06 Civ. 3972 (LTS)(JCF)
U.S. District Court, Southern District of New York
Cedar Petrochemicals, Inc. v. Dongbu Hannong Chemicacl Co., Ltd.




A Korean seller and a US buyer entered into a contract for the sale of a certain quantity of liquid phenol which was to meet certain specifications for color and to be resold to a third party (a Spanish company). Pursuant to the agreement, the phenol would be inspected by a “mutually acceptable independent surveyor whose findings as to quantity/quality …are final and binding on both parties.” The phenol was transferred to the vessel designated by the buyer in Korea and tested before departure. As the tests had established that the phenol met the specifications required, the buyer paid the seller and delivered the goods to the final destination indicated by the third party. When the ship arrived at its final destination in Europe the phenol was again tested and found to be off specification. As a result, the US buyer brought an action against the seller and, during proceedings, it asked the Court to be allowed to amend its pleading in order to provide evidence of the seller's liability for breach of contract under CISG and to include the third party as plaintiff in the proceedings.

The Court found that the CISG was applicable as buyer and seller have their places of business in different Contracting States (Art. 1(1)(a) CISG). The Court additionally found that there was no indication that the parties had opted out of CISG pursuant to its Art. 6.

Whereas the Court found that the plaintiff's pleading could be amended in order to make it possible to demonstrate whether the seller was liable for breach of contract under CISG, it denied the same result with respect to the buyer's claim to include the third party as plaintiff in the proceedings. In reaching this conclusion, the Court pointed out that CISG addresses only rights of buyer and seller in a transaction and does not cover any right or claim by a third party.



JAMES C. FRANCIS IV, United States Magistrate Judge.
*1 Cedar Petrochemicals, Inc. (“Cedar”) has brought breach of contract and related claims against Dongbu Hannong Chemical Co., Ltd. (“Dongbu”) in connection with a sale of liquid phenol. Cedar now moves by letter application to amend its complaint pursuant to Rule 15 of the Federal Rules of Civil Procedure to (1) delete claims of negligence and fraud; (2) assert the applicability of the United Nations Convention on Contracts for the International Sale of Goods (the “CISG”); and (3) add Ertisa, S.A. (“Ertisa”) as a plaintiff. The motion is granted in part and denied in part.


In April 2005, Cedar, a New York corporation with its principal place of business here, and Ertisa, a Spanish corporation, entered into a contract pursuant to which Cedar would sell Ertisa 4,000 metric tons of liquid phenol for delivery “CFR Rotterdam” in the second half of May. The phenol was to meet certain specifications for color. (Proposed Amended Complaint (“PAC”), ¶¶ 2, 5, 14-15 & Exh. A). Cedar then sought to purchase phenol in order to fulfill its contract with Ertisa, and on May 17, 2005, it entered into a contract with Dongbu, a Korean corporation (PAC, ¶ 8), to buy 2,000 metric tons plus or minus 5% at the seller's option. This contract contained the same specification for color as the Ertisa-Cedar contract and called for the phenol to be delivered “FOB Ulsan Anchorage, Korea.” (PAC, ¶¶ 16-21 & Exh. B). Pursuant to the agreement, inspection was to be “[b]y mutually acceptable independent surveyor whose findings as to quantity/quality as per shoretank figures at loadport are final and binding on both parties.” (PAC, Exh. B).

The phenol used to satisfy Dongbu's contract with Cedar was drawn from shore tanks at Yosu, Korea on May 21, 2005. (PAC, ¶ 27). It was loaded on to the M/T No. 3 Green Pioneer, a vessel chartered by Dongbu to transport the phenol to the Ulsan Anchorage. (PAC, ¶¶ 26-27). On May 24, 2005, the phenol was transferred to Cedar's designated vessel, the M/T Bow Flora, at Ulsan Anchorage. (PAC, ¶¶ 25, 28).

