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<pre>                  United States Court of Appeals <br>                      For the First Circuit <br>                       ____________________ <br> <br>No. 96-2352 <br> <br>               SERVICIOS COMERCIALES ANDINOS, S.A., <br>                      Plaintiff - Appellee, <br> <br>                                v. <br> <br>                GENERAL ELECTRIC DEL CARIBE, INC., <br>                      Defendant - Appellant. <br> <br>                       ____________________ <br> <br>           APPEAL FROM THE UNITED STATES DISTRICT COURT <br> <br>                 FOR THE DISTRICT OF PUERTO RICO <br> <br>         [Hon. Salvador E. Casellas, U.S. District Judge] <br> <br>                       ____________________ <br> <br>                              Before <br> <br>                     Torruella, Chief Judge, <br> <br>                    Cyr, Senior Circuit Judge, <br> <br>and Pieras, Jr., Senior District Judge. <br> <br>                      _____________________ <br> <br>    Gordon T. Walker, with whom Heidi A. Chesley and McDermott, <br>Will & Emery were on brief for appellant. <br>    Edward M. Borges, with whom Luis Edwin Gonzlez-Ortiz and <br>O'Neill & Borges were on brief for appellee. <br> <br> <br> <br>                       ____________________ <br> <br>                         June 12, 1998 <br>                       ____________________

          TORRUELLA, Chief Judge.  This appeal revolves around a <br>breach of contract claim governed by Peruvian law.  Defendant <br>General Electric del Caribe, Inc. ("GE del Caribe") appeals from <br>the September 20, 1996, judgment of the district court finding it <br>liable for the breach of a contract to purchase 1,000 metric tons <br>of Pima cotton from the plaintiff, Servicios Comerciales Andinos, <br>S.A. ("SECOMAN"), a Peruvian partnership.  Following a bench trial, <br>the district court found for SECOMAN, awarded damages for loss of <br>profits caused by the breach, and ordered GE del Caribe to pay a <br>portion of SECOMAN's attorneys' fees as a sanction under P.R. R. <br>Civ. P. 44.1 for its obstinate conduct during litigation.  GE del <br>Caribe appeals the finding of breach, the determination of damages, <br>and the imposition of sanctions.  We affirm in part and reverse in <br>part. <br>I.  Background <br>          We recite the facts in the light most favorable to the <br>district court's findings of fact.  See Wainwright Bank & Trust Co.v. Boulos, 89 F.3d 17, 18 (1st Cir. 1996). <br>          SECOMAN had been engaged in the purchase and resale of <br>Tanguis cotton since its founding in 1977.  Until 1989, SECOMAN was <br>licensed to sell cotton only inside Peru.  At that time, SECOMAN <br>attempted to enter the international cotton market, first by <br>obtaining a license to export cotton from Peru, and then by <br>entering into a joint venture with another Peruvian business to buy <br>cotton and resell it on the international market.  The joint <br>venture focused on Pima rather than Tanguis cotton because Pima <br>cotton is of higher quality and is generally in greater demand.  <br>Moreover, at the time there was a substantial differential between <br>the price at which Pima cotton could be purchased from cotton <br>producers in Peru and the international market price.  In order to <br>build a stock of cotton for export, SECOMAN obtained lines of <br>credit, totaling $2,000,000, from various Peruvian banks.  In the <br>fall of 1989, SECOMAN began to purchase Pima cotton. <br>          GE del Caribe, a corporation organized under the laws of <br>Puerto Rico, is a subsidiary of the GE Supply Company, based in <br>Connecticut, which is in turn a division of the General Electric <br>Company.  As its name suggests, GE del Caribe is engaged in the <br>sale of General Electric products in the Caribbean, Central <br>America, and South America.  Mr. Enrique Aranda, a Peruvian <br>national, was the president of GE del Caribe from 1986 to 1993.  In <br>1990, he was trying to increase his company's sales by penetrating <br>different Latin American markets.  <br>          In early 1990, Mr. Aranda spoke with a friend in Peru, <br>Mr. Huertas del Pino, who was the president of Carmel Export <br>Agency, Inc. ("Carmel"), and who informed him that through his <br>contacts there, he could facilitate GE del Caribe's expansion into <br>that market.  In particular, Mr. Huertas had a business <br>relationship with Horizon Trading, Inc. ("Horizon"), a Peruvian <br>entity established in the Cayman Islands and engaged in the export <br>of Peruvian products. <br>          Around the same time, Horizon was informed that there was <br>a seller on the market ready to provide 1,000 tons of Pima cotton <br>for sale at $1.70 per pound, and that the seller was willing to pay <br>a commission on the sale.  Horizon communicated this information, <br>as well as the fact that the international price for Pima cotton <br>was $2.40 per pound, to Mr. Huertas, who replied that he believed <br>that he could find a buyer. <br>          That person was Mr. Aranda.  Mr. Huertas arranged for a <br>meeting to take place in Peru between Mr. Aranda and several <br>Peruvian businessmen who were interested in exporting cotton and <br>other Peruvian products.  In preparation for the meeting, <br>Mr. Aranda requested that both Mr. Huertas and a GE del Caribe <br>employee provide him with information regarding the cotton market.  <br>He received samples of SECOMAN's Pima cotton, and began to research <br>the possibility of reselling the cotton abroad. <br>          The meeting was held on Friday, March 23, 1990, at the <br>Caesar's Palace Hotel in Lima, Peru.  Among those present was <br>Mr. Alfredo Gordillo, general manager and 90% owner of SECOMAN.  At <br>the meeting, Mr. Aranda told Mr. Gordillo that he was interested in <br>purchasing the cotton that SECOMAN had in stock.  Although <br>Mr. Gordillo was offering only 600 tons, when asked whether he <br>could supply more he stated that he could export up to a total of <br>1,000 tons, at $1.72 per pound.  After the meeting, Mr. Aranda <br>called Mr. Gordillo and insisted that the two of them meet again <br>the following day to discuss the transaction.   <br>          At the second meeting, held in Mr. Gordillo's office, <br>Mr. Aranda and Mr. Gordillo negotiated the details of an agreement <br>pursuant to which GE del Caribe would purchase 1,000 tons of Pima <br>cotton from SECOMAN.  Among other things, Mr. Gordillo agreed to <br>Mr. Aranda's request that the asking price be reduced to $1.58 per <br>pound.  Payment was to be made by a negotiable letter of credit, <br>with a face value of $2,800,000, which would be submitted to <br>SECOMAN for its approval.  GE del Caribe was also to make an <br>initial deposit of $100,000 in Mr. Gordillo's account in a Miami, <br>Florida bank.  As they had discussed the day before, SECOMAN had <br>600 tons of Pima cotton in stock and ready to ship immediately.  <br>Mr. Aranda agreed to allow SECOMAN an additional two weeks to <br>purchase and ship the extra 400 tons.   <br>          Mr. Gordillo also asked Mr. Aranda whether he had pre- <br>sold the cotton.  Mr. Aranda replied that he had not, but that he <br>had some prospects.  Mr. Aranda asked Mr. Gordillo for the names of <br>some of SECOMAN's clients, which Mr. Gordillo agreed to do if <br>Mr. Aranda's prospective buyers did not purchase the cotton.  <br>Mr. Gordillo also offered SECOMAN's services as a sales agent for <br>GE del Caribe, given SECOMAN's greater expertise in the cotton <br>market.  Mr. Aranda agreed, but only on condition that SECOMAN not <br>offer the same cotton for sale without GE's prior written <br>authorization.  Finally, Mr. Gordillo asked Mr. Aranda to have GE <br>del Caribe confirm his authority to enter into the agreement. <br>          Because it was a Saturday, Mr. Gordillo did not have <br>secretarial assistance in the office, and he therefore suggested <br>that the agreement be drafted at a later date.  Mr. Aranda stated, <br>however, that he would rather have a document drafted immediately, <br>and then proceeded to type up the substance of their agreements in <br>English in a document entitled "Agreement to Purchase" <br>("Agreement").  Both of them then signed the Agreement. <br>          Initially, the parties began to perform their respective <br>duties under the Agreement.  Thus, on March 29, 1990, GE's Vice <br>President of Finance sent a letter by facsimile to SECOMAN <br>ratifying the Agreement, indicating that Mr. Aranda was "authorized <br>by GE del Caribe to negotiate and conclude business deals such as <br>the one we have concluded on March 24 with [SECOMAN]."  