The opinion of the court was delivered by: WALKER
This case presents the question whether the publisher of New York Magazine (" New York "), dissatisfied with the quality performance of its printer twenty months into a five year printing agreement containing an arbitration clause, may terminate its contract, switch printers, go to arbitration and, if found at fault, respond in damages. Plaintiff Unimedia Group, Inc. ("Unimedia"), on behalf of its printing division located in Drummondville, Quebec, Litho Prestige ("Litho") has brought this action seeking a preliminary injunction to restrain News America Publishing Inc. ("News America") from terminating the agreement pending a resolution of their dispute in arbitration which both sides have demanded.
On August 22, 1986, this Court entered an order for a temporary restraining order expressly noting that the decision was reached "in the context of the temporary restraint sought, to stay the termination for one week. Thus, the Court's determination is without prejudice to any judicial conclusion that no restraint would be appropriate in the context of a application for a preliminary injunction that could last many months and create an entirely different equation of hardships."
For the reasons discussed below, the Court now denies Unimedia's motion for a preliminary injunction pending arbitration.
The Court has received extensive factual submissions from both sides. It has carefully read, word-by-word and line-by-line, all of the exhibits, the several affidavits, the deposition transcripts, and the transcripts of two days of hearings at which the Court was able to assess the demeanor of the principal witnesses. The Court finds the following facts.
By 1983, New York Magazine, in its fifteenth year since its founding in 1968, was enjoying advertising revenues of $25,000,000 as its advertisers sought to reach its affluent market of sophisticated metropolitan readers. Its printing contract was coming to a close. In anticipation of this event, Litho undertook and was able to attract for itself this important printing business. As part of its move, Litho acquired a new press for $16 million that could, it believed, satisfy New York's requirements and promised to News America's predecessor corporation that it would be Litho's "number one customer". In order to arrange $18 million in financing for the acquisition of the press and other necessary plant expansion occasioned by the increase in business, Litho obtained the necessary bank financing supplemented by subsidies from the governments of Canada and Quebec of about $4 million and $1 million, respectively, in anticipation of an increase in exports and domestic employment.
On November 18, 1983, Litho and News America's predecessor executed the printing agreement. The lengthy agreement "for the complete manufacture of the weekly New York Magazine " covered an initial five year term. It provided for renewal at the end of five years on January 29, 1990 unless "either party shall on or before September 1, 1989, notify the other of the intent not to so extend" (Art. XIII, para. 13.01). The agreement also provided that the printer could terminate upon six months notice after a change in the U.S. dollar/Canadian dollar exchange rate specified therein (Art. VI, para. 6.05) and that the publisher could terminate the contract upon the occurrence of two events: (1) discontinuance of its publication of New York Magazine or (2) circulation losses giving rise to an inability to sustain the minimum print order required by the agreement. That neither of these two events has occurred is not disputed.
The agreement in Article IV, para. 14.01 provided that "any controversy of [sic] claim arising out of or relating to this contract, or breach thereof, shall be settled by arbitration" in New York under the rules of the American Arbitration Association and "judgment upon the award rendered by the Arbitration(s) may be entered in any court having jurisdiction thereof."
Regarding Litho's performance under the agreement, the agreement spelled out Litho's warranties and limitations on liability in Article VII, para. 701 and 702. Litho warranted that "all WORK to be performed by it shall be done in a good and workmanlike manner consistent with the quality of WORK performed by Arcata [the predecessor printer for New York Magazine ] . . . and consistent with the manufacturing process and the materials being used". The agreement required that defendant notify Litho of any breach of warranty within thirty days, failing which all work "shall be conclusively presumed to comply with all warranties of Litho Prestige". In the following provision, headed "Limitations", Litho's liability for breach of warranty was generally limited to direct out-of-pocket losses. The provision further provided that in the event of a breach there was no liability for other direct, indirect or consequential damages except upon a finding of "Litho Prestige's gross negligence, deliberate, willful or bad faith refusal to perform its obligations under this agreement."
This Court will not dwell at great length on the problems encountered by the parties in the twenty months they have been operating under the contract. Their nature and the effect to be accorded these issues are properly the subject of the mutually-sought arbitration. It will suffice here to point out News America's claim that Litho's performance was substandard from the outset. News America asserts that its termination of the Litho contract is fully justified; that initial problems with binding were superceded by late deliveries and by repeatedly defective printing: first in editorial copy and later in advertising reproductions, particularly in color prints; that poor reproductions of advertising required the magazine to run free advertising to compensate for defective ads, or "make goods", at a rate three times greater than with its prior printer and that, as a result of these poor reproductions, advertisers were beginning to defect. Litho, while admitting to some deficiencies in reproductions, denies that the situation is as grave as News America portrays, and claims responsibility for most defects lies with the publisher, who approved the printing work based on copy it submitted. Litho maintains that termination by News America is not justified and is a breach of the agreement.
While it is not for this Court to venture into the domain of the arbitration panel, which will have the task of deciding the contract issues and any blame therefor, the Court did hear credible testimony that such advertising reproduction deficiencies did exist, had resulted in numerous "make goods" and had resulted in a decision by two advertisers to cease doing business and by others to closely monitor future issues for improvements before finally deciding whether to continue advertising in New York Magazine.
From May to early August 1986, the management of News America held a series of internal meetings to discuss the printing situation. These led to a decision by News America to terminate the agreement with Litho, and on August 6, 1986, News America's President Martin Sugarman advised Litho's President Eric Ferrat that the agreement would be terminated after the printing of the New York Magazine issue dated September 1, 1986. News America offered to "buy out" the contract for $2 million.
On August 15, 1986, both parties demanded arbitration, and on August 19, 1986, Unimedia commenced this ...