a New Age of International Law: Toward a Federal Common Law of International Choice of Law, supra, 74 Iowa L.Rev. 165, 192-193 (fns. omitted).) As I have noted at the outset, California occupies a position of leadership in international trade, [11] and it is in the interest of this state and its residents that transactions with international aspects not be discouraged. The reasons for giving effect to the parties' choice of law are compelling when the courts are concerned with a sophisticated transactional business transaction. When, as here, the parties to a lawsuit are large-scale international business entities of apparently equal bargaining power seeking commercial advantage, the case does not implicate the concerns the law properly has for individuals and smaller entities that may be offered contractual terms for a vital service or product on a take-it-or-leave-it basis by a party with greater economic power. In this case, California's interest in respecting the parties' choice-of-law agreement is at least as strong as its interest in applying its substantive law to the transaction at issue. Because, on balance, honoring the parties' choice of governing law will serve California's interests as well or better than overriding that choice, California should not be deemed to have a materially greater interest than Hong Kong in determining whether the amended complaint states a cause of action for breach of an implied covenant of good faith and fair dealing. Accordingly, consideration of the pertinent factors in this context leads me to conclude that California has no substantial interest in applying its law to Seawinds' cause of action for breach of the implied covenant of good faith and fair dealing.