On <br>April 20, 1990, GE del Caribe deposited the agreed-upon $100,000 in <br>Mr. Gordillo's bank account.  SECOMAN, in the meantime, began <br>purchasing additional Pima cotton to comply with its duty to <br>provide a total of 1,000 tons of cotton. <br>          Mr. Aranda had also immediately begun to seek buyers for <br>the cotton at $1.90 per pound.  However, by April 5, 1990, he had <br>not yet found any buyers, so on that day he wrote to SECOMAN <br>indicating that the sale of the cotton was taking longer than <br>foreseen and requesting an additional eight working days to <br>conclude the sale.  At the same time, Mr. Huertas was also <br>negotiating the sale of 1,000 tons of Pima cotton at $1.90 per <br>pound.  Mr. Huertas also required the prospective buyer to make a <br>$100,000 deposit.  Although Mr. Huertas claimed that it was merely <br>a coincidence that he was offering Pima cotton for sale on the same <br>terms as GE del Caribe, the district court found that Mr. Huertas <br>had no cotton of his own, but was instead helping Mr. Aranda to <br>find a buyer for the cotton that GE del Caribe had purchased from <br>SECOMAN.   <br>          Throughout the late spring and early summer of 1990, the <br>international market price for Pima cotton was steadily dropping, <br>dooming Mr. Aranda's efforts to sell the cotton that GE del Caribe <br>had purchased from SECOMAN.  For example, on May 14, 1990, <br>Mr. Aranda contacted again a potential purchaser who had offered to <br>buy the cotton at $1.70 per pound, but had originally been turned <br>down because GE del Caribe was asking for $1.90 per pound.  Even <br>though Mr. Aranda lowered the sale price to $1.73 per pound, the <br>offeree rejected the offer noting that the world price had dropped <br>even further. <br>          In mid-April, Mr. Aranda began to visit banks in Puerto <br>Rico to obtain the letter of credit that was due under the <br>Agreement.  At that time, he had not yet informed his superiors of <br>his trip to Peru, of the existence of the Agreement, or of his <br>efforts to sell the cotton.  The banks, however, would not issue a <br>letter of credit without a guarantee, or "letter of comfort," from <br>GE's parent company.  Therefore, in early May, Mr. Aranda sought <br>the assistance of his superiors in GE Supply Co., explaining that <br>GE del Caribe needed the letter of comfort in order to obtain the <br>letter of credit that SECOMAN was to receive pursuant to the <br>Agreement.  He also explained that GE del Caribe stood to gain <br>$300,000 on the sale of the cotton. <br>          Mr. Aranda's superiors, however, refused to issue the <br>letter of comfort, instructed him not to comply further with the <br>Agreement, and began to investigate the matter.  On May 23, 1990, <br>Mr. James Ambrose, who was the Chairman of the Board of Directors <br>of GE del Caribe as well as an officer in GE Supply, flew to Puerto <br>Rico to discuss the Agreement with Mr. Aranda.  Mr. Ambrose <br>expressed his displeasure over the fact that Mr. Aranda had <br>committed GE del Caribe to this transaction without the approval of <br>the Board of Directors.  At its next meeting, the Board reprimanded <br>Mr. Aranda for his actions. <br>          The district court concluded that from that point on, GE <br>del Caribe sought ways to shirk its duties under the contract.  In <br>particular, after much delay, GE del Caribe sent SECOMAN a <br>revocable letter of credit.  SECOMAN rejected the proffered letter <br>and requested, instead, a confirmed, irrevocable letter of credit.  <br>On June 11, 1990, GE del Caribe wrote to SECOMAN claiming that <br>SECOMAN's rejection of the proffered letters was an essential <br>breach of the contract that entitled GE del Caribe to resolve the <br>Agreement.  However, the district court determined that SECOMAN had <br>not breached any obligation in rejecting the revocable letter of <br>credit, since such a letter did not satisfy the requirement, <br>imposed by the Agreement, that GE del Caribe produce a negotiableletter of credit because only irrevocable letters of credit can be <br>negotiable.  The district court further determined that GE del <br>Caribe's violation of this aspect of the contract was willful and <br>in bad faith, since it knew that the Agreement required that the <br>letter of credit be irrevocable. <br>          GE del Caribe's initial delay and eventual failure to <br>procure an irrevocable letter of credit not only deprived SECOMAN <br>of its expected profit on the Pima cotton transaction, but also <br>started a chain reaction that devastated SECOMAN's finances.  GE <br>del Caribe's failure to tender a negotiable letter of credit <br>rendered SECOMAN unable to meet its obligations under the lines of <br>credit it had opened the year before.  SECOMAN was then reported to <br>the Superintendent of Banks and Insurance of Peru for its failure <br>to meet these obligations and placed on a list of defaulting <br>entities.  The listing prevented SECOMAN from obtaining any further <br>financing, which in turn prevented SECOMAN from purchasing the <br>additional cotton that it was required to deliver under two <br>different contracts with other parties.  Because of its breach of <br>its obligations under these contracts, the buyers filed demands for <br>arbitration against SECOMAN.  Awards were entered against SECOMAN <br>in both arbitrations.  Thus, in addition to losing its expected <br>profits on those contracts, SECOMAN was ordered to pay damages to <br>the buyers.  Finally, the cumulative effect of these losses was to <br>reduce SECOMAN's value as a going concern. <br>          SECOMAN subsequently filed suit against GE del Caribe for <br>breach of contract in the U.S. District Court for the District of <br>Puerto Rico, alleging alienage jurisdiction under 28 U.S.C. <br> 1332(a)(2).  Before trial, the parties stipulated that their <br>dispute was governed by Peruvian law.  After an extensive bench <br>trial, the district court determined that GE del Caribe had not <br>only breached the Agreement, but also that it had done so with <br>"dolo" or dolus -- that is, in bad faith.  Under Peruvian contract <br>law, a defendant who breaches a contract in bad faith is liable for <br>all damages proximately caused by the breach, including <br>unforeseeable damages.  See Cdigo Civil (C. Civ.) art. 1321 <br>(Peru).  Accordingly, the district court's award of damages to <br>SECOMAN included its loss of profits on the sale of cotton to GE <br>del Caribe, as well as all other losses it suffered as a <br>consequence of the breach.  Finally, the district court required GE <br>del Caribe to pay a certain portion of SECOMAN's attorney's fees, <br>as a sanction for GE's obstinate conduct.  GE del Caribe then filed <br>the appeal that is now before us. <br>II.  Standard of Review <br>          We review de novo a district court's conclusions of law.  <br>See Exxon Corp. v. Esso Workers' Union, Inc., 118 F.3d 841, 844 <br>(1st Cir. 1997).  In this regard, a district court's determination <br>of foreign law "shall be treated as a ruling on a question of law."  <br>Fed. R. Civ. P. 44.1.  In contrast, "[i]n all actions tried upon <br>the facts without a jury," a district court's "[f]indings of fact, <br>whether based on oral or documentary evidence, shall not be set <br>aside unless clearly erroneous, and due regard shall be given to <br>the opportunity of the trial court to judge the credibility of the <br>witnesses."  Fed. R. Civ. P. 52(a); see La Esperanza de P.R., Inc.v. Prez y Ca. de P.R., Inc., 124 F.3d 10 (1st Cir. 1997).  "We <br>will conclude that a finding is clearly erroneous only when, after <br>reviewing the entire record, we are left with the definite and firm <br>conviction that a mistake has been committed."  Strahan v. Coxe,   <br>127 F.3d 155, 172 (1st Cir. 1997), petition for cert. filed, 66 <br>U.S.L.W. 3605 (U.S. Mar.  6, 1998) (No.  97-1485) (citations <br>omitted). <br>          Some questions presented to a trial court, however, are <br>neither pure questions of law nor of fact.  We review "mixed" <br>questions of law and fact "along a degree-of-deference continuum, <br>ranging from plenary review for law-dominated questions to <br>clear-error review for fact-dominated questions."  Inmates of <br>Suffolk County Jail v. Rouse, 129 F.3d 649, 661 (1st Cir. 1997), <br>petition for cert.  filed, 66 U.S.L.W. 3531 (U.S. Feb.  4, 1998)  <br>(No. 97-1278) (quoting Johnson v. Watts Regulator Co., 63 F.3d <br>1129, 1132 (1st Cir. 1995)).  