Opinion ID: 1349036
Heading Depth: 3
Heading Rank: 2

Heading: Choice-of-law Standards

Text: Although this court has not directly addressed the enforceability of a choice-of-law provision in a contract, the issue has been the subject of a number of appellate court decisions. When a contract specifies the parties' choice of law, California courts have enforced the contractual choice-of-law clause, subject to two qualifications. First, the chosen state must bear some substantial relationship to the parties or the contract, or there must be some other reasonable basis for the parties' choice. Second, application of the chosen state's law must not violate a strong policy of California law. These standards have been adopted, with some variations in language and emphasis, by the overwhelming majority of California decisions. (See Mencor Enterprises, Inc. v. Hets Equities Corp. (1987) 190 Cal. App.3d 432, 435-436 [235 Cal. Rptr. 464] [strong policy and substantial relationship]; Hall v. Superior Court (1983) 150 Cal. App.3d 411, 417 [197 Cal. Rptr. 757] [strong policy]; Ashland Chemical Co. v. Provence (1982) 129 Cal. App.3d 790, 794 [181 Cal. Rptr. 340] [strong policy and substantial relationship]; Bos Material Handling, Inc. v. Crown Controls Corp., supra, 137 Cal. App.3d 99, 108 [substantial relationship]; Gamer v. duPont Glore Forgan, Inc. (1976) 65 Cal. App.3d 280, 287 [135 Cal. Rptr. 230] [strong policy and substantial relationship]; Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1971) 20 Cal. App.3d 668, 673 [97 Cal. Rptr. 811] [strong policy and substantial relationship]; Ury v. Jewelers Acceptance Corp. (1964) 227 Cal. App.2d 11, 18, 20 [38 Cal. Rptr. 376] [strong policy].) The federal appellate courts, in applying California conflicts law, have also adhered to these rules. ( Consul Ltd. v. Solide Enterprises, Inc. (9th Cir.1986) 802 F.2d 1143, 1146-1147 [strong policy and substantial relationship]; S.A. Empresa, etc. v. Boeing Co. (9th Cir.1981) 641 F.2d 746, 749 [same]; Sarlot-Kantarjian v. First Pa. Mortg. Trust (9th Cir.1979) 599 F.2d 915, 917 [same]; Foreman v. George Foreman Associates, Ltd. (9th Cir.1975) 517 F.2d 354, 357 [strong policy].) The substantial relationship and strong policy standards of California law are similar to the approach of the Restatement Second of Conflict of Laws, section 187, subdivision (2). [6] Although some California courts have referred to this part of the Restatement Second with approval, they have never expressly adopted it. [7] As noted above, this court has not previously and directly determined the enforceability of a choice-of-law clause in a contract. The court has, however, considered the related problem of contractual forum selection clauses. In Smith, Valentino & Smith, Inc. v. Superior Court (1976) 17 Cal.3d 491, 496 [131 Cal. Rptr. 374, 551 P.2d 1206], the court held that forum selection clauses are valid and may be given effect in the court's discretion and in the absence of a showing that enforcement of the clause would be unreasonable. Citing section 187 of the Restatement Second of Conflict of Laws, the court observed in passing that choice of law provisions are usually respected by California courts. (17 Cal.3d at p. 494.) In following the general approach of the Restatement Second, California courts are within the jurisprudential mainstream. [8] In providing that the parties' choice of a state's law to govern a contract will be respected unless either the parties or the contract have no substantial relationship to the chosen state and the parties have no other reasonable basis for the choice, or application of the chosen law would violate a strong policy of the state of the law that would otherwise apply, California choice-of-law analysis reconciles differing and important interests that are in tension in many cases. The first of these interests is party autonomy. Party autonomy means that the parties to a contract are free to select the law that governs the contract. (Scoles & Hay, Conflict of Laws (2d ed. 1992) § 18.1, p. 657.) A basic principle of contract law is that contracts should be interpreted to give effect to the intentions of the parties (Civ. Code, § 1636), and the concept of party autonomy implements that principle in the context of choice-of-law clauses. But to allow parties a completely unrestrained choice of the law they wish to apply to a contract would have unacceptable results. It would license parties to a contract to evade at will the law of the state in which they reside and conduct their activities; they could make contracts, enforceable in their state of residence, that had no substantial connection to the state of the chosen law and that violated the law of the state that would otherwise apply in the absence of a choice-of-law clause. In other words, to allow unrestricted party autonomy in the selection of the governing law would lead to a state's loss of control over the law of contracts and over the activities governed by that law. Thus, contractual choice-of-law analysis recognizes both the parties' interest in autonomy and the interest of a state in applying its own law to contracts that have a substantial connection to that state. Accordingly, California cases recognize that the ability of parties to select the law that governs a contract should be limited to situations in which the state of the chosen law has some substantial connection to the parties or the transaction, or to situations in which the parties have some other reasonable basis for their choice, and in which enforcement of the chosen law will not defeat an important policy of the law of the state that would otherwise apply. (See, e.g., Ashland Chemical Co. v. Provence, supra, 129 Cal. App.3d at p. 794; Gamer v. duPont Glore Forgan, Inc., supra, 65 Cal. App.3d at pp. 287-289.) Application of these standards to this case demonstrates that the parties' choice of Hong Kong law governs Seawinds' cause of action for breach of the implied covenant of good faith and fair dealing. As I shall explain, enforcement of the choice-of-law clause here is appropriate because Hong Kong has a substantial connection to the parties and enforcement of the clause will not defeat an important policy of the law of California, the state whose law would otherwise apply.