NEDLLOYD LINES v. SEAWINDS LIMITED

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Court of Appeal, First District, Division 1, California.

NEDLLOYD LINES B.V. et al., Petitioners, v. SUPERIOR COURT of San Mateo County, Respondent; SEAWINDS LIMITED, Real Party in Interest.

No. A049718.

Decided: January 31, 1991

Charles S. Donovan, James R. Walsh, Edward M. Keech, Ann S. Crownover, Elizabeth M. Miller, Walsh, Donovan, Lindh & Keech, San Francisco, for petitioners. Thomas R. Fahrner, Michele C. Jackson, Michael R. Hudson, Furth, Fahrner & Mason, San Francisco, for real party in interest.

PROCEDURAL HISTORY

By petition for extraordinary relief petitioners Nedlloyd Lines B.V., Royal Nedlloyd Group N.V. and KNSM Lines B.V. (hereafter collectively Nedlloyd or petitioner) seek to compel respondent, San Mateo County Superior Court, to set aside two orders issued in an action brought against Nedlloyd by real party in interest, Seawinds.   As relevant, the first order, filed March 20, 1990, denied Nedlloyd's motion to dismiss based on the argument that the suit was preempted by the Shipping Act of 1984.1  (46 U.S.C. § 1701–20.)   Although the second order, filed March 21, 1990, sustained Nedlloyd's demurrer to Seawinds' complaint, the trial court had applied California's law to the case rather than the law of Hong Kong as urged by Nedlloyd.

We summarily denied the petition;  however, our Supreme Court granted review and transferred the matter to us with directions to vacate our earlier order and issue an alternative writ.   The order directed us to The Bremen v. Zapata Off–Shore Co. (1972) 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513, Smith, Valentino & Smith, Inc. v. Superior Court (1976) 17 Cal.3d 491, 131 Cal.Rptr. 374, 551 P.2d 1206, Bos Material Handling, Inc. v. Crown Controls Corp. (1982) 137 Cal.App.3d 99, 186 Cal.Rptr. 740, and Gamer v. duPont Glore Forgan, Inc. (1976) 65 Cal.App.3d 280, 135 Cal.Rptr. 230.

When Nedlloyd filed its initial petition, it explained that Seawinds had filed a first amended complaint and that its demurrer to that complaint, which sought reconsideration of the choice of California law as opposed to that of Hong Kong, was still pending in the trial court.

After we issued our alternative writ, we also asked the parties to brief the question whether Nedlloyd's then-pending reconsideration of the choice-of-law ruling warranted denial of the petition.   Nedlloyd not only filed the requested brief, it also filed a new petition challenging respondent's subsequent order overruling its demurrer to the amended complaint.2

FACTS

Seawinds operated three shipping container vessels but is currently undergoing reorganization under the direction of the bankruptcy court in San Francisco.   Seawinds was incorporated in Hong Kong in 1982, but has no office or employees there.   Rather, its headquarters and principal place of business are located in Redwood City, California.   Meetings of the Seawinds' board of directors and all activities with regard to its business took place in the San Francisco Bay area.   Nedlloyd is incorporated in the Netherlands with principal places of business there.   Nedlloyd, however, has been present in California for several years and has engaged in litigation against Seawinds here.

Seawinds sued Nedlloyd alleging causes of action for breach of contract, tortious breach of good faith and fair dealing and violations of fiduciary duties.   The allegations of the complaint 3 recite claims based on a “shareholders' Agreement in Respect of Seawinds Limited” which was made between Seawinds, Nedlloyd and other third parties in March of 1983.   This agreement was drafted in California and was negotiated and executed by Seawinds in California.   It provided that Seawinds would carry on the business of the transportation company and that the parties to the agreement would “use means reasonably available” to ensure the business was a success.   The essence of the complaint is that petitioners 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.”