Thus, "the applicable standard of <br>review varies depending upon the nature of the mixed question; the <br>more fact-dominated it is, the more likely that deferential, <br>clear-error review will obtain, and the more law-dominated it is, <br>the more likely that non-deferential, de novo review will obtain."  <br>Sierra Fra Corp. v. Donald J. Evans, P.C., 127 F.3d 175, 181 (1st <br>Cir. 1997). <br>          Contract interpretation often presents mixed questions of <br>law and fact.  We thus employ a bifurcated standard in reviewing a <br>district court's interpretation of a contract.  See Boston Car Co.v. Acura Auto. Div., Honda Motor Co., 971 F.2d 811, 815 (1st Cir. <br>1992).  On the one hand, "it is for the court to determine whether <br>the terms of an integrated agreement are unambiguous and, if so, to <br>construe them according to their plain meaning."  United States <br>Liab. Ins. Co. v. Selman, 70 F.3d 684, 687 (1st Cir. 1995).  <br>Appellate review of such determinations is, accordingly, de novo.  <br>See id.  On the other hand, "when the district court's answers rest <br>not on plain meaning but on differential findings by the trier of <br>fact, derived from extrinsic evidence as to the parties' intent <br>with regard to an uncertain contract provision, appellate review <br>proceeds under the 'clearly erroneous' standard."  Id.; see alsoICC v. Holmes Transp. Inc., 983 F.2d 1122, 1126 (1st Cir. 1993); <br>Gel Sys., Inc. v. Hyundai Eng'g & Constr. Co., 902 F.2d 1024, 1027 <br>(1st Cir. 1990). <br>III.  Analysis <br>          A.  Breach of Contract <br>          GE del Caribe contends that the district court erred in <br>determining that it breached its obligations under the "Agreement <br>to Purchase," for the simple reason that the Agreement was not a <br>final and binding contract under the law of Peru.  In support of <br>its claim, GE del Caribe points out three different flaws in the <br>Agreement that arguably prevent it from being a binding contract.  <br>First, GE del Caribe claims that the Agreement fails to comply with <br>C. Civ. art. 1359, which provides that "[n]o contract exists as <br>long as the parties do not agree with all of its stipulations, even <br>if the discrepancy is secondary," because the Agreement lacks an <br>undertaking to purchase, a price term, a delivery term, and an <br>agreement on the terms for the letter of credit.  Second, GE del <br>Caribe contends that the district court's reliance on evidence <br>extrinsic to the Agreement, particularly in determining that the <br>Agreement's "facilitation" clause contained a drafting error, was <br>ultra vires because, under Peruvian law, a court may not use <br>extrinsic evidence to interpret a contract, let alone to rewrite <br>its clear and unambiguous terms.  Third, and finally, GE del Caribe <br>asserts that the district court erred in rejecting GE del Caribe's <br>argument that the Agreement was invalid because its purpose was <br>unlawful.   <br>            1.  Conclusions of Law   <br>          In its first two arguments, GE del Caribe implicitly <br>contends that the district court erred both by failing to apply <br>correctly the rules of contractual hermeneutics required by the <br>Peruvian Civil Code, and by finding ambiguity in the terms of the <br>contract when there was none.  However, GE del Caribe's arguments <br>are also based in part on claims that the district court <br>misapprehended the evidence.  As we discussed above, we review de <br>novo the district court's determinations of Peruvian law and of the <br>ambiguousness of the terms of the Agreement, but we review the <br>court's findings of fact only for clear error.  For the sake of <br>clarity and convenience, we first address the questions of law and <br>of contractual hermeneutics, and only then pass on to evaluate the <br>district court's findings of fact. <br>               a. Terms of the Agreement  <br>          GE del Caribe's first argument begins with the claim that <br>C. Civ. art. 1359 establishes that there can be no contract if the <br>parties have not reached an agreement as to every element of the <br>contract, whether primary or secondary.  This assumes that a lackof agreement as to any contractual terms, as opposed to a <br>disagreement, is enough to prevent a contract from arising.  <br>Contending that the Agreement lacked an undertaking to purchase and <br>reflected no agreement on price, date of delivery, or the essential <br>terms of the letter of credit, GE del Caribe concludes that there <br>was no contract. <br>          GE del Caribe's argument is subtly but seriously flawed.  <br>The fundamental problem is that, contrary to GE's assertions, <br>Article 1359 does not require the affirmative agreement of the <br>parties as to each and every term of a contract.  Instead, Article <br>1359 distinguishes between essential and non-essential terms, <br>requiring affirmative agreement as to essential terms, but merely <br>requiring that there be no disagreement as to non-essential terms.  <br>See Manuel de la Puente y Lavalle, El Contrato en General[Contracts in General], Pt. 1, Tome 1, at 397-98 (Lima, Peru <br>1993). <br>     Silence as to an essential term is fatal; that is to say, <br>there can be no contract unless the parties have affirmatively <br>agreed to the essential terms of the contract.  The crucial problem <br>is determining which terms are essential and which are not.  As one <br>commentator has noted, some terms are objectively essential, while <br>others are only subjectively essential.  See id. at 392.  <br>Objectively essential terms are those elements of a contract that <br>are made necessary by the very nature of the contract, without <br>regard to the parties' subjective intent.  See id.  Of course, the <br>difficulty of the task of determining which elements are <br>objectively essential depends on the type of contract involved: <br>          Notwithstanding that it is relatively <br>          difficult to establish, as a general rule, <br>          just which are the essential terms of each <br>          [type of] contract, the task is easier <br>          when it involves those types of contracts <br>          that are defined by law, such as the <br>          contracts [] defined in the Peruvian Civil <br>          Code. . . .  Thus, for example, insofar as <br>          Article 1529 of the Code defines the <br>          contract of sale as the contract whereby a <br>          seller binds himself to transfer the <br>          ownership of a good to a buyer, and the <br>          latter to pay a price in money, the <br>          essential terms of that contract are the <br>          good  and the price. . . .  The problem is <br>          more delicate with regard to atypical <br>          contracts, in which, because of a lack of <br>          [legislative] definition, it is hardly <br>          possible to determine which contractual <br>          obligations are essential and which are <br>          secondary. . . .  [I]t is therefore <br>          necessary to analyze, case by case, the <br>          business purpose of the contract so as to <br>          determine which obligations are <br>          indispensable for its success: such <br>          obligations will constitute the essential <br>          elements of the contract. <br> <br>M. de la Puente y Lavalle, El Contrato en General [Contracts in <br>General], Pt. 1, Tome 1, at 392 (emphasis supplied). Subjectively <br>essential terms, in contrast, are those which, even though they are <br>not objectively essential, are deemed to be essential by the <br>contracting parties.  See id.  For example, although a delivery <br>term is not objectively essential to a contract of sale (for <br>reasons discussed below), the parties to such a contract may very <br>well consider these essential to the negotiations.  The question <br>whether a particular term is subjectively essential presents a <br>issue of fact. <br>     Silence with regard to non-essential terms, in contrast, <br>is not fatal because the Civil Code's norms regarding contracts <br>"are suppletory to the will of the parties, save for those that are <br>imperative."  C. Civ. art. 1356.  Article 1356 must be read in <br>conjunction with C. Civ. art. 1354, which, in stating that "[t]he <br>parties may freely determine the content of a contract, so long as <br>it is not contrary to any imperative legal norms," establishes a <br>distinction between the imperative and optional provisions of the <br>Civil Code.  Optional norms are presumed to apply to a given <br>contract, but parties may elect otherwise, whereas the parties may <br>not opt out of imperative norms.  