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June 26, 1996

ALESAYI BEVERAGE CORPORATION, Plaintiff and Counterclaim Defendant, against CANADA DRY CORPORATION, Defendant and Counterclaim Plaintiff.

The opinion of the court was delivered by: CARTER

CARTER, District Judge

 In this action, Plaintiff Alesayi Beverage Corporation ("Alesayi") seeks damages resulting from an alleged breach of contract and breach of express and implied warranties by defendant Canada Dry Corporation ("Canada Dry"). Canada Dry counterclaims, alleging breach of contract by Alesayi and damages. A bench trial was held from December 4, 1995 to December 12, 1995.


 The following facts were established at trial. On February 6, 1969, Plaintiff Alesayi *fn1" entered into a licensing agreement (the "License Agreement" or "Agreement") with defendant and counterclaim-plaintiff Canada Dry under which Alesayi gained the exclusive right to use Canada Dry trademarks, including the Canada Dry Shield, in that part of the Kingdom of Saudi Arabia lying west of the 45 degree longitude. *fn2" The License Agreement had an initial term of five years; thereafter, the agreement was to be renewed year by year unless terminated by either party for any reason. A party had to give six months notice of termination before the expiration of the then-current term. (Joint Exh. 1 at 4). Throughout the relationship, Alesayi's main contact with Canada Dry was through Kameel Shabb, the Senior Vice-president for Canada Dry for the Middle East, whose main office was in Beirut, Lebanon.

 At all relevant times, Alesayi was engaged in the business of bottling and selling carbonated beverages, commonly called soft drinks. (Am. Compl. at P1). At its bottling facility in Jeddah, Saudi Arabia, Alesayi produced soft drinks in various containers that were changed according to technological advances and market forces. To make the soft drinks, Alesayi used Canada Dry flavor extracts that were produced in Canada Dry's extract manufacturing plant in Ireland. These extracts were transported by unrefrigerated cargo ship to the Jeddah port in Saudi Arabia for use by Alesayi in its Jeddah facility. (Tr. at 142-43, 144).

 Apparently, however, Canada Dry adopted a labelling system with dual meaning: the technical staff of Canada Dry understood that the extracts would expire according to expiration periods set by the appropriate staffpersons; but from 1984 and onwards, the labels on units shipped to bottlers indicated expiration periods that exceeded the understood and accepted periods of time. According to internal Canada Dry technical documents dated February, 1982, Canada Dry set a six-month expiration period for Orange 18C. (PX 166). *fn4" At some point in 1984, the true expiration period was extended to nine months and then to twelve months. (Tr. at 246-47; DX 1N). Simultaneously in 1984, however, Canada Dry decided to comply with the repeated requests of Shabb to label all of the flavor extract units (e.g., Lemon-lime, Cola, and Ginger Ale) shipped to the Middle East with an eighteen-month expiration date, (Tr. at 240-41), so as to prevent government authorities from dumping shipments of expired extracts unloaded from the cargo ships at the entry port in Jeddah, Saudi Arabia. *fn5" Despite its decision to circumvent problems with government authorities, Canada Dry did not apply the artificial expiration date to the Orange 18C extract; this extract retained its established twelve-month expiration on the label. *fn6"

 In 1982 and 1983, Alesayi verbally complained to Shabb that the orange extract resulted in orange soda that was off-taste and/or off-color, (Shabb Testimony, Tr. at 127, 154, 155, 160), and made one written complaint to Canada Dry on the same subject prior to 1984. (Tr. at 153). By late 1984 and early 1985, Alesayi complained to Canada Dry that it had received many complaints about Canada Dry's orange soda and that large quantities of orange soda were being returned to Alesayi from the market. (Shabb Testimony, Tr. at 162; Tr. at 669, 670-71).

 In mid-1984, Alesayi told Shabb that it needed to find other bottling opportunities in order to sustain its business because the plant was underutilized due to a decrease in demand for Canada Dry soft drinks. (Tr. at 299-300). *fn7" Pursuant to a verbal agreement with Fifa Beverage Co. ("Fifa"), (Tr. at 428), an independent, limited liability company owned by two of Sheik Alesayi's sons but established with Sheik Alesayi's financial assistance, Alesayi began to bottle drink products, including an orange drink product, for Fifa. (Tr. at 388-89, 406-09).

 Upon learning of Alesayi's bottling of Fifa drink products, Canada Dry objected and warned Alesayi in August, 1984, that its involvement with Fifa constituted a breach of the dilution of efforts clause--Article 10--of the License Agreement. (DX 1T). On October 1, 1984, Canada Dry invoked the 30 day warning period pursuant to Article 13 of the License Agreement during which Alesayi was to discontinue the Fifa line of products or else Canada Dry would cancel the License Agreement. (DX 1U). Canada Dry rejected Alesayi's response that Fifa was its own legal entity and instead charged that the participation of Alesayi's management in the marketing of Fifa constituted a willful promotion of Fifa products by the Alesayi company. (DX 1W).

 However, on November 14, 1984, Canada Dry agreed to let Alesayi manufacture Fifa products and to sell them to Fifa if Alesayi relocated all sales, distribution, marketing and activities other than manufacturing relating to Fifa away from Alesayi's bottling plant and Alesayi's sales and distribution personnel. (DX 1Y; Tr. at 361).