The claims alleged in the complaint were originally filed against Nedlloyd as pendant claims to an antitrust suit filed in federal court.   In that action, Nedlloyd successfully moved to dismiss the antitrust claims, but not the state law claims, on the ground they were barred by the Shipping Act of 1984.   Subsequently, Seawinds filed the instant action which Nedlloyd removed to federal court alleging federal jurisdiction over the state law claims.   The action was eventually remanded to the state courts.

DISCUSSION

Preemption by the Shipping Act of 1984

 “It is accepted that Congress has the authority, in exercising its Article I powers, to pre-empt state law.   In the absence of an express statement by Congress that state law is pre-empted, there are two other bases for finding pre-emption.   First, when Congress intends that federal law occupy a given field, state law in that field is pre-empted.  [Citation.]  Second, even if Congress has not occupied the field, state law is nevertheless pre-empted to the extent that it actually conflicts with federal law, that is, when compliance with both state and federal law is impossible, [citation], or when the state law ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,’ [citation].”  (California v. ARC America Corp. (1989) 490 U.S. 93, 109 S.Ct. 1661, 1665, 104 L.Ed.2d 86.)   Petitioner concedes that there is no express statement by Congress that state law claims are pre-empted by the Shipping Act of 1984.   The claims involved do not seek to enforce the act and may be resolved with reference to tort and contract principles.   As respondent superior court correctly observed in its order denying Nedlloyd's motion, it has not met the test set out in California v. ARC America Corp., supra.

Choice of Law

Had Seawinds failed to file an amended complaint within the time prescribed in the order sustaining Nedlloyd's demurrer, a final judgment could have been rendered against them.  (5 Witkin, Cal.Procedure (3d ed. 1985) Pleading, §§ 939 and 940, pp. 375–376.)   Thus, when Nedlloyd filed its initial petition in this court, it was premature with regard to the trial court's “choice-of-law” decision.   For that reason alone, we could deny relief;  however, and for the guidance of the parties, we deem it appropriate to discuss the substantive issue.

Nedlloyd's argument that Hong Kong law ought to apply to Seawinds' complaint rests on the fact that its shareholders' agreement contained a choice-of-law provision which stated, “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.” 4

 Enforcement of choice-of-law clauses may be denied if the law chosen by the parties is the law of a place having no substantial relationship to the parties or their claims, or if enforcement of the choice would result in an erosion of a California law protective of its citizens' rights.  (Mencor Enterprises, Inc. v. Hets Equities Corp. (1987) 190 Cal.App.3d 432, 435–437, 441, 235 Cal.Rptr. 464;  see Ashland Chemical Co. v. Provence (1982) 129 Cal.App.3d 790, 795, 181 Cal.Rptr. 340—no enforcement of parties' choice of Kentucky law in an action on a promissory note where Kentucky had no substantial relationship to the dispute even though Kentucky was plaintiff's domicile and the place of contracting.)   The parties and the issues in the case have virtually nothing to do with Hong Kong.5

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.  (See Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 768, 206 Cal.Rptr. 354, 686 P.2d 1158.)   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.  (Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108–111, 81 Cal.Rptr. 592, 460 P.2d 464.)

 Once the choice-of-law contract clause is set aside, the determination of the choice-of-law question is determined by a governmental interest analysis first adopted in Reich v. Purcell (1967) 67 Cal.2d 551, 63 Cal.Rptr. 31, 432 P.2d 727 and most recently applied in Hurtado v. Superior Court (1974) 11 Cal.3d 574, 114 Cal.Rptr. 106, 522 P.2d 666, Bernhard v. Harrah's Club (1976) 16 Cal.3d 313, 128 Cal.Rptr. 215, 546 P.2d 719 and Offshore Rental Co. v. Continental Oil Co. (1978) 22 Cal.3d 157, 148 Cal.Rptr. 867, 583 P.2d 721.   According to that analysis, the court must first determine if California law differs from that of Hong Kong on the questions at issue.   As we have seen, it does.

