UPDATED: All Bets are [Off] : CISG [Not] Applied in Expedition Helicopters Inc. v. Honeywell Inc. Appeal

UPDATE: As I predicted, today’s decision by the Court of Appeal for Ontario in Expedition Helicopters Inc. v. Honeywell Inc., 2010 ONCA 351  is silent on the CISG as the applicable law.
Interestingly, Juriansz, J.A. writing for the unanimous Court (O’Connor A.C.J.O. and Gillese J.A., concurring) allowed the appeal, set aside the order of the motion judge, and entered a stay of proceedings. Essentially, the Court of Appeal held that the motion judge incorrectly applied the “strong cause” test regarding enforcement of a forum selection clause as forth in the Supreme Court of Canada’s decision in Z.I. Pompey Industrie v. ECU-Line N.V., [2003] 1 S.C.R. 450, and as first stated in the British case The “Eleftheria”, [1969] 1 Lloyd’s Rep. 237 (Adm. Div.). According to the Court of Appeal, t he motion judge instead conducted a forum non conveniens analysis in which she regarded the forum selection clause as but one of a number of factors, rather than giving full weight to the clause or considering the effect it had on the factors relevant to the forum non conveniens analysis. 

So why is the CISG even relevant? Here’s why. On the issue of the applicable law, Juriansz, J.A. states:

[15]         The motion judge did not mention that the forum selection clause provided that “THIS AGREEMENT SHALL BE GOVERNED, CONTROLLED AND INTERPRETED UNDER THE LAW OF THE STATE OF ARIZONA”.  Quite to the contrary, it seems the motion judge may have assumed the case would be governed by the law of the jurisdiction in which it proceeded.  She observed that the plaintiff’s claim in Arizona might be dismissed because under the law of Arizona the issue would arise as to whether it had been “timely filed”, and noted that in Ontario such an issue would not arise.  There was no basis for the motion judge’s apparent assumption that, if the case proceeded in Ontario, the law of Ontario would apply.  The motion judge should have considered that the clause provided that the law of Arizona would apply.
Yes, but….

Consider that one of the factors in the “strong cause” test is “(b) Whether the law of the foreign Court applies and, if so, whether it differs from English law in any material respects…” Hence, the CISG is a neutralizing factor in the “strong cause” test; it is not “foreign law”, rather, it is both the law of Arizona and Ontario. The CISG also factors into the forum non conveniens analysis on the issue of where the contract was formed and the correlative rights and duties of the buyer and seller under the international commercial contract. I emphasize the term “international commercial contract” for a reason, since it seems as though both the motion judge and appeal panel lost sight of this fact. Granted, Juriansz, J.A. does note that the motion judge “alludes to the public policy that parties honour their contractual commitments and the principles of order and fairness at the heart of private international law only in setting out Honeywell’s position and not in her analysis of the factors. “
Justice Juriansz concludes:
[23]         In this case, there is no reason to depart from the presumption that Expedition should be held to the bargain that it made.  A departure is only justified in “exceptional circumstances”, as Bastarache J. stressed in Pompey.  There is nothing exceptional about this case.  As discussed above, the analysis of whether there is “strong cause” to decline to enforce a forum selection clause is not an analysis of the forum conveniens in the conventional sense.  In this case Expedition may have established that it will experience some inconvenience in the conventional sense in having to assert its claim in Arizona.  That inconvenience does not justify permitting it to resile from its agreement in this [sic] commercial contract to tolerate that inconvenience.
[24]         A forum selection clause in a [sic] commercial contract should be given effect.  The factors that may justify departure from that general principle are few.  The few factors that might be considered include the plaintiff was induced to agree to the clause by fraud or improper inducement or the contract is otherwise unenforceable, the court in the selected forum does not accept jurisdiction or otherwise is unable to deal with the claim, the claim or the circumstances that have arisen are outside of what was reasonably contemplated by the parties when they agreed to the clause, the plaintiff can no longer expect a fair trial in the selected forum due to subsequent events that could not have been reasonably anticipated, or enforcing the clause in the particular case would frustrate some clear public policy.  Apart from circumstances such as these, a forum selection clause in a [sic] commercial contract should be enforced.
[25]         None of these factors has been shown in this case.  There was no basis to refuse the stay of proceedings.
For a change of pace, I am going to make a wager regarding the appeal in Expedition Helicopters Inc. v. Honeywell Inc., 2010 ONSC 732 (CanLII) a case involving the enforceability of an exclusive jurisdiction/choice of law clause and jurisdictional challenge under s.106 of the Courts of Justice Act, R.S.O. c.C.43 (as am.), The appeal decision, currently under reserve, will be released by the Court of Appeal for Ontario tomorrow.

I will not predict the outcome. I will, however, use my otherwise pusillanimous powers of prognostication to predict that the Court of Appeal for Ontario will not correctly identify the applicable law as the United Nations Convention on Contracts for the International Sale of Goods, 1980 (CISG) as incorporated by the International Sale of Goods Act, R.S.O. 1990, c.I.10 (as am.)  If I am wrong, I will donate $100 to the designated charity of each of the first five commentators pointing out that my prediction was wrong.

