International contract law - choice-of-law analysis applies when signatory nations adopt opposing oral contract provisions under the CISG - Forestal Guarani S.A. v. Daros Int'l., Inc.

Author:Sedgwick, Jeannette
Position:United Nations Convention on Contracts for the International Sale of Goods

The United Nations Convention on Contracts for the International Sale of Goods (CISG) governs contract formation between parties of signatory nations and grants a right of action for breach of contract. (1) Article 11 of the CISG allows signatory nations to create enforceable oral contracts. (2) Signatory nations may opt out of Article 11 obligations by making an Article 96 reservation or declaration. (3) In Forestal Guarani S.A. v. Daros Int'l., Inc., (4) the United States Court of Appeals for the Third Circuit considered the enforceability of an oral contract created by parties of signatory nations with divergent implementation of the CISG. (5) The Third Circuit held that when one party's country of incorporation has made an Article 96 reservation and the other party's state has not, and neither the text nor principles of the CISG apply, the court must undertake a choice-of-law analysis to determine which forum's law applies. (6) Only after such analysis would the court apply that forum's law to adjudicate issues of contract formation and breach. (7)

In 1999, Daros International, Inc., an export-import company based in New Jersey, entered into a verbal contract with the Argentinean manufacturing company Forestal Guarani S.A. for wooden finger-joints. (8) Daros paid Forestal $1,458,212.35 for finger-joints which, according to Forestal, were valued at $1,857,766.06.9 Forestal filed a breach of contract claim in the Superior Court of New Jersey in April 2002 for the remaining balance due because it believed the oral contract specified the greater amount. (10) Daros subsequently removed to federal court, naming the CISG as the international treaty on which the subject matter jurisdiction of the federal court was based. (11)

The District Court denied Daros' 2005 summary judgment motion, determining that there were genuine issues of material fact concerning the contract's existence. (12) After briefing in 2008, the District Court granted Daros' motion for summary judgment, finding the oral contract to be invalid. (13) The Third Circuit disagreed, holding that the CISG "does not expressly settle" whether a party can sustain a breach of contract claim for an oral contract when only one party's country of incorporation has made an Article 96 Declaration. (14) Further, the principles of the CISG do not facilitate adjudication. (15) Under these circumstances, the Third Circuit decided that choice-of-law rules for the forum state must govern, given the CISG's reference to the "rules of private international law." (16)

The origins of the CISG lie in decades of international drafting and cooperation. (17) Today, the CISG applies to contracts of sale of goods between parties that are incorporated in different contracting states. (18) Under Article 7(1), contracting states should regard the CISG's goals to promote uniformity and observe good faith in international trade. (19) Good faith includes a standard of reasonableness. (20) Finally, the CISG governs contract formation, including the rights and obligations within that formation, and is adopted into a country's domestic law upon ratification. (21)

A signatory nation may choose to comply with or opt out of several provisions of the CISG. (22) For instance, Article 11 governing formation of a contract under the CISG does not require contracts to be in writing, and Article 29 allows parties to prove modifications to an oral contract. (23) Signatory countries, however, may require parties to memorialize contracts through writing by making an Article 96 declaration, thereby opting out of Part II and Articles 11 and 29. (24)

When two signatory countries have adopted opposing provisions, the courts must apply CISG's underlying principles in accordance with Article 7(2) to reconcile the discrepancy. (25) The CISG controls in situations even when a reconciliation between provisions may be needed; there is no consensus, however, among the United States or international courts as to how the CISG's principles may resolve disputes effectively. (26)

In Forestal Guarani S.A. v. Daros Int'l., Inc., the United States Court of Appeals for the Third Circuit determined a choice-of-law analysis would apply when disputes between parties of signatory states with different CISG provisions could not be resolved through the CISG's text or general principles. (27) Given the sparse jurisprudence on this issue, the court relied on scholars' expertise to inform its decision. (28) The court acknowledged that the CISG governs this contract dispute generally, but could not resolve whether a contract or the terms of the contract had been formed. (29) After applying the CISG's plain language, it found Articles 11 and 96 did not resolve the issue. (30) Next, the court applied the first clause of Article 7(2) which mandates applying general principles when the CISG does not expressly settle a conflict. (31) Finding no applicable general principles, the court invoked the second half of Article 7(2) and determined application of private international law the most appropriate manner of adjudication. (32)

In its reasoning, the Third Circuit contemplated two possible approaches: first, that courts might apply a choice-of-law analysis based on principles of private international law; and second, that a contract between Argentinean and American companies must be in writing because Argentina, a signatory nation with an Article 96 declaration, requires international contracts governed by the CISG to be in writing. (33) Having established these two alternatives, the court determined the first approach was proper because neither the plain text nor the principles of the CISG expressly settled the issue. (34) The court concluded this approach was consistent with the CISG, given Article 7(2)'s reference to the rules of private international law. (35) In so ruling, the Third Circuit established a standard that disregards the CISG's principles, potentially undermining the creation of a uniform international sales law. (36)

Faced with this unusual dispute, the Third Circuit properly ruled the CISG applied to this contract. (37) The CISG became part of domestic law when the U.S. ratified it. 38 Additionally, the court grounded its analysis of the case in the CISG's text, in accordance with the prevailing analysis for interpreting international treaties. (39)

The Third Circuit should have looked to Article 7(2) and conducted a more thorough analysis of the CISG's general principles. (40) Additionally, the court might have seized the opportunity to read the CISG's principles of good faith and party autonomy expansively, as had the District Court. (41) A choice-of-law analysis may frustrate the goals of the CISG. (42) Uniformity in international sales, though still not the norm, would increase certainty in the CISG's interpretation. (43) Likewise, the court could have provided clear guidance to other signatory states by strictly adhering to Argentina's Article 96...

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