United States 3 September 2008 Federal District Court [Illinois] (CNA Int'l, Inc. v. Guangdong Kelon Electronical Holdings et al.)
[Cite as: http://cisgw3.law.pace.edu/cases/080903u1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 05 C 5734
CASE HISTORY: See also Federal District Court [Illinois] 10 April 2009
SELLER'S COUNTRY: Hong Kong [People's Republic of China] (defendant)
BUYER'S COUNTRY: United States (plaintiff)
GOODS INVOLVED: Refrigerators and freezers
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
7A ; 7B1 [Principles of interpretation: reliance on clear and unambiguous language of the Convention; Materials for interpretation: international case law and scholarly studies]; 93A [Declarations concerning Convention's application to territorial units]
7A ; 7B1 [Principles of interpretation: reliance on clear and unambiguous language of the Convention; Materials for interpretation: international case law and scholarly studies];
93A [Declarations concerning Convention's application to territorial units]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
CNA Int'l Inc. v. Guangdong Kelon Electronical Holdings et al. [*]
3 September 2008 [Case No. 05 C 5734]
PRESIDING JUDGE: Amy J. St. Eve
DOCKET ENTRY TEXT
Having reviewed the parties' position papers on choice of law, the Court agrees with Plaintiff that the CISG governs this action.
* [For further details see text below.] Notices mailed by Judicial staff.
Plaintiff CNA International, Inc. ("CNA") has filed a Memorandum on Choice of Law asserting that the United Nations Convention on Contracts for the International Sale of Goods ("CISG") should govern this action. (R. 158-1; Pl.'s Mem. on Choice of Law.) Defendants Guangdong Kelon Electrical Holdings Company, Limited ("Guangdong") and Kelon International, Inc. ("Kelon International") argue in response that the CISG does not apply to companies doing business in Hong Kong, and is therefore inapplicable to this lawsuit. (R. 162-1; Defs.' Resp. at 2.)
- Plaintiff CNA International's Memorandum on Choice of Law, dated 18 July 2008; and
- Defendant's Response to Plaintiff's Memorandum on Choice of Law, dated 1 August 2008.]
For the following reasons, the Court agrees with Plaintiff that the CISG governs this case.
The CISG is an international treaty, ratified by the United States in 1986, that "sets out substantive provisions of law to govern the formation of international sales contracts and the rights and obligations of the buyer and seller." Caterpillar, Inc. v. Usinor Industeel, 393 F. Supp. 2d 659, 673 (N.D. Ill. 2005) (citing cases). As a treaty to which the United States is a signatory, the CISG is federal law and therefore preempts inconsistent provisions of Illinois law where it applies. Id.; Usinor Industeel v. Leeco Steel Prods., 209F. Supp. 2d 880, 884 (N.D. Ill. 2002) ("[W]hen the CISG applies, it pre-empts domestic sales law that otherwise would govern the contract, such as Article 2 of the UCC."); see also BP Oil Int'l, Ltd. v. Empresa Estatal Petroleos de Ecuador (PetroEcuador), 332 F.3d 333, 337 (5th Cir. 2003). The People's Republic of China ("China") ratified the CISG in 1986 and the Convention went into force on January 1, 1988. See Ulrich Schroeter, The Status of Hong Kong and Macao Under the United Nations Convention on Contracts for the International Sale of Goods, 16 Pace Int'l L. Rev. 307, 312 (Fall 2004). [page 1]
Article 1 of the CISG provides, in relevant part, that it "applies to contracts of sale of goods between parties whose places of business are in different States . . . when the States are Contracting States." United Nations Convention on Contracts for the International Sale of Goods, art. 1(a), opened for signature April 11, 1980, 19 I.L.M. 668 (hereinafter "CISG"); Caterpillar, 393 F. Supp. 2d at 673; Usinor Industeel, 209 F. Supp. at 884. Importantly, under the clear language of the treaty, the CISG applies only if all parties to a contract are members of Contracting States. See CISG, supra, art. 1(a); see also Chateau Des Charmes Wines, Ltd. v. Sabate USA Inc., 328 F.3d 538, 530 (9th Cir. 2003).
Because the CISG only applies to parties with places of business in different Contracting States, the Court must determine whether the parties to the contract at issue here are from Contracting States. See CISG, supra, art. 1(a); see also Treibacher Industrie, A.G. v. Allegheny Techs., Inc., 464 F.3d 1235, 1238 n.5 (11th Cir. 2006). Plaintiff CNA is an Illinois corporation with its place of business in Illinois. (R. 158-1; Pl.'s Mem. at 12.) Defendant Guangdong Kelon is a company organized under the laws of China and it maintains its place of business in China. (Id. at 12-13.) The United States and China are Contracting States, thus the CISG reaches both CNA and Guangdong.