Stated differently, a contract <br>is subject to all imperative norms, as well as any optional norms <br>not excluded by the parties.   <br>     Thus, the parties' silence as to any non-essential term <br>is not fatal under Article 1359 because the Code's optional norms <br>provide the missing terms.  In contrast, if rather than silence we <br>find disagreement as to any such term, then there can be no <br>contract, because the fact that there is a dispute over a given <br>term rebuts the presumption that the parties would consent to the <br>incorporation of the Code's suppletory norms. <br>     As noted before, GE del Caribe claims that the Agreement <br>to purchase was not a contract because it lacked an undertaking to <br>purchase, a price term, a delivery term, and an agreement on the <br>terms for the letter of credit.  The claim fails, for a variety of <br>reasons.  With regard to the two essential terms that GE del Caribe <br>contends were missing, these were found by the district court to be <br>present.  For example, the alleged lack of an explicit undertaking <br>to purchase is irrelevant because the district court found that <br>such an undertaking was implicit in the Agreement.  Similarly, the <br>district court found that the line in the Agreement stating "Cost <br>offered per pound: $1.58 USD" was an explicit price term. <br>     The lack of an explicit agreement on the time and place <br>of delivery does not prevent a contract from arising in this case. <br>The delivery term is not objectively essential to a contract of <br>sale because C. Civ. arts. 1552 and 1553 provide default rules <br>governing the time and place of delivery.  Moreover, there is no <br>evidence on the record that the delivery term was subjectively <br>essential, and articles 1552 and 1553 are not excluded either <br>explicitly or implicitly by the terms of the Agreement to Purchase.  <br>Consequently, these provisions are applicable to this contract. <br>     Finally, the argument based on the letter of credit is <br>also unconvincing.  The method of payment is not an objectively <br>essential term of a contract of sale.  Moreover, although the <br>parties to a sales contract could consider the method of payment to <br>be subjectively essential, there is no indication that such was the <br>case here.  In particular, reviewing the text of the Agreement, we <br>find no stipulation that the content of the letter was to be the <br>sine qua non of the Agreement.  <br>     The specific content and format of the letter of credit <br>were thus secondary, non-essential terms of the Agreement.  As <br>discussed above, only disagreement as to such terms is fatal under <br>Article 1359.  The problem here is that the text of the Agreement <br>does not indicate the existence of a disagreement, or even that the <br>parties agreed to leave the specifics of the letter of credit open <br>for future negotiation.  Specifically, it is not clear to us that <br>the requirement that a draft of the letter be submitted to SECOMAN <br>for its approval necessarily means that the parties had not already <br>agreed upon the content of the letter.  To the contrary, the <br>requirement may very well have been intended merely to allow <br>SECOMAN the opportunity to ensure that the letter of credit was <br>drafted in accordance with the terms already agreed upon.  <br>Accordingly, it fell upon GE del Caribe to prove to the district <br>court by a preponderance of the evidence that the parties had <br>agreed to postpone their negotiation over the details of the letter <br>of credit.  The district court, however, found that GE del Caribe <br>failed to carry that burden. <br>               b.  Redrafting of the "facilitation" clause and <br>               consideration of extrinsic evidence <br> <br>     The clause in question states: "The SELLERS guarantee the <br>following: . . . That the SELLERS will use GE del Caribe as <br>facilitators and sales consultants during this transaction.  <br>SELLERS will not negotiate sale of the lot aforementioned without <br>the written agreement of GE del Caribe."  The district court found <br>that this clause was not consistent with the most natural reading <br>of the rest of the Agreement, which otherwise seemed to be a <br>contract for the sale of cotton.  Moreover, SECOMAN presented <br>evidence that the "facilitation" clause had been incorrectly <br>drafted by Mr. Aranda, because the actual agreement between Mr. <br>Gordillo and himself provided that SECOMAN would act as facilitator <br>and sales consultant for GE del Caribe, not the other way around.  <br>The district court believed this evidence, and ruled accordingly.  <br>     GE del Caribe claims, however, that Peruvian law <br>prohibits courts from using extrinsic evidence to rewrite the clear <br>and unambiguous terms of an agreement, and therefore that the <br>district court's determination that the Agreement's "facilitation" <br>clause contained a drafting error was ultra vires.  Although <br>agreeing with the court that the "facilitation" clause was not <br>consistent with the view that the Agreement was a contract of sale, <br>GE del Caribe argues that the clause means what it says, that the <br>court could not ignore the inconsistency, and thus that the only <br>legally permissible conclusion to be drawn from the inconsistency <br>was that the Agreement was not a contract of sale. <br>     GE del Caribe is correct in stating that Peruvian law <br>does not permit a court to rewrite the clear and unambiguous terms <br>of a contract; however, Peruvian law does permit a court to inquire <br>into the common intention of the parties if the terms of the <br>contract are unclear or ambiguous.  Contrary to GE del Caribe's <br>assertion, several of the Agreement's provisions are ambiguous and <br>confusing.  The source of the problem is evident.  GE del Caribe's <br>argument is premised on the erroneous assumption that a contractual <br>provision is ambiguous only when its words are literally unclear.  <br>To the contrary, contractual provisions may be ambiguous, even if <br>their words are otherwise clear, if their meaning is placed in <br>question by the context in which they are found.  <br>     In order to explain our conclusion, we review some basic <br>concepts of Peruvian contractual hermeneutics.  Pursuant to C. Civ. <br>art. 1352, "[c]ontracts are perfected by the consent of the <br>parties, except for those which, in addition, must observe the form <br>required by law under penalty of nullity."  Thus, Peruvian law does <br>not require any particular form for contracts, except for certain <br>specific types of contracts that are not relevant here.  Instead, <br>the Peruvian Civil Code contains a number of provisions designed to <br>guide the parties (and the courts) in the interpretation of <br>contracts, no matter what their form.   <br>     The most basic of these provisions are C. Civ. arts. 168, <br>169, and 170, which regulate the interpretation of all "juridical <br>acts," including contracts.  In particular, Article 168 provides <br>that "[a] legal act must be interpreted in accordance with its <br>content and with the principle of good faith,"  Article 169 <br>provides that "[a] clause in a legal act is interpreted in the <br>light of the other clauses, and those clauses which are dubious are <br>ascribed the meaning arising from the whole," and Article 170 <br>provides that "[s]tatements that have several meanings must be <br>understood to have the meaning that is most suitable to the nature <br>and object of the legal act."  In addition, there are a number of <br>hermeneutic rules that are specifically applicable to contracts.  <br>For example, C. Civ. art. 1361 provides that "[c]ontracts are <br>binding as to what is expressed in them.  It is presumed that the <br>statements expressed in a contract reflect the common will of the <br>parties, and whomever denies [that the statements do reflect the <br>common will] must prove it."  Moreover, C. Civ. art. 1362 <br>emphasizes that "[c]ontracts must be negotiated, executed, and <br>performed according to the rules of good faith and the common <br>intent of the parties."  The principle of good faith has been <br>interpreted to imply, among other things, the principle of <br>conservation of contracts, which requires that contracts be <br>interpreted whenever possible in such a way as to preserve their <br>validity.  See Manuel Miranda-Canales, Derecho de los Contratos[The Law of Contracts], at 33-34 (Lima, Peru 1986). <br>     As GE del Caribe correctly states, the theory underlying <br>these provisions is known as the objectivist theory of <br>interpretation.  