The CISG Doesn’t Live Here Anymore

The recent decision of Justice Belobaba in Collingwood Ethanol LLP v. Humblet Inc., 2010 ONSC 2132 (CanLII) provides an economical analysis of the new Van Breda test for jurisdiction simpliciter and conventional forum non conveniens test. What it lacks, however, is the correct application of the CISG as applicable law to the overall jurisdictional analysis.

The plaintiff, Collingwood Ethanol LLP, (“CE”) was building an ethanol processing plant in Collingwood, Ontario and retained VTEK (now Humblet Technologies) to supply and install the distillation and dehydration system. Humblet, then sub-contracted with Sulzer Chemtech Gmbh (“SG”) based in Germany.for the manufacture and supply of the thirteen membrane modules essential to the processing system. The modules were marketed through SG’s Swiss marketing subsidiary, Sulzer Chemtech Ltd., (“SG”), which also provided Humblet with on-site engineering, technical supervision and start-up services, following installation. The modules failed, were rebuilt, and failed again. Eventually, a different processing system was installed.

CE has sued the Humblet and Sulzer defendants for $16 million in property damage and economic loss. The claims against Sulzer were based concurrently in contract and tort. The tort claim, in essence, alleges negligence in the design and manufacture of the modules and negligence in the on-site start-up operations.

The contract between CE and SG for the purchase of the seven modules contained choice of forum and choice of law clauses specifying Switzerland and Swiss law. CE limited its claim to the thirteen modules that were not the subject of any contractual agreement between CE and SG.

The Humblet defendants attorned by filing a statement of defence and cross-claim against the Sulzer defendants. The Sulzer defendants then brought a motion contesting jurisdiction and forum.

After laying out the two-step jurisdictional analysis under the Van Breda test, Belobaba, J. then states:

“[10] First, presumed jurisdiction under rule 17.02(g). In my view, there is ample support for CE’s submission that the tort was committed in Ontario presumptively satisfying the real and substantial connection test. Consider the following:

• CE, an Ontario partnership, was building an ethanol plant in Ontario;

• CE contracted with Humblet who subcontracted the modules portion to SG;

• SG, a world-wide leader in membrane technology, manufactured the modules in Germany and shipped them to the Ontario project with full knowledge about their destination and intended use in Ontario;

• SG and SS then sent two technical experts to Ontario to supervise the start-up;

• Certain steps taken by these experts on-site in Ontario allegedly caused the modules to fail;

• The resulting damage was sustained in Ontario.

[11] The fact that some of the allegedly wrongful activity (i.e. design and manufacture) took place in Germany does not preclude a finding that the tort was committed in Ontario. Where a defendant can reasonably foresee that its conduct will cause harm within the forum by putting a product into the normal channels of trade and knows, or ought to know, that the product will be used in the forum and that if defective could harm a consumer in the forum, jurisdiction may be assumed: Van Breda at para. 89. I see no reason in principle for distinguishing between foreseeable personal injury harm and foreseeable property damage or economic harm.

[12] This is not a case of a local supplier that confined its activities to its home jurisdiction. The fact that the thirteen German-made modules were being shipped to Ontario, to be installed by SG’s own distributor at CE’s ethanol processing plant, which would be started-up under the supervision of SG and SS’s own experts attending on-site in Collingwood – was not only foreseeable but well-known.

[13] In sum, I have no difficulty concluding on the facts herein that the tort was committed in Ontario. A real and substantial jurisdictional connection is therefore presumed.” [footnotes omitted]

In a footnote, Belobaba, J. observes,

[1] CE is also suing the Sulzer defendants in contract, arguing that Sulzer is somehow caught by the contract that was entered into between CE and Humblet, who at the time was a non-exclusive Canadian distributor for SG products and services. I suggested to Mr. Brunner that the contract prong and the “agency by estoppel” argument may not be accepted upon closer examination. Fortunately, Mr. Pinos intervened and confirmed on the record that he was not asking the court to stay the contract portion of the action and if the matter got to trial was willing to deal with both claims, contract and tort. This being the case, the contract claim was not subjected to any further scrutiny. In any event, the tort claim is more direct and helps to establish jurisdiction much more convincingly.”

