US Court of Appeals for the Fifth Circuit
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.


Before SMITH and BARKSDALE, Circuit
Judges, and FITZWATER,* District Judge.

JERRY E. SMITH, Circuit Judge:

Empresa Estatal Petroleos de Ecuador ("PetroEcuador") contracted with BP Oil In-ternational, Ltd. ("BP"), for the purchase and transport of gasoline from Texas to Ecuador. PetroEcuador refused to accept delivery, so BP sold the gasoline at a loss. BP appeals a summary judgment dismissing PetroEcuador and Saybolt, Inc. ("Saybolt"), the company re-sponsible for testing the gasoline at the port of departure. We affirm in part, reverse in part, and remand.


PetroEcuador sent BP an invitation to bid for supplying 140,000 barrels of unleaded gasoline deliverable "CFR" to Ecuador. "CFR," which stands for "Cost and FReight," is one of thirteen International Commercial Terms ("Incoterms") designed to "provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade." Incoterms are recognized through their incorporation into the Convention on Contracts for the International Sale of Goods ("CISG").Z St. Paul Guardian Ins. Co. v. Neuromed Med. Sys. & Support,

BP responded favorably to the invitation, and PetroEcuador confirmed the sale on its contract form. The final agreement required that the oil be sent "CFR La Libertad-Ecua-dor." A separate provision, paragraph 10, states, "Jurisdiction: Laws of the Republic of Ecuador." The contract further specifies that the gasoline have a gum content of less than three milligrams per one hundred milliliters, to be determined at the port of departure. PetroEcuador appointed Saybolt, a company specializing in quality control services, to en-sure this requirement was met.

To fulfill the contract, BP purchased gaso-line from Shell Oil Company and, following testing by Saybolt, loaded it on board the M/T TIBER at Shell's Deer Park, Texas, refinery. The TIBER sailed to La Libertad, Ecuador, where the gasoline was again tested for gum content. On learning that the gum content now exceeded the contractual limit, Petro-Ecuador refused to accept delivery. Eventu-ally, BP resold the gasoline to Shell at a loss of approximately two million dollars.

BP sued PetroEcuador for breach of con-tract and wrongful draw of a letter of guaran-tee. After PetroEcuador filed a notice of in-tent to apply foreign law pursuant to FED. R. Civ. P. 44.1, the district court applied Texas choice of law rules and determined that Ecua-dorian law governed. BP argued that the term "CFR" demonstrated the parties' intent to pass the risk of loss to PetroEcuador once the goods were delivered on board the TIBER. The district court disagreed and held that un-der Ecuadorian law, the seller must deliver conforming goods to the agreed destination, in this case Ecuador. The court granted sum-mary judgment for PetroEcuador.

BP also brought negligence and breach of contract claims against Saybolt, alleging that the company had improperly tested the gaso-line.' Saybolt moved for summary judgment, asserting a limitation of liability defense and waiver of claims based on the terms of its ser-vice contract with BP. The court granted Say-bolt's motion, holding that BP could not sue in tort, that BP was bound by the waiver pro-vision, and that Saybolt did not take any ac-tion causing harm to BP. Pursuant to FED. R. Civ. P. 54(b), the court entered final judgment in favor of PetroEcuador and Saybolt.


We review a summary judgment using the same standards as did the district court; thus our review is de novo. Walton v. Alexander, 44 F.3d 1297, 1301 (5th Cir. 1995) (en banc). Summary judgment is proper where "there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." FED. R. Civ. P. 56(c). All inferences from the record must be construed in the light most favorable to the non-movant. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,587-88 (1986). "[O]nly when there is a choice of reasonable interpre-tation of the contract is there a material fact issue concerning the parties' intent that would preclude summary judgment." Amoco Prod Co. v. Tex. Meridian Res. Exploration, Inc., 180 F.3d 664, 669 (5th Cir. 1999).


BP and PetroEcuador dispute whether the domestic law of Ecuador or the CISG applies. After recognizing that federal courts sitting in diversity apply the choice of law rules of the state in which they sit, Coghlan v. Wellcraft Marine Corp., 240 F.3d 449,452 n.2 (5th Cir. 2001), the district court ap-plied Texas law, which enforces unambiguous choice of law provisions. DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 678 (Tex. 1990). Paragraph 10, which states "Jurisdiction: Laws of the Republic of Ecuador," purports to apply Ecuadorian law.' Based on an affidavit submitted by PetroEcuador's expert, Dr. Gustavo Romero, the court held that Ecuadorian law requires the seller to deliver conforming goods at the agreed desti-nation, making summary judgment inappro-priate for BP.