See Fernando Vidal-Ramrez, Tratado de Derecho <br>Civil [Treatise on Civil Law], Tome III, Vol. I, at 395 (Lima, Peru <br>1990); see generally M. de la Puente y Lavalle, El Contrato en <br>General, Pt. 1, Tome 1, at 121-52 (from which much of the following <br>discussion is derived).  However, GE's interpretation of the <br>objectivist approach is incorrect.  As noted above, although under <br>Peruvian law a contract is perfected by the consent of the parties, <br>see C. Civ. art. 1352, consent as a mere subjective mental state <br>has no legal effect.  Instead, some outward sign of consent, some <br>declaration of the common will of the parties is required.  <br>Unfortunately, the possibility then arises that the declaration of <br>will may not accurately reflect the subjective common will of the <br>parties. <br>     Various theories have been developed in order to resolve <br>the problems that may be caused by this discrepancy.  The two most <br>influential theories, the subjectivist and the objectivist, seem <br>also to be diametrically opposed to each other.  The subjectivist <br>theory requires the parties to subjectively consent to the <br>contract, and treats the declaration of will merely as evidence of <br>the subjective will of the parties.  In contrast, pursuant to the <br>pure version of the objectivist theory, the declaration of will <br>prevails over the subjective common will of the parties, so that if <br>the declaration appears to indicate that the parties consented to <br>the contract, the contract will be upheld even if the parties had <br>not, in fact, had the requisite subjective intent. <br>     Although GE del Caribe claims that Peru has adopted the <br>"pure" version of the objectivist theory, that is clearly not the <br>case.  To the contrary, the provisions of the Peruvian Civil Code <br>reflect a less strict version of the objectivist theory, sometimes <br>referred to as the "reliance" theory.  See M. de la Puente y <br>Lavalle, El Contrato en General, Pt. 1, Tome 1, at 149-51 <br>(describing the "teora de la confianza"); see also Vidal-Ramrez, <br>Tratado de Derecho Civil, at 374-78.  In particular, Article 1361 <br>establishes only a rebuttable presumption that the declaration <br>expressed in the contract reflects the common will of the parties.  <br>"This approach conserves the benefits of the [objectivist] system, <br>and, in particular, its security, but it also leaves the way open <br>for the interpreter to determine the subjective intent of the <br>declarant," which furnishes evidence of the common will of the <br>parties.  Id.  <br>     Thus, notwithstanding GE del Caribe's arguments to the <br>contrary, it is simply not true that Peruvian law bars courts from <br>considering evidence extrinsic to the text of an ambiguous or <br>unclear contract.  A contract is interpreted as a whole (not as a <br>series of disjointed, independent clauses), and in light of its <br>nature and purpose.  See C. Civ. arts. 169, 170.  Consequently, <br>when an individual clause appears to be inconsistent with the <br>others and with the purpose of the contract, a court is empowered <br>to inquire further into the common will of the parties.  In doing <br>so, the court operates under a presumption that the text of the <br>clause in question reflects the common will of the parties, but the <br>presumption may be rebutted by evidence to the contrary as to the <br>common will of the parties.  See C. Civ. art. 1361.  A fortiori, <br>that evidence can only be evidence that is extrinsic to the <br>contract.  If the evidence is sufficient to rebut the Article 1361 <br>presumption, the court may enforce the terms of the contract as it <br>finds that they were agreed to, rather than as they were written.  <br>See Lavalle-Zago, Contratos at 197-98. <br>     With regard to the case at hand, we agree with the <br>district court's conclusion that the "facilitation" clause was not <br>consistent with the rest of the contract.  The contract was <br>entitled "Agreement to Purchase," and labeled the parties as <br>"BUYERS" and "SELLERS."  Most of the other clauses in the contract <br>were consistent with the interpretation that the Agreement was, in <br>fact, a contract for the sale of cotton.  The first sentence in the <br>facilitation clause, however, indicates that SECOMAN is to use GE <br>del Caribe as a facilitator and sales consultant, which, as both <br>parties agree, is difficult to reconcile with the view that the <br>Agreement is a sales contract. <br>     There are at least two alternative interpretations of <br>this discrepancy, the one advocated by SECOMAN and adopted by the <br>district court, and the one espoused by GE del Caribe.  As one <br>commentator has noted with regard to Article 168, courts are not <br>required to interpret words literally, "when such an interpretation <br>would lead to [an] absurd [result] or to contradiction."  Lavalle- <br>Zago, Contratos at 194.  In this case, both parties' <br>interpretations may lead to internal contradictions: SECOMAN's <br>interpretation appears to be contradicted by the first sentence of <br>the facilitation clause, while GE del Caribe's interpretation <br>appears to be contradicted by the title of the Agreement and the <br>nomenclature of the parties used therein.   <br>     Regardless of which interpretation is correct, we find <br>that the meaning of the facilitation clause was sufficiently <br>contentious to make it necessary for the district court to receive <br>any evidence that was probative of the common will of the parties.  <br>In this regard, we find no merit in GE del Caribe's claim that the <br>subsequent conduct of the parties may not be used by a court in <br>interpreting a contract.  To the contrary, when the meaning of a <br>contract is unclear, "the entire behavior of the parties must be <br>observed, before, during, and even after the conclusion of the <br>contract."  Max Arias-Schreiber, Cdigo Civil Peruano de 1984[Peruvian Civil Code of 1984], Tome I, at 89-90 (Lima, Peru 1986). <br>          2.  Findings of Fact <br>     A single reading of the Agreement suggests that the <br>parties intended to enter into some sort of binding contract.  As <br>noted before, the Agreement was entitled "Agreement to Purchase," <br>labeled the parties "BUYERS" and "SELLERS," indicated the price and <br>quantity of the cotton being offered, expressed the parties' <br>various guarantees and obligations in imperative language, and was <br>signed by the President and Managing Director of GE del Caribe and <br>SECOMAN, respectively.  At first blush, the Agreement appears to be <br>a contract for the sale of cotton.   <br>     Upon examining the Agreement more closely, however, that <br>initial impression is placed in doubt.  For example, the first <br>sentence of the Agreement states that the parties are agreeing to <br>"initiate this agreement to purchase," which could lead one to <br>question whether the Agreement was merely designed to pave the way <br>to further negotiations.  Similarly, the Agreement does not <br>literally state that the sellers will sell the cotton, or that the <br>buyers will buy it.  Instead, the Agreement indicates that "[t]he <br>SELLERS guarantee . . . [t]hat they have available to sell a total <br>of 1000 metric tons of PIMA cotton," and that "[t]he BUYERS agree <br>. . . that they will produce a letter of credit (negotiable) with <br>due diligence."  On the basis of the text alone, it is not possible <br>to establish with certainty that the Agreement contemplates the <br>immediate sale of cotton to GE del Caribe.  Moreover, as we have <br>discussed above, it is very difficult to reconcile the text of the <br>facilitation clause with the view that the Agreement is a contract <br>for the sale of cotton. <br>     The district court was faced with the task of making <br>sense of this unclear text.  GE del Caribe contends that, upon <br>determining that the text alone was insufficient to establish the <br>existence of a contract of sale, the court should have ruled that <br>there was no contract.  As we have explained, however, when a court <br>is faced with a text such as this, the principle of conservation of <br>contracts directs the court to look beyond the four corners of the <br>contract for evidence of the common will of the parties.  After <br>all, one conclusion that can be drawn with confidence from the text <br>itself is that the parties intended the Agreement to be binding.  <br>As GE del Caribe correctly points out, that does not necessarily <br>mean that the Agreement is a binding contract, because the terms of <br>the Agreement must comply with the requirements established by <br>Peruvian contract law.  