 Subsequently, the Fifa manufacturing process was moved off the Alesayi premises, but then was returned back again in early 1985. (Tr. at 432-33). Between 1984 and 1985, Alesayi trucks were used for 100 trips--out of 12,000 trips that year--to deliver Fifa products. (Tr. at 418-19). After 1985, the number of Fifa deliveries by Alesayi trucks increased. (Tr. at 421). An agreement signed in 1988, but dated March 22, 1985, between Alesayi and Fifa indicated that Alesayi agreed to bottle and distribute Fifa's carbonated beverages, juices and syrups for a commission from Fifa per each carton sold. Alesayi also agreed to bear "all advertising expenses and any other expense relating to shipment of samples, travel expenses, freight charges, etc., which relate to the development of the products." (DX 1Y.1).

 Canada Dry continued to supply Alesayi with orange extract up through November 1985 and responded to Alesayi's complaints that the market was rejecting its orange soda by reimbursing Alesayi for half of the cost of products returned that year. (DX 3O, DX 3Q, DX 3S; Shabb Testimony, Tr. at 335-36, 382-83). The sum, approximately $ 100,000, included the price of the orange extract. Id. Canada Dry further instructed Alesayi to perform "sunlight tests" on Canada Dry's orange soda and the other orange soda brands in the market to assess the sodas' stability in direct sunlight. See e.g., PX 565.

 Alesayi stopped ordering extract from Canada Dry in November, 1985. Alesayi's sales of Canada Dry dropped from sales approximating 15 million liters in 1983 and 1984 to 9.1 million liters in 1985 and to 2.3 million liters in 1986. In 1986, Alesayi ceased selling orange soda in cans altogether. From 1985 to 1986, Fifa sales dramatically increased threefold. (PX 958; DX 6J).

 In December, 1987, Canada Dry sent Alesayi a letter informing Alesayi that it accepted Alesayi's recent order for extracts, for the stated purposes of using up its inventory of containers, as further indication that Alesayi did not want to continue to promote Canada Dry. (PX 268). Although the December, 1987 letter was not sent by certified or registered mail as required by Article 21 of the Agreement, the parties subsequently acted as if in fact the contract was terminated at that point.

 Alesayi initiated this action in October, 1989. Soon thereafter, Sheikh Alesayi instituted an action in March, 1990, against Canada Dry before the Grievances Board of the Tenth Commercial Circuit of the Kingdom of Saudi Arabia ("the Grievances Board") for breach of contract arising from defective extracts, defective bottles, loss of commercial reputation and costumers' confidence, and loss of capital invested over the period of time from 1970 through October, 1982. Alesayi claimed damages of 46,751,427 Saudi Riyals. (Pl.'s Memo. of Law in Oppn. to Def's Mot. to Enjoin Prosecution of Foreign Action, Exh.s B-C; Def's Memo of Law in Supp. of Mot. to Enjoin, at 2). In July, 1990, this court denied Canada Dry's motion to enjoin Alesayi from concurrently prosecuting Canada Dry in Saudi Arabia. Alesayi Beverage Corp. v. Canada Dry Corp., No. 89 Civ. 7221, slip op. (S.D.N.Y. July 6, 1990) (Broderick, J.). The Second Circuit affirmed. Alesayi Beverage Corp. v. Canada Dry Corp., 930 F.2d 909 (2d Cir. 1991).

 In October, 1995, the Grievances Board denied Sheik Alesayi's claims. In March, 1996, the Fourth Scrutiny Court upheld the Grievances Board's decision.

 II. Claim/Issue Preclusion

 Canada Dry argued that the decision by the Saudi Arabian courts precluded this court's consideration of Alesayi's claims. Canada Dry's position necessarily raised the issue of whether the Saudi courts' decisions have effect in this court.

 Under federal law, the recognition of foreign judgments and proceedings is governed by principles of comity. Hilton v. Guyot, 159 U.S. 113, 163, 40 L. Ed. 95, 16 S. Ct. 139 (1895); Victrix S.S. Co. v. Salen Dry Cargo, 65 Bankr. 466, 468 (S.D.N.Y. 1986) (Carter, J.), aff'd, 825 F.2d 709 (2d Cir. 1987). In Hilton v. Guyot, the seminal case in the area of enforcement *fn8" of foreign judgments, the United States Supreme Court defined comity as "the recognition which one nation allows within its Territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protection of its laws." Hilton, 159 U.S. at 164. The Court held that if the foreign forum provides a full and fair trial before a court of competent jurisdiction, under a system of procedural fairness akin to the principles governing United States courts, and there is nothing to show either prejudice or fraud in the foreign forum, then "the merits of the case should not, in an action brought in this country upon the judgment, be tried afresh . . . upon the mere assertion of [a] party that the judgment was erroneous in law or in fact." Canadian Imperial Bank of Commerce v. Saxony Carpet Co., Inc., 899 F. Supp. 1248, 1252 (S.D.N.Y. 1995) (Batts, J.) (quoting Hilton, 159 U.S. at 202-03).

 It is well established that United States courts are not obliged to recognize judgments rendered by a foreign country, but may choose to give res judicata effect to foreign judgments on the basis of comity. This Circuit has consistently extended comity "whenever the foreign court has proper jurisdiction and enforcement does not prejudice the rights of United States citizens or violate domestic public policy." Victrix S.S. Co. v. Salen Dry Cargo A.B., 825 F.2d 709, 713 (2d Cir. 1987); Pariente v. Scott Meredith Literary Agency Inc., 771 F. Supp. 609, 615 (S.D.N.Y. 1991) (Leisure, J.). The court has previously found that it is primarily principles of fairness and reasonableness that should guide domestic courts in their preclusion determinations. Gordon & Breach Science Pub. v. Am. Inst. of Physics, 905 F. Supp. 169, 179 (S.D.N.Y. 1995) (Sand, J.).

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