Will a California court apply the law the contract chooses?
Usually, under a test the Supreme Court took from the Restatement: in determining the enforceability of arm's-length contractual choice-of-law provisions, California courts apply the principles of Restatement (Second) of Conflict of Laws section 187, which reflects a strong policy favouring enforcement (Nedlloyd). Two statutes cut across that. Civil Code § 1646.5 lets parties to a transaction of at least $250,000 choose CALIFORNIA law whether or not the transaction bears any reasonable relation to California, but expressly not for labour or personal-services contracts or consumer transactions. Labor Code § 925 forbids an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision depriving the employee of the substantive protection of California law with respect to a controversy arising in California, or requiring the employee to adjudicate outside California a claim arising in California; such a provision is VOIDABLE by the employee, and if voided the dispute is adjudicated in California under California law. Section 925 applies to a contract entered into, modified or extended on or after January 1, 2017 (§ 925(f)). Nedlloyd restates the test as follows: the court first asks whether the chosen state has a substantial relationship to the parties or their transaction, or whether there is any other reasonable basis for the choice; if neither, "that is the end of the inquiry, and the court need not enforce the parties' choice of law"; if either test is met, the court "must next determine whether the chosen state's law is contrary to a fundamental policy of California", and "[i]f there is no such conflict, the court shall enforce the parties' choice of law": enforcement at that point is mandatory, not discretionary; only if there is a fundamental conflict does the court go on to ask whether California has a materially greater interest than the chosen state in the determination of the particular issue, and only then is the choice not enforced. Nedlloyd itself ENFORCED the clause: the court held a Hong Kong choice-of-law clause in a fully negotiated commercial contract "fully enforceable" and broad enough to reach claims for breach of the implied covenant and breach of fiduciary duty arising out of the contract, reversed the judgments of the Court of Appeal, and remanded with instructions to direct the trial court to reconsider the demurrer under Hong Kong law. With no effective choice, Civil Code § 1646 interprets the contract by the law of the place of performance, or of the place of making if no place of performance is indicated. Section 1646.5 also yields to the contrary provisions of Commercial Code § 1301(c) (§ 1646.5, third exclusion), and an employee enforcing § 925 may be awarded reasonable attorney's fees on top of injunctive and other relief (§ 925(c)). Its forum-side companion is Code of Civil Procedure § 410.40: a foreign corporation or nonresident that chose California law in a transaction of at least $1,000,000 and agreed to submit to California courts may be sued here.
The trap
The choice-of-law clause is the last line of defence for terms California voids, and for employees it fails first: § 925 lets an employee who primarily resides and works in California void the clause (unless the employee was in fact individually represented by counsel in negotiating it, § 925(e)), and 'adjudication' expressly includes arbitration (§ 925(d)), so an out-of-state arbitration seat does not escape it. For everyone else, Restatement § 187(2), which Nedlloyd adopts, asks whether applying the chosen law 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; nothing quoted here establishes which California statutes a court has held fundamental for that purpose.
10 authorities
The words that state the rule
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 [f] (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 [f] (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.”
- statuteCal. Civ. Code § 1646.5enactment date not established
The words that state the rule
Notwithstanding Section 1646, the parties to any contract, agreement, or undertaking, contingent or otherwise, relating to a transaction involving in the aggregate not less than two hundred fifty thousand dollars ($250,000), including a transaction otherwise covered by subdivision (a) of Section 1301 of the Commercial Code, may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not the contract, agreement, or undertaking or transaction bears a reasonable relation to this state. This section does not apply to any contract, agreement, or undertaking (a) for labor or personal services, (b) relating to any transaction primarily for personal, family, or household purposes, or (c) to the extent provided to the contrary in subdivision (c) of Section 1301 of the Commercial Code. This section applies to contracts, agreements, and undertakings entered into before, on, or after its effective date; it shall be fully retroactive. Contracts, agreements, and undertakings selecting California law entered into before the effective date of this section shall be valid, enforceable, and effective as if this section had been in effect on the date they were entered into; and actions and proceedings commencing in a court of this state before the effective date of this section may be maintained as if this section were in effect on the date they were commenced.
- statuteCal. Lab. Code § 925enactment date not established
The words that state the rule
(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: (1) Require the employee to adjudicate outside of California a claim arising in California. (2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California. (b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.
The words that state the rule
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.
- statuteCal. Civ. Code § 1646enactment date not established
The words that state the rule
A contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made.
- statuteCal. Lab. Code § 925enactment date not established
The words that state the rule
(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.
- statuteCal. Civ. Proc. Code § 410.40enactment date not established
The words that state the rule
Any person may maintain an action or proceeding in a court of this state against a foreign corporation or nonresident person where the action or proceeding arises out of or relates to any contract, agreement, or undertaking for which a choice of California law has been made in whole or in part by the parties thereto and which (a) is a contract, agreement, or undertaking, contingent or otherwise, relating to a transaction involving in the aggregate not less than one million dollars ($1,000,000), and (b) contains a provision or provisions under which the foreign corporation or nonresident agrees to submit to the jurisdiction of the courts of this state. This section applies to contracts, agreements, and undertakings entered into before, on, or after its effective date; it shall be fully retroactive. Contracts, agreements, and undertakings selecting California law entered into before the effective date of this section shall be valid, enforceable, and effective as if this section had been in effect on the date they were entered into; and actions and proceedings commencing in a court of this state before the effective date of this section may be maintained as if this section were in effect on the date they were commenced.
The words that state the rule
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.
The words that state the rule
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.
- statuteCal. Lab. Code § 925enactment date not established
The words that state the rule
(d) For purposes of this section, adjudication includes litigation and arbitration. (e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied. (f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.