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Reproduced with permission of the author.

Kolmar Petrochemicals v. Grupo Idesa; Contract Formation, Interpretation of Parties' Intent, and Interpretation of the CISG

Alejandro Osuna González [*]
July 2006

  1. Introduction
  2. Facts of the case
  3. Procedural history
    1. The lawsuit
    2. The appeal to the Superior Court of México City
  4. Kolmar files for a Writ of Amparo

I. INTRODUCTION

On March 10, 2005, an appeals court from Mexico's First Circuit, by refusing to grant a Writ of Amparo,[1] confirmed a judgment issued on appeal in the matter of Kolmar Petrochemicals Americas Inc. (Amparo Directo Civil No. 127/2005, Primer Tribunal Colegiado del Primer Circuito). The Kolmar case touches on the often complex issues of contract formation, interpretation of party intent, and interpretation of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter the "CISG" or the "Convention"). It also shows the difficulties in interpreting the CISG encountered by the several Mexican Courts that heard the case at different levels, the Trial Court, the Superior Court of Mexico City, and the Federal Circuit Court.

II. FACTS OF THE CASE

On November 29, 2002, a purchase agent for Kolmar, a U.S. company, and a sales agent for Idesa, Mexico, concluded a contract over the phone for the purchase of 3,000 tons of Mono Ethylene Glycol (MEG) to be delivered at the port of Coatzacoalcos, Mexico, in January of 2003. Following their phone conversation, the Kolmar executive sent an e-mail to the Mexican firm, as a memorandum of what he believed was a done deal. That same day, the agent for Idesa sent an e-mail to Kolmar stating that he was confirming buyer's purchase order, but added that he was awaiting confirmation on the availability of a container in the port of Coatzacoalcos, State of Veracruz, Mexico.

On December 2, 2002, the agent for Kolmar sent another e-mail to Idesa's sales representative saying that it was not clear to them what the agent for Idesa meant when he mentioned the issue concerning the terminal, and that he should get in touch with another Kolmar employee to explain the issue in more detail.

On December 19, 2002 the same agent for Kolmar sent an e-mail designating the ship that would pick up the 3,000 tons of MEG at Coatzacoalcos, and also asking that Idesa provide confirmation accepting the nomination of the ship by that afternoon. However, the sales executive at Idesa did not respond until January 10, 2003 -- nearly twenty two days later -- saying that the situation had gotten complicated at his company and that "he was fighting" to save the transaction. The agent for Idesa also stated that he had secured the 3,000 tons of MEG, but that he was under internal pressure not to lose money on the transaction, and attempted to renegotiate the contract with Kolmar. The sales agent for Idesa acknowledged that they were not honoring the original agreement, but that accepting the price change was the only way out of the problem. Kolmar refused to renegotiate and deemed Idesa's conduct a breach of contract, and decided to pursue legal action against Idesa.

III. PROCEDURAL HISTORY

1. The lawsuit

Kolmar filed a lawsuit against Idesa with the Fiftieth Civil Court of First Instance in Mexico City claiming specific performance of the November 29, 2002 contract, damages in an amount of not less than US $724,500.00, interest and costs including attorneys' fees. In its response, Idesa raised as one of its defenses that no contract had been formed, that the e-mails were merely attempts to negotiate a contract. The Court of First Instance found this theory persuasive, and decided in favor of Idesa.

2. The appeal to the Superior Court of Mexico City

Unsatisfied with the judgment issued in the first instance, Kolmar filed an appeal with the Superior Court for the Federal District hoping to overturn the judgment. Kolmar alleged that the Court of First Instance had interpreted the parties' intent in a manner contrary to article 7(1), and article 8 of the CISG, concerning the principle of good faith. According to Kolmar, the judge should have found in favor of the existence of a contract, in a manner consistent with article 1853 of the Federal Civil Code of Mexico.[2]

Kolmar also argued that, after the contract had been formed, it took the requisite steps to obtain a vessel to pick up the goods, but that once Idesa found that it had made a losing contract, Idesa attempted to get out of the deal. According to Kolmar, it was contrary to the principle of good faith to deem Idesa's confirmation pnly an acceptance of the agreement with a reservation.