Samples of the phenol were drawn from the shore tanks at Yosu, from the tanks of the M/T Green Pioneer, and from the M/T Bow Flora. Some samples were removed for immediate testing by SGS Korea Co. Ltd. (“SGS”) and Global Surveyors & Inspectors Ltd. (“GSI”), while duplicate samples were sealed and retained in Korea by SGS and GSI and aboard the M/T Bow Flora. (PAC, ¶¶ 33-34). An analysis of the samples conducted by SGS and GSI in Korea between May 20 and 24, 2005 indicated that the phenol met specifications for color. (PAC ¶ 33). As a consequence, Dongbu received payment under its contract with Cedar. (PAC, ¶ 35).

On July 19, 2005, the M/T Bow Flora arrived at Rotterdam, and samples of the phenol were again drawn for examination. (PAC, ¶¶ 40-41). This time, the analysis showed that the phenol was off specification for color. (PAC, ¶ 41). Accordingly, Ertisa rejected delivery on July 19, 2005. (PAC, ¶ 42). The samples of the phenol drawn in Korea and retained aboard the M/T Bow Flora were tested at the laboratories of SGS in the Netherlands on July 29, 2005, and were found to be off specification. (PAC, ¶ 45). Similarly, on August 8, 2005, the samples that had been retained in Korea were analyzed and were also off specification. (PAC, ¶ 46). Cedar then repurchased the phenol from Ertisa and sold it to an entity in India. (PAC, ¶¶ 47, 50).

On May 24, 2006, Cedar commenced this action. Subsequently, it submitted the instant motion.


A motion to amend is governed by Rule 15(a) of the Federal Rules of Civil Procedure, which states that leave to amend “shall be freely given when justice so requires.” Fed.R.Civ.P. 15(a); see Oneida Indian Nation of New York v. City of Sherrill, New York, 337 F.3d 139, 168 (2d Cir.2003), rev'd on other grounds, 544 U.S. 197 (2005). Notwithstanding the liberality of the general rule, “it is within the sound discretion of the court whether to grant leave to amend,” John Hancock Mutual Life Insurance Co. v. Amerford International Corp., 22 F.3d 458, 462 (2d Cir.1994) (citation omitted), and for proper reasons, a court may deny permission to amend in whole or in part. See Krumme v. WestPoint Stevens Inc., 143 F.3d 71, 88 (2d Cir.1998). In discussing the use of this discretion, the Supreme Court has stated:

In the absence of any apparent or declared reason-such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.-the leave sought should ... be freely given. Foman v. Davis, 371 U.S. 178, 182 (1962).

In this case, Dongbu consents to deletion of the negligence and fraud claims from the complaint but opposes the remaining amendments on grounds of futility. A motion to amend is futile and therefore may be denied if the amendment could not withstand a motion to dismiss. See Oneida Indian Nation, 337 F.3d at 168; Milanese v. Rust-Oleum Corp., 244 F.3d 104, 110 (2d Cir.2001); Flutie Brothers LLC v. Hayes, No. 04 Civ. 4187, 2006 WL 1379594, at *10 (S.D.N.Y. May 18, 2006); E*Trade Financial Corp. v. Deutsche Bank AG, 420 F.Supp.2d 273, 283 (S.D.N.Y.2006); Smith v. CPC International, Inc., 104 F.Supp.2d 272, 274 (S.D.N.Y.2000).

