Date: 11.06.2003
Country: USA
Number: 02-20166
Court: US Court of Appeals for the Fifth Circuit
Parties: BP Oil International and BP Exploration&Oil INc v. Empresa Estatal Petroleos de Ecuador (PetroEcuador et al.
A Texan company (the Seller) entered into a contract with an Ecuadorian company (the Buyer) for the sale of gasoline. The contract stated that the gasoline was to be delivered "CFR La Libertad, Ecuador", and contained the following choice of law clause "Jurisdiction: Laws of the Republic of Ecuador". Another provision of the contract required that the gasoline have a specified maximum gum content. Before the gasoline was loaded on the ship, an independent inspector, designated by Buyer, certified that its gum content was within contractual limits. However, after its arrival in Ecuador; the gasoline was again tested and found to contain an excessive gum content. As a consequence Buyer rejected the goods. Seller brought an action before the federal district court of Texas which decided that Ecuadorian law applied to the contract and granted summary judgment for Buyer.

On appeal, the Court of Appeals noted that the parties had their places of business in two
different States which are parties to CISG and that the sales contract was therefore governed by CISG (Art. 1(1)(a) CISG), unless the parties had excluded its application according to Article 6 CISG. The Court observed that CISG was the law of Ecuador, and that the choice of law clause was not sufficiently specific to exclude the application of CISG in favor of Ecuadorian domestic sales law. The Court, quoting a U.S. legal writer, stated "If the parties decide to exclude the Convention, it should be expressly excluded by language which states that it does not apply and also states what law shall govern the contract." According to the Court, such "an affirmative opt-out requirement promotes uniformity and the observance of good faith in international trade, two principles that guide interpretation of the CISG" pursuant to Art. 7 (1).

On the merits of the dispute, the Court noted that "CFR" is part of the 1990 INCOTERMS issued by the International Chamber of Commerce, which the CISG incorporates through Article 9(2). Indeed, according to the Court even if the usage of INCOTERMS is not global, the fact that they are well known in international trade means that they are incorporated through Article 9(2). In a CFR transaction, the risk of loss passes to the buyer once the goods "pass the ship's rail" at the port of shipment. The Court stated that pursuant to Article 36(1), Seller fulfilled its obligations when the inspector certified the goods as conforming prior to shipment, and that under Article 39(1), Buyer ought to have discovered any lack of conformity after the inspection and prior to the shipment of the cargo. According to the Court, Seller could still be found to have breached the contract under Article 40 CISG, notwithstanding the inspection of the goods prior to shipment, if it knew or could not have been unaware that the gasoline was defective prior to the passing of the risk of loss to Buyer. As a consequence the Court remanded the case to the District Court for clarification of this particular point.