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Publication data for citation purposes: Pace Rev. of the CISG (2004-2005) (forthcoming). Reproduced with permission of the author and the Review.

Brown & Root Services v. Aerotech Herman Nelson:
The Continuing Plight of the U.N. Sales Convention in Canada

by Peter J. Mazzacano [*]
January 2005

Introduction
Facts of the case
Discussion
-     Applicable law
-     The relationship between the CISG and Provincial Sale of Goods legislation
-     The CISG and the quest for international uniformity
Conclusion

INTRODUCTION

Reporting in 1999 on the first Canadian court case on the U.N. Convention on Contracts for the International Sale of Goods ("CISG" or "Convention"), Jacob Ziegel noted that "the decision is not a good precedent for the treatment of the Convention in future Canadian litigation."[1] With a few minor exceptions, the situation does not appear to have changed. With the most recent court decision on the CISG, one has to wonder if legal practitioners will ever get the law right. The latest disappointment involves rulings by Manitoban trial and appeal courts in Brown & Root Services v. Aerotech Herman Nelson.[2] This is the eighth domestic case since Canada acceded to the CISG in 1992. Since that time, most Canadian cases have remained unreported, and there is still doubt as to whether legal practitioners fully grasp the significance of this law, if they are aware of it all. However, after more than fourteen years as law, the excuse that the CISG is a relatively new law - or that case law is scant - is beginning to wear thin.

Considering the poor treatment the CISG has received in previous cases, perhaps we should not be entirely surprised with the Manitoba courts' bewildering handling of this law. In the past, courts have sometimes ignored the CISG entirely, or treated it as an interloper, or considered it to be synonymous with domestic sales law. In Brown & Root, however, counsel for the defense argued for the applicability of the CISG, yet courts at two levels failed to take heed. While it could be argued that in the end, justice was still served, the outcome for the CISG in Brown & Root is wholly unsatisfactory. Fortunately, the case is awaiting leave to appeal to the Supreme Court.

Hopefully, guidance will be given to lower courts to utilize the interpretive methodology embodied within the CISG. Regard must be had to its international character and the need to promote uniformity in its application at the international level. This dictates that the CISG be interpreted by courts in an autonomous manner, and not through the lens of domestic law. However, as the Brown & Root case illustrates, this is where errors most often seem to arise. To echo the words of Ziegel, unless legal practitioners develop a better understanding of this autonomous interpretive methodology - or unless the Supreme Court puts them straight - the future of the Convention in Canadian law will continue to languish.

FACTS OF THE CASE

In December 1995, Brown & Root Services Corporation and Kellogg Brown & Root, Inc. (collectively "Brown & Root") of Houston, Texas, contracted to provide logistical support for the U.S. military in Hungary/Bosnia. (Brown & Root is a business unit of Halliburton, a large US government contractor). As part of this support, Brown & Root was required to provide heaters for the tents of U.S. troops. With the onset of freezing temperatures, the company urgently sought to locate a supplier. Utilizing the help of a manufacturers' sales representative, it began negotiations with Aerotech Herman Nelson Inc. ("Aerotech"), a Winnipeg firm, to purchase a large quantity of new heaters, along with spare parts and related goods and services. In this transaction Aerotech's promotional material asserted that the heaters were "new product." However, in order to expedite the installation and operation of the heaters overseas, Paul Sigurdson, Aerotech's sole owner and director, was to send five of its technicians to Hungary to arrive concurrently with the heaters. With this understanding, on December 16th, Brown & Root prepared and forwarded a facsimile notice of award to Aerotech for 240 heaters. Two days later this was increased to 282 heaters. As agreed upon, the purchase price in the final purchase order was $1,392,071.50. This included the heaters, spare parts kits, cable, manuals, and five on-site technical representatives (for up to ten days).

Following the transfer of the full purchase price by bank wire on December 19th and 20th, the first shipment of 141 heaters was air freighted at Brown & Root's expense from Winnipeg to Kaposvar, Hungary. It arrived on December 21st and the second load followed the next day. The spare parts kits and manuals were never shipped. The transportation cost to Brown & Root was $321,905.55 U.S. Immediately after the arrival of the heaters, it became apparent to Brown & Root representatives at Kaposvar that the heaters were not new, but were used (or surplus), and had numerous missing or defective parts. On December 22nd, Brown & Root executives spoke with Sigurdson. He denied that the heaters were used. Brown & Root verbally rejected the heaters, stating that they would not be accepted "until they're up and operational."[3] Brown & Root insisted that the technicians be sent over immediately as promised, but they did not arrive until January 4, 1996.