Though the court correctly recognized that federal courts apply the choice of law rules of the state in which they sit, it overlooked its concurrent federal question jurisdiction that makes a conflict of laws analysis un-necessary.' The general federal question jurisdiction statute grants subject matter juris-diction over every civil action that arises, inter alia, under a treaty of the United States. 28 U.S.C. ยง 1331(a). The CISG, ratified by the Senate in 1986, creates a private right of action in federal court. Delchi Carrier v.Rotorex Corp., 71 F.3d 1024, 1027-28 (2d Cir. 1995). The treaty applies to "contracts of sale of goods between parties whose places of business are in different States ... [w]hen the States are Contracting States." CISG art. 1(1)(a). BP, an American corporation, and PetroEcuador, an Ecuadorian company, con-tracted for the sale of gasoline; the United States and Ecuador have ratified the CISG.

As incorporated federal law, the CISG gov-erns the dispute so long as the parties have not elected to exclude its application. CISG art. 6. PetroEcuador argues that the choice of law provision demonstrates the parties' intent to apply Ecuadorian domestic law instead of the CISG. We disagree.

A signatory's assent to the CISG necessar-ily incorporates the treaty as part of that na-tion's domestic law. BP's expert witness as to Ecuadorian law, Xavier Rosales-Kuri, ob-served that "the following source of Ecuadorian law would be applicable to the present case: (i) United Nations Convention on the International Sale of Goods . . . " PetroEcuador's expert did not disagree with this assessment. [Dr. Romero interprets article 4 of the Ecuador Commercial Code as "stat[ing] that mercantile customs (INCOTERMS) will be used to interpret commercial contract disputes when the law is 'sil- ent' as to an issue in dispute. However, mercan- tile customs/INCOTERMS do not apply to the case at hand because the Commercial Code is not silent on the various contract issues this Agree- ment presents." This statement merely begs the question whether the Commercial Code of Ecua- dor applies in lieu of the CISG. Notably, article 4 of the Commercial Code was enacted in 1960, over thirty year before Ecuador ratified the CISG.].Given that the CISG is Ecuadorian law, a choice of law provision designating Ecuadorian law merely confirms that the treaty governs the transaction.

Where parties seek to apply a signatory's domestic law in lieu of the CISG, they must affirmatively opt-out of the CISG. In Asante Techs., Inc. v. PMC-Sierra, Inc., 164 F. Supp. 2d 1142, 1150 (N.D. Cal. 2001), the court held that a choice-of-law provision selecting British Columbia law did not, without more, "evince a clear intent to opt out of the CISG . ... Defendant's choice of applicable law adopts the law of British Columbia, and it is undisputed that the CISG is the law of British Columbia.[ See also Ajax Tool Works, Inc. v. Can-EngManu. Ltd., 2003 U.S. Dist. LEXIS 1306, at *8 (N.D. 111. Jan. 30, 2003) ("The parties' contract states that the `agreement shall be governed by the laws of the Province of Ontario, Canada.' Obvi-ously, this clause does not exclude the MG."); St. Paul Guardian Ins., 2002 U.S. Dist. LEXIS 5096, at *8 (stating that the CISG applies "[w]here parties, as here, designate a choice of law clause in their contract-selecting the law of a Contracting State without expressly excluding application of the CISG . . . . To hold otherwise would undermine the objectives of the Convention which Germany has agreed to uphold.").

Similarly, because the CISG is the law of Ecuador, it governs this dispute. "[I]fthe par-ties 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."( RALPH H. FOLSOM, ET AL., INTERNATIONAL BUSINESS TRANSACTIONS 12 (2d ed. 2001).).An affirmative opt-out requirement promotes uniformity and the observance of good faith in international trade, two principles that guide interpretation of the CISG. CISG art. 7(1).