Here is the text of forum selection clause at issue in the dispute:

CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED, CONTROLLED AND INTERPRETED UNDER THE LAW OF THE STATE OF ARIZONA, EXCLUDING ITS CONFLICT OR CHOICE OF LAW PROVISIONS. The parties (i) agree that any state or federal court located in Phoenix, Arizona shall have exclusive jurisdiction to hear any suit, action or proceeding arising out of or in connection with this Agreement, and consent and submit to the exclusive jurisdiction of any such court in any such suit, action or proceeding and (ii) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding to the extent permitted by the applicable law, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper, or that this Agreement or any of the transactions contemplated hereby may not be enforced in or by such courts.

The CISG does not define the term “sale” or “goods”. Assuming the lease contained an option to purchase (i.e. a conditional sales or hire-purchase agreement), then the CISG would not be excluded under Art. 3. Professor John O. Honnold, in his authoritative  legal text, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (The Hague: Kluwer Law International, 1999) at 60-62, posits that the CISG may apply to leases by analogical reference, noting:

“In some situations tribunals may find that provisions of the Convention are helpful in solving comparable problems that fall outside its scope. Such voluntary borrowing of solutions from specialized statutes has been useful within domestic legal systems. For example, in the United States the Uniform Sales Act (1906) and it successor, Article 2 of the Uniform Commercial Code (1954), state that they govern “sales” of [page 60] goods, language that literally would exclude the burgeoning field of supplying goods through leasing (hiring or rental) arrangements. However, courts faced with the question whether the user (lessee) of the goods was entitled to legal protection when the goods were defective found that the “sales” statutes dealt with a comparable problem and relied on these provisions; this approach was not in obedience to statutory command but in observance of the principle that similar problems called for similar solutions.[6] The extension of “sales” rules to “leases” of goods has necessarily been selective; for example, some of the “sales” rules dealing with remedies for breach are inappropriate to transactions in which the user’s investment is limited to rental payments.[7] Problems such as these led in 1987 to the addition to the Uniform Commercial Code (UCC) of a new Article 2A. Leases, immediately following Article 2. Sales.

“Lease” or “Sale”: Form or Substance. Some transactions labelled “lease” in substance are sales—subject to a security interest. Whether the CISG applies to these transactions should depend on substance rather than form; “chameleon leases” may be subject to CISG if they satisfy the other requirements for applicability—e.g., Article 1. Penetrating such disguises in the setting of the UCC is discussed in White & Summers (1995) 21-3.

Tribunals, of course, are under no international obligation to use the Convention’s provisions for transactions that lie outside its scope; such “borrowing” depends on principles of domestic jurisprudence and a decision whether rules designed for domestic transactions are as suited to international transactions as the Convention. In a larger sense, careful analogical extension of these and other international rules can make a measured, albeit modest, contribution to the reestablishment of an international law-merchant.[8] [page 61]”

In any event, leases and bailments are not expressly excluded under the CISG, so the gap-filling would involve the court’s characterization of the substance of the agreement, which would be determined by domestic law (likely Arizona law).

Under Article 1(1)(a) of the CISG, the internationality requirement is met as both parties are from Contracting States. The plaintiff, Expedition Helicopters Inc., is a helicopter charter company based in Cochrane, Ontario. The defendant, Honeywell Inc., headquartered in Phoenix, Arizona, is a global provider of engines, avionics and other systems in the aviation and aerospace industry.

The aforementioned clause above does not expressly exclude the application of the CISG (Art. 6).

At first glance, Article 2(e) appears to exclude the sale of aircraft from the CISG’s applicability. Article 2 of the CISG reads:

Article 2

This Convention does not apply to sales:
(a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use;
(b) by auction;
(c) on execution or otherwise by authority of law;
(d) of stocks, shares, investment securities, negotiable instruments or money;
(e) of ships, vessels, hovercraft or aircraft;
(f) of electricity. [emphasis added].

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

8. Under article 2(e) sales of ships, vessels, aircraft, and hovercraft are also excluded from the Convention. However, sales of parts of ships, vessels, aircraft, and hovercraft — including essential components, such as engines  –may be governed by the Convention since exclusions from the Convention’s sphere of application must be interpreted restrictively. According to one arbitral tribunal, the sale of a decommissioned military submarine is not excluded by article 2(e).[citations omitted, emphasis added]

See also, Franco Ferrari, “Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing”, 15 Journal of Law and Commerce (1995) 1-126 also available online at: http://www.cisg.law.pace.edu/cisg/biblio/2ferrari.html, citing the Hungarian Supreme Court in United Technologies (Pratt & Whitney) v. Malev Hungarian Airlines, Legfalsobb Biróság 25 September 1992 which held that the CISG applied to aircraft engines, available online at: http://cisgw3.law.pace.edu/cases/920925h1.html

Safe bet.

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