Brown & Root immediately directed all efforts toward making the heaters functional. The technicians began work on January 5th but returned home after one week due to a lack of progress and the unavailability of spare parts. In February 1996, all heaters were withdrawn from the field by Brown & Root and were not used thereafter, with the exception of six heaters which inadvertently remained in use - three operational - for about another year. On March 6, 1996, the legal department at Brown & Root provided formal written notice to Aerotech that the contract was being rescinded.

Subsequently, Brown & Root brought an action with respect to this purchase alleging that Aerotech and Sigurdson fraudulently misrepresented that the heaters were new, and that they fundamentally breached their agreement with the company by materially misrepresenting the nature of the heating equipment, and their ability to supply technicians and spare parts. Brown & Root sought reimbursement for the cost of the heaters and related equipment in the amount of $1,359,571.50 (U.S.). It also sought the cost of the shipment of the goods, plus punitive damages for fraud.

Aerotech counterclaimed for losses it allegedly incurred for the cost of the five technicians and their airfares to Hungary, as well as excess baggage charges, and vehicle rental costs. Aerotech contended that Brown & Root knew it was purchasing equipment that had yet to be reconditioned, hence, received what it had bargained for, and accepted the goods. It also indicated that Brown & Root failed to supply adequate power generators necessary to operate the heaters. Further, Aerotech maintained it was willing to honour the warranty on the equipment.

At trial, McKelvey J. of the Court of Queen's Bench of Manitoba found that Brown & Root expected the heaters would be a new product in keeping with the terms of the contract, and there "was an obvious intention to mislead the buyer, albeit the used state of the heaters was evident."[4] She concluded that the terms of the contract were those set out in the formal purchase order from Brown & Root to Sigurdson. Not only did Aerotech take no steps to advise the buyer of the true state of the heaters, but rather "Aerotech took steps to disguise the fact that the goods were used by virtue of altering hour meters, painting, cleaning, reserializing and changing manufacture plates."[5] She emphasized that "a reasonable buyer would have anticipated that new product was an intended and, indeed, an expressed term. There were clear misrepresentations by Aerotech and Sigurdson in this case."[6] Concluding "that fraud has been proven,"[7] McKelvey J. ruled in favour of Brown & Root and awarded it the following: the cost of the heaters and other related equipment in the amount of $1,359,571.50 (U.S.); the cost of shipment of goods to Kaposvar in the amount of $321,905.55 (U.S.); punitive damages in the sum of $50,000.00; the costs of the action; and, pre-judgment interest.[8] The defendants' counterclaim was also dismissed. She ordered that payments made in U.S. dollars in December, 1995, be converted into Canadian currency using the conversion rate applicable on the date of her judgment, September 20, 2002, (the "judgment date" rule).[9]

In affirming the decision at trial, the appeal court acknowledged that Brown & Root had only "conditionally" rejected the heaters on December 22, 1995.[10] However, the fact that the company had attempted to repair the heaters did not constitute acceptance or bar rescission. A majority of the court also upheld the trial court's currency conversion "judgment date" rule, even though this approach has not been utilized in previous Supreme Court decisions.[11] On this latter issue, Twaddle J.A., dissented, and deferred to the recognized "breach date" currency conversion rule.[12]

DISCUSSION

- Applicable Law

Considering the international dimensions of this case, it is remarkable that the trial and appeal courts do not specifically address the issue of applicable law. As J. Anthony Van Duzer recently noted, there continues to be a "lamentable state of ignorance" in cases involving the CISG.[13] True to form, both courts apply Canadian and common law principles to the contract formation where the CISG clearly ought to govern. And where the CISG is briefly mentioned, there appears to be a serious lack of understanding regarding its scope and applicability.

