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ALESAYI BEV. CORP. v. CANADA DRY CORP.

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK


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.

 I.

 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).

 In the early 1980's, *fn3" Canada Dry introduced Orange 18C, a modification of the extract for orange soda bottled by Alesayi. The units of Orange 18C extract were labeled with expiration dates indicating the effective shelf life. For the labeled period to have meaning, however, Canada Dry informed Alesayi that the extracts must be stored in clean, sanitary conditions, protected from direct sunlight, stored at appropriate temperatures, and rotated by age and delivery date. Canada Dry also suggested that the extracts be used on a first-in, first-out basis. (Tr. at 148-49, 166-67, 319-20).

 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.).

  If a final judgment is reached first in the foreign court, it can then be pled as res judicata in the domestic court. Scheiner v. Wallace, 832 F. Supp. 687, 693 (S.D.N.Y. 1993) (Sweet, J.) (citing China Trade & Dev. Corp. v. M.V. Choong Yong, 837 F.2d 33, 36 (2d Cir. 1987)).

 Because this is a diversity action, the law of the forum with respect to comity should be applied. British Midland Airways Ltd. v. Int'l Travel, Inc., 497 F.2d 869, 871 n.2 (9th Cir. 1974); Pariente, 771 F. Supp. at 615. New York law therefore determines the extent of the preclusive effect of the Saudi Arabian judgment. With certain exceptions, New York law provides that "a foreign country judgment that is final, conclusive and enforceable where rendered must be recognized and will be enforced as 'conclusive between the parties to the extent that it grants or denies recovery of a sum of money.'" *fn9" Pariente, 771 F. Supp. at 615 (quoting In re Union Carbide Corporation Gas Plant Disaster at Bhopal, 809 F.2d 195, 204 (2d Cir.), cert. denied, 484 U.S. 871 (1987)). Employing a liberal standard, New York courts presume that a foreign country judgment is valid "if that judgment, or the pleadings, shows that the court had jurisdiction over the action and is a court of general jurisdiction." Pariente, 771 F. Supp. at 615 (quoting 54 N.Y.Jur.2d, Enforcement and Execution of Judgments § 60, at 90 (1986)). As noted in the commentaries to the New York statute that governs foreign judgments, "so liberal has New York case law been in the recognition of the judgments of foreign nations that the occasion for the use of Article 53 has been rare." Siegel, N.Y.C.P.L.R. § 5301 Practice Commentary, at 486 (McKinney's 1978); Pariente, 771 F. Supp. at 616. Here, the Saudi court had jurisdiction over the action before it; thus, this court can recognize the Saudi decisions. The court turns to whether those decisions have preclusive effect.

 A. Res Judicata

 The doctrine of res judicata holds that "[a] final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action." Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 398, 69 L. Ed. 2d 103, 101 S. Ct. 2424 (1981); Saud v. Bank of New York, 929 F.2d 916, 918 (2d Cir. 1991). Under New York's "transactional approach" to res judicata, claims in a later action that arise out of the same "factual grouping" that formed the predicate for the prior proceeding are deemed to be part of the same "claim." The rationale of this approach is to prevent parties from splitting their claims among various jurisdictions. The court will bar such claims irrespective of whether they are based upon different legal theories or seek different relief. Davidson v. Capuano, 792 F.2d 275, 278 (2d. Cir. 1986) (citing Smith v. Russell Sage College, 54 N.Y.2d 185, 192-93, 445 N.Y.S.2d 68, 71, 429 N.E.2d 746 (1981)).

  Canada Dry *fn10" argued that the October 24, 1995 decision by the Grievances Board of the Tenth Commercial Circuit of the Kingdom of Saudi Arabia precluded the current action. In the that decision, the Saudi court denied Alesayi's claims, finding, inter alia, that Alesayi did not show that Canada Dry violated the contract nor that the alleged acts of Canada Dry caused Alesayi's damages. That decision, as both parties' declarants indicated, while valid, was not enforceable when the parties briefed the issue because Alesayi had filed an appeal within the 30-day appeals period. (Ltr. of 11/28/95 from Samuel D. Rosen to Hon. Robert L. Carter at 4). "A judgment shall become enforceable if the period allowed for appeal lapses without the losing party having appealed or if it has been confirmed by the appellate court within the Board of Grievances." (Decl. of Hassan Mahassni [for Canada Dry] at P 6). *fn11" Since the parties' briefing, however, the appellate court has affirmed the Grievances Board decision; that decision is now final and enforceable. (Ltrs. of 4/19/96 and 5/3/96 from Robert E. Pokusa, counsel for Alesayi; Official Translation of the Stamp of the Fourth Circuit of the Grievances Board). For res judicata purposes, it is not material that the Saudi action was brought after Alesayi commenced the action presently before the court. Chicago, R. I. & P. Ry. Co. v. Schendel, 270 U.S. 611, 70 L. Ed. 757, 46 S. Ct. 420 (1926); Restatement of Judgments § 43 (1980).