“Although the two potentially concerned states have different laws, there is still no problem in choosing the applicable rule of law where only one of the states has an interest in having its law applied․  When one of two states related to a case has a legitimate interest in the application of its law and policy and the other has none, there is no real problem;  clearly the law of the interested state should be applied.  (Currie, Selected Essays on The Conflict of Laws (1963) p. 189.)  [Fn. omitted.]  (Hurtado v. Superior Court, supra, 11 Cal.3d at p. 580, 114 Cal.Rptr. 106, 522 P.2d 666.)

“We must therefore examine the governmental policies underlying the ․ laws, preparatory to assessing whether either or both states have an interest in applying their policy to the case.  (Kay, Comments on Reich v. Purcell (1968) 15 UCLA L.Rev. 584, 585.)   Only if each of the states involved has a legitimate but conflicting interest in applying its own law will we be confronted with a true conflicts case.  (Bernhard v. Harrah's Club (1976) 16 Cal.3d 313, 319 [128 Cal.Rptr. 215, 546 P.2d 719].) ․”

“Once [a] preliminary analysis has identified a true conflict of the governmental interests involved as applied to the parties under the particular circumstances of the case, the comparative impairment approach to the resolution of such conflict seeks to determine which state's interest would be more impaired if its policy were subordinated to the policy of the other state.   This analysis proceeds on the principle that true conflicts should be resolved by applying the law of the state whose interest would be the more impaired if its law were not applied.  [Citation.] ․

“[T]his analysis does not involve the court in weighing the conflicting governmental interests in the sense of determining which conflicting law manifest[s] the better or the worthier social policy on the specific issue.   An attempted balancing of conflicting state policies in that sense ․ is difficult to justify in the context of a federal system in which, within constitutional limits, states are empowered to mold their policies as they wish.  [Fn. omitted.]  (Horowitz, The Law of Choice of Law in California—A Restatement (1974) 21 UCLA L.Rev. 719, 753.)  [¶] Rather, the resolution of true conflict cases may be described as essentially a process of allocating respective spheres of lawmaking influence.  (Baxter, Choice of Law and the Federal System (1963) 16 Stan.L.Rev. 1, 11–12.)”  (Offshore Rental Co. v. Continental Oil Co., supra, 22 Cal.3d at pp. 163–165, 148 Cal.Rptr. 867, 583 P.2d 721, internal quotation marks omitted.)

Offshore Rental Co. v. Continental Oil Co., supra, 22 Cal.3d 157, 148 Cal.Rptr. 867, 583 P.2d 721, directs us to consider several factors in determining the proper allocation of spheres of law making influence when we attempt to resolve a true conflict.   These are:

1. Where possible, determine whether the policy underlying state law was more strongly held in the past than now.  (Offshore Rental Co. v. Continental Oil Co., supra, 22 Cal.3d at p. 165, 148 Cal.Rptr. 867, 583 P.2d 721.)

2. Consider whether “one of the competing laws is archaic and isolated in the context of the laws of the federal union, [and if it is] it may not unreasonably have to yield to the more prevalent and progressive law, other factors of choice being roughly equal․  (Freund, Chief Justice Stone and the Conflict of Laws (1946) 59 Harv.L.Rev. 1210, 1216.)”  (Offshore Rental Co. v. Continental Oil Co., supra, 22 Cal.3d at p. 165, 148 Cal.Rptr. 867, 583 P.2d 721, internal quotation marks and italics omitted.)   And consider whether the law is infrequently enforced or interpreted even within its own state.  (Id. at p. 166, 148 Cal.Rptr. 867, 583 P.2d 721.)

3. Finally, another chief criterion in the comparative impairment analysis is the “maximum attainment of underlying purpose by all governmental entities.   This necessitates identifying the focal point of concern of the contending lawmaking groups and ascertaining the comparative pertinence of that concern to the immediate case.”  (Baxter, Choice of Law, supra, 16 Stan.L.Rev. 1, 12, our emphasis.)

