The Panama-flagged motor vessel Nervion was owned by Sheldon Ship Co Inc (Sheldon). On 8 December 1982, while the Nervion was in Norrköping, an agreement was entered into between Sheldon and the International Transport Workers' Federation (the ITF). The agreement included an undertaking by Sheldon to employ seafarers in accordance with the terms of the ITF Collective Agreement. On the same day, the six seafarers employed on the Nervion, namely BA, JB, AK, CO, JG, and KK, and Sheldon concluded individual employment agreements which provided that the 'current ITF Collective Agreement shall be considered to be incorporated into and to form part of this contract'. On 30 December 1982, MB was employed on the Nervion. No written employment agreement was drawn up.

After their employment on the ship ended, BA, JB, AK, CO, JG, KK, and MB brought an action against Sheldon at the Göteborgs District Court and demanded payment of wages. In support of their cause of action, the individual employment contracts and ITF agreements were invoked. For the amounts claimed, a maritime lien was claimed in accordance with s 244 of the Maritime Code (the Code). Sheldon claimed that it was not bound by the ITF agreement and the individual employment agreements that referred to this. During the trial, BA, JB, CO, JG, and MB transferred their claims against Sheldon to the ITF, which then brought an action in their place.

Sheldon claimed that the collective agreement, the special agreement, and the individual employment agreements were invalid, and that the matter should be assessed in accordance with Panamanian, or alternatively English, law. The plaintiffs claimed that Swedish law must be applied. In support of this, they relied on the provision in s 259.1 of the Code that Swedish law shall be applied when a maritime lien over ships referred to in Ch 11 of the Code is invoked before a Swedish authority. A basic precondition for a maritime lien in connection with a wage claim is that the agreement establishing the maritime lien is valid. The question of the validity of the agreement should therefore be assessed in accordance with s 259 of the Code in accordance with Swedish law.

The District Court applied Panamanian law and held that the seafarers' claims should be dismissed. The ITF appealed to the Court of Appeal for Western Sweden. The Court of Appeal agreed with the District Court's assessment that the circumstances of the case were not such that there are reasons to deviate from the principle that the law of the flag (Panamanian law) governed the legal relationship between Sheldon and the crew of the Nervion. The Court of Appeal thus confirmed the District Court's ruling.

The ITF appealed to the Supreme Court.

Held (by a majority): Appeal dismissed.

To begin with, the question arises according to which country's law the question of the validity of employment contracts is to be assessed. The ITF has argued that Swedish law is applicable, while Sheldon has argued that primarily Panamanian law, as the law of the flag, and secondarily English law should be applied. In support of the application of Swedish law in the present case, the ITF has argued that both Sheldon and Nervion Shipping Ltd lacked an independent business purpose and independent management, and also had too little share capital to be able to operate shipping operations; that the vessel was in fact owned by Swedish citizens, who have inserted Nervion Shipping Ltd or Sheldon as an independent subject in order to avoid the application of Swedish law; that the shipping business has been run from Sweden; that the ship during the relevant time travelled to and from Swedish ports; that the agreements in question were entered into in Sweden; and that the ship also otherwise had a close connection to Sweden. The ITF has further argued that Swedish law should be applied in examining the question of whether the blockades taken constitute permissible industrial action, even if the legal relationship between the parties is otherwise to be assessed in accordance with foreign law.

With regard to the choice of law, the starting point must be that the question of the validity of the individual employment contracts must be examined in its entirety according to one and the same legal system. Different elements of significance in this examination must thus in principle be assessed according to the same law. As regards the legal relationship between shipowners and employees on board, Swedish private international law has long considered the principle that the law of the State in which the ship is registered - the law of the flag - should apply. In support of upholding this principle, several reasons can be invoked. It can be assumed that there is in general a real connection between the ship and the State of registration, which has been the precondition for registration. This connection consists primarily of the ship being wholly or partly owned by a legal entity that is domiciled in the State of registration, or that such a legal entity has a decisive influence over the ship's operation. The State where a ship is registered may also be assumed, as the ship's home country, to generally exercise certain jurisdiction and control over the ship. As a rule, applying the law of the flag to the legal relationship between shipowners and onboard employees should also be in line with what applies in most other countries; such an application avoids that different rules become applicable, depending on the country in which a dispute is tried.