The trial court indicates that this is a transaction for the sale of goods between U.S. buyer Brown & Root and Canadian seller Aerotech in which the buyer's standard purchase order terms and conditions applied. These terms and conditions formed the basis of the contract, and are recited at para. 17 of the court's opinion. They include the statement that "[u]nless otherwise provided herein, this sales contract shall be governed by the laws of the State of Texas in effect on the date of execution by Buyer." Considering this statement, Texas law would appear to apply. However, with puzzling silence, the court fails to address the issue as to why Texas law is not utilized as the applicable law. It must be noted that even if Texas law had applied, the CISG would have ultimately trumped domestic (that is, Texan) sales law. Having been adopted by the United States in 1988, the CISG automatically applies to all U.S. foreign sales transactions when the parties are from two signatory states - unless the parties exclude it. The sole reference to the CISG in the trial court's opinion is found at para. 95. It states:

"Aerotech maintains that fundamental breach is not a consideration given the fact that B & R received what it bargained. The International Sale of Goods Act, S.M. 1989-90, c. 18, Cap. S11 and particularly articles 38 and 49 were argued to enhance the position of Aerotech in that B & R took too long if it was intending to assert a fundamental breach or repudiation of the contract. Aerotech maintains that the conduct of B & R from December 22nd onward was demonstrative of keeping the contract alive, at least until the end of the heating season. I am persuaded that B & R repudiated the contract within a reasonable time."[14]

With these two exceptions, the court refers only to Canadian cases and law, and a number of common law principles. Strangely, no conflict of laws analysis is conducted. This would be understandable had this case arisen from an inter-provincial sale of goods, as there are few conflict of law issues arising from inter-provincial trade. In an international case, where the parties are from different states, and each pleads for the application of different laws, this omission is inexcusable.

This issue does not fare any better at the Court of Appeal. Here, the only reference to the CISG to be found in the opinion appears at para. (l). It states:

"[b]oth The International Sale of Goods Act, C.C.S.M., c. S11, and The Sale of Goods Act, C.C.S.M., c. S10, provide that when a purchaser receives delivery of goods, having had a reasonable opportunity to inspect them, any act done inconsistent with ownership by the seller will constitute acceptance. In considering this provision, 'the courts have adopted a strict interpretation favourable to the seller.' See Stairman Steel Ltd. v. Franki Canada Ltd. (1985), 23 D.L.R. (4th) 180 at 193."[15]

Again, the court refers only to Canadian cases and law. Furthermore, in a single sentence it combines the CISG with The Sale of Goods Act, failing to differentiate the two laws. No consideration is given to the fact that the former law is exclusively for international sales; the latter law should be applied only to domestic transactions. Mixing the two laws simplifies matters to an unacceptable degree.

- The Relationship between the CISG and Provincial Sale of Goods Legislation

Both courts fail to address the crucial issue of when the CISG applies and takes precedence over provincial sale of goods legislation. As a matter of law, unless specifically excluded, the CISG applies to "contracts of sales of goods between parties whose places of business are in different states when the states are contracting states."[16]

Since the CISG was not excluded by the contract between Brown & Root and Aerotech, and since both parties to the contract have their places of business in different "contracting states," the CISG should be the applicable law, and it should govern the contract. In other words, it supersedes The Sale of Goods Act. Furthermore, the element of misrepresentation and fraud should not displace the CISG as the law governing the terms of the contract. Misrepresentation and fraud can still be proven outside the realm of the CISG. It need not be supplanted entirely. Reference to art. 4(a) of the CISG would have allowed the court to address the issue of the validity of the contract. It is provided therein that a party can seek recourse to domestic law where a case concerns the validity of the contract, and include questions of fraud, duress, and illegality. These specific issues can be resolved by reference to domestic law.

Myopically, both courts interpret the legal rights of the parties on the basis of The Sale of Goods Act, and focus exclusively on Canadian common law principles. There is no mention of art. 4 of the CISG. They also ignore art. 38 concerning the examination of goods and notice of non-conformity, as well as art. 48, which governs contract avoidance and breach thereof. In doing so, they obviously felt it unnecessary to consider the relationship between fraud and misrepresentation to contracts governed by the CISG. At a minimum, such an analysis could have informed the courts, and provided the international dimension that is so badly lacking in their decisions. Considering the different legal and interpretive rules between the CISG and The Sale of Goods Act, the outcome for the parties might have been remarkably altered had a proper analysis been conducted.