The Court previously determined that although Defendant Kelon International is organized under the laws of the British Virgin Islands, its place of business for purposes of the CISG is in Hong Kong. (R. 155-1; June 17, 2008 Mem. Op. at 4.) In its prior Opinion, the Court left open the question of whether Hong Kong is a Contracting State under the CISG; a question the Court must now resolve. The Court interprets the treaty's provisions by looking to its plain language and to "the general principles" upon which the treaty is based. Chicago Prime Packers, Inc. v. Northam Food Trading Co., 408 F.3d 894, 898 (7th Cir. 2005) (citing CISG, supra, art. 7(2)).
I. Hong Kong Special Administrative Region of China
On June 30, 1997, the United Kingdom transferred sovereignty over Hong Kong to China. See Schroeter, supra, at 313. The countries had previously agreed on the terms of the handover and its impact on Hong Kong's legal future. See Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People's Republic of China on the Question of Hong Kong, Dec. 19, 1984, 23 I.L.M. 1366 (hereinafter "Joint Declaration"). The Joint Declaration stipulated that China would establish a Hong Kong Special Administrative Region ("SAR") upon resuming sovereignty of Hong Kong. Id. at 1373.
The Joint Declaration outlines Hong Kong's legal system and declares that China will decide whether international agreements to which it is a party will extend to the Hong Kong SAR. Joint Declaration, supra, § XI. The Joint Declaration also states that the Hong Kong SAR will be under the direct authority of China and that "foreign and defence affairs [of the Hong Kong SAR] are the responsibilities of the Central People's Government." Id. at § I. Article 13 of the Basic Law of Hong Kong [page 2] echoes the Joint Declaration in stipulating that the Central People's Government is responsible for foreign affairs relating to the Hong Kong SAR. See Zhonghua Renmin Gongheguo Xianggang Tebie Xingzhengqu ji ben fa (The Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China) art. 13 (hereinafter "XIANGGANG JI BEN FA").
II. Article 93 of the CISG
In order to determine the status of the Hong Kong SAR under the CISG, the Court looks first to the provisions of the CISG itself. See Sale v. Haitian Ctrs. Council, 509 U.S. 155, 194 (1993) ("It is axiomatic that a treaty's plain language must control absent 'extraordinarily strong contrary evidence.'"). Article 93 of the CISG addresses the applicability of the treaty to territorial units of a Contracting State:
"(1) If a Contracting State has two or more territorial units in which, according to its constitution, different systems of law are applicable in relation to the matters dealt with in this Convention, it may, at the time of signature, ratification, acceptance, approval or accession, declare that this Convention is to extend to all its territorial units or only to one or more of them, and may amend its declaration by submitting another declaration at any time.
"(2) These declarations are to be notified to the depositary and are to state expressly the territorial units to which the Convention extends.
"(3) If, by virtue of a declaration under this article, this Convention extends to one or more but not all of the territorial units of a Contracting State, and if the place of business of a party is located in that State, this place of business, for the purposes of this Convention, is considered not to be in a Contracting State, unless it is in a territorial unit to which the Convention extends.
"(4) If a Contracting State makes no declaration under paragraph (1) of this article, the Convention is to extend to all territorial units of that State."
CISG, supra, art. 93.
A. Territorial Units Under Article 93(1)
Currently, Hong Kong and Macao enjoy constitutional independence from China under Article 31 of China's Constitution, which permits China to establish Special Administrative Regions. See Schroeter, supra, at 321. Pursuant to its Basic Law, Hong Kong enjoys a high degree of autonomy and independent executive, legislative and judicial power. See XIANGGANG JI BEN FA art. 2; see also Schroeter, supra, at 322. Macao enjoys the same autonomy under Article 2 of its Basic Laws. See Zhonghua Renmin Gongheguo Aomen Tebie Xingzhengqu ji ben fa (The Basic Law of the Macao Special Administrative Region of the People's Republic of China) art. 2. Given that different legal systems apply to the sale of goods in China's territorial units (Mainland China, Hong Kong, Macao), China falls within the scope of Article 93(1).
