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February 4, 1985

SILEX S.P.A. and Tito Bentivogli, Defendants

The opinion of the court was delivered by: HAIGHT


HAIGHT, District Judge:

 This case is before the Court on cross-motions to compel or stay arbitration, and for related relief.


 Plaintiff Jab Industries, Inc. ("Jab"), a New York corporation, is an importer and distributor of household items. Defendant Silex S.P.A. ("Silex"), an Italian corporation, manufactures portable oil-filled electric heaters. Defendant Tito Bentivogli is president of Silex.

 On May 16, 1981 Jab and Silex entered into a written agreement by which Silex appointed Jab to be the exclusive distributor of its heaters in the United States and Canada. The agreement calls for Jab to purchase Silex's heaters for its own account, P2, paying for them through irrevocable letters of credit payable 90 days from the date of presentation of shipping documents. P5.

 Paragraph 18 provides for arbitration. It reads:

 "In the event of any dispute arising hereunder or in connection herewith, the same shall be submitted to binding arbitration in the City of New York, New York before three (3) arbitrators in accordance with the rules of the American Arbitration Association. Each party hereto consents to the jurisdiction of such Association and agrees to be bound by the award of such tribunal. Nothing in this Paragraph, however, shall limit the ability of any party to this Agreement from seeking from a court of competent jurisdiction, any provisional remedy, including but not limited to injunction, receivership or attachment in the event of a dispute arising hereunder or in connection herewith."

 Thereafter Jab and Silex entered into three supplemental agreements. The first is dated February 22, 1982. It is captioned "Supplemental Agreement." Its preface recites that it "supplements the Distributorship Agreement dated May 16, 1981" between Silex and Jab. Paragraph 1 of this supplemental agreement recited Jab's delivery to Silex, and Silex's receipt, of three checks in payment of three designated invoices, as well as the delivery by Jab to Silex of "accepted drafts" payable "at 90 days from the due date" of three additional specified invoices.

 Paragraph 2 of the supplemental agreement of February 22, 1982 provides as follows:

 "The Distributor will accept drafts in a form substantially [sic] the same as that annexed hereto as Exhibit "A" for amounts of each invoice which remains unpaid, the drafts to be payable at 90 days from the due date of each invoice and to be mailed by registered mail, return receipt requested, to the Company before the due date of each invoice. At the request of the Distributor the due date of each draft referred to in this paragraph or in paragraph 1 above, shall be extended for additional 30 day periods up to a maximum of 90 days."

 The form of draft attached as Exhibit "A" to this agreement is printed in Italian. It contains a handwritten notation incorporating by reference the supplemental agreement of February 22, 1982 between Silex and Jab.

 The second supplemental agreement is dated August 12, 1982. Its preamble recites that the agreement "supplements the distributorship agreement" between Silex and Jab. The agreement sets forth details of further purchases and shipments. In respect of payment, this supplemental agreement provides:

 "2. Delivery and payment of the abovementioned units will be effected as follows:

 "a. The first 25,000 units will be shipped against receipt of irrevocable Letters of Credit payable 90 days from the date of shipment according to the shipping documents. Shipping documents to be those documents that indicate the day the boat has left the port of Europe to be called hereafter Bill of Lading. The Letters of Credit must include the following statements "Irrevocable Letter of Credit to be confirmed by advising Italian Bank (name of bank) with draft drawn on (name of Italian bank).

 "b. The following 15,000 units will be shipped immediately after the first 25,000 units are shipped and will be paid against drafts accepted by the Distributor payable 90 days from the date of the Bill of Lading. The drafts will be accepted and delivered to the Company or to one designated by the Company upon receipt of the invoice which will be made the day before the goods leave the Company's premises."

 A third supplemental agreement, so captioned, was entered into on October 28, 1982. Its preamble recites that it is "supplemental to and is an integral part of the distributorship agreement (the "Distributorship Agreement") dated May 16, 1981" between Silex and Jab. Further commercial details are given. Certain units covered by this supplemental agreement were to be paid for by letters of credit. This agreement then provides at P3(e):

 "(e) Notwithstanding the provisions of subparagraphs (c) and (d) above, after Silex has shipped 15,000 units covered by containers 55 through 73, and after Silex has received letters of credit in acceptable form in payment therefor, Silex will ship four containers containing an aggregate of approximately 3,520 units on open account, the title documents of which will be released to Jab against acceptance and delivery by Jab to Silex of drafts payable at 90 days from the date of shipment of the units from Italian port, such drafts to be in the same form as used in the past."

 The drafts submitted pursuant to the second and third of these three supplemental agreements were not required to include notations incorporating the agreements by reference.

 It is not at all clear from the motion papers which party took the initiative in amending the methods of payment under the distribution agreement. What is clear is that, increasingly over time, "notes" or "drafts" (the parties use the terms interchangeably) replaced letters of credit against shipping documents as the method of payment. It does not matter which party suggested the change, because whichever it was, the other party acquiesced.

 When the draft procedure of payment was followed, Silex's procedure was to invoice Jab and send with the invoice a draft which had not yet been signed by Silex as the drawer. Jab accepted the draft by signing it and returning it to Silex. Silex then signed the draft as drawer and presented it to an Italian bank.

 Disputes arose under the distribution agreement. I need not detail them here. It is sufficient to say that at present, some 20,000 heaters purchased by Jab from Silex are presently languishing in warehouses in New Jersey. Jab says that most of them suffer from defective manufacture. Silex says that if the heaters are defective, the condition resulted from damage during ocean shipment, with the risk falling on Jab since the shipments were F.O.B. These significant disputes as to quality and merchantability are reflected on the payment side of the distributorship agreement. Jab has refused to accept certain drafts forwarded by Silex, and, although accepting others, has refused payment on them.

 The situation is further complicated by the fact that Silex negotiated or assigned a number of accepted drafts to Italian banks. The best present estimate is that fourteen drafts totalling $370,700.15 are in the possession of Italian banks. Silex holds original drafts totalling $827,264.48. Jab refuses to pay any of them. Predictably, the banks take the position that they are not concerned with the disputes between Jab and Silex. The banks look to Jab to pay the drafts, or notes, which they hold. One bank has commenced an action on its drafts against Jab in ...

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