Filanto, S.p.A. v. Chilewich International Corp.
789 F. Supp. 1229 (1992)
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Rule of Law:
Under the U.N. Convention on Contracts for the International Sale of Goods (CISG), a party’s conduct, such as failing to object to contract terms in a timely manner and subsequently performing under or relying on the contract, can constitute acceptance of those terms, including an arbitration clause incorporated by reference.
Facts:
- On February 28, 1989, Chilewich's agent entered into a contract (the 'Russian Contract') with a Soviet entity, which contained a clause requiring all disputes to be settled by arbitration in Moscow.
- On March 13, 1990, Chilewich sent Filanto a 'Memorandum Agreement' for the purchase of boots, which explicitly incorporated the terms of the Russian Contract, including the Moscow arbitration clause.
- Chilewich signed the March 13 Memorandum Agreement, but Filanto did not immediately sign or return it.
- On May 7, 1990, Chilewich performed its initial obligation under the agreement by opening a multi-million dollar Letter of Credit in Filanto's favor.
- On August 7, 1990, five months after receiving the offer and three months after Chilewich opened the Letter of Credit, Filanto returned the signed Memorandum Agreement but included a cover letter purporting to exclude the arbitration clause among other terms.
- Filanto subsequently began manufacturing and delivered the first shipment of 100,000 pairs of boots on September 15, 1990, and drew upon the Letter of Credit for payment.
- After the lawsuit was initiated over Chilewich's failure to purchase the remaining boots, Filanto sent a letter on June 21, 1991, expressly relying on a claims-procedure provision of the Russian Contract to address an issue of allegedly defective boots.
Procedural Posture:
- Filanto, S.p.A. filed a lawsuit against Chilewich International Corp. in the U.S. District Court for the Southern District of New York for breach of contract.
- Chilewich moved to stay the action pending arbitration in Moscow, pursuant to the arbitration clause in the contract.
- Filanto moved to enjoin arbitration or, in the alternative, to order that arbitration take place in New York rather than Moscow.
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Issue:
Does a party's failure to timely object to an arbitration clause in a memorandum agreement, combined with its subsequent performance and reliance on other terms of an incorporated contract, constitute acceptance of the arbitration agreement under the U.N. Convention on Contracts for the International Sale of Goods?
Opinions:
Majority - Brieant, Chief Judge
Yes. A binding agreement to arbitrate exists because Filanto's conduct demonstrated its assent to the terms of the March 13 Memorandum Agreement, including the incorporated arbitration clause. The controlling law for this international sales contract is the U.N. Convention on Contracts for the International Sale of Goods (CISG), not the Uniform Commercial Code (UCC). Under CISG Article 18(1), conduct indicating assent can form an acceptance. Filanto's retention of the offer for five months without objection, particularly after Chilewich had commenced performance by opening a substantial Letter of Credit, established a duty to object in a timely fashion. Furthermore, Filanto’s subsequent conduct, including signing the agreement 'for acceptance', suing on the March 13 contract, and most importantly, later invoking other provisions of the incorporated Russian Contract for its own benefit, are all strong evidence under CISG Article 8(3) that Filanto considered itself bound by the entire agreement.
Analysis:
This case is a foundational U.S. decision interpreting the CISG and its interaction with the Federal Arbitration Act. It highlights a key difference between the CISG and the UCC's 'battle of the forms' provision, as the CISG follows the common law 'mirror image' rule where a modified acceptance is a counteroffer. However, the court demonstrates that under the CISG's more flexible approach to contract formation, a party's course of dealing and subsequent conduct can override a written attempt to reject terms. This decision strengthens the enforceability of arbitration clauses in international commerce by showing that courts will look at the parties' objective actions to find assent, furthering the strong federal policy in favor of arbitration.
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