- U.S. Court of Appeals, Second Circuit
- Transmar Commodity Group Ltd. v. Cooperativa Agraria Indus- trial Naranjillo Ltda.
INTERPRETATION OF THE PARTIES' INTENT (ART. 8 CISG) - ALL RELEVANT CIRCUMSTANCES TO BE TAKEN INTO ACCOUNT
USE OF EXTRINSIC EVIDENCE FOR CONTRACT INTERPRETATION - ADMISSIBLE UNDER CISG
A Peruvian agricultural cooperative concluded six contracts for the supply of certified cocoa butter with a U.S. trading company based in Texas. The seller failed to deliver the goods; hence, the buyer initiated arbitral proceedings in the city of New York under an arbitration agreement in the buyer’s standard terms of purchase. The arbitral tribunal found for the buyer. The seller brought an action before the New York District Court seeking to obtain the arbitral award vacation, alleging that it had never consented to an arbitration clause and therefore was not bound by it. The District Court vacated the arbitral award reasoning that the parties had not validly agreed to arbitration; in doing so, it denied that the contract between the parties was governed by CISG, and it applied New York law.
The Appellate Court found that CISG applied as both parties were located in Contracting States (Art. 1(1) CISG). In reviewing the lower judge's finding, the Court noted that even if it was true that, as pointed out by the District Court, U.S. case law relating to CISG is relatively rare, this element did not justify the application of New York law instead of the uniform text.
Furthermore, CISG and New York law differ in several aspects, for example concerning the admissibility of extrinsic evidence for contract interpretation. While under CISG due consideration should be had to the extrinsic evidence to identify what was the common intention of the parties, New York law prohibits the use of extrinsic evidence in many cases. The Court concluded that the District Court, instead of merely relying on the façade of the written contract, should have considered all relevant circumstances of the case, including the negotiations (Art. 8(3) CISG), to establish whether the parties had consented to arbitration. The case was then remanded to the District Court for further findings.
Appellant Transmar Commodity Group Ltd. appeals from the September 26, 2016 judgment 1 of the United States District Court for the Southern District of New York (Stanton, J.), vacating an arbitration award in Transmar’s favor under 9 U.S.C. § 10(a)(4). We assume the parties’ familiarity with the underlying facts, procedural history, and specification of issues for review.
«We review a district court’s decision to confirm or vacate an arbitration award de novo on 2 questions of law and for clear error on findings of fact.» National Football League Mgmt. Council v. National Football League Players Association, 820 F.3d 527, 536 (2d Cir. 2016). «We re-
view de novo the district court’s legal conclusion that the parties did not contractually bind themselves to arbitrate disputes, and review factual findings underlying those conclusions for clear error.» Aceros Prefabricados, S.A. v. TradeArbed, Inc., 282 F.3d 92, 97 (2d Cir. 2002).
On February 4, 2016, an arbitration panel of The Cocoa Merchants’ Association of America, 3 Inc. («CMAA») ruled that Cooperativa Agraria Industrial Naranjillo Ltda. («Naranjillo») had defaulted on its contractual obligations to deliver cocoa butter to Transmar. It ordered Naranjillo
to pay Transmar $2,606,626.60. The award was based on six nearly identical contracts Naranjillo and Transmar entered into on August 30, 2012 for delivery of UTZ Certified cocoa butter over the course of six months in 2013.
The district court vacated the CMAA’s award by order of September 22, 2016. Cooperativa 4 Agraria Industrial Naranjillo Ltda. v. Transmar Commodity Group Ltd., No. 16-cv-3356, 2016 WL 5334984 (S.D.N.Y. Sept. 22, 2016) («Naranjillo»). Under the FAA, a court may vacate an arbitral award «only if at least one of the grounds specified in 9 U.S.C. § 10 is found to exist.» Barbier v. Shearson Lehman Hutton Inc., 948 F.2d 117, 120 (2d Cir. 1991). The district court relied on Section 10(a)(4), which allows for vacatur, in relevant part, «where the arbitrators exceeded their powers.» It found that Naranjillo and Transmar had not actually agreed to arbitrate their disputes before the CMAA or anywhere else, so the CMAA did not have any power to rule on their dispute. Id. at *4–6.