 However, there are situations in which res judicata is not appropriate. These situations--exceptions to the rule against claim-splitting--are set forth in the Restatement (Second) Judgments, Section 26(1). Under Exception (c), *fn12" successive actions in various jurisdictions are allowed when a plaintiff is unable to seek relief in the first action because the court does not have subject matter jurisdiction. In this case, Alesayi initiated the New York action on claims arising from November, 1982 to February, 1991. Then Alesayi instituted the Saudi action to recover on claims covering the period of 1970 through October, 1982. Alesayi could not have sought recovery in this court on the Saudi claims because those claims were barred by even the most permissive of the relevant New York limitations bars. *fn13" Therefore, regardless of whether the claims before the Saudi court arose from the same factual grouping as the claims in the New York action, the Saudi decision does not have preclusive effect because the statute of limitations bar stripped this court of subject matter jurisdiction over the Saudi claims. *fn14" Id.

  B. Collateral Estoppel

 Collateral estoppel ("issue preclusion") bars a party from relitigating matters determined adversely to him in a prior action. *fn15" The Second Circuit has held that in New York, collateral estoppel requires two levels of inquiry: (1) the court must determine if the issues are identical and the issues necessarily decided in the prior action are decisive in the present action; and, (2) the court must determine whether the party to be bound had a full and fair opportunity to contest the determination. Conte v. Justice, 996 F.2d 1398, 1400 (2d Cir. 1993).

 The party seeking the benefit of collateral estoppel bears the burden of proving that the issues resolved in a prior proceeding and those raised currently are identical. Khandhar v. Elfenbein, 943 F.2d 244, 247 (2d Cir. 1991); Ryan v. New York Telephone Co., 62 N.Y.2d 494, 501, 478 N.Y.S.2d 823, 827, 467 N.E.2d 487 (1984). Issues are not identical when the standards governing them are significantly different. Cullen v. Margiotta, 811 F.2d 698, 732 (2d Cir.), cert. denied, 483 U.S. 1021 (1987).

 Here, there is evidence that the standards governing Alesayi's breach of contract claim in the Saudi action and the current action are significantly different--Alesayi need only prove its case by a preponderance of the evidence to this court while it had to meet a much higher, stricter standard before the Grievances Board. *fn16" Thus, on this inquiry alone, Canada Dry fails to show that collateral estoppel bars Alesayi's current claims.

 Since neither res judicata nor collateral estoppel bars subject matter jurisdiction in this case, the court turns to a consideration of the claims--breach of contract arising from defective and overaged extracts and breach of express and implied warranties--and the counterclaim--breach of contract arising from a violation of the Agreement's dilution of efforts clause--on their merits.

 III. Choice of Law

 The License Agreement between Canada Dry and Alesayi provides that New York law governs the issues in this case; neither party contested the choice of law clause. Ostano Commerzanstalt v. Telewide Systems, Inc., 794 F.2d 763, 765 n.1 (2d Cir. 1986); (Joint Exh. 1 at 6). Under New York law, the plaintiff bears the burden of proving the material allegations of the complaint by a fair preponderance of the evidence. Canada Dry, as a counterclaim-plaintiff, bears the same burden on its counterclaim. V.S. Int'l, S.A. v. Boyden World Corp., 862 F. Supp. 1188, 1195 (S.D.N.Y. 1994) (Leisure, J.).

 IV. Breach of Contract

 A. Statute of Limitations

 By characterizing the Agreement as a contract for the sale of goods--the extracts--Canada Dry argued that the Uniform Commercial Code dictated the appropriate four-year limitations period. Alesayi asserted that the Agreement should be governed by the six-year statute of limitations for contracts under New York's C.P.L.R. § 213 because the Agreement was a contract for both goods and services.

