BP Oil International, Ltd. v. Empresa Estatal Petroleos De Ecuador

U.S. Court of Appeals6/11/2003

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United States Court of Appeals
Fifth Circuit
F I L E D
June 11, 2003
In the
Charles R. Fulbruge III
United States Court of Appeals Clerk
for the Fifth Circuit
_______________

m 02-20166
_______________

BP OIL INTERNATIONAL, LTD.,
AND
BP EXPLORATION & OIL, INC.,

Plaintiffs-Appellants,

VERSUS

EMPRESA ESTATAL PETROLEOS DE ECUADOR (PETROECUADOR), ET AL.,

Defendants,

EMPRESA ESTATAL PETROLEOS DE ECUADOR (PETROECUADOR)
AND
SAYBOLT, INC.,

Defendants-Appellees.

_________________________

Appeals from the United States District Court
for the Southern District of Texas

_________________________
Before SMITH and BARKSDALE, Circuit Neuromed Med. Sys. & Support, Gmbh, 2002
Judges, and FITZWATER,* District Judge. U.S. Dist. LEXIS 5096, at *9-*10 (S.D.N.Y.
Mar. 26, 2002).
JERRY E. SMITH, Circuit Judge:
BP responded favorably to the invitation,
Empresa Estatal Petroleos de Ecuador and PetroEcuador confirmed the sale on its
(“PetroEcuador”) contracted with BP Oil In- contract form. The final agreement required
ternational, Ltd. (“BP”), for the purchase and that the oil be sent “CFR La Libertad-Ecua-
transport of gasoline from Texas to Ecuador. dor.” A separate provision, paragraph 10,
PetroEcuador refused to accept delivery, so states, “Jurisdiction: Laws of the Republic of
BP sold the gasoline at a loss. BP appeals a Ecuador.” The contract further specifies that
summary judgment dismissing PetroEcuador the gasoline have a gum content of less than
and Saybolt, Inc. (“Saybolt”), the company re- three milligrams per one hundred milliliters, to
sponsible for testing the gasoline at the port of be determined at the port of departure.
departure. We affirm in part, reverse in part, PetroEcuador appointed Saybolt, a company
and remand. specializing in quality control services, to en-
sure this requirement was met.
I.
PetroEcuador sent BP an invitation to bid To fulfill the contract, BP purchased gaso-
for supplying 140,000 barrels of unleaded gas- line from Shell Oil Company and, following
oline deliverable “CFR” to Ecuador. “CFR,” testing by Saybolt, loaded it on board the M/T
which stands for “Cost and FReight,” is one of TIBER at Shell’s Deer Park, Texas, refinery.
thirteen International Commercial Terms The TIBER sailed to La Libertad, Ecuador,
(“Incoterms”) designed to “provide a set of in- where t he gasoline was again tested for gum
ternational rules for the interpretation of the content. On learning that the gum content
most commonly used trade terms in foreign now exceeded the contractual limit, Petro-
trade.”1 Incoterms are recognized through Ecuador refused t o accept delivery.
their incorporation into the Convention on Eventually, BP resold the gasoline to Shell at
Contracts for the International Sale of Goods a loss of approximately two million dollars.
(“CISG”).2 St. Paul Guardian Ins. Co. v.
BP sued PetroEcuador for breach of con-
tract and wrongful draw of a letter of
*
District Judge of the Northern District of guarantee. After PetroEcuador filed a notice
Texas, sitting by designation. of intent to apply foreign law pursuant to FED.
1
R. CIV. P. 44.1, the district court applied
INTERNATIONAL CHAMBER OF COMMERCE, Texas choice of law rules and determined that
INCOTERMS 1990 (1990); see also Nuovo Pignone, Ecuadorian law governed. BP argued that the
SpA v. Storman Asia M/V, 310 F.3d 374, 380 n.5
term “CFR” demonstrated the parties’ intent
(5th Cir. 2002).
to pass the risk of loss to PetroEcuador once
2
United Nations Convention on Contracts for the goods were delivered on board the TIBER.
the International Sale of Goods, Apr. 11, 1980, S.
Treaty Doc. No. 98-9 (1983), 19 I.L.M. 668
2
(1980), reprinted at 15 U.S.C. app. (entered into (...continued)
(continued...) force Jan. 1, 1988).

