In Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459 (Nedlloyd), the Supreme Court held a contractual choice-of-law clause will be enforced by California courts where: (1) the chosen state has a substantial relationship to the parties or their transaction, or; (2) there is any other reasonable basis for the parties' choice of law. If either of these tests is met, the parties' choice of law will be enforced unless the chosen state's law is contrary to a fundamental policy of California. (Id. at p. 466.) In Nedlloyd Lines B.V. v. Superior Court (1992) interrelated shipping companies (Nedlloyd) and other parties purchased shares of stock in Seawinds Limited (Seawinds) under a written shareholders agreement. Both Seawinds and one of the purchasing parties were incorporated in Hong Kong. The shareholder agreement provided that it was to be governed and construed according to Hong Kong law. Seawinds sued Nedlloyd, alleging breach of the shareholders agreement. Nedlloyd demurred, arguing that Hong Kong law applied. In opposition, Seawinds contended that California law should apply. The trial court applied California law and sustained demurrers to both the original and first amended complaints. After the Court of Appeal denied petitions for a writ of mandate directing the application of Hong Kong law, the Supreme Court granted review. The Nedlloyd court concluded that California courts apply the principles set out in the Restatement Second of Conflict of Laws, section 187, which reflect a strong policy favoring enforcement of conflict of law provisions. (Nedlloyd, supra, 3 Cal.4th at pp. 464-465.) "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.'" ( Id. at p. 465.) "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. 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. 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." (Nedlloyd, supra, 3 Cal.4th at p. 466, ) The Supreme Court found a substantial relationship because the case involved two parties incorporated in Hong Kong, the jurisdiction whose law was to govern. ( Nedlloyd, supra, 3 Cal.4th at p. 467.) The fact that two Hong Kong corporations were parties also satisfied the second prong of the Nedlloyd test, a "reasonable basis" for the choice of law provision. (Ibid.) In the disposition, the court reversed the judgments in the consolidated proceedings and remanded the matter to the Court of Appeal with instructions to issue a peremptory writ of mandate directing the trial court to reconsider its ruling on Nedlloyd's demurrer to Seawinds' first amended complaint in light of applicable Hong Kong law. ( Id. at pp. 471-472.) The Supreme Court repeatedly emphasized that it was deciding the enforceability of a choice-of-law provision contained in a commercial contract that was fully and voluntarily negotiated at arm's length by sophisticated commercial parties. (Id., pp. 464 "arm's-length", 468 "sophisticated, commercial entities", 470 "commercially sophisticated parties", 471 "voluntarily negotiated," "fully negotiated".) It also noted that the rule governing the "closely related issue of the enforceability of a contractual choice-of-forum provision" is that such provisions are enforced if they appear "'in a contract entered into freely and voluntarily by parties who have negotiated at arm's length.'" (Id., p. 464.) The Supreme Court interpreted a provision: "'This agreement shall be governed by and construed in accordance with Hong Kong law . . . .'" (3 Cal.4th at pp. 468-469.) The Supreme Court rejected a narrow construction of that clause, explaining: "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." (Id., p. 469.) Because that agreement created the relationship between the parties, Hong Kong law must govern the legal duties created by or emanating from that relationship. (Ibid.) The first step in the analysis is "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. 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. 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 . . . ." If California has a materially greater interest than the chosen state, the choice of law shall not be enforced . . . ." (Nedlloyd Lines B.V., p. 466.) The California Supreme Court adopted the Restatement Second of Conflict of Laws, section 187, subdivision (2) test for determining the enforceability of a choice of law contractual provisions: "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 of the Restatement, would be the state of the applicable law in the absence of an effective choice of law by the parties." In Nedlloyd Lines B.V. v. Superior Court (1992) the operative language for the choice-of-law provision used the phrase, "governed by." The Supreme Court emphasized this language in holding, "When a rational business person 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 intends that law to apply to all disputes arising out of the transaction or relationship." ( Id. at p. 469.)