 Whether a contract is for the sale of goods or for services provided is a question of fact. Farm Automation Corp. v. Senter, 84 A.D.2d 757, 443 N.Y.S.2d 765, 765 (N.Y. S. Ct. 1981). In determining whether the violation of a contract providing both for the sale of goods and for the furnishing of services is controlled by the four-year statute of limitations of U.C.C. § 2-725 (McKinney's 1993) or the six-year statute of limitations in N.Y.C.P.L.R. § 213(2), the test is whether the contract is "predominantly" one for the sale of goods or for the providing of services. Levin v. Hoffman Fuel Co., 94 A.D.2d 640, 462 N.Y.S.2d 195, 196 (N.Y. S. Ct.), aff'd, 60 N.Y.2d 665, 468 N.Y.S.2d 104, 455 N.E.2d 663 (1983). If the provision of services or rendering of other performance predominates and is not merely incidental or collateral to the sale of goods, then the U.C.C. does not apply. Compania Sud-Americana de Vapores v. IBJ Schroder Bank & Trust, 785 F. Supp. 411, 431 n.19 (S.D.N.Y. 1992) (Kram, J.). This inquiry depends heavily on the facts and terms peculiar to that contract. McNally Wellman Co. v. New York State Electric & Gas Co., 63 F.3d 1188, 1194 (2d Cir. 1995) (resting the determination of the applicable statute of limitations period on the essential terms and consequences of the contract); see also Coca-Cola Bottling Co. of Elizabethtown v. Coca-Cola Co., 696 F. Supp. 57, 85 (D. Del. 1988) (discussing cases in which courts have alternatively found actions involving franchises, distributorships, or other "mixed" goods and services contracts as both outside and within the U.C.C. for statute of limitations purposes), aff'd in part and rev'd in part on other grounds, 988 F.2d 386 (3d Cir. 1993), cert. denied, U.S. , 114 S. Ct. 289 (1993).

 The court finds that while the contract provides for the sale of extracts, it also provides for services that were not incidental to the sale of goods. Specifically, Article 7 of the Agreement indicates that the purpose behind the agreement was the establishment of a bottling business by Alesayi, not just the sale of extracts from Canada Dry to Alesayi:

 

The Bottler agrees to establish and commence operation of a plant for the production of "CANADA DRY" beverages, at Bottler's expense no later than July 31, 1969. . . . When the demand for "CANADA DRY" beverages in the territory shall necessitate additional facilities, the Bottler agrees to establish such additional facilities.

 Article 7, License Agreement (emphasis added). *fn17" Furthermore, Shabb testified that the Agreement contemplated other activities beyond the sale of extract. (Tr. at 134). After carefully evaluating the Agreement in its entirety, the court finds that the sale of extracts did not predominate and therefore the breach of contract action is subject to the six-year statute of limitations under New York's C.P.L.R. § 213(2). Because Alesayi and Canada Dry entered into an agreement to toll the statute of limitations as of November 1, 1988, Alesayi may recover on claims for damages accruing from November 1, 1982. *fn18"

 B. Standards For Breach of Contract

 A party seeking recovery for breach of contract must show: (1) a contract; (2) performance by the party seeking recovery; (3) breach of the contract by the other party; and (4) damages attributable to the breach. Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522 (2d Cir. 1994). When a party materially breaches, it has failed to substantially perform the contract and the other party is discharged from performing its obligations. Jafari v. Wally Findlay Galleries, 741 F. Supp. 64, 68 (S.D.N.Y. 1990) (Sweet, J.).

 The power to terminate a contract following breach is one of election. Bigda v. Fischbach Corp., 849 F. Supp. 895, 901 (S.D.N.Y. 1994) (Carter, J.). The non-breaching party faces two options: it may either continue to perform under the contract or it may terminate the contract. Id. If the non-breaching party elects to continue performance, it may not later choose to terminate the contract on account of the breach. Id. However, the non-breaching party may later sue for breach, even though it elected to continue to perform rather than terminate the agreement, if notice of the breach was given to the breaching party. Nat'l Westminster Bank v. Ross, 130 Bankr. 656, 675 (S.D.N.Y. 1991) (Kram, J.), aff'd sub nom, Yaeger v. Nat'l Westminster, 962 F.2d 1 (2d Cir. 1992).

 C. The Alleged Breaches

 At trial, Alesayi claimed that the market rejected its Canada Dry orange soda as off-taste and off-color because Canada Dry sold Alesayi defective orange extracts and knowingly labelled the extracts with incorrect expiration dates--two acts that constituted a breach of the License Agreement. As a result, Alesayi suffered a loss of profits and loss of value in its business as a going concern. However, Canada Dry contested whether Alesayi satisfied the second element of its breach of contract claim--that Alesayi faithfully performed its contract obligations. To the contrary, Canada Dry argued, Alesayi breached the Agreement by violating the dilution of efforts provision of Article 10 and that Alesayi therefore cannot recover. *fn19"

 1. Article 10 -- Dilution of Efforts

 Canada Dry alleged that when Alesayi began to bottle and sell Fifa products in late 1984, Alesayi violated Article 10 of the License Agreement. Alesayi responded that Article 10 did not prohibit the contract bottling of other beverages; rather, it only prohibited the distribution and sale of other beverages that would dilute or tend to dilute Alesayi's efforts on behalf of Canada Dry. *fn20" Alesayi also challenged Canada Dry's evidence of dilution and Canada Dry's assertion that Alesayi's de minimis efforts *fn21" on behalf of Fifa--while in contravention to the parties' agreement signed on November 14, 1984--rose to the level of a material breach.