Additionally, Kolmar argued that the trial judge had misinterpreted its e-mail of December 19, 2002. In that electronic message, the buyer advised seller of the name of the ship that would pick up the goods and requested confirmation from seller.[3] The judge understood this to mean that the parties had not yet fully agreed on all of the contract terms. Kolmar had argued that its advising of the name of the ship was simply in accord with commercial practice under Article 9 of the CISG, but the Superior Court failed to follow this argument.[4] The Superior Court of Mexico City concurred with the trial level judge when he said that the e-mails showed that:

The parties had failed to agree "on the price, payment, quality, quantity of the goods and the place and time of their delivery. Article 19(3) of the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) therefore applies. It is thus incorrect to talk about the existence of a contract."

In my opinion, this paragraph shows that both courts committed a serious misinterpretation of the CISGīs article 19(3). Contrary to the courts' findings, this provision applies when there is a reply that purports to be an acceptance but includes additions, limitations or other modifications that materially alter the terms of the offer.[5] According to the reading of the Convention by the Mexican courts in the Kolmar case, the parties had failed to agree to all the "materially altering" terms mentioned in article 19(3), a reading that is clearly wrong. The parties had agreed on the quality and quantity of the goods and on the price, as can be deduced from a reading of article 14 of the CISG.[6] The parties had initially agreed on the port of Coatzacoalcos. However, first and foremost, the Court should have looked at the parties' intent, analyzed under the lenses of both Article 8 on the interpretation of statement and conduct of the parties, and Article 7 which requires that the Convention be interpreted in a manner consistent with furthering the policy of good faith in international trade. To consider article 19(3) as a "checklist" of all the issues on which the parties must agree, shows a lack of understanding of the purpose of this provision, which is meant to resolve battle-of-the-forms issues.

The flawed interpretation of the CISG's article 19(3) also shows that the courts -- and most likely the lawyers -- failed to understand the gap-filling role of the Convention. Indeed, the CISG operates on a two-tiered approach where the parties' intent plays a primary role but, absent an agreement, the Convention attempts to fill such gaps. For example, under Article 33(2), the parties may not have specifically agreed on the date on which the goods must be delivered, but absent an agreement, the goods must be delivered within a reasonable time after the contract was concluded. In a similar fashion, the parties may have been vague about the quality of the goods required under the contract, in which case, pursuant to CISG Article 35, for the goods to be conforming, they must be fit for the purposes for which the goods of the same description would ordinarily be used. In cases in which the buyer has explained the intended use of the goods, the goods will be deemed conforming if they are fit for that particular purpose.[7] From the reading of the facts of the Kolmar case, it would seem that the parties had agreed to a contract in their phone conversation of November 29, 2002, and that the e-mails that followed were confirmatory of an agreement that had been made.

KOLMAR FILES FOR A WRIT OF AMPARO

Finally, Kolmar filed for a Petition of Direct Amparo claiming that the Court of Appeals and the Court of First Instance had violated its rights guaranteed under articles 14 and 16 of the Mexican Constitution by making an erroneous interpretation of articles 1853 of the Federal Civil Code, and of articles 7, 8, 9 and 19 of the Convention. In the Writ of Amparo, one of the issues that counsel for Kolmar cited was that the courts had made an erroneous application of article 1853 of the Federal Civil Code, since it is clearly inapplicable.[8] Clearly, this provision is displaced by Article 8 of the CISG, which governs the interpretation of conduct and statements of the parties. Pursuant to Article 8(1), the conduct and statements of a party are to be interpreted pursuant to his intent where the other party knew or could not have been unaware what that intent was. If this level of inquiry does not avail, particularly when parties disagree as to what their subjective intent was -- as in this case -- pursuant to Article 8(2), the statements and conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. From a reading of the exchange of e-mails, the language used by Idesa seems to imply that in fact, a contract had been concluded,[9] a finding that would have been consistent with the mandate to interpret the Convention in a manner to promote good faith in international trade.[10] Unfortunately for Kolmar, on March 10, 2005, the First Circuit Court for the First Circuit determined that neither the Court of First Instance, nor the Superior Court of Mexico City had erred in interpreting either article 1853 of the Federal Civil Code, or articles 7, 8, 9 and 19 of the CISG, therefore, Kolmar's constitutional rights had not been violated. The First Circuit Tribunal of the First Circuit refused Kolmar's petition for Constitutional Protection.