 Under these principles, respondent superior court properly applied California law.   Seawinds is a resident of California and Hong Kong;  petitioner is a resident of neither.   California imposes duties on both controlling and majority shareholders and provides remedies for breach of those duties, while Hong Kong does not.   California likewise provides remedies for breach of an implied covenant of good faith and fair dealing.   Even if we assume that Hong Kong has any interest in this case, clearly California's interest in redress to its residents is significant and its law progressive.

Nor do the cases cited by our Supreme Court in the transfer order require a different result.  Bos Material Handling, Inc. v. Crown Controls Corp., supra, 137 Cal.App.3d 99, 186 Cal.Rptr. 740, expressly found it “unnecessary to address choice of law problems” (id. at p. 105, 186 Cal.Rptr. 740) in the case.  Gamer v. duPont Glore Forgan, Inc., supra, 65 Cal.App.3d 280, 135 Cal.Rptr. 230, engage in essentially the same analysis as did the trial court here.   That is, before a choice-of-law provision is applied, the trial court must examine whether there is a sufficient relationship with the selected state and the parties and the subject matter of the contract, and whether the choice-of-law provision would do violence to a declared policy of California.  (Id. at p. 285, 135 Cal.Rptr. 230.)   Although it is true, as the Supreme Court said in Smith, Valentino & Smith, Inc. v. Superior Court, supra, 17 Cal.3d at p. 494, 131 Cal.Rptr. 374, 551 P.2d 1206, that “choice of law provisions are usually respected by California courts,” it is also the case that such provisions may be ignored under the circumstances we have recited.   Gamer v. duPont Glore Forgan, Inc., supra, 65 Cal.App.3d at p. 288, 135 Cal.Rptr. 230 quoted the tests recited in the Restatement Second of Conflict of Laws section 187 with regard to the laws selected by parties to a contract:

“(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.

“(2) 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․”

The trial court did not abuse its discretion in ruling Hong Kong law inapplicable here.

Petitioner urges that the principles set forth in The Bremen v. Zapata Off–Shore Co., supra, 407 U.S. 1, 92 S.Ct. 1907—relating to forum selection clauses but cited by our Supreme Court in its transfer order—should apply to choice-of-law clauses in contracts.   As we have seen, however, our high court has analyzed choice of law under a governmental interest analysis.   In any case, The Bremen case holds forum selection clauses enforceable unless the party opposing enforcement can demonstrate “that enforcement would be unreasonable and unjust, or that the clause was invalid․”  (The Bremen, supra, 407 U.S. at p. 15, 92 S.Ct. at p. 1916.)   Seawinds has met that test.

CONCLUSION

The alternative writ is discharged and the petition denied.

FOOTNOTES

1.   The portion of the order denying Nedlloyd's motion to stay or dismiss on the basis of forum nonconveniens is not challenged here.

2.   By separate order filed this date, we have denied that petition.

3.   Referring to the complaint to which petitioner's demurrer was sustained with leave to amend.

4.   By its terms this provision applies only to contract claims.   Nedlloyd did not contend in its demurrer that Seawinds' tort claim was not governed by California law.   Rather, it argued that the tort allegations did not state a cause of action under California law.   It does not reiterate that argument here.

5.   The trial court found:  “The shareholders' agreement and the charters for Seawinds vessels were drafted in California.   The documents were negotiated and executed by Seawinds in Redwood City, all the meetings of the Board of Directors took place in the San Francisco Bay area.   Finally, Seawinds is undergoing reorganization pursuant to Chapter 11 in San Francisco.   Defendants have also used the California judicial process to enforce its rights against Seawinds.”   In denying Nedlloyd's motion to move the case to Hong Kong on the grounds of forum nonconveniens, the trial court noted that there is ambiguity in the status of Hong Kong law.

STEIN, Associate Justice.

RACANELLI, P.J., and NEWSOM, J., concur.