B. Declaration Requirement Under Article 93(1)
Before China resumed sovereignty over Hong Kong (and Macao), however, Article 93 of the CISG had no practical effect on China because China had no "territorial units."3 In other words, when Hong Kong became an SAR, China for the first time fell within Article 93(1). The parties dispute what effect Hong Kong's becoming a SAR had under the CISG. [page 3]
Article 93(1) permits a Contracting State with more than one territorial unit to declare "at the time of signature, ratification, acceptance, approval or accession" that the CISG is to extend to one or more of its territorial units. CISG, supra, art 93(1). Of course, China could not make an Article 93 declaration at the time it signed the CISG because Article 93 did not pertain to China at that time. While Article 93(1) does not expressly address the situation where, as here, a State gains control over a territorial unit after ratification of the CISG, reading the CISG to limit Article 93(1) declarations to those times specifically mentioned (signature, ratification, acceptance, approval or accession) would render a declaration by China impossible. Article 93(1) does, however, allow a Contracting State to "amend its declaration by submitting another declaration at any time." A plain reading of this provision of the treaty permits China to make an Article 93(1) declaration regarding the status of its territorial units after gaining control of those territorial units. See generally Schroeter, supra, at 323-326. Accordingly, the Court finds that China falls under the provisions of Article 93, and that China had the legal opportunity to declare that the CISG should not extend to the Hong Kong SAR when it resumed sovereignty over Hong Kong.
1. Letter of Notification of Treaties Applicable to the Hong Kong SAR
Having established that the CISG permitted China to make an Article 93 declaration regarding Hong Kong, the Court must determine if China did so. An Article 93(1) declaration, as defined in Article 93(2), is to be "notified to the depositary and [is] to state expressly the territorial units to which the Convention extends." CISG, supra, art 93(2). Defendants argue that a letter the Chinese government deposited with the Secretary-General of the United Nations after resuming sovereignty of Hong Kong qualifies as an Article 93(1) declaration. Letter of Notification of Treaties Applicable to Hong Kong after 1 July 1997, Deposited by the Government of the People's Republic of China with the Secretary-General of the United Nations, June 20, 1997, 36 I.L.M. 1675 (hereinafter "Notification Letter" or "Letter"). This Notification Letter lists the treaties China applied to the Hong Kong SAR, without mentioning the CISG. See Notification Letter, 16 I.L.M. at 1676-91; Schroeter, supra, at 315. Defendants allege that China's omission of the CISG in this letter serves as a declaration that the CISG is not to extend to the Hong Kong SAR. (R. 162-1; Defs.' Resp. at 4.)
To constitute an Article 93 declaration, the Notification Letter must satisfy the two requirements provided by Article 93(2). First, the declaration must be notified to the Secretary-General of the United Nations, who is the depositary of the CISG. In China's case, the Notification Letter satisfies this requirement because the Chinese government deposited it with the Secretary-General of the United Nations after resuming sovereignty of Hong Kong. Second, the declaration must expressly identify the territorial units to which the CISG extends. Here, the Notification Letter fails. The Notification Letter is far from an express statement that the treaty requires of an Article 93(1) declaration. Rather, the Letter merely lists some treaties which China determined should apply to Hong Kong. The Letter says nothing with respect to the CISG, and clearly does not "state expressly the territorial units to which the Convention extends." As such, China's Notification Letter does not constitute an Article 93 declaration.
Moreover, Defendants' argument that the Notification Letter constitutes an Article 93 declaration presumes that the Letter represents an exhaustive and definitive list of the treaties China applied to Hong Kong; an argument the Notification Letter itself contradicts. The Letter states that the Chinese government will separately carry out the formalities for any treaty that is not listed which it decides to apply to Hong Kong. Notification Letter, 36 I.L.M. at 1676, § IV. It then declares that no separate formalities are needed "with respect to treaties which fall within the category of foreign affairs or defence or which, owing to their nature and provisions, must apply to the entire territory of a State." Id. This language undermines Defendants' argument that the Notification Letter evidences China's intent not to apply the CISG to Hong Kong.
Only one case, recently decided by the Supreme Court of the Republic of France, has directly addressed the applicability of the CISG to Hong Kong. See Cour de Cassation première chambre civile [Supreme Court, 1st Civil Chamber], April 2, 2008, No. 04-17726, translated at: <http://cisgw3.law.pace.edu/cases/080402f1.html> (hereinafter "French Case"). In its opinion, the Supreme Court of France reaches the opposite conclusion and finds that the CISG does not extend to Hong Kong. A close examination of the French Supreme Court's [page 4] reasoning, however, supports this Court's conclusion that the CISG does in fact apply to the Hong Kong SAR.
Defendants rely heavily on the French Case as persuasive authority. (R. 162-1; Defs.' Resp. at 2.) In that case the buyer, a French company, asserted that the CISG controlled the sale of goods by the seller, a Hong Kong company. The buyer alleged that the CISG applied because Hong Kong is a region of China and because China, a signatory to the treaty, did not make an Article 93 declaration restricting the application of the CISG to Hong Kong. French Case, supra. The Supreme Court of France disagreed with the buyer and held that the CISG does not apply to Hong Kong. In its opinion, the Supreme Court of France characterized the Notification Letter as "a formality equivalent to what is provided for in Art. 93, CISG." French Case, supra. Because the court equated the Notification Letter with a declaration, it concluded that China's failure to list the CISG on the Letter's list of applicable treaties was determinative. For the reasons discussed above, however, the Court does not conclude that the Notification Letter constitutes a declaration under Article 93. Respectfully, the Court believes that the Supreme Court of France overlooked the declaration requirements in Article 93(2) in reasoning that the Notification Letter qualifies as a declaration. Moreover, the Court finds persuasive the language in the Notification Letter noting that China could later name treaties which would apply to Hong Kong. Accordingly, this Court is not persuaded by the French Court's decision.