A. Reliance on the CISG

Cedar proposes to amend its complaint, in part, to assert that Dongbu's alleged breach of contract violated its obligations under the United Nations Convention on Contracts for the International Sale of Goods, April 11, 1980, S. Treaty Doc. No. 98-9 (1983), 1489 U.N.T.S. 3, 15 U.S.C.App. (1998). (PAC, ¶¶ 10, 55-57). The CISG governs the sale of goods between parties whose principal places of business are in different nations as long as those nations are signatories to the treaty. See BP Oil International, Ltd. v. Empresa Estatal Petroleos de Ecuador (PetroEcuador), 332 F.3d 333, 336 (5th Cir.2003); American Mint LLC v. GOSoftware, Inc., No. 1:05-CV-650, 2005 WL 2021248, at *3 (M.D.Pa. Aug. 16, 2005); St. Paul Guardian Insurance Co. v. Neuromed Medical Systems & Support, No. 00 Civ. 9344, 2002 WL 465312, at *3 (S.D.N.Y. March 26, 2002); Calzaturificio Claudia s.n.c. v. Olivieri Footwear Ltd., No. 96 Civ. 8052, 1998 WL 164824, at *4 (S.D.N.Y. April 7, 1998). While the parties to a contract may exclude the applicability of the CISG, any such exclusion must be explicit. See PetroEcuador, 332 F.3d at 337; American Mint, 2005 WL 2021248, at *2-3; Ajax Tool Works, Inc. v. Can-Eng Manufacturing Ltd., No. 01 C 5938, 2003 WL 223187, at *2-3 (N.D.Ill. Jan. 30, 2003); Neuromed, 2002 WL 465312, at *3. In this case, both the United States, where Cedar's principal place of business is located, and Korea, where Dongbu is based, are signatories to the CISG. Furthermore, there is no indication that these parties opted out of the CISG's provisions. Nevertheless, Dongbu contends that “the purpose of the proposed amended complaint is to assert a theory that permits Cedar to override the express provisions of the [c]ontract and hold Dongbu liable for the condition of the phenol after it was delivered FOB to Cedar.... The CISG, however, does not preempt a private contract between parties.” (Letter of Carolyn Traister Schiff dated May 15, 2007, at 2).

*3 It would be premature at this juncture to reach the merit of Dongbu's argument. Even if Dongbu is correct, Cedar would still be left with a breach of contract claim, albeit not one based on the CISG. The proposed amendment, then, simply offers a new legal theory, and amendments that merely propose alternative legal theories for recovery on the same underlying facts should generally be permitted. See Mayeaux v. Louisiana Health Service & Indemnity Co., 376 F.3d 420, 427 (5th Cir.2004); Lowrey v. Texas A & M University System, 117 F.3d 242, 246 n. 2 (5th Cir.1997); In re Integrated Resources, Inc., 157 B.R. 66, 71 (S.D.N.Y.1993). The appropriate course here is to allow the amendment and adjudicate the merits of Cedar's breach of contract claim, under whatever legal theories may be applicable, on a motion to dismiss or for summary judgment.

B. Addition of Ertisa as a Plaintiff

By contrast, there is no basis for adding Ertisa as a plaintiff. Cedar's theory for doing so is not altogether clear. Ertisa is not even named in the ad damnum clause of the Proposed Amended Complaint. (PAC at 16). The Second Cause of Action asserts a claim for indemnification by Cedar against Dongbu for payments that Cedar may have to pay to Ertisa. (PAC, ¶¶ 60-65). Plainly, Ertisa is not the plaintiff for purposes of that claim. In the First Cause of Action, Cedar alleges that “Dongbu breached the Cedar-Dongbu Contract [.]” (PAC, ¶ 54). Ertisa is mentioned only as having performed its obligations under the Ertisa-Cedar contract and as having incurred damages as the result of Dongbu's delivery of non-conforming goods. (PAC, ¶¶ 58-59). Under the most generous reading of this cause of action, Cedar appears to claiming that Ertisa is a third-party beneficiary of the contract between Cedar and Dongbu.

However, based on the facts pled in the Proposed Amended Complaint, Ertisa has no viable third-party beneficiary claim. To the extent that the CISG applies to a transaction, it addresses only the rights of buyer and seller, in this case Cedar and Dongbu. CISG art. 4; American Mint, 2005 WL 2021248, at *3; Usinor Industeel v. Leeco Steel Products, Inc., 209 F.Supp.2d 880, 885 (N.D.Ill.2002); Richard E. Speidel, The Revision of Article 2, Sales in Light of the United Nations Convention on Contracts for the Sale of Goods, 16 Nw. J. Int'l L. & Bus. 165, 173 (1995). Furthermore, Cedar has not identified any the common law authority that would support a claim for Ertisa under the facts pled.