 Article 10 provides:

 

The Bottler agrees to devote all of its efforts to the promotion of sales of "CANADA DRY" beverages in the territory, and the Bottler shall not engage in any undertaking, or sell or distribute any beverages other than "CANADA DRY" which shall dilute or tend to dilute the Bottler's effort. Compliance by Bottler with the provisions of this article constitutes a material consideration to Canada Dry in granting this agreement.

 On its face, Article 10 is unambiguous. Furthermore, Alesayi's de minimis argument fails to rebut the clear meaning of Article 10: that breach of this provision is considered material. The question, therefore, is whether Alesayi's involvement with Fifa diluted or tended to dilute Alesayi's efforts on behalf of Canada Dry. *fn22"

  Alesayi began to bottle and distribute Fifa products in mid-1984 which included orange, lemon, cola, and fruit-flavored beverages. (DX 1S and DX 5G--Alesayi's driver record of 9/27/84 indicating quantity in cases of Fifa and Canada Dry beverages sold and unsold for that day). By October, 1984, Canada Dry had observed that Fifa trucks left and returned to Alesayi's premises; that the Fifa sales force was located on Alesayi's premises; that the telephone number given to the public for Fifa was the same as Alesayi's; that the name of Alesayi Beverage Corp. appeared on the Fifa beverage bottles; and that Alesayi's management was actively involved in marketing Fifa's products. (DX 1U--Telex of 10/01/84 from Shabb to Alesayi). Concerned that the Fifa products and Fifa activity were in direct competition with Canada Dry's orange, lemon-lime, and cola soft drinks, Canada Dry informed Alesayi that Alesayi was in breach of the Agreement. Id. Canada Dry refuted Alesayi's contention that Fifa was a separate legal entity and accused Alesayi of using its management, distribution and sales to promote the Fifa products.

 However, because both parties expressed the desire to continue the relationship, Canada Dry agreed in November, 1984 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 from Alesayi's sales and distribution personnel. (DX 1Y; Tr. at 361). One year later, in October, 1985, Canada Dry informed Alesayi that Alesayi was in breach of the November, 1984 agreement because Alesayi resumed selling Fifa from the Alesayi premises and Alesayi was again mixing the Fifa line with Canada Dry products. Canada Dry once again invoked Article 13 and gave Alesayi 30 days to move the Fifa operation from Alesayi's premises. (DX 2K--Telex of 10/29/85 from Shabb to Alesayi).

 By entering into the November, 1984 agreement with Alesayi, Canada Dry forgave any breach by Alesayi that might have occurred prior to the date of that agreement. See e.g., Bigda, 849 F. Supp. at 901. Any Fifa activity occurring after that agreement that diluted or tended to dilute Alesayi's Canada Dry efforts, however, may be considered a breach. Canada Dry has not waived its breach claim for the post-November, 1984 activity, even though it continued to perform under the Agreement, because Canada Dry gave Alesayi notice of the alleged breach in the October, 1985 telex. Nat'l Westminster Bank, 130 Bankr. at 675. Therefore, the court considers whether Alesayi's Fifa activity from October, 1985 until December 7, 1987--the date from which both parties behaved as if the contract had been terminated--constituted a breach of the Agreement.

 Canada Dry presented persuasive evidence on this point. Canada Dry's expert in the beverage industry testified as to the causative effect of Alesayi's Fifa activity on Canada Dry's declining sales. He testified that Alesayi induced distributors to buy Fifa over Canada Dry products by pricing the Fifa line at similar or slightly lower levels than the Canada Dry line. The important wholesale distributors were also given substantially larger discounts on Fifa beverages than the quoted discounts on Canada Dry products. (DX 6X at 5--Report of Michael C. Bellas).