2
The district court disagreed and held that un- Meridian Res. Exploration, Inc., 180 F.3d
der Ecuadorian law, the seller must deliver 664, 669 (5th Cir. 1999).
conforming goods to the agreed destination, in III.
this case Ecuador. The court granted BP and PetroEcuador dispute whether the
summary judgment for PetroEcuador. domestic law of Ecuador or the CISG applies.
After recognizing that federal courts sitting in
BP also brought negligence and breach of diversity apply the choice of law rules of the
contract claims against Saybolt, alleging that state in which they sit, Coghlan v. Wellcraft
the company had improperly tested the Marine Corp., 240 F.3d 449, 452 n.2 (5th Cir.
gasoline.1 Saybolt moved for summary 2001) (citation omitted), the district court ap-
judgment, asserting a limitation of liability plied Texas law, which enforces unambiguous
defense and waiver of claims based on the choice of law provisions. DeSantis v. Wack-
terms of its service contract with BP. The enhut Corp., 793 S.W.2d 670, 678 (Tex.
court granted Saybolt’s motion, holding that 1990). Paragraph 10, which states
BP could not sue in tort, that BP was bound “Jurisdiction: Laws of the Republic of
by the waiver provision, and that Saybolt did Ecuador,” purports to apply Ecuadorian law.2
not take any action causing harm to BP. Based on an affidavit submitted by
Pursuant to FED. R. CIV. P. 54(b), the court PetroEcuador’s expert, Dr. Gustavo Romero,
entered final judgment in favor of the court held that Ecuadorian law requires the
PetroEcuador and Saybolt. seller to deliver conforming goods at the
agreed destination, making summary judgment
II. inappropriate for BP.
We review a summary judgment using the
same standards as did the district court; thus A.
our review is de novo. Walton v. Alexander, Though the court correctly recognized that
44 F.3d 1297, 1301 (5th Cir. 1995) (en banc). federal courts apply the choice of law rules of
Summary judgment is proper where “there is the state in which they sit, it overlooked its
no genuine issue as to any material fact and the concurrent federal question jurisdiction that
moving party is entitled to a judgment as a makes a conflict of laws analysis unnecessary.3
matter of law.” FED. R. CIV. P. 56(c). All in-
ferences from the record must be construed in
2
the light most favorable to the non-movant. We assume arguendo that the provision stat-
Matsushita Elec. Indus. Co. v. Zenith Radio ing “Jurisdiction: Laws of the Republic of Ecua-
Corp., 475 U.S. 574, 587-88 (1986). “[O]nly dor” unambiguously conveys the intent to apply
when there is a choice of reasonable Ecuadorian law.
interpretation of the contract is there a 3
See 28 U.S.C. § 1652 (“The laws of the sev-
material fact issue concerning the parties’
eral states, except where the Constitution or trea-
intent that would preclude summary ties of the United States or Acts of Congress other-
judgment.” Amoco Prod. Co. v. Tex. wise require or provide, shall be regarded as rules
of decision in civil actions in the courts of the
United States, in cases where they apply.”);
1
BP also filed an amended admiralty claim Resolution Trust Corp. v. Chapman, 29 F.3d
against the TIBER in rem, Tiber Shipping, L.L.C., 1120, 1124 (7th Cir. 1994) (“What Illinois courts
and Rio Grande Transport in personam. (continued...)