For a third-party beneficiary to succeed on a breach of contract claim under New York law, the party “must establish (1) existence of a valid and binding contract between other parties, (2) that the contract was intended for his or her benefit, and (3) that the benefit to him or her is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate him if the benefit is lost.”

*4 Synovus Bank of Tampa Bay v. Valley National Bank, 487 F.Supp.2d 360, 368 (S.D.N.Y.2007) (quoting BDG Oceanside, LLC v. RAD Terminal Corp., 14 A.D.3d 472, 473, 787 N.Y.S.2d 388, 390 (2d Dep't 2005)). Moreover, “New York law requires that the parties' intent to benefit a third-party be shown on the face of the contract .” Id. (citing Strauss v. Belle Realty Co., 98 A.D.2d 424, 428, 469 N.Y.S.2d 948, 951 (2d Dep't 1983)). Nothing in the contract between Cedar and Dongbu expresses any intent to benefit Ertisa (PAC, Exh. B), and Cedar has alleged no facts from which any such intent could be inferred.

This is not surprising. According to the facts alleged in the Proposed Amended Complaint, Ertisa was simply a remote purchaser of the phenol that Dongbu sold to Cedar. However, courts have generally held that a third party is not a beneficiary of a sales agreement merely because both contracting parties knew that the product would be resold to the third party, or to a class of which the third party was a member. Even where the subsequent purchaser is mentioned by name in the contract, such a third party is “no more than a known remote buyer” in the absence of further evidence of an intent to benefit the third party.

Corrugated Paper Products, Inc. v. Longview Fibre Co., 868 F.2d 908, 911 (7th Cir.1989) (quoting Kaiser Aluminum & Chemical Corp. v. Ingersoll-Rand Co., 519 F.Supp. 60, 73 (S.D.Ga.1981)). While a remote purchaser may be an incidental beneficiary of the initial sales contract, it is not a third-party beneficiary absent proof that the parties to that contract intended to accord it that status. See Kanematsu-Gosho Ltd. v. M/T Messiniaki Aigli, No. 83 Civ. 530, 1986 WL 751, at *5 n. 3 (S.D.N.Y. Jan. 8, 1986). Here, there is no allegation of such an intention, and none is reflected in the contract between Cedar and Dongbu.

The Proposed Amended Complaint does allege that under the delivery terms in the respective contracts, delivery of the phenol by Dongbu to Cedar was contemporaneous with delivery by Cedar to Ertisa. (PAC, ¶ 37). Even if correct, this has no significance with respect to a third-party beneficiary claim. The two contracts remained juridically independent even if they were performed simultaneously.

Finally, Cedar asserts that there is “a partial assignment between Ertisa and Cedar of their claims for damages against Dongbu” that makes Ertisa a real party in interest in this litigation. (Letter of John T. Lillis, Jr. dated May 23, 2007 (“Lillis Letter”), at 3-4). But this “partial assignment” consists of no more than Cedar's acknowledgment that it is liable to Ertisa for such damages as it may recover from Dongbu. (Lillis Letter at 3; Agreement dated April 26, 2007, attached to PAC). It does not assign any of Cedar's claims to Ertisa, and it could not assign to Cedar any claim of Ertisa's arising out of the Cedar-Dongbu contract, since there is none.

Thus, no colorable claim has been articulated on behalf of Ertisa in the Proposed Amended Complaint, and it would be futile to add Ertisa as a party.


*5 For the reasons set forth above, Cedar's motion to amend the complaint is granted to the extent that it may delete negligence and fraud claims and allege breach of contract claims under the CISG. The motion to add Ertisa as a plaintiff is denied. Within two weeks of the date of this order, Cedar shall serve and file an amended complaint consistent with this decision.



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