In coming to this conclusion, the district court applied New York law. Naranjillo, 2016 WL 5 5334984, at *4. It did so in error.
As a contract between the United States and Peru, it is governed by the United Nations Convention on Contracts for the International Sale of Goods («CISG»). «Generally, the CISG governs sales contracts between parties from different signatory countries» unless the parties clearly indicate an intent to be bound by an alternative source of law. Delchi Carrier SpA v. Rotorex Corp., 71 F.3d 1024, 1027 n. 1 (2d Cir. 1995) («The CISG ... is a self-executing agreement between the United States and other signatories ...»); Status, United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980), http://www.un- citral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html (showing that Peru is a signatory country). Although the CMAA’s standard contract contains a choice-of-law provision designating New York law, the parties dispute whether that document is part of these contracts at all. The CMAA’s choice of law provision therein therefore cannot guide us.
Even if the district court is correct that the «caselaw interpreting the CISG is relatively sparse,» 7 Naranjillo, 2016 WL 5334984, at *4 (quoting Hanwha Corp. v. Cedar Petrochemicals, Inc., 760 F.Supp.2d 426, 430 (S.D.N.Y. 2011)), that fact alone does not warrant substituting New York
law for the CISG.
In fact, we have specifically that « [b]ecause there is virtually no case law under the [CISG, at 8 least as of 1995], we look to its language and to ‘the general principles’ upon which it is based.» Delchi, 71 F.3d at 1027. Moreover, New York law differs from the CISG in several important respects. In particular, Article 8(3) requires courts to give «due consideration» to extrinsic evidence of the reasonable expectations of the parties if their subjective intent is at odds. See U.N.C.I.S.G. Art.8(3), available at http://www.uncitral.org/pdf/english/ texts/sales/cisg/V1056997-CISG-e-book.pdf; MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova d’Agostino, S.p.A., 144 F.3d 1384, 1389 (11th Cir. 1998) (calling Article 8(3) «a clear instruction to admit and consider parol evidence... »). Moreover, Article 9(2) evinces «a strong preference for enforcing obligations and representations customarily relied upon by others in the industry,» which, of course, cannot but be demonstrated through extrinsic evidence. Geneva Pharmaceuticals Technology Corp. v. Barr Laboratories, Inc., 201 F.Supp.2d 236, 281 (S.D.N.Y. 2002), rev’d in part on other grounds, 386 F.3d 485 (2d Cir. 2004); U.N.C.I.S.G. Art. 9(2). New York law, by contrast, has long applied the «four corners rule» that prohibits extrinsic evidence unless the face of the document is ambiguous. See Kass v. Kass, 91 N.Y.2d 554, 566–67, 673 N.Y.S.2d 350, 696 N.E.2d 174 (1998).
The district court erred as a matter of law by relying primarily on the face of the contract and the document allegedly incorporated by reference. It should have also considered extrinsic evidence concerning «all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties,» U.N.C.I.S.G. Art. 8(3), and «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» at issue here. U.N.C.I.S.G. Art. 9(2). Because additional fact-finding will be required in order to adduce such evidence, the district court abused its discretion in failing to allow discovery, hold an evidentiary hearing, or both. See Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Tr., 729 F.3d 99, 103 (2d Cir. 2013) («We review a decision to deny an evidentiary hearing for abuse of discretion.»). Of course, we express no view as to whether such extrinsic evidence should lead to the same or a different result.
The order of the district court hereby is VACATED and REMANDED for further proceedings 10 consistent with this order.}}
Commented on by:
- Franco Ferrari, 'What Is Wrong With the "Transmar" Decisions', New York Law Journal, 2018.}}