The CISG incorporates Incoterms through article 9(2), which provides:

"The parties are considered, unless other-wise agreed, to have impliedly made ap-plicable to their contract or its forma-tion a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned."
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). ['See St. Paul Guardian Ins., 2002 U.S. Dist. LEXIS 5096, at *9-*10 (stating that "INCO-TERMS are incorporated into the CISG through Article 9(2)"); RALPH H. FOLSOM, ET AL., supra, at 72 ("Incoterms could be made an implicit term of the contract as part of international custom. Courts in France and Germany have done so, and both treaties and the UNCITRAL Secretariat de-scribe Incoterms as a widely-observed usage for commercial terms."].
PetroEcuador's invitation to bid for the procurement of 140,000 barrels of gasoline proposed "CFR" delivery. The final agree-ment, drafted by PetroEcuador, again speci-fied that the gasoline be sent "CFR La Libertad-Ecuador" and that the cargo's gum con-tent be tested pre-shipment.[ In accepting PetroEcuador's invitation, BPstated "CNF" as the condition of delivery. CNF was used in a previous version of Incoterms to specify "cost and freight" delivery. INTERNATIONAL CHAMBER OF COMMERCE, INCOTERMS 1980 (1980). In any event, the final agreement uses the term "CFR."] Shipments designated "CFR" require the seller to pay the costs and freight to transport the goods to the delivery port, but pass title and risk of loss to the buyer once the goods "pass the ship's rail" at the port of shipment. The goods should be tested for conformity before the risk of loss passes to the buyer.(FOLSOM, supra, at 41). In the event of subsequent damage or loss, the buyer generally must seek a remedy against the carrier or insurer. In re Daewoo Int'l (Am) Corp., 2001 U.S. Dist. LEXIS 19796, at *8 (S.D.N.Y. Dec. 3, 2001).
In light of the parties' unambiguous use of the Incoterm "CFR," BP fulfilled its contrac-tual obligations if the gasoline met the con-tract's qualitative specifications when it passed the ship's rail and risk transferred to PetroEcuador. CISG art. 36(1). Indeed, Say-bolt's testing confirmed that the gasoline's gum content was adequate before departure from Texas. Nevertheless, in its opposition to BP's motion for summary judgment, Petro-Ecuador contends that BP purchased the gaso-line from Shell on an "as is" basis and thereaf-ter failed to add sufficient gum inhibitor as a way to "cut corners." [Under CISG article 36(1), "[t]he seller is lia-ble in accordance with the contract ... for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time."] In other words, the cargo contained a hidden defect."

Having appointed Saybolt to test the gaso-line, PetroEcuador "ought to have discovered" the defect before the cargo left Texas. CISG art. 39(1) [CISG article 39(1) states: "The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller spe-cifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it."]. Permitting PetroEcuador now to distance itself from Saybolt's test would negate the parties' selection of CFR delivery and would undermine the key role that reliance plays in international sales agreements. Nev-ertheless, BP could have breached the agree-ment if it provided goods that it "knew or could not have been unaware" were defective when they "passed over the ship's rail" and risk shifted to PetroEcuador. CISG art. 40." [See also RALPH H. FOLSOM, ET AL., supra, at 41 ("Thus, the buyer is still able to recover for any nonconformity which becomes apparent long after delivery, but the buyer may have to prove that the defect was present at the delivery and was not caused by buyer's use, maintenance or protection of the goods.")]

Therefore, there is a fact issue as to wheth-er BP knowingly provided gasoline with an excessive gum content. The district court should permit the parties to conduct discovery as to this issue only.


BP raises negligence and breach of con-tract claims against Saybolt, alleging that the company improperly tested the gasoline's gum content before shipment. These claims amount to indemnification for BP's losses suffered on account of PetroEcuador's refusal to accept delivery. Our conclusion that Petro-Ecuador is liable so long as BP did not knowingly provide deficient gasoline renders these claims moot. Summary judgment was there-fore proper, though we need not review the district court's reasoning.
If PetroEcuador improperly refused CFR delivery, it is liable to BP for any consequen-tial damages. In its claims against Saybolt, BP pleaded "in the alternative"; counsel also acknowledged, at oral argument, that beyond those damages stemming from PetroEcuador's refusal to accept delivery, BP has no collateral claims against Saybolt.12 If Saybolt negligent-ly misrepresented the gasoline's gum content, PetroEcuador (not BP) becomes the party with a potential claim.

Even if PetroEcuador is not liable because BP knowingly presented gasoline with an in-adequate gum content, BP's claims drop out. BP alleges that Saybolt "negligently misrepre-sented the quality" of the gasoline before its loading in Texas; it also claims that Saybolt's improper testing was "a proximate cause of the gasoline to be refused by PetroEcuador and/or the gum content to increase which caused BP to suffer pecuniary loss." BP's claims depend on the fact that Saybolt misrep-resented the quality of the gasoline. It goes without saying, however, that if BP knew that the gasoline was deficient, it could not have relied on Saybolt's report to its detriment.

The judgment dismissing PetroEcuador is REVERSED and REMANDED for proceed-ings consistent with this opinion. The judgment dismissing Saybolt is AFFIRMED.}}