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Sperry International Trade Inc. v. Government of Israel

decided: September 3, 1982.

SPERRY INTERNATIONAL TRADE, INC., PLAINTIFF-APPELLANT,
v.
GOVERNMENT OF ISRAEL, DEFENDANT-APPELLEE; SPERRY INTERNATIONAL TRADE, INC., PETITIONER-APPELLEE, V. GOVERNMENT OF ISRAEL, RESPONDENT-APPELLANT



Appeals from orders of the United States District Court for the Southern District of New York (1) vacating an order of attachment entered in New York Supreme Court, and (2) confirming an arbitration award.

Mansfield and Kearse, Circuit Judges, and Cabranes,*fn* District Judge.

Author: Kearse

KEARSE, Circuit Judge:

The principal question on these appeals concerns the power of arbitrators to make certain rulings, in light of a prior decision of this Court in this litigation reversing the district court's granting of a preliminary injunction on the ground that the moving party had failed to prove irreparable injury. In No. 82-7181, 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, confirming an arbitration award in a proceeding between Israel and petitioner-appellee Sperry International Trade, Inc. ("Sperry"). Because we conclude that the award was within the arbitrators' powers and did not disregard the law, we affirm. On the basis of this affirmance we also affirm No. 82-7121.*fn1

FACTS

The relevant facts in this continuing controversy between Sperry and Israel are more fully discussed in our previous opinion in Sperry International Trade, Inc. v. Government of Israel, 670 F.2d 8 (2d Cir. 1982) (" Sperry I "), and Judge Pollack's opinion at issue here, reported at 532 F. Supp. 901 (S.D.N.Y. 1982). Familiarity with both opinions is assumed.

In July 1978, Sperry Rand International Trade, Inc., the predecessor of appellee Sperry (both referred to as "Sperry"), and Israel executed a contract (the "Contract") requiring Sperry to design and construct a communication system for the Israeli Air Force. As contemplated by para.59 of the Contract, Sperry caused Citibank, N.A. ("Citibank") to open a clean irrevocable letter of credit in Israel's favor for a sum eventually set at approximately $15 million. Paragraph 59 gave Israel the right to draw on this letter of credit, to the extent of its payments to Sperry, 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. The provision for payment in the letter of credit itself stated, somewhat differently, as follows:

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.

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.

On August 3, 1981, Sperry initiated arbitration proceedings, seeking a declaration that Israel had breached its contractual obligations and demanding damages of approximately $10 million. Sperry alleged that its attempts to perform its obligations under the Contract had been seriously and substantially frustrated by wrongful actions and inactions of Israel. Israel denied Sperry's allegations and asserted eleven counterclaims, claiming, inter alia, nonperformance of the Contract by Sperry.

On September 11, 1981, Sperry instituted suit in the district court to compel arbitration and to enjoin Israel from drawing on the letter of credit pending a decision by the arbitrators. The district court enjoined Israel from making the certification that would enable it to draw on the letter of credit, "pending an early ruling by the arbitrators" as to "whether it is equitable and proper in the circumstances that Israel shall or shall not draw on the letter of credit." On January 21, 1982, we reversed the district court's order granting the preliminary injunction because Sperry had made no showing that it would be irreparably injured in the absence of such an injunction. Sperry I. We declined to express a view as to the merits of the controversy. Id., 670 F.2d at 11 & n.4. By order dated January 25, we issued our mandate immediately.

On January 27, 1981, Israel furnished Citibank with a sight draft and certification acceptable to Citibank for drawing down the letter of credit, and requested Citibank to transmit the proceeds to an account at another bank in New York. On January 31, however, before the proceeds had been transmitted, Sperry obtained an ex parte order of attachment in New York State Supreme Court. Israel removed the action to federal court pursuant to 28 U.S.C. § 1441(d) (1976) and moved to vacate the order of attachment; Sperry cross-moved to confirm the attachment. Argument on these motions was scheduled for February 9, with the expectation that by that time the arbitrators would have ruled on the letter of credit question. On February 8, the arbitration panel held its first hearing and considered Sperry's motion to require Israel to withdraw its certification and demand for payment, and to enjoin it permanently from drawing down the letter of credit. Early on the morning of February 9, the arbitrators made their award on these issues (the "Award"), ordering that the proceeds of the letter of credit be held in an escrow account in the joint names of Israel and Sperry.*fn2

This action was promptly reported to Judge John M. Cannella, before whom the parties argued the motions to vacate or confirm Sperry's attachment. Sperry stated that it would move for an order confirming the arbitrators' Award, and that if the Award were confirmed, the attachment would become "essentially moot and unnecessary." (Transcript at 3.) On February 10 Judge Cannella vacated the attachment on the ground "that the attachment [was] unnecessary to the security of [Sperry]." N.Y. Civ.Prac. Law § 6223(a) (McKinney 1980); see Fed. R. Civ. P. 64 (law of forum state applicable to attachment). See note 1, supra. Judge Cannella also stayed Israel "from taking any further 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" pending a hearing on Sperry's motion to confirm the arbitrators' award. (Order To Show Cause dated February 10, 1982, at 2.)

Sperry's motion to confirm the Award was heard before Judge Pollack on February 18, and was opposed by Israel principally on the ground that the Award was inconsistent with our decision in Sperry I, since the arbitrators allegedly had granted substantially the same relief Israel claimed we had held impermissible. Judge Pollack rejected all of Israel's arguments*fn3 in a reasoned opinion and confirmed the award.*fn4 On this appeal, Israel renews its ...


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