BP Oil Intl Ltd, et al v. Empresa Estatal Petr, et

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

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

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

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

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5
Similarly, because the CISG is the law of
Ecuador, it governs this dispute. “[I]f the par-
ties decide to exclude the Convention, it
should be expressly excluded by language
which states that it does not apply and also
states what law shall govern the contract.”
RALPH H. FOLSOM, ET AL., INTERNATIONAL
BUSINESS TRANSACTIONS 12 (2d ed. 2001).
An affirmative opt-out requirement promotes
uniformity and the observance of good faith in
international trade, two principles that guide
interpretation of the CISG. CISG art. 7(1).
B.
The CISG incorporates Incoterms through
article 9(2), which provides:
The parties are considered, unless
otherwise agreed, to have impliedly
made applicable to their contract or its
formation a usage of which the parties
knew or ought to have known and
which in international trade is widely
known to, and regularly observed by,
parties to contracts of the type involved
in the particular trade concerned.
CISG art. 9(2). Even if the usage of
Incoterms is not global, the fact that they are
well known in international trade means that
they are incorporated through article 9(2).7
PetroEcuador’s invitation to bid for the
procurement of 140,000 barrels of gasoline
proposed “CFR” delivery. The final
agreement, drafted by PetroEcuador, again
specified that the gasoline be sent “CFR La
Libertad-Ecuador” and that the cargo’s gum
content be tested pre-shipment.8 Shipments
designated “CFR” require the seller to pay the
costs and freight to transport the goods to the
delivery port, but pass title and risk of loss to
the buyer once the goods “pass the ship’s rail”
at the port of shipment. The goods should be
tested for conformity before the risk of loss
passes to the buyer. FOLSOM, supra, at 41. In
the event of subsequent damage or loss, the
buyer generally must seek a remedy against the
carrier or insurer. In re Daewoo Int’l (Am.)
Corp., 2001 U.S. Dist. LEXIS 19796, at *8
(S.D.N.Y. Dec. 3, 2001).
In light of the parties’ unambiguous use of
the Incoterm “CFR,” BP fulfilled its
contractual obligations if the gasoline met the
contract’s qualitative specifications when it
passed the ship’s rail and risk transferred to
PetroEcuador. CISG art. 36(1). Indeed, Say-
bolt’s testing confirmed that the gasoline’s
gum content was adequate before departure
from Texas. Nevertheless, in its opposition to
6(...continued)
the CISG . . . . To hold otherwise would undermine
the objectives of the Convention which Germany
has agreed to uphold.”).
7 See St. Paul Guardian Ins., 2002 U.S. Dist.
LEXIS 5096, at *9-*10 (stating that “INCO-
TERMS are incorporated into the CISG through
Article 9(2)”); RALPH H. FOLSOM, ET AL., supra, at
72 (“Incoterms could be made an implicit term of
the contract as part of international custom.
(continued...)
7(...continued)
Courts in France and Germany have done so, and
both treaties and the UNCITRAL Secretariat de-
scribe Incoterms as a widely-observed usage for
commercial terms.”).
8 In accepting PetroEcuador’s invitation, BP
stated “CNF” as the condition of delivery. CNF
was used in a previous version of Incoterms to
specify “cost and freight” delivery. INTERNATION-
AL CHAMBER OF COMMERCE, INCOTERMS 1980
(1980). In any event, the final agreement uses the
term “CFR.”

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6
BP’s motion for summary judgment, Petro-
Ecuador contends that BP purchased the gaso-
line from Shell on an “as is” basis and
thereafter failed to add sufficient gum inhibitor
as a way to “cut corners.”9 In other words,
the cargo contained a hidden defect.
Having appointed Saybolt to test the
gasoline, PetroEcuador “ought to have
discovered” the defect before the cargo left
Texas. CISG art. 39(1).10 Permitting
PetroEcuador now to distance itself from
Saybolt’s test would negate the parties’
selection of CFR delivery and would
undermine the key role that reliance plays in
international sales agreements. Nevertheless,
BP could have breached the agreement if it
provided goods that it “knew or could not
have been unaware” were defective when they
“passed over the ship’s rail” and risk shifted to
PetroEcuador. CISG art. 40.11
Therefore, there is a fact issue as to wheth-
er BP knowingly provided gasoline with an
excessive gum content. The district court
should permit the parties to conduct discovery
as to this issue only.
IV.
BP raises negligence and breach of contract
claims against Saybolt, alleging that the
company improperly tested the gasoline’s gum
content before shipment. These claims amount
to indemnification for BP’s losses suffered on
account of PetroEcuador’s refusal to accept
delivery. Our conclusion that PetroEcuador is
liable so long as BP did not knowingly provide
deficient gasoline renders these claims moot.
Summary judgment was therefore proper,
though we need not review the district court’s
reasoning.
If PetroEcuador improperly refused CFR
delivery, it is liable to BP for any consequential
damages. In its claims against Saybolt, BP
pleaded “in the alternative”; counsel also ac-
knowledged, at oral argument, that beyond
those damages stemming from PetroEcuador’s
refusal to accept delivery, BP has no collateral
claims against Saybolt.12 If Saybolt negligently
misrepresented the gasoline’s gum content,
PetroEcuador (not BP) becomes the party
with a potential claim.
9 Under CISG article 36(1), “[t]he seller is lia-
ble in accordance with the contract . . . for any lack
of conformity which exists at the time when the
risk passes to the buyer, even though the lack of
conformity becomes apparent only after that time.”
10 CISG article 39(1) states: “The buyer loses
the right to rely on a lack of conformity of the
goods if he does not give notice to the seller spe-
cifying the nature of the lack of conformity within
a reasonable time after he has discovered it or
ought to have discovered it.”
11 See also RALPH H. FOLSOM, ET AL., supra, at
41 (“Thus, the buyer is still able to recover for any
nonconformity which becomes apparent long after
delivery, but the buyer may have to prove that the
defect was present at the delivery and was not
caused by buyer’s use, maintenance or protection
of the goods.”).
12 Theoretically, BP might still have a collateral
breach of contract claim against Saybolt for
$3,913.96SSthe amount that it, PetroEcuador, and
Shell were invoiced for Saybolt’s inspection ser-
vices. There is, however, no evidence in the record
that BP ever paid its share of the invoice. Even so,
the breach of contract claim set forth in BP’s Third
Amended Consolidating Claim alleges only that the
contract requires Saybolt to “defend, indemnify and
hold BP harmless from any damages.” BP does
not seek recovery of the inspection fee as part of its
breach of contract claim.

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7
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.

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