Choice of Law and the CISG

Last week, I wrote about a New York case in which the court and the litigants failed to recognize the applicability of the United Nations Convention on Contracts for the International Sale of Goods (CISG). In today’s post, I discuss a case decided by a federal court in Rhode Island, Chilean Sea Bass Inc. v. Kendell Seafood Imports, Inc., which both recognized the applicability of the CISG and engaged with the scholarly commentary relating to it. This decision highlights the important—but sometimes overlooked—point that while the CISG governs contract issues such as formation and breach, it does not purport to address a number of non-contract issues. When these issues arise, the court must still perform a choice-of-law analysis to ascertain the governing law.

Facts

The plaintiff was Chilean Sea Bass, Inc. (CSB), a Panamanian corporation with its principal place of business in Chile. The defendant was Kendell Seafood Imports, Inc. (Kendell), a U.S. company with its principal place of business in Rhode Island. In early 2020, CSB entered into an agreement to sell Chilean sea bass to Kendell. When the covid-19 pandemic struck in March 2020, Kendell refused to accept delivery of the fish because the restaurants to which it had planned to sell them were closed.

In an attempt to persuade Kendell to reconsider its position, an affiliate of CSB named Pedro Grimaldi orally offered to reduce the price of the catch from $21 per kilogram to $15 per kilogram. Kendell accepted this offer orally and thereafter accepted delivery of the fish.

A dispute subsequently arose as to the contract price. CSB took the position that Grimaldi lacked authority to negotiate a price reduction and insisted on being paid the full contract price. Kendell argued that the reduction in price negotiated by Grimaldi was binding. After an unsuccessful attempt to settle the dispute, CSB sued Kendell for breach of contract in federal court in Rhode Island.

Choice of Law

The court (Judge John J. McConnell) held that the contract issues were governed by the CISG because the contract involved the international sale of goods and both the United States and Chile are parties to the CISG. It then noted that when the CISG is silent on an issue, the courts should attempt to resolve that issue in “conformity with the general principles” on which the treaty was based, per Article 7(2). The court also stated that, in the absence of any general principles, Article 7(2) required the courts to resolve issues on which the CISG is silent “in conformity with the law applicable by virtue of the rules of private international law.” In the United States, the relevant rules of private international law are the ones set forth in the Restatement (Second) of Conflict of Laws.

Contract Formation

With respect to the threshold issue of whether a contract existed, the court applied the CISG to conclude that the parties had initially entered into an agreement to purchase fish at a price of $21 per kilogram. It then turned its attention to whether Grimaldi had agreed to a valid reduction in price on behalf of CSB. The answer to this question turned on whether Grimaldi possessed apparent authority to bind CSB. Since the CISG does not address questions of agency, and since the court could not identify any “general principles” on this topic, the court had to perform a choice-of-law analysis to ascertain what which jurisdiction’s agency law should be applied.

Agency Law

As part of its choice-of-law analysis, the court consulted the list of factors in Section 188 and Section 6 of the Restatement (Second) of Conflict of Laws. It ultimately concluded that it should apply the agency law of the United States because that state had the closest relationship to the parties and the dispute. While this was arguably the correct outcome, the court would have done better to rely on Section 292 (which deals with issues relating to agency law) rather than Section 188 (which deals with issues relating to contract law).

In any event, the court noted that (a) there was no one state where the putative agent (Grimaldi) dealt with the third party (Kendell), (b) it had no information as to where Kendell was negotiating in January 2020, (c) the fish were caught in international waters and destined for ports in California, New York, and Florida, and (d) it was not clear where the fish were kept or whether they ultimately reached their intended destinations.

On these hazy facts, the court held that U.S. agency law should be applied for three reasons. First, neither party had briefed it on the content of Chilean agency law. Second, it reasoned that since CSB had chosen to bring the suit in a U.S. forum, it had implicitly consented to the application of U.S. law. Third, the court invoked Section 191 of the Restatement (Second) of Conflict of Laws (which deals with sales contracts) to observe that that section called for application of the law of the place where delivery of the goods was to occur. The goods here at issue—the fish—were delivered in the United States.

Again, one may fairly criticize the court for focusing on a choice-of-law rule relating to contracts (Section 191) rather than the choice-of-law rule for agency (Section 292). The choice-of-law rules for contracts are irrelevant because, as discussed above, the CISG supplies the rule of decision for contract issues. Nevertheless, after concluding that U.S. law governed the agency issue, the court held that Grimaldi had apparent authority to bind CSB to the modification because it was reasonable on the facts presented for Kendell to believe, based on CSB’s words and actions, that Grimaldi had actual authority to act on behalf of CSB.

Statute of Frauds

Article 11 of the CISG states that a contract “need not be concluded in or evidenced by writing and is not subject to any other requirement as to form.” The effect of this provision is to do away with the statute of frauds for most contracts to which the CISG applies. There is, however, a catch. Article 96 of the CISG provides that any state may, if it so chooses, opt out of Article 11. When Chile ratified the CISG, it made an Article 96 reservation and opted out. The United States, on the other hand, declined to make an Article 96 reservation. The issue of whether Grimaldi’s oral promise to reduce the price was binding and enforceable absent a writing thus presented something of a legal tangle.

The court untangled the issue by looking to International Sales Convention Advisory Council Opinion No. 15 for guidance. In reliance on this “highly persuasive” opinion, the court held that an Article 96 reservation only had a “negative” effect. It held, in other words, that Chile’s decision to opt out of Article 11 only meant that the court was not required to enforce an oral agreement. It did not mean that every agreement had to be reduced to writing to be enforceable. The court reasoned—consistent with the advisory opinion—that it was therefore necessary to perform another choice-of-law analysis to determine what law to apply to the statute of frauds issue.

The court began its analysis by observing that the choice-of-law issue was (again) governed by the Restatement (Second) of Conflict of Laws as a matter of federal common law. But it did not cite the relevant section of the Restatement (Second) – Section 199 – which specifically addresses what law to apply when the laws of two states conflict with respect to whether an agreement must be in writing to be enforceable. Instead, it pivoted away from the Restatement (Second) to the Supremacy Clause in the U.S. Constitution.

The court reasoned that “treaties entered by the United States . . . preempt competing state law.” It then held that Article 11 “preempts any application of the U.C.C. statute of frauds” because “the United States has made no Article 96 reservation.” The court concluded, in effect, that the fact that the United States had not made an Article 96 reservation was dispositive with respect to the question of whether the contract had to be in writing. Under the court’s reasoning, the position adopted by the United States—that Article 11 applies and the sales contract need not be in writing—will seemingly always carry the day when the issue is presented to a U.S. court. Having concluded that Article 11 governed the issue, and that the contract did not need to be in writing, the court concluded that the oral modification to which Grimaldi had agreed was enforceable.

Breach and Damages

The court turned back to the rules of the CISG to hold that Kendell was in breach of the modified contract. Although Kendell had paid roughly $3.5 million for the fish, the amount due after the modification was just over $4 million. Accordingly, the court ordered Kendell to pay CSB approximately $575,000 in damages, plus costs and interest.

Conclusion

The CISG seeks to harmonize the law of sales across many different nations. It has largely accomplished this goal with respect to issues of contract formation and breach. It does not, however, purport to address many issues that frequently arise alongside claims for breach of contract. When these issues arise, the courts must still perform a traditional choice-of-law analysis to resolve them. As the foregoing analysis suggests, the task of juggling the terms of a harmonizing treaty, national choice-of-law rules, and national substantive rules is not always simple or easy.