 The expert also concluded that because Alesayi shifted some of its warehouse, delivery, and sales personnel to the Fifa brand--where they were often instructed to give preference to the Fifa products over the Canada Dry line--Alesayi's marketing and sales efforts on behalf of Canada Dry were significantly curtailed. Furthermore, Alesayi converted some of its trucks to exclusive Fifa delivery. These trucks no longer bore the Canada Dry logo but the Fifa logo and decals. Id. Consequently, the market's attention was split between Canada Dry and Fifa; indeed, Alesayi actively encouraged the market to consider and try Fifa. The expert concluded that the strong performance of Fifa beverages in the marketplace--during which Fifa sales represented almost 63.1 percent of Alesayi's total sales in 1986--came at the expense of Canada Dry products. Id. at 6. *fn23"

 Alesayi rebutted Canada Dry's allegation and claimed that by the time it began to bottle for Fifa, the market demand for Canada Dry products had already begun to decline. It was precisely this market rejection of Canada Dry, *fn24" which left Alesayi with a high level of excess production and distribution capacity, that caused Alesayi to expend its de minimis Fifa efforts. Therefore, Alesayi contended, it committed no dilution of efforts.

 However, both parties' data indicated that Alesayi's sales were significantly higher in 1982 through 1984--the period during which the market allegedly rejected Canada Dry products--than in previous years. (PX 958; DX 6J). Alesayi contended that the increased sales were due to the introduction of soft drinks sold in cans. But if the market was rejecting Canada Dry because it was off-taste and off-color, it is logical that the market would have rejected the same poor quality soda even if it were suddenly sold in a can. *fn25" Therefore, Alesayi has failed to reconcile its market rejection theory with data indicating that its sales of an allegedly substandard product had increased.

 The court finds that Alesayi breached Article 10, the dilution of efforts clause, because its post-November, 1984 Fifa activity diluted its efforts on behalf of Canada Dry.

 Both parties agree that the following legal principle applies to this case: a party who has committed a material breach first cannot claim a subsequent breach by the other party. (Pl.'s Post-Trial Memo. at 2; Def. and Countercl. Pl.'s Proposed Findings of Fact and Conclusions of Law at P 50). Since the court finds that Alesayi breached Article 10, Alesayi's claim that Canada Dry breached the Agreement can no longer stand. Moreover, even though Alesayi claimed that Canada Dry's alleged breach occurred prior to its dilutive Fifa-related activity, Alesayi waived its opportunity to assert a breach of contract claim because it continued to perform under and accept the benefits of the contract until 1987. See Nat'l Westminster Bank v. Ross, 130 Bankr. at 675. Therefore, the court dismisses Alesayi's breach of contract claim arising from defective and overaged extracts and its breach of express and implied warranties claim.

 V. Damages

 Under New York law, the recovery of lost profits as damages is subject to the following stringent requirements: (1) it must be demonstrated with certainty that the damages were caused by the breach, (2) the alleged loss must be must be capable of proof with reasonable certainty, and (3) there must be a showing that the damages were fairly within the contemplation of the parties to the contract at the time it was made. Travellers Int'l, A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1577 (2d Cir. 1994) (quoting Kenford Co. v. County of Erie, 67 N.Y.2d 257, 502 N.Y.S.2d 131, 493 N.E.2d 234 (1986) (per curiam)).

 Canada Dry has shown that any damages it suffered was due to Alesayi's breach. Alesayi's efforts to market Fifa were at the expense of Canada Dry's sales and foothold in the market. See discussion at Sec. IV-C-1, supra; DX 6Y. Canada Dry could not prevail upon another bottler to sell its products in that market because it had given Alesayi an exclusive license to bottle and sell Canada Dry in the Western Region of Saudi Arabia. See Joint Exh. 1 at 1, Art. 1. As long as Canada Dry and Alesayi were parties to that exclusive agreement, Canada Dry's market share was tied to Alesayi's efforts.

 Regarding the second element, Canada Dry maintained that its lost profits calculations were reasonably certain and accepted under Second Circuit caselaw. Alesayi claimed the calculations were legally impermissible because Canada Dry's calculations actually projected lost gross profits rather than lost net profits.

 It is well settled that the general rule for measuring damages for breach of contract is the amount necessary to put the non-breaching party in the same economic position it would have been in had the breaching party fulfilled the contract. Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 495 (2d Cir. 1995). Proof of lost profits is one method of proving the amount necessary to restore a plaintiff to the economic position it would have been in absent the breach. Id. However, any revenues due to the non-breaching party must be offset by any amount that the non-breaching party saved as a result of the breach. Included in this offset is variable costs, or the costs that would have been incurred by the non-breaching party if there had been performance under the contract. Id.

 Alesayi correctly stated the law concerning lost profits; however, Canada Dry's calculations were in fact lost net, not gross, profits. Alesayi seems to have mischaracterized Canada Dry's calculations because Canada Dry used a gross profit margin figure, rather than a net profit margin figure, to account for the estimated manufacturing costs attributable to Canada Dry. See Tr. at 954. The resulting figure was