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BP Oil Intl Ltd v. Empresa Estatal Petr, et

Court of Appeals for the Fifth Circuit
332 F.3d 333 (2003)
ELI5:

Rule of Law:

A general choice-of-law clause selecting the law of a nation that is a signatory to the Convention on Contracts for the International Sale of Goods (CISG) does not exclude the CISG. To exclude the CISG, parties must expressly state that the convention does not apply to their contract.


Facts:

  • Empresa Estatal Petroleos de Ecuador (PetroEcuador), an Ecuadorian state-owned oil company, contracted with BP Oil International, Ltd. (BP), a U.S. company, for the purchase of 140,000 barrels of unleaded gasoline.
  • The contract specified delivery 'CFR La Libertad-Ecuador,' a standard International Commercial Term (Incoterm), and contained a clause stating 'Jurisdiction: Laws of the Republic of Ecuador.'
  • The agreement required the gasoline to have a gum content below a specified limit, to be verified at the port of departure in Texas.
  • PetroEcuador appointed Saybolt, Inc. to conduct the quality testing.
  • Saybolt tested the gasoline at Shell's refinery in Deer Park, Texas, and certified that it conformed to the contract's gum content specification before it was loaded onto the vessel M/T TIBER.
  • Upon the vessel's arrival in La Libertad, Ecuador, the gasoline was re-tested and its gum content was found to exceed the contractual limit.
  • PetroEcuador refused to accept delivery of the gasoline.
  • As a result, BP resold the gasoline to another buyer at a loss of approximately two million dollars.

Procedural Posture:

  • BP sued PetroEcuador for breach of contract and Saybolt for negligence in the U.S. District Court for the Southern District of Texas (trial court).
  • The district court applied Texas choice-of-law rules and determined that Ecuadorian domestic law, not the CISG, governed the contract.
  • Interpreting Ecuadorian domestic law to require the seller to deliver conforming goods to the destination, the district court granted summary judgment in favor of PetroEcuador.
  • The district court also granted summary judgment in favor of Saybolt.
  • BP, as the plaintiff-appellant, appealed the summary judgments against both PetroEcuador and Saybolt to the United States Court of Appeals for the Fifth Circuit.

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Issue:

Does a general choice-of-law provision selecting the law of a country signatory to the Convention on Contracts for the International Sale of Goods (CISG) displace the CISG in favor of that country's domestic law?


Opinions:

Majority - Judge Smith

No. A general choice-of-law provision selecting the law of a CISG signatory nation does not displace the CISG; rather, it incorporates the CISG as part of that nation's law because parties must affirmatively opt-out of the convention. The CISG is a treaty of the United States and, as incorporated federal law, it governs contracts for the sale of goods between parties from different signatory nations, such as the U.S. and Ecuador. Because a signatory nation's ratification of the CISG makes the treaty part of its domestic law, a clause choosing 'Laws of the Republic of Ecuador' does not exclude the CISG but rather confirms its application. The court reasoned that under CISG Article 9(2), widely used trade terms like Incoterms are incorporated into the contract. The 'CFR' (Cost and Freight) term used by the parties passes the risk of loss to the buyer once the goods pass the ship's rail at the port of shipment. Therefore, BP fulfilled its obligation if the gasoline conformed to the contract when it was loaded in Texas, which the pre-shipment inspection confirmed. The case was remanded to determine the limited factual issue of whether BP knew or could not have been unaware of a hidden defect in the gasoline at the time of shipment, which would be a breach under CISG Article 40.



Analysis:

This decision solidifies the principle that the CISG is the default law for international sales contracts between parties in signatory countries. It establishes a high bar for opting out, requiring an explicit exclusion rather than a general choice-of-law clause, thereby promoting uniformity and predictability in international trade. The case also reinforces the importance of Incoterms in allocating risk, clarifying that terms like 'CFR' determine the point at which responsibility for the goods shifts from seller to buyer. This precedent instructs commercial parties that if they wish to avoid the CISG's provisions, they must do so with unambiguous language in their contracts.

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