It does, however, mean that the court may <br>presume that the Agreement is a contract, and therefore investigate <br>further to determine what the specific terms of the contract might <br>be.  During such an inquiry, moreover, the party claiming that the <br>Agreement is not a contract bears the burden of proof.  See C. Civ. <br>art. 1361. <br>     After reviewing the evidence that the district court had <br>before it, we conclude that its finding that the Agreement to <br>Purchase was a binding contract for the sale of cotton was not <br>clearly erroneous.  First, there is substantial evidence indicating <br>that both SECOMAN and GE del Caribe perceived themselves to be <br>bound by the Agreement and acted accordingly.  Indeed, it would be <br>difficult to characterize the evidence that GE del Caribe deposited <br>$100,000 in Mr. Gordillo's bank account, or that Mr. Aranda made a <br>substantial effort to obtain a confirmed letter of credit, as <br>indicating anything but that the parties perceived the Agreement to <br>be binding.  In addition, GE del Caribe sent SECOMAN a fax <br>ratifying the Agreement, stating that Mr. Aranda "is authorized by <br>GE del Caribe to negotiate and conclude business deals such as the <br>one we have concluded on March 24 with your company."  (Emphasis <br>supplied).  GE del Caribe's decision to send SECOMAN a letter of <br>credit, albeit one that did not comply with the Agreement, also <br>tends to undermine the claim that it did not consider the Agreement <br>to have any binding force. <br>     Second, the conclusion that the contract was specifically <br>one for the sale of cotton is supported by the text of the <br>Agreement and by the testimony of the plaintiffs and their legal <br>experts, which the district court found credible.  For example, we <br>perceive no error in the district court's determination that the <br>clause stating that the "[c]ost offered per pound: $1.58 USD" <br>provided the sale price, or in the finding that the reference to <br>1000 tons of cotton being available indicated that the quantity of <br>cotton sold was 1000 tons.  The court heard testimony indicating <br>that these price and quantity terms were the terms of SECOMAN's <br>offer, and that GE del Caribe accepted the offer by signing the <br>Agreement.  The fact that the Agreement uses the terms "cost <br>offered" and "availability" rather than "price for sale" and <br>"quantity sold" does not necessarily imply that the Agreement was <br>not a contract of sale.  Moreover, the Agreement was typewritten by <br>a non-lawyer who, to judge from the fact that he could not wait <br>until the following working day, was apparently in a hurry to close <br>the deal.  We thus find that there was sufficient evidence before <br>the court to allow it to conclude that the Agreement contained <br>price and quantity terms. <br>     Similarly, the findings as to the delivery term are <br>perfectly consistent with the Civil Code's default provisions.  SeeC. Civ. arts. 1552, 1553.  In particular, the Code provides that, <br>absent a stipulation to the contrary, a good is delivered by making <br>available to the buyer at the place where it is located.  See C. <br>Civ. art. 1553.  Accordingly, SECOMAN's agreement to make the <br>cotton available and ready to ship was sufficient to comply with <br>its contractual obligation to deliver the cotton. <br>     The district court also heard testimony indicating that <br>Mr. Aranda had mis-drafted the facilitation clause, erroneously <br>transposing the names of GE del Caribe and SECOMAN.  GE del Caribe <br>argues that such testimony was inherently unreliable, since the <br>resulting clause would be internally inconsistent.  We disagree.  <br>The resulting clause would read as follows: <br>          That GE del Caribe will use SELLERS as <br>          facilitators and sales consultants during <br>          this transaction.  SELLERS will not <br>          negotiate sale of the lot aforementioned <br>          without the written agreement of GE del <br>          Caribe. <br> <br>The district court's reading is not implausible.  Indeed, far from <br>being internally incoherent, the resulting clause is consistent <br>with a contract whereby SECOMAN sells cotton to GE del Caribe, <br>which then resells the cotton.  According to the district court's <br>understanding of this aspect of the Agreement, although Mr. Aranda <br>had some potential buyers in mind, SECOMAN agreed to assist GE del <br>Caribe in its efforts to resell the cotton because of its greater <br>expertise in the cotton market.  GE del Caribe, however, retained <br>final authority to approve or reject any offer from a potential <br>buyer.  Given the evidence heard at trial, we cannot say that it <br>was clear error for the district court to find that this was the <br>deal agreed to by Mr. Aranda and Mr. Gordillo. <br>     Furthermore, it was not clear error for the district <br>court to find that the Agreement required GE del Caribe to submit <br>a confirmed letter of credit, based on evidence that, as a matter <br>of customary practice in international trade and finance, a letter <br>of credit will not be treated as negotiable unless it is confirmed <br>by a bank.  Based on this evidence, as well as on evidence that <br>GE's policy is never to accept an unconfirmed letter of credit <br>because it is not negotiable, the court also found that GE del <br>Caribe knew of this customary practice and thus knew that the <br>Agreement required the letter of credit to be confirmed.  We find <br>the evidence sufficient to support the court's conclusions. <br>     In sum, GE del Caribe failed to show that the Agreement <br>was not a sales contract.  Although GE del Caribe presented some <br>evidence to the contrary, the evidence on SECOMAN's side was not so <br>unreliable as to make it unreasonable for the district court to <br>give it credit.  Moreover, although GE del Caribe has focused on <br>arguing that the Agreement was not a binding contract, it has also <br>hinted that the Agreement might have been binding after all, but <br>only as part of a multilateral barter trade agreement, rather than <br>as a simple contract of sale.  Admittedly, GE del Caribe's <br>proposed interpretation of the Agreement is plausible, but it is <br>not our province to make findings of fact.  More importantly, even <br>if the Agreement had been a barter trade contract, GE del Caribe <br>failed to show that it would not have required GE del Caribe to <br>produce the letter of credit.  Given that SECOMAN's cause of action <br>arises out of GE's willful failure to produce a negotiable letter <br>of credit, it is unclear whether GE's proposed reading of the <br>Agreement would lead to a different result in this case. <br>    Finally, we address GE del Caribe's argument that the <br>Agreement was invalid because its purpose was unlawful.  Article <br>1403 of the Civil Code provides that the "obligation that is the <br>object of the contract must be legitimate."  We agree that under <br>Peruvian law, a contract for an unlawful purpose is void.  However, <br>as GE del Caribe admits, nothing on the face of the Agreement <br>indicates that the Agreement had an illegal purpose.  Instead, GE <br>del Caribe's argument is based on the plaintiff's testimony <br>indicating that SECOMAN requested payment in the form of a letter <br>of credit so that it could circumvent Peru's foreign exchange and <br>tax laws.  GE del Caribe specifically claims that SECOMAN violated <br>a Peruvian law that requires exporters to deposit any proceeds from <br>their sales abroad in the government-owned Central Bank, which <br>converts the proceeds to Peruvian currency at a rate that is <br>usually less favorable than the market exchange rate. <br>    Although the evidence did show that the purpose of <br>arranging for payment by means of a letter of credit was to permit <br>SECOMAN to choose an advantageous time to convert the letter into <br>currency, GE del Caribe has failed to establish that such a <br>strategy is, in fact, illegal under Peruvian law.  For example, it <br>is not clear that the duty to deposit the proceeds from export <br>transactions extends to forms of payment other than payment in <br>currency, such as payment by letter of credit.  Moreover, SECOMAN <br>presented evidence that even when payment is made in currency, the <br>duty to deposit the proceeds does not arise until the transaction <br>is consummated.  Because SECOMAN had not shipped any cotton when GE <br>del Caribe breached the Agreement, it does not appear that SECOMAN <br>was yet under a duty to deposit the $100,000 in the Central Bank. <br>    B.  