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SPERRY INT'L TRADE, INC. v. GOVERNMENT OF ISRAEL

February 24, 1982

SPERRY INTERNATIONAL TRADE, INC., Petitioner,
v.
GOVERNMENT OF ISRAEL, Respondent.



The opinion of the court was delivered by: POLLACK

Petitioner Sperry International Trade, Inc. ("Sperry" hereafter) seeks confirmation of an Arbitration Award which respondent, Government of Israel ("GOI") opposes and seeks to have vacated. 9 U.S.C. § 9 (1976) and N.Y. CPLR § 7510. For the reasons indicated hereafter the motion to confirm the Award will be granted.

The procedural history

 The procedural history of the dispute between the parties will aid an understanding of the issues.

 The parties entered into a contract dated July 28, 1978 which contained a broad agreement for arbitration of all disputes arising thereunder or in connection therewith to be settled under the rules of the American Arbitration Association. Sperry was to design and build a communications system for GOI. The contract conditioned GOI's obligation to make certain payments on GOI's receipt of an irrevocable Letter of Credit in its favor. The Letter of Credit was originally in the amount of $ 11,847,749.00 but was increased to, and became the amount of $ 15,008,098.00.

 The project apparently encountered great difficulties from the start. On August 3, 1981 Sperry filed with the AAA a Demand for Arbitration claiming that GOI had obstructed Sperry's attempts to perform the contract and seeking a declaration that GOI was in breach and also seeking damages of about $ 10,000,000. GOI denied Sperry's allegations and asserted eleven counter-claims.

 On September 11, 1981 Sperry obtained an Order to Show Cause in this Court requiring GOI to show why it should not be required to proceed with the arbitration and why it should not be enjoined meanwhile from drawing down under the Letter of Credit.

 On October 9, 1981, Sperry halted all work on the project.

 On October 16, 1981 this Court heard Sperry's motion to compel arbitration to be proceeded with and for a preliminary injunction and GOI's cross-motions connected therewith. The Court dismissed GOI's objections to the appointment of non-United States citizens as arbitrators, *fn1" recommended that the AAA proceed on the matter with due dispatch, and stayed GOI from drawing down on the Letter of Credit until April 1, 1982 pending an early ruling of the arbitrators permitting the draw down of the funds. *fn2"

 On January 21, 1982, the Second Circuit reversed that part of this Court's decision concerning the Letter of Credit. It held that this Court had improperly issued a preliminary injunction because Sperry had not, as a matter of law, demonstrated irreparable harm since the potential damage to Sperry was strictly monetary. Whether the contractual condition had arisen for a draw down of the proceeds was not then a subject of litigation. The Court of Appeals expressly stated that it expressed no view as to the other elements that a movant must establish in order to obtain injunctive relief, viz., the merits.

 On January 27, 1982 the GOI furnished Citibank, N.A., the issuer of the Letter of Credit, with the Sight Draft and Certification required by its terms to effect a drawing thereunder, and requested Citibank, N.A. to transmit the proceeds to an account at Bank Leumi. On February 2, 1982 Citibank, N.A. acknowledged that the certification was in order so far as it was concerned. However, before the proceeds were transmitted as requested, Citibank, N.A. was stopped therefrom by an Order of Attachment of GOI's account issued on January 31, 1982 at the instance of Sperry in a State Supreme Court action. The Warrant of Attachment was served on Citibank, N.A. on February 1, 1982 by the Sheriff of New York County. GOI removed the action from the state to this Court on February 2, 1982 pursuant to 28 U.S.C. § 1441(d) on the ground that GOI is a foreign state and then moved in this Court to vacate the attachment. A hearing on that motion was set for February 9, 1982.

 Early in the morning of February 9, 1982 and before the hearing set on the motion to vacate the state court attachment, the Arbitrators handed down an Award requiring both parties to escrow in a joint account the amount of the proceeds of the Letter of Credit pending resolution of the further issues to be arbitrated or until otherwise dealt with by the Arbitrators or the Courts. They did not reach the issues of liability for breach and damages. Those issues have been set for hearing commencing late in March 1982.

 The next day, February 10, being apprised of the Award, Judge Cannella on defendant's motion vacated the Order of Attachment obtained in the state court. Judge Cannella's Memorandum indicates that there was no showing that the attachment was needed to secure satisfaction of a judgment following the arbitration, stating however that he made no findings on the subject whether the GOI had explicitly waived its immunity pursuant to either the contract or treaties between the United States and Israel. In a footnote Judge Cannella also stated that he made no findings with respect to the propriety of the Arbitration Award of February 9, 1982. All other applications and related matters were referred to this Court.

 On February 10, 1982 the GOI demanded that Citibank wire the proceeds of the Letter of Credit to Bank Leumi. Citibank did not comply.

 At 3:15 P.M. on February 10, 1982 Judge Cannella signed an Order to Show Cause returnable February 18, 1982 on Sperry's motion to confirm the Arbitration Award. The Order to Show Cause provided that pending the hearing of Sperry's application to confirm the Award GOI "is stayed from taking any action to collect the proceeds of the letter of credit or to remove the proceeds resulting from any payment of that letter of credit from their present location at Citibank, N.A." GOI then served a cross-motion to vacate the Award returnable at the same time.

 After the hearing herein on February 18, 1982 on the motions, and with the consent of both parties, the restraint against any removal of the proceeds of the Letter of Credit from Citibank, N.A. was continued by the Court until the determination of the motions to confirm or vacate the Award.

 Both parties had appeared before the Arbitrators on February 8, 1982 and made written and oral submissions on the Letter of Credit matter. The Arbitrators were made fully aware of the rival claims and the equities each party urged.

 The Award

 The equitable relief granted by the Arbitrators on February 9, 1982 was in the following terms:

 
Upon the motion of Claimant, in an arbitration before this Tribunal commenced by a Demand for Arbitration dated August 3, 1981 (as amended), for injunctive relief with respect to a Letter of Credit (no. WCG-150297) purchased by Claimant from Citibank, N.A., or the proceeds thereof, and for other relief, and upon hearing and considering the arguments presented and the large number of documents submitted (directly or during the month prior to the hearing, through the American Arbitration Association) on behalf of Claimant and Respondent in favor of and in opposition to such injunctive and other relief;

 Now, upon due consideration, the arbitrators order as follows:

 
1. The proceeds of said Letter of Credit shall be paid into an escrow account ("Escrow Account") in the joint names of Claimant and Respondent with such bank or other entity in the United States of America as shall be agreed upon in writing by Claimant and Respondent prior to the release of such proceeds by Citibank, N.A. or, in default of such agreement, with Citibank, N.A.
 
2. Claimant and Respondent shall maintain the Escrow Account in their joint names as aforesaid and the moneys or other investments standing to the credit thereof, including all interest or other income which may be earned thereon, shall not be withdrawn or transferred until (and then only in such manner, on such terms and in such amount, whether as to the whole or in part, as) Claimant and Respondent shall so agree in writing or, in default of such agreement, this Tribunal or a Court in the State of New York or Federal Court in the United States of America shall finally so determine.
 
3. Claimant and Respondent shall not permit the Escrow Account to become subject to any lien or encumbrance without the leave of this Tribunal or of a Court in the State of New York or Federal Court in the United States of America.
 
8. This order shall constitute an Award of the arbitrators and either party is at liberty to apply forthwith to the United States District Court for the Southern District of New ...

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