Belobaba, J. then addresses the factors under forum non conveniens analysis. On the issue of applicable law, Justice Belobaba held:

“(c) The applicable law and its weight in comparison to the factual questions to be decided: The applicable law is not Swiss law as set out in the agreement between Humblet and SG. The plaintiff is not privy to this agreement. The plaintiff’s primary claim, or at least the one that clearly provides for Ontario jurisdiction, is in tort. The applicable law is therefore the lex loci delicti (the law of the place of the wrong.) As already noted, the alleged tort was committed in Ontario. The law that applies is therefore Ontario law. Advantage: Ontario.”

The problem here is that even if the underlying contract was inapplicable due to “agency by estoppel” or non-privity grounds, the fact remains that the CISG still governs the dispute.

First, the availability of concurrent claims in contract and tort is well-established (see Central Trust Co. v. Rafuse [1986] 2 S.C.R. 147, 206, [1986] 31 D.L.R. (4th) 481, 522 (Le Dain, J.).

Second, the contracting parties (and intermediaries and agents) were from different states: namely, Canada and Germany (and Switzerland). If counsel had properly briefed the court and characterized the dispute as one involving an international sale of goods, then the CISG would have applied by virtue of Article 1(1)(a) or Article 1(1)(b) which read:

Article 1

(1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States:
(a) when the States are Contracting States; or
(b) when the rules of private international law lead to the application of the law of a Contracting State.

Third, while Article 5 states that the CISG “does not apply to the liability of the seller for death or personal injury caused by the goods to any person”, this does not end the inquiry. The prevailing view of CISG scholars is that claims for property damage and resultant economic loss (see Articles-74-77) are not excluded. In other words, concurrent claims framed in contract and tort/delict (including product liability) are governed by the CISG. Moreover, the decision sheds no light on the relevant dates, including when notice of non-conformity of the modules was given (see, Articles 39(1) and 39)2) and Article 40 of the CISG which impose an ultimate 2 year time-limit on the buyer to give notice of non-conformity to the seller).

According to the 2008 UNCITRAL Digest of case law on the United Nations Convention on the International Sale of Goods:

“Scope of the exclusion

2. Article 5 declares that the Convention does not govern liability for death or personal injury “to any person.” Although this can be read to exclude a buyer’s claim against the seller for pecuniary loss resulting from the buyer’s liability to third parties for personal injury caused by the goods, one court has applied the Convention to such a claim.[2]

3. A claim for damage to property caused by non-conforming goods is not excluded by article 5.[3] Unlike some legal systems, however, the Convention requires a buyer to notify the seller of the lack of conformity, as specified in article 39, in order to preserve the claim.[4] Where the damage to property is not “caused by the goods”, as where the buyer’s property is damaged by delivery of the goods, the liability issue must be settled on the basis of applicable domestic law.”

In my article, “Bringing Locus Into Focus: A Choice-of-Law Methodology for CISG-based Concurrent Contract and Product Liability Claims” REVIEW OF THE CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (CISG) 2004-2005, Pace International Law Review, ed., München: Sellier European Law Publishers, pp. 179-223, 2006, I coined the term “lex foci conventionis,” or simply the “lex foci,” as meaning “the law of the place where CISG claims in contract and tort converge”. It never caught on. I also proposed the following choice-of-law rules for concurrent claims based upon contract and negligent tort-based product liability (ie. property damage):

1. Where the international sales contract specifies that the CISG applies, but the parties have not addressed the issue of product liability claims, then any issues not governed by the CISG (i.e. gaps or exclusions) are to be determined by the lex loci contractus. 

2. If the parties are both from contracting States but the international sales agreement has not expressly waived or varied application of the CISG under Article 6, then the lex foci – the point of convergence of contract or tort liability regimes – requires the domestic court to consider the following factors: 
(i) the factual characterization of the claim to determine the core of the action (contract or tort, or both?); 

(ii) If the nature of the claim is not readily discernable (i.e. the facts pleaded are neither dispositive nor determinative as to whether the claim is predominantly contractual or delictual (tortious)), then the court should assess whether the ground on which the remedy is based is contrary to the aims of the CISG. If so, then the lex loci contractus should govern.

3. If the concurrent claim is predominantly negligence-based, then the domestic court should apply the lex loci delicti, unless doing so would result in an injustice, determined with reference to the CISG, UNIDROIT Principles, PECL and decisions of international courts and arbitrators.”

Too bad no one took the time to read it.

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