2. Effect of the Lack of a Declaration under Article 93(1) of the CISG
When a Contracting State with two or more territorial units does not make a declaration under Article 93(1) of the CISG, the Convention extends to all territorial units of that State pursuant to Article 93(4). CISG, supra, art. 93(4). This provision clearly and expressly states that the CISG will automatically apply to all units of a Contracting State where the Contracting State fails to make an Article 93(1) declaration. Applying the CISG to all territorial units is therefore the default and, as Plaintiff correctly argues, a State must affirmatively opt-out of the CISG on behalf of one or more of its territories in order to avoid this provision. (R. 164-1; Pl.'s Reply at 5.); see Schroeter, supra, at 325. As the Court concluded above, China did not make an Article 93(1) declaration. In the absence of such a declaration, Article 93(4) automatically extends the CISG to China's territorial units, including Hong Kong. See Schroeter, supra, at 325.
The language of these CISG provisions is clear and unambiguous when read in context and is therefore binding. Based on the plain language of the treaty, the Court concludes that the CISG applies to the Chinese Special Administrative Region of Hong Kong. See United States v. Duarte-Acero, 208 F.3d 1282, 1285 (11th Cir. 2000) ("If the language of the treaty is clear and unambiguous, as with any exercise in statutory construction, our analysis ends there and we apply the words of the treaty as written.").
III. The Department of Justice of Hong Kong
Defendants advance the fact that the Department of Justice for Hong Kong does not list the CISG as a treaty to which it is bound. (R. 162-1; Defs.' Resp. at 4, 5.) While the Court finds this fact initially persuasive, it is not determinative. Importantly, because China is a party to the CISG, the Chinese government holds the authority to extend the CISG to Hong Kong. See supra Part I; Joint Declaration, supra, § XI. Although the Department of Justice for Hong Kong does not list the treaty on its List of Treaties in Force and Applicable to the Hong Kong Special Administrative Region, it is ultimately China's decision. As discussed above, under the unambiguous language of the treaty, China's failure to make an Article 93 declaration exempting Hong Kong from the CISG triggers the default application rule of Article 93(4).
IV. Policy Considerations
Plaintiff raises persuasive policy considerations in favor of its contention that the CISG should apply to the Hong Kong SAR. Specifically, Plaintiff notes that the CISG drafters' goal was to remove legal barriers in international trade. CISG, supra, Annex I; (see R. 158-1; Pl.'s Mem on Choice of Law at 9.) In 2006, Hong Kong's total merchandise trade amounted to U.S. $658 billion, making it the world's twelfth largest trading entity. See World Trade Organization, Leading Exporters and Importers in World Merchandise Trade (2006), Table I.8. In light of Hong Kong's status as a major leader in international trade and as a territorial unit of the Contracting State of China, these policy considerations further support the plain reading of the Treaty that the CISG applies to [page 5] Hong Kong.
Because the language of Article 93 of the CISG is clear and unambiguous, the Court concludes that the CISG applies to the Hong Kong SAR. As a company with its place of business in Hong Kong, Defendant Kelon International is therefore subject to the CISG. All parties to the contract have their places of business in different Contracting States under the Convention, so the CISG is the applicable law in this case. [page 6]
* Source of case text: Case 1:05-cv-D5734, Document 170; Filed 3 September 2008.
1. Plaintiff argues that Kelon International is not a party to the contract at issue in this case and thus Defendants' arguments for the inapplicability of the CISG to the Hong Kong company are irrelevant. (R. 164-1; Pl.'s Reply at 2.) This is a disputed factual issue, the outcome of which does not affect the Court's ultimate conclusion that the CISG governs this case. For the reasons discussed below, if Kelon International is a party to the contract, the CISG governs. Even if Kelon International is not a party, however, the CISG still governs because the two remaining parties (CNA and Guangdong) have their places of business in the United States and China, both Contracting States.
2. Available at <http://www.info.gov.hk/basic_law/fulltext/>.
3. China resumed sovereignty over Macao, its only other Special Administrative Region, on December 20, 1999. Schroeter, supra, at 313.
4. Available at: <http://www.legislation.gov.hk/interlaw.htm>.
5. Available at: <http://www.wto.org/english/res_e/statis_e/its2007_e/its_07_world_trade_dev_e.htm>Go to Case Table of Contents