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Sperry International Trade Inc. v. Government of Israel

decided: January 21, 1982.

SPERRY INTERNATIONAL TRADE, INC., PETITIONER-APPELLEE,
v.
GOVERNMENT OF ISRAEL, RESPONDENT-APPELLANT, GOVERNMENT OF ISRAEL, THIRD-PARTY PETITIONER-APPELLANT, V. AMERICAN ARBITRATION ASSOCIATION, THIRD-PARTY RESPONDENT-APPELLEE



Appeal from an order of the United States District Court for the Southern District of New York, Milton Pollack, Judge, preliminarily enjoining beneficiary of standby letter of credit from drawing on letter of credit and refusing to enjoin appointment of non-United States nationals to arbitrate dispute between United States corporation and foreign government. Affirmed in part and reversed in part.

Before Timbers, Kearse and Cardamone, Circuit Judges.

Author: Kearse

Respondent-appellant Government of Israel ("Israel") appeals from an order of the United States District Court for the Southern District of New York, Milton Pollack, Judge, which, inter alia, enjoined Israel from drawing on a standby letter of credit issued in its favor by Citibank, N.A. ("Citibank") on behalf of petitioner-appellee Sperry International Trade, Inc. ("Sperry"), pending an arbitration panel's ruling on Israel's entitlement to draw on said letter. Because Sperry failed to demonstrate any likelihood of irreparable harm, we reverse so much of the district court's order as granted the preliminary injunction.*fn1

FACTS

The papers submitted by the parties to the district court paint the following picture. In July 1978, Israel and Sperry Rand International Trade, Inc., the predecessor of appellee Sperry (both referred to as "Sperry"), executed a contract (the "Contract") requiring Sperry, over a forty-month period, to carry out "Project 6977," the design and construction of a modern ground-to-ground communication system for the Israeli Air Force. Under P 59 of the Contract, Israel's obligation to make certain payments to Sperry was conditioned on Israel's receipt of an irrevocable letter of credit in its favor. The Contract gave Israel the right to draw on this letter of credit upon presentation of a sight draft and Israel's own "certification that it is entitled to the amount covered by such draft by reason of a clear and substantial breach" of the Contract. (Contract P 59.)

Paragraph 45 of the Contract provided that all Contract disputes that could not be resolved by negotiation were to be submitted to arbitration in accordance with the rules of the American Arbitration Association ("Association"). It required that any such arbitration be conducted in New York City, in the English language, and in accordance with the substantive laws of the State of New York.

In February 1979, Citibank opened its clean irrevocable letter of credit in Israel's favor for $11,847,749. (In August 1979 the amount was increased to $15,008,098.) The provision for payment stated:

FUNDS UNDER THIS CREDIT ARE AVAILABLE TO YOU AGAINST YOUR SIGHT DRAFT DRAWN ON US ... PROVIDED SUCH DRAFT IS ACCOMPANIED BY YOUR CERTIFICATION THAT YOU ARE ENTITLED TO THE AMOUNT COVERED BY SUCH DRAFT BY REASON OF NONDELIVERY IN ACCORDANCE WITH CONTRACT NO. 6977 OR BY REASON OF DENIAL OF THE NECESSARY LICENSES.

The credit was effective immediately, and was due to expire on January 13, 1982.

By the summer of 1981, it was clear that Project 6977 was not proceeding according to the parties' expectations, and on August 3, pursuant to P 45 of the Contract, Sperry served on Israel and filed with the Association a Demand for Arbitration, seeking a declaration that Israel had breached its contractual obligations and demanding damages of approximately $10,000,000.*fn2 Sperry claimed that its attempts to perform its Contract obligations had been seriously and substantially frustrated, hindered, and delayed by the wrongful actions and inactions of Israel. In particular, Sperry claimed that Israel had failed to provide certain equipment, structures, facilities, documentation, information, and services to Sperry as required by the Contract, and that Israel had repeatedly insisted upon patently irrational interpretations of the parties' respective contractual rights and obligations. Israel denied Sperry's allegations and asserted eleven counterclaims, alleging, inter alia, nonperformance of the Contract by Sperry.

Although when Sperry initially requested arbitration, it estimated that it could complete the project if the timetable were extended by twenty months, the situation apparently deteriorated rapidly. On September 11, 1981, Sperry notified Israel that it would cease all work on Project 6977 by October 9, and it instituted the present suit, seeking, inter alia, to enjoin Israel from drawing on the letter of credit. It alleged that Israel had committed fraud in the underlying transaction, relying on N.Y. U.C.C. ยง 5-114(2)(b) (McKinney 1964), which provides that "a court of appropriate jurisdiction may enjoin" the honoring of a letter of credit when "there is fraud in the transaction," and asserted that it would be irreparably harmed if the injunction were not granted.

The district court, after a nonevidentiary hearing, enjoined Israel from making the certification that would enable it to draw on the letter of credit, "pending an early ruling by the arbitrators"*fn3 as to "whether it is equitable and proper in the circumstances that Israel shall or shall not draw on the letter of credit." The court stated the basis for this order as follows:

The foregoing stay ... is based on an ample showing of good faith prima facie on the part of Sperry and without prejudice to the ultimate determination of that question, as well as on a probability of (Sperry's) success on the merits and possibility of irreparable harm were not such a stay (of) certification granted, or as a minimum, on a balancing of the hardships tipping decidedly toward Sperry and sufficiently serious questions going to the merits to make them a fair ground for litigation (arbitration).

($)15 million is not such a sum as could conceivably warrant any notion that Israel will be financially prejudiced if it does not have such a sum in hand for the brief period of the times specified above in order to pay its bills incurred ...


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