Damages <br>    Reviewing the district court's findings as to damages for <br>clear error, we find only one.  The district court's award of <br>damages to SECOMAN apparently failed to take into account the <br>$100,000 that was paid up front to Mr. Gordillo as a deposit on the <br>Agreement.  The district court did not make an explicit finding <br>that the deposit was not to be considered an advance on the payment <br>due under the Agreement, and we would consider any such finding to <br>be clearly erroneous.  We will therefore reduce the award of <br>damages contained in the district court's judgment by $100,000. <br>    We reject, however, GE's contention that the award of <br>damages should be reduced by the amount of taxes that SECOMAN would <br>have had to pay on the proceeds from this sale.  Such a reduction <br>might have been in order only upon proof that SECOMAN would not be <br>liable for payment of taxes on its award, see Atlas Truck Leasing, <br>Inc. v. First N.H. Banks, Inc., 808 F.2d 902, 905 (1st Cir. 1987), <br>and no such proof was provided. <br>    We also do not agree with GE del Caribe's argument that <br>the district court erred both in determining that GE del Caribe <br>acted with dolus and in its calculation of damages.  A party acts <br>with dolus when that party willfully fails to perform an <br>obligation.  See C. Civ. art. 1318.  A determination that a <br>breaching party acted with dolus has a substantial effect upon the <br>damages available to the injured party.  Any person breaching a <br>contract is "responsible for compensating the losses and damages <br>[proximately] caused by its failure to perform."  See C. Civ. art. <br>1321.  However, a person who breaches a contract with dolus is also <br>liable for any unforeseeable damages caused by the breach.  See id.  <br>GE del Caribe correctly states that a finding of dolus requires a <br>finding that the breaching party intentionally breached an <br>obligation that it knew was binding, and that a court must analyze <br>the subjective intent of the breaching party in order to make a <br>finding of dolus.    <br>    In its opinion, however, the district court found that GE <br>del Caribe "knew that by failing to tender a negotiable letter of <br>credit, it was performing an act contrary to the contractual <br>obligations it had assumed" under the Agreement.  The court's <br>conclusion was based on evidence indicating that SECOMAN had <br>informed GE del Caribe of its pressing need for the negotiable <br>letter of credit, that at least some GE del Caribe employees were <br>aware that the Agreement required payment to be made by means of an <br>irrevocable letter of credit, and that GE del Caribe was concerned <br>about the significant decline in the price of cotton.  The court <br>also found the letter sent by GE del Caribe on June 11, 1990, in <br>which GE del Caribe claimed that SECOMAN's rejection of the terms <br>of the letter of credit "release[d] and excuse[d] [it] from any and <br>all performance [under the Agreement],"  to be evidence probative <br>of bad faith.  In particular, the letter indicates that GE del <br>Caribe felt the need to find a way to be released from the <br>Agreement, which in turn supports the implication that it knew <br>itself to be bound by the Agreement.  Reviewing these findings only <br>for clear error, with due deference to the trier of fact's greater <br>ability to gauge the demeanor and credibility of the witnesses, we <br>cannot say that the district court's findings were clearly <br>erroneous. <br>    GE del Caribe also raised several other challenges to the <br>district court's calculation of damages, including claims that the <br>court should have reduced the award of damages by the amount by <br>which the Peruvian foreign exchange restrictions would have reduced <br>SECOMAN's profits, that the court should not have based its award <br>of damages on the assumption that SECOMAN had actually purchased <br>1000 tons of cotton, that there was no evidence from which the <br>court could conclude that SECOMAN suffered losses on "cover sales," <br>that the court failed to deduct $200,000 attributable to Mr. Manuel <br>Bentin's partial ownership of the cotton, and that the court should <br>not have compensated SECOMAN for the liability it incurred when it <br>breached two subsequent contracts for the sale of cotton.  We <br>affirm the district court on these points, substantially for the <br>reasons expressed in its opinion. <br>    C.  Attorney's Fees <br>    GE del Caribe contends that the district court's award <br>under P.R. R. Civ. P. 44.1(d) was erroneous because Puerto Rico law <br>was inapplicable to this case.  In the alternative, GE del Caribe <br>claims that, even if Rule 44 were applicable to this case, the <br>district court abused its discretion in finding that GE del Caribe <br>had litigated in an obstinate manner.  We disagree with both <br>claims. <br>    In general terms, a federal court sitting in diversity <br>applies the substantive law of the forum state and federal <br>procedural rules.  See 28 U.S.C.  2072 (the "Rules Enabling Act"); <br>Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Woods-Leber v. <br>Hyatt Hotels of P.R., Inc., 124 F.3d 47, 50 (1st Cir. 1997).  A <br>state law "that would be controlling in an action upon the same <br>claim by the same parties in a State court" is substantive for Eriepurposes if it would "significantly affect the result of a <br>litigation for a federal court to disregard it."  Guaranty Trust <br>Co. v. York, 326 U.S. 99, 109 (1945).  It has long been the law in <br>this circuit that P.R. R. Civ. P. 44.1 is substantive for Eriepurposes.  See Dopp v. Pritzker, 38 F.3d 1239, 1252 (1st Cir. <br>1994); Pan Am. World Airways, Inc. v. Ramos, 357 F.2d 341, 342 (1st <br>Cir. 1966).  State conflict of laws rules are also considered <br>substantive for purposes of the Erie doctrine.  See David & <br>Zimmermann, Inc. v. Challoner, 423 U.S. 3, 4 (1975); Klaxon v. <br>Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941); New Ponce <br>Shopping Ctr. v. Integrand Assurance Co., 86 F.3d 265, 267 (1st <br>Cir. 1996).  The courts of the Commonwealth of Puerto Rico have <br>consistently followed the choice of law rules laid out in the <br>Restatement (Second) of Conflict of Laws.  See, e.g., Efectos <br>Litogrficos, C.A. v. National Paper & Type Co. of P.R., 112 P.R. <br>Dec. 389, 396-97 (1982); Partido Popular Democrtico v. Barreto- <br>Prez, 111 P.R. Dec. 199, 256 (1981); Archilla v. Smyth Worldwide <br>Movers, Inc., 106 P.R. Dec. 538, 550 (1977); Green Giant Co. v. <br>Tribunal Superior, 104 P.R. Dec. 489, 499 (1975); Fernndez vda. de <br>Fornaris v. American Surety Co. of N.Y., 93 P.R. Dec. 29, 48 <br>(1966).  Pursuant to section 122 of the Restatement, "[a] court <br>usually applies its own local law rules prescribing how litigation <br>shall be conducted even when it applies the local law rules of <br>another state to resolve other issues in the case."  Restatement <br>(Second) of Conflict of Laws  122 (1969). <br>    GE's contention is that Rule 44.1 is applicable only in <br>those diversity cases in which the merits of the controversy are <br>determined on the basis of the substantive law of Puerto Rico.  GE <br>del Caribe concludes that, since Puerto Rico's conflict of laws <br>rules establish that Peruvian law governs the underlying dispute, <br>Rule 44.1 is inapplicable to this case. <br>    GE's argument is based upon the erroneous premise that if <br>a particular state law is "substantive" for purposes of Erieanalysis, it must also be substantive for purposes of conflict of <br>laws analysis.  To the contrary, the U.S. Supreme Court has <br>"reject[ed] the notion that there is an equivalence between what is <br>substantive under Erie doctrine and what is substantive for <br>purposes of conflict of laws."  Sun Oil Co. v. Wortman, 486 U.S. <br>717, 722 (1988) (citing Guaranty Trust Co., 326 U.S. at 108).  As <br>the Court explained in Sun Oil,  <br>         Except at the extremes, the terms <br>         "substance" and "procedure" describe very <br>         little except a dichotomy, and what they <br>         mean in a particular context is largely <br>         determined by the purposes for which the <br>         dichotomy is drawn.  In the context of our <br>         Erie jurisprudence, . . . that purpose is <br>         to establish (within the limits of <br>         applicable federal law, including the <br>         prescribed Rules of Federal Procedure) <br>         substantial uniformity of predictable <br>         outcomes between cases tried in a federal <br>         court and cases tried in the courts of the <br>         State in which the federal court sits.   <br> <br>486 U.S. at 726-27.  In the conflict of laws context, in contrast, <br>the traditional substance-procedure dichotomy sought to reflect the <br>relative interests of both the forum and of the foreign <br>jurisdiction in having their law be applied to a case involving <br>both forum and foreign law.  See Restatement (Second) of Conflict <br>of Laws  122 cmts. a, b (1969); see generally James W. Moore, <br>Moore's Federal Practice  0.310[1] at 3129-30 (1996).  In fact, <br>the Restatement notes that characterizations of laws as <br>"substantive" or "procedural,"  <br>         [W]hile harmless in themselves, have led <br>         some courts into unthinking adherence to <br>         precedents that have classified a given <br>         issue as 'procedural' or 'substantive,' <br>         regardless of what purposes were involved <br>         in the earlier classifications. . . .  To <br>         avoid encouraging errors of that sort, the <br>         rules stated in [the Restatement] do not <br>         attempt to classify issues as 'procedural' <br>         or 'substantive.'  Instead they face <br>         directly the question whether the forum's <br>         rule should be applied. <br> <br>Restatement (Second) of Conflict of Laws  122 cmt. b (1969). <br>    In cases involving the law of a state or country other <br>than the forum state, therefore, a district court sitting in <br>diversity must engage in a two-step inquiry.  First, the district <br>court determines whether a particular matter is procedural or <br>substantive for Erie purposes.  If the matter is procedural, <br>federal law is applied, and if substantive, the court follows the <br>law of the forum state.  Second, if a choice of law must be made, <br>for example, because a contractual choice-of-law clause is at issue <br>or because a tort was committed in another jurisdiction, the <br>district court applies the law that would be applied under the <br>conflict of laws rules of the forum state.  However, "[i]n <br>determining whether any state law will be adopted, the fact that a <br>matter is characterized as substantive by the state courts for <br>choice of law purposes does not connote that it will also be <br>substantive for purposes of Erie, and the converse should be true."  <br>Maryland Cas. Co. v. Williams, 377 F.2d 389, 393 n.1 (5th Cir. <br>1967).  Contrary to GE's contention, therefore, the fact that Rule <br>44.1 is considered "substantive" for Erie purposes does not bar a <br>finding that it is "procedural" for conflict of laws purposes. <br>    Turning to the case at hand, we are faced with the <br>question whether, pursuant to section 122 of the Restatement, the <br>courts of the Commonwealth of Puerto Rico would apply Rule 44.1 in <br>a suit otherwise subject to the laws of another state or country.  <br>Although we have found no Puerto Rico decision directly on point, <br>we are confident that the Supreme Court of Puerto Rico would <br>conclude that Rule 44.1 is a "local law rule[] prescribing how <br>litigation shall be conducted."  Restatement (Second) of Conflict <br>of Laws  122.  Rule 44.1 does not modify the parties' substantive <br>rights under the law.  Instead, it serves the institutional <br>concerns of the courts by allowing the imposition of sanctions upon <br>parties who abuse the judicial process.  After all, "[t]he purpose <br>behind [Rules 44.1 and 44.3] is to penalize 'a losing party that <br>because of his stubbornness, obstinacy, rashness, and insistent <br>frivolous attitude has forced the other party to needlessly assume <br>the pains, costs, efforts, and inconveniences of a litigation.'"  <br>Dopp, 38 F.3d at 1253 (quoting Fernndez v. San Juan Cement Co., <br>118 P.R. Dec. 713, 718 (1987)). <br>    Our conclusion is reinforced by an evaluation of the four <br>factors listed by the Restatement to be taken into consideration in <br>making this determination: (1) "whether the issue is one to which <br>the parties are likely to have given thought in the course of <br>entering into the transaction"; (2) "whether the issue is one whose <br>resolution would be likely to affect the ultimate result in this <br>case"; (3) "whether the precedents have tended consistently to <br>classify the issue as 'procedural' or 'substantive' for choice-of- <br>law purposes"; and (4) "whether an effort to apply the rules of the <br>judicial administration of another state would impose an undue <br>burden upon the forum."  See Restatement (Second) of Conflict of <br>Laws  122 cmt. a.   <br>    First, there is no evidence whatsoever that the parties <br>intended to exclude the applicability of Rule 44.1, or to make <br>applicable to this case the litigation rules of another forum.  <br>Second, we do not agree that "the issue is one whose resolution is <br>likely to affect the ultimate result of the case," Restatement <br>(Second) of Conflict of Laws  122 cmt. a, because, although the <br>imposition of sanctions under Rule 44.1 does entail the payment of <br>a monetary penalty, the penalty is not a remedy arising out of the <br>cause of action.  Third, laws providing for awards of attorneys' <br>fees have not been consistently classified as either "procedural" <br>or "substantive" for choice-of-law purposes, either in Puerto Rico <br>or elsewhere.  Compare Du-Wel Prods. v. United States Fire Ins., <br>565 A.2d 1113, 1120 (N.J. Super. 1990) (Michigan counsel fee law <br>held procedural and therefore inapplicable to suit brought in New <br>Jersey state court), with Aries v. Palmer Johnson, Inc., 735 P.2d <br>1373, 1380 (Ariz. App. 1987) (Arizona law providing for award of <br>attorney's fees was substantive); cf. Arno v. Club Med Boutique, <br>Inc., 134 F.3d 1424, 1425-26 (9th Cir. 1998) (leaning toward <br>treating fees issue as procedural, but noting that some courts have <br>held the contrary). <br>    Fourth, "an effort to apply the rules of the judicial <br>administration of" Peru "would impose an undue burden upon the" <br>courts in Puerto Rico.  Restatement (Second) of Conflict of Laws <br> 122 cmt. a.  For example, this court has not been able to <br>determine what the Peruvian law of civil procedure would provide in <br>a situation such as the one at hand.  In any case, Peruvian civil <br>procedure is not as easily transplanted as its substantive law of <br>obligations and contracts. <br>     Finding that the district court did not err as a matter <br>of law in determining that GE del Caribe's conduct in this case <br>should evaluated under Rule 44.1, we turn next to the question <br>whether the district court abused its discretion in determining <br>that GE del Caribe behaved in a manner deserving of sanctions under <br>that rule.  See Dopp, 38 F.3d at 1253 (explaining that appellate <br>review of orders imposing sanctions under Rule 44.1 is for abuse of <br>discretion).  Rule 44.1(d) provides, in pertinent part: "In the <br>event any party or its lawyer has acted obstinately or frivolously, <br>the court shall, in its judgment, impose on such person the payment <br>of a sum for attorney's fees which the court decides corresponds to <br>such conduct."  "The purpose behind [Rule 44.1] is to penalize 'a <br>losing party that because of his stubbornness, obstinacy, rashness, <br>and insistent frivolous attitude has forced the other party to <br>needlessly assume the pains, costs, efforts, and inconveniences of <br>a litigation.'"  Dopp, 38 F.3d at 1253 (quoting Fernndez v. San <br>Juan Cement Co., 118 P.R. Dec. 713, 718 (1987)).  For the reasons <br>already discussed above, we have affirmed the district court's <br>determination that GE del Caribe breached its obligations under the <br>Agreement in bad faith.  A finding of bad faith implies that GE del <br>Caribe was aware that it was breaching its obligations under the <br>Agreement when, in June 1990, it attempted unilaterally to <br>terminate the Agreement.  We thus find no abuse of discretion in <br>the district court's further conclusion that GE del Caribe's <br>complete denial of liability, by forcing the plaintiffs and the <br>court to undergo the expense of litigating a full trial, was an <br>obstinate posture deserving of sanctions under Rule 44.1. <br>IV.  Conclusion <br>     For the foregoing reasons, we affirm the district court's <br>judgment on the issue of liability, but reduce the award of damages <br>by $100,000.  Furthermore, we affirm the district court's <br>imposition of sanctions under P.R. R. Civ. P. 44.1.  Costs are <br>awarded to appellees. <br></pre>

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