Eli Lilly Do Brasil, Ltda v. Federal Express Corp.
502 F.3d 78 (2007)
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Rule of Law:
Under federal common law choice-of-law principles, the justified expectations of sophisticated commercial parties that their contractual terms will be enforced can outweigh the interests of the jurisdiction with the most significant physical contacts, leading a court to apply the law that validates the contract.
Facts:
- Eli Lilly do Brasil (“Lilly”) contracted to ship fourteen drums of pharmaceuticals from its factory in Brazil to a customer in Japan.
- Lilly's freight forwarder subcontracted with Federal Express (“FedEx”) for the transportation.
- The FedEx waybill for the shipment conspicuously limited FedEx's liability for lost or stolen goods to $20 per kilogram.
- The waybill also offered shippers the option to declare a higher value and pay a supplemental charge for increased coverage.
- Lilly did not declare a higher value or pay for the additional coverage.
- FedEx hired a local Brazilian company, Jumbo Jet Transportes, to truck the cargo from one location in Brazil to an airport in Brazil.
- While en route to the airport within Brazil, the truck was hijacked and the entire cargo, valued at approximately $800,000, was stolen.
- The liability limitation in the waybill would cap FedEx's total exposure for the loss at approximately $28,000.
Procedural Posture:
- Eli Lilly do Brasil sued Federal Express in the United States District Court for the Southern District of New York.
- Both parties filed cross-motions for partial summary judgment to determine which law—federal common law or Brazilian law—governed FedEx's liability.
- The District Court granted summary judgment in favor of FedEx, ruling that federal common law applied and the liability limitation clause was enforceable.
- After the parties stipulated to the amount of damages under the limitation clause, the District Court entered a final judgment for Lilly in that limited amount.
- Lilly, as the appellant, appealed the judgment to the United States Court of Appeals for the Second Circuit.
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Issue:
Does federal common law, which upholds a carrier's contractual limitation of liability, apply to a shipping dispute over Brazilian law, which might invalidate such a limitation in cases of gross negligence, when the shipment originated and was lost in Brazil but the parties' justified expectations favor enforcing the contract as written?
Opinions:
Majority - B.D. Parker, Jr.
Yes, federal common law applies. When conducting a federal common law choice-of-law analysis using the Restatement (Second) of Conflict of Laws, the court prioritizes the protection of the parties' justified expectations. While Brazil, as the place of dispatch and loss, has significant contacts with the transaction, this interest is outweighed by the paramount importance of enforcing freely undertaken contractual obligations between sophisticated parties. The presumption is to apply the law that validates the contract. Lilly chose not to purchase additional insurance and offered insufficient proof that Brazilian law would invalidate the liability limitation for ground carriage even in cases of gross negligence. Therefore, the United States' strong policy interest in enforcing the contract as written gives it the most significant relationship to the issue.
Dissenting - Meskill
No, Brazilian law should apply. The majority improperly disregards the Restatement's specific rules for transportation contracts, which establish a strong presumption for applying the law of the state of dispatch—in this case, Brazil. Every significant contact with the transaction (place of negotiation, contracting, performance, location of goods, and domicile of most parties) is in Brazil. The United States' general interest in validating contracts does not create a 'significant' or 'close' relationship sufficient to overcome Brazil's dominant sovereign interest in regulating commerce within its own borders. The presumption of validity should not be used to override the clear choice-of-law analysis that points overwhelmingly to applying Brazilian law.
Analysis:
This decision solidifies the principle that in federal common law choice-of-law analysis, protecting the justified expectations of contracting parties is a paramount consideration that can override the traditional 'center of gravity' or 'most significant contacts' approach. It signals that U.S. courts will heavily favor the enforcement of liability limitation clauses in contracts between sophisticated commercial entities, providing predictability for international carriers. The ruling effectively places the burden on the shipper to either prove that foreign law has a stronger, invalidating interest or to protect itself by purchasing additional insurance, thereby reinforcing the 'released value' doctrine in international shipping.
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