3
The general federal question jurisdiction PetroEcuador’s expert did not disagree with
statute grants subject matter jurisdiction over this assessment.5 Given that the CISG is Ec-
every civil action that arises, inter alia, under uadorian law, a choice of law provision des-
a treaty of the United States. 28 U.S.C. § ignating Ecuadorian law merely confirms that
1331(a). The CISG, ratified by the Senate in the treaty governs the transaction.
1986, creates a private right of action in
federal court. Delchi Carrier v. Rotorex Where parties seek to apply a signatory’s
Corp., 71 F.3d 1024, 1027-28 (2d Cir. 1995). domestic law in lieu of the CISG, they must
The treaty applies to “contracts of sale of affirmatively opt-out of the CISG. In Asante
goods between parties whose places of busi- Techs., Inc. v. PMC-Sierra, Inc., 164 F. Supp.
ness are in different States . . . [w]hen the 2d 1142, 1150 (N.D. Cal. 2001), the court
States are Contracting States.” CISG art. held that a choice-of-law provision selecting
1(1)(a). BP, an American corporation, and British Columbia law did not, without more,
PetroEcuador, an Ecuadorian company, con- “evince a clear intent to opt out of the CISG .
tracted for the sale of gasoline; the United . . . Defendant’s choice of applicable law
States and Ecuador have ratified the CISG.4 adopts the law of British Columbia, and it is
undisputed that the CISG is the law of British
As incorporated federal law, the CISG gov- Columbia.”6
erns the dispute so long as the parties have not
elected to exclude its application. CISG art. 6.
5
PetroEcuador argues that the choice of law Dr. Romero interprets article 4 of the Ecuador
provision demonstrates the parties’ intent to Commercial Code as “stat[ing] that mercantile
apply Ecuadorian domestic law instead of the customs (INCOTERMS) will be used to interpret
commercial contract disputes when the law is ‘sil-
CISG. We disagree.
ent’ as to an issue in dispute. However, mercantile
customs/INCOTERMS do not apply to the case at
A signatory’s assent to the CISG hand because the Commercial Code is not silent on
necessarily incorporates the treaty as part of the various contract issues this Agreement
that nation’s domestic law. BP’s expert presents.” This statement merely begs the question
witness as to Ecuadorian law, Xavier Rosales- whether the Commercial Code of Ecuador applies
Kuri, observed that “the following source of in lieu of the CISG. Notably, article 4 of the
Ecuadorian law would be applicable to the Commercial Code was enacted in 1960, over thirty
present case: (i) United Nations Convention on year before Ecuador ratified the CISG.
the International Sale of Goods . . . .”
6
See also Ajax Tool Works, Inc. v. Can-Eng
Manu. Ltd., 2003 U.S. Dist. LEXIS 1306, at *8
(N.D. Ill. Jan. 30, 2003) (“The parties’ contract
3 states that the ‘agreement shall be governed by the
(...continued)
would choose is, however, irrelevant. This is not a laws of the Province of Ontario, Canada.’ Obvi-
diversity case, where Erie would require the forum ously, this clause does not exclude the CISG.”); St.
court to apply the whole law of the state, including Paul Guardian Ins., 2002 U.S. Dist. LEXIS 5096,
its choice of law principles.”). at *8 (stating that the CISG applies “[w]here
parties, as here, designate a choice of law clause in
4
The United States Senate ratified the CISG in their contractSSselecting the law of a Contracting
1986. Ecuador ratified the CISG in 1993 without State without expressly excluding application of
any rights or reservations. 15 U.S.C. app. (continued...)

4
Similarly, because the CISG is the law of
Ecuador, it governs this dispute. “[I]f the par- PetroEcuador’s invitation to bid for the
ties decide to exclude the Convention, it procurement of 140,000 barrels of gasoline
should be expressly excluded by language proposed “CFR” delivery. The final
which states that it does not apply and also agreement, drafted by PetroEcuador, again
states what law shall govern the contract.” specified that the gasoline be sent “CFR La
RALPH H. FOLSOM, ET AL., INTERNATIONAL Libertad-Ecuador” and that the cargo’s gum
BUSINESS TRANSACTIONS 12 (2d ed. 2001). content be tested pre-shipment.8 Shipments
An affirmative opt-out requirement promotes designated “CFR” require the seller to pay the
uniformity and the observance of good faith in costs and freight to transport the goods to the
international trade, two principles that guide delivery port, but pass title and risk of loss to
interpretation of the CISG. CISG art. 7(1). the buyer once the goods “pass the ship’s rail”
at the port of shipment. The goods should be
B. tested for conformity before the risk of loss
The CISG incorporates Incoterms through passes to the buyer. FOLSOM, supra, at 41. In
article 9(2), which provides: the event of subsequent damage or loss, the
buyer generally must seek a remedy against the
The parties are considered, unless carrier or insurer. In re Daewoo Int’l (Am.)
otherwise agreed, to have impliedly Corp., 2001 U.S. Dist. LEXIS 19796, at *8
made applicable to their contract or its (S.D.N.Y. Dec. 3, 2001).
formation a usage of which the parties
knew or ought to have known and In light of the parties’ unambiguous use of
which in international trade is widely the Incoterm “CFR,” BP fulfilled its
known to, and regularly observed by, contractual obligations if the gasoline met the
parties to contracts of the type involved contract’s qualitative specifications when it
in the particular trade concerned. passed the ship’s rail and risk transferred to
PetroEcuador. CISG art. 36(1). Indeed, Say-
CISG art. 9(2). Even if the usage of bolt’s testing confirmed that the gasoline’s
Incoterms is not global, the fact that they are gum content was adequate before departure
well known in international trade means that from Texas. Nevertheless, in its opposition to
they are incorporated through article 9(2).7
7
(...continued)
6
(...continued) Courts in France and Germany have done so, and
the CISG . . . . To hold otherwise would undermine both treaties and the UNCITRAL Secretariat de-
the objectives of the Convention which Germany scribe Incoterms as a widely-observed usage for
has agreed to uphold.”). commercial terms.”).
7 8
See St. Paul Guardian Ins., 2002 U.S. Dist. In accepting PetroEcuador’s invitation, BP
LEXIS 5096, at *9-*10 (stating that “INCO- stated “CNF” as the condition of delivery. CNF
TERMS are incorporated into the CISG through was used in a previous version of Incoterms to
Article 9(2)”); RALPH H. FOLSOM, ET AL., supra, at specify “cost and freight” delivery. INTERNATION-
72 (“Incoterms could be made an implicit term of AL CHAMBER OF COMMERCE, INCOTERMS 1980
the contract as part of international custom. (1980). In any event, the final agreement uses the
(continued...) term “CFR.”