What has been stated above also applies in principle to ships under flags of convenience, regardless of the specific reason for the registration. However, it must be assumed that in the case of such vessels there is more scope to deviate from the principle of the law of the flag as the governing law.

The connection which as a rule exists between a ship and the State in which it is registered may consist of the ownership belonging to a legal person which is to be considered a resident of the State of registration. This is the case if a limited liability company or other legal person is formed and registered there, even if the shares or corresponding shares are to a greater or lesser extent owned by persons who are foreigners in relation to that State.

The investigation in the case shows that Sheldon was formed in accordance with the provisions of Panamanian law and was registered in Panama as a limited company. This company formation cannot be disregarded on the grounds that it would constitute a sham. The fact that Swedish legal entities may have owned shares in the company or otherwise had a dominant influence over the company's operations cannot give rise to any other assessment.

This means that the question of whether the employment contracts are invalid is to be judged under Panamanian law as the law of the flag. As is clear from the foregoing, this position has also decided that various elements, which are important in examining the question of invalidity, must be assessed in accordance with Panamanian law, unless special reasons require otherwise.

The ITF argues that Swedish law should be applied regarding the admissibility of industrial action. The ITF also argues that the question of the admissibility of industrial action constitutes a preliminary question in the case and that the application of Panamanian law to the question would clearly be contrary to the principles of the Swedish legal order.

This Court finds that the six individual employment agreements entered into on 8 December 1982 between Sheldon and BA, JB, CO, JG, AK, and KK are invalid under Panamanian law. The Panamanian labor law of the Código de Trabajo contains a detailed regulation of the right to use industrial action in the labour market, including the conditions for taking industrial action and the formal procedure for resorting to such action. Admittedly, the provisions mean that the right to resort to industrial action is more limited than under Swedish law. Even under Panamanian law, however, there is a principled freedom to form trade unions and to take industrial action to assert trade union interests. Panama has also acceded to several Conventions in the field of labour law.

It may be assumed that on an application of Swedish law, a non-contractual industrial action in principle does not cause an employment law agreement entered into under the influence of such a measure to be considered invalid. However, this fact cannot mean that, now that Panamanian law is being applied, the annulment of the agreements in question must be regarded as contrary to the principle of public policy.

Nor are there any other circumstances which cause an application of Panamanian law leading to the invalidity of the agreements in accordance with what has been stated above to be considered to be manifestly incompatible with the principles of the legal system in this country.

In view of the above, the action of the ITF cannot be upheld.

Bengtsson J, dissenting: For the reasons stated by the majority, the law of the flag State should in principle be applied to the legal relationship between shipowners and onboard employees, and there are not sufficient reasons to deviate from this principle in the employment agreements in question. Such a position may, in particular regarding ships under flags of convenience, mean that legal rules that deviate from Swedish law in significant respects become applicable to contractual relations with a clear connection to Sweden. An application of the law of the flag can lead to results that, from a Swedish point of view, seem surprising or directly offensive.

It seems highly doubtful whether, under Panamanian law, the employment contracts resulting from the industrial action would be invalid. This would presuppose that the Panamanian legal text would be consistently interpreted to the detriment of workers on a number of unclear points. Although Panamanian labour law has a special structure, no evidence has emerged that such an interpretation would apply. On the contrary, it has been emphasized by Sheldon that the Panamanian legislation, which adheres to several international Conventions in the field of labour law, would not show any attitude that deviates markedly from the Swedish one.

The action of the ITF should therefore be upheld.