FOOTNOTES

* Alejandro Osuna González. LLB, Universidad Iberoamericana, Tijuana (1995); LLM, University of Pittsburgh (1998). Profesor of Law at the Universidad Iberoamericana, Tijuana. Partner of the law firm of Osuna & Rivero, in Tijuana, Mexico. For comments on this article he can be reached at <aosuna(a)osuna-rivero.com>.

1. An Amparo proceeding (literally, "protection"), is a special proceeding considered a cornerstone of the Mexican Legal system. It is filed, among other reasons, when a party claims that a government entity has committed or is attempting to commit a violation of his constitutional rights (typically the violation of the right to due process, equal protection, freedom of association, fear of an illegal detention, etc.). The procedure is governed by the Law of Amparo, which was enacted in 1936, but has gone through numerous reforms. It can be either an Indirect Amparo that is filed before the District Courts, (such an Amparo is typically filed against a governmental agency along with a petition for injunctive relief); or it can a Direct Amparo that is filed before the Federal Circuit Courts against a final judgment. A Direct Amparo shares similarities with the procedure filed before the French Cour de Cassation when there is mistake in a judgment and there is no other form of appeal. In the instant case, Kolmar filed a Direct Amparo before the First Circuit claiming that the trial court and the appeals court had erred in interpreting the law, thus committing a violating of Kolmar's constitutional rights provided for under Article 14. This constitutional provision reads in its final paragraph:

"In civil disputes, the final judgment shall be made following the letter of the law, or its legal interpretation, and absent any of these, [the judgment] shall be based on general principles of law."

2. Article 1853 of the Civ.Cod.Fed. reads: "If a clause in a contract allows for different interpretations, the interpretation most favorable for it to have effect shall be preferred."

3. This is consistent with the INCOTERMS, 2000 FOB, § B7 which reads: "Notice to the Seller. The buyer must give the seller sufficient notice of the vessel name, loading point and required delivery time."

4. Id.

5. Pursuant to article 19(3) the terms that materially alter the terms are the offer are, among others, those concerning the price, payment, quality and quantity of the goods, parties' liabilities and the settlement of disputes.

6. But see Article 55 of the CISG, where absent an express or implied determination of the price, parties are considered to have made applicable the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned, provided they have made a valid contract. However, under many legal systems, a contract may not be validly made when there is no price that has been agreed to, and is even considered an element of validity. On this topic see Carlos Gabuardi, Open Price Terms in the CISG, the UCC and Mexican Commercial Law, available at <http://cisgw3.law.pace.edu/cisg/biblio/gabuardi.html>.

7. Other examples of gap-filling found in the CISG is on the issue of conformity of the goods and warranties, where it is implied under the Convention that the buyer must receive goods that are free from third party claims, either stemming from alleged infringements of intellectual property, or any other type such as liens, or third party claims of ownership of the goods (articles 41 thru 44 of the CISG). Another example is the open price term, under Convention's article 55, parties may form a contract even if they have failed to fix a price, provided they have made a valid contract. It also provides for gap filling in matters of place of payment of the price (article 57); the time when price is to be paid (article 58).

8. Article 1853 of the Federal Civil Code of Mexico states that if a provision in a contract allows more than one interpretation, the preferred interpretation is the one that gives effect to the contract.

9. An additional basis can be the general principal of favore contractus, that when interpreting the parties intent, doubts as to the existence of a contract should be decided in favor of its existence, consistent with the principle of good faith found in Article 7(1) of the CISG.

10. See CISG art. 7(1).


Pace Law School Institute of International Commercial Law - Last updated July 31, 2006
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