5
BP’s motion for summary judgment, Petro- er BP knowingly provided gasoline with an
Ecuador contends that BP purchased the gaso- excessive gum content. The district court
line from Shell on an “as is” basis and should permit the parties to conduct discovery
thereafter failed to add sufficient gum inhibitor as to this issue only.
as a way to “cut corners.”9 In other words,
the cargo contained a hidden defect. IV.
BP raises negligence and breach of contract
Having appointed Saybolt to test the claims against Saybolt, alleging that the
gasoline, PetroEcuador “ought to have company improperly tested the gasoline’s gum
discovered” the defect before the cargo left content before shipment. These claims amount
Texas. CISG art. 39(1).10 Permitting to indemnification for BP’s losses suffered on
PetroEcuador now to distance itself from account of PetroEcuador’s refusal to accept
Saybolt’s test would negate the parties’ delivery. Our conclusion that PetroEcuador is
selection of CFR delivery and would liable so long as BP did not knowingly provide
undermine the key role that reliance plays in deficient gasoline renders these claims moot.
international sales agreements. Nevertheless, Summary judgment was therefore proper,
BP could have breached the agreement if it though we need not review the district court’s
provided goods that it “knew or could not reasoning.
have been unaware” were defective when they
“passed over the ship’s rail” and risk shifted to If PetroEcuador improperly refused CFR
PetroEcuador. CISG art. 40.11 delivery, it is liable to BP for any consequential
damages. In its claims against Saybolt, BP
Therefore, there is a fact issue as to wheth- pleaded “in the alternative”; counsel also ac-
knowledged, at oral argument, that beyond
those damages stemming from PetroEcuador’s
9 refusal to accept delivery, BP has no collateral
Under CISG article 36(1), “[t]he seller is lia-
ble in accordance with the contract . . . for any lack claims against Saybolt.12 If Saybolt negligently
of conformity which exists at the time when the misrepresented the gasoline’s gum content,
risk passes to the buyer, even though the lack of PetroEcuador (not BP) becomes the party
conformity becomes apparent only after that time.” with a potential claim.
10
CISG article 39(1) states: “The buyer loses
the right to rely on a lack of conformity of the
12
goods if he does not give notice to the seller spe- Theoretically, BP might still have a collateral
cifying the nature of the lack of conformity within breach of contract claim against Saybolt for
a reasonable time after he has discovered it or $3,913.96SSthe amount that it, PetroEcuador, and
ought to have discovered it.” Shell were invoiced for Saybolt’s inspection ser-
vices. There is, however, no evidence in the record
11
See also RALPH H. FOLSOM, ET AL., supra, at that BP ever paid its share of the invoice. Even so,
41 (“Thus, the buyer is still able to recover for any the breach of contract claim set forth in BP’s Third
nonconformity which becomes apparent long after Amended Consolidating Claim alleges only that the
delivery, but the buyer may have to prove that the contract requires Saybolt to “defend, indemnify and
defect was present at the delivery and was not hold BP harmless from any damages.” BP does
caused by buyer’s use, maintenance or protection not seek recovery of the inspection fee as part of its
of the goods.”). breach of contract claim.

6
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
misrepresented 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 misrepresented 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
proceedings consistent with this opinion. The
judgment dismissing Saybolt is AFFIRMED.

7

BP Oil International, Ltd. v. Empresa Estatal Petroleos De Ecuador

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