- The CISG and the Quest for International Uniformity

By introducing the CISG, the Manitoban courts should have paid special attention to art. 7, which establishes the main interpretive rules of the Convention. In particular, art. 7(1) provides that, "[i]n the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade."[17] This requires national courts to avoid recourse to domestic legal concepts. To this end, art. 7(1) emphasizes the importance of having due regard for its international character, as well as for the need to promote uniformity across all signatory states. Reliance on domestic law would likely lead to different, contradictory, and confusing rules, and would ultimately defeat the purpose of the CISG. As a result, functional uniformity[18] should be at the core of the CISG. In this respect the purpose of the CISG is not only to create new, state-sanctioned law, but also to give recognition to the rules born of international commercial practice and to encourage national courts to apply them in a functionally uniform manner through a form of jurisconsultorium.[19]

According to art. 7(1), the goal of uniformity should impart an obligation upon legal practitioners, tribunals, and courts to look to standards of international practice in an interpretation or a determination of provisions of the Convention. In other words, the courts of all signatory nations are obliged to consider the practice and judgments of other countries, a form of non-binding "ipso facto stare decisis" or "supranational stare decisis."[20] Tribunals and courts should not resort to domestic law, unless they are specifically directed to do so under the CISG. As Antonio Boggiano states, "[u]niform law requires … a new common law" in which "[f]oreign precedents would not be precedents of a foreign law, but of uniform law."[21] Similarly, Lord Scarman notes, "[c]ourts … have to develop their jurisprudence in company with the courts of other countries."[22] In this respect, the CISG is to be interpreted autonomously, and recourse to strictly common law, civil law, or socialist law concepts is not permitted.

With this spirit in mind, the Supreme Court of the United States decided that when considering specific words in international conventions, court decisions from other nations are "entitled to considerable weight."[23] The court again repeated this interpretive methodology in a 1999 treaty case.[24] Thus, in addition to the courts' own evaluation of the issues in a particular case, international precedent should also be considered for its non-binding, persuasive value. In the spirit of international uniformity, courts need not follow international precedent if it is incorrect or inapplicable. However, there is a minimal duty to consider similar cases from international practice.

In contrast to Canadian developments, national courts in other jurisdictions appear to have made greater efforts to consider international precedent in CISG cases. This suggests that there is a growing development of a trend towards the jurisconsultorium that art. 7(1) contemplates - at least at the broader, international level. For example, the courts of Italy and Switzerland were the first to consider international precedent in CISG cases, with rulings decided in 1996 and 1997 respectively.[25] Shortly thereafter, the German Supreme Court issued a ruling citing CISG material from England, France, Switzerland, and the United States.[26] More recently, a number of other national courts, including those in the United States, have referred to CISG authorities in other jurisdictions.[27]

As a beacon of all things multicultural, it might be expected that Canadian courts would, if not lead, at least follow these developments. After all, Canada is not only a liberal democracy with a history of involvement in international commerce, it is also known for being one of the most culturally diverse and tolerant nations in the world. It might be expected that Canadian courts would be naturally predisposed to embrace foreign authorities, especially when such an opportunity is sanctioned by law.

CONCLUSION

Not all Canadian cases have turned out like Brown & Root. There have been some commendable efforts for proper CISG interpretation. More typically, however, as Brown & Root illustrates, Canadian courts have tended to treat the CISG in a cursory manner, and ultimately make decisions on the basis of domestic law. In other words, Canadian CISG jurisprudence is still permeated with domestic gloss. To the international community, this suggests that the Canadian judiciary lacks a certain analytical sophistication with international law, or suffers from legal parochialism. At the very least, this failure illustrates the fundamental difficulties that Canada - and other nations - face when trying to implement uniform international law. Indeed, as one legal scholar has noted, "diverging interpretations by national courts is a problem of all international uniform laws."[28]

Perhaps this is simply evidence that the CISG, like other uniform laws, is an evolving, living code. As it develops, it is hoped that courts will apply the interpretive methodology of the Convention in a more serious manner. Doing so will produce a coalescing of national CISG jurisprudence, and will create a more uniform law for international merchants of the future.


FOOTNOTES

* Peter J. Mazzacano is an LL.M. graduate student at Osgoode Hall Law School at York University and the Editor of CISG Canada at <http://www.cisg.ca> and an editor of UNILEX at <http://www.unilex.info> at the International Institute for the Unification of Private Law (UNIDROIT), Rome, Italy. He is also a member of The Society of Legal Scholars in the UK. My special thanks to Prof. Albert H. Kritzer, Executive Secretary of the Institute of International Commercial Law, Pace University School of Law, for providing me with the inspiration for this article, and for his comments on an early version of this article. Jacob S. Ziegel, "Canada’s First Decision on the International Sales Convention" (1999) 32 Can. Bus. L. J. 313 at 313.

1. Jacob S. Ziegel, "Canada's First Decision on the International Sales Convention" (1999) 32

Can. Bus. L. J. 313 at 313.

2. Brown & Root Services Corp. v. Aerotech Herman Nelson Inc., 2002 MBQB 229, aff'd 2004 MBCA 63.

3. Appeal aff'd, para. vii.

4. Trial judgment, para. 64.

5. Ibid., para. 84.

6. Ibid., para. 96.

7. Ibid, para. 107.

8. Ibid., paras. 121-122.

9. Appeal aff'd, paras 15-16.

10. Ibid., para. xlviii.

11. Ibid., paras. 1-39.

12. Ibid., paras. 115-148.

13. J. Anthony Van Duzer, "The Adolescence of the United Nations Convention on Contracts for the International Sale of Goods in Canada," (paper presented to the Canadian Bar Association's International Law Section Annual Conference in Montréal, May 2001) online: Pace Law School CISG Database <http://cisgw3.law.pace.edu/cisg/biblio/vanduzer2.html>, p. 1.

14. Trial judgment, para. 95.

15. Ibid., para. l.

16. The International Sale of Goods Act, S.M. 1989-90, c. 18 containing the United Nations Convention on Contracts for the International Sale of Goods, Article 1(a).

17. The International Sale of Goods Act, S.M. 1989-90, c. 18 containing the United Nations Convention on Contracts for the International Sale of Goods, Article 7.

18. "Functional uniformity" must be differentiated from "absolute" or "strict uniformity." It is closer to the concept of "harmonization," or "relative uniformity," in that the goal is to lessen the legal impediments to international trade. See Larry A. DiMatteo et al., "The Interpretive Turn in International Sales Law: An Analysis of Fifteen Years of CISG Jurisprudence" (2004) 34 Nw. J. Internat'l L. & Bus. 299 at 309-310, available online at <http://cisgw3.law.pace.edu/cisg/biblio/dimatteo3.html>.

19. Jurisconsultorium or jurisconsultus may be defined as the consideration of legal doctrine, jurisprudence, case law, and scholarly writings from all jurisdictions, including foreign or international jurisdictions, or comity. This term is discussed by Vikki Rogers and Albert Kritzer in "A Uniform International Sales Law Terminology", in I. Schwenzer and G.Hager, eds., Festschrift für Peter Schlechtriem zum 70. Geburtstag, Tübingen: J.B.C. Mohr / Paul Siebeck (2003) 223-253, available online at: <http://cisgw3.law.pace.edu/cisg/biblio/rogers2.html>. See also Gino Gorla in International Uniform Law in Practice, supra note 8 at 304, and <http://www.cisg.law.pace.edu/network.html>.

20. This term "ipso facto stare decisis" has been coined by Rene Henschel in "Conformity of Goods in International Sales Governed by CISG Article 35: Caveat Venditor, Caveat Emptor and Contract Law as Background Law and as a Competing Set of Rules" (2004) 1 Nordic J. Com. L. article 2 at 9, available online at <http://www.njcl.fi/1_2004/article2.pdf>. The term "supranational stare decisis" appears to have been created by Larry A. DiMatteo in "The CISG and the Presumption of Enforceability: Unintended Contractual Liability in International Business Dealings" (1997) 22 Yale J. Int'l L. 111, at 133, available online at <http://cisgw3.law.pace.edu/cisg/biblio/dematteo.html>.

21. Antonio Boggiano, "The Experience of Latin American States," International Uniform Law in Practice, (New York: Oceana, 1988) 47 (italics in the original).

22. Fothergill v. Monarch Airlines, 2 All E.R. (1980) 696, 715, quote found online: Pace Law School CISG Database <http://cisgw3.law.pace.edu/cisg/text/introduction.html#note1>.

23. Air France v. Saks, 470 U.S. 392 at 404 (1985).

24. El Al Israel Airlines, Ltd. v. Tsui Yuan Tseng, 525 U.S. 155 at 176 (1999).

25. Tribunale di Cuneo, 31 January 1996, and Obergericht Luzern, 8 January 1997, available online: Pace Law School CISG Database <http://cisgw3.law.pace.edu/cisg/text/schedule.html>.

26. See Medical Marketing v. International Medico Scientifica, 17 May 1999, available online: ibid.

27. Ibid.

28. Quote by Denis Tallon, in Leonardo Graffi, "Case Law on the Concept of 'Fundamental Breach' in the Vienna Sales Convention" (2003) 3 I.B.L.J. 338 and at <http://cisgw3.law.pace.edu/cisg/biblio/graffi.html>.


Pace Law School Institute of International Commercial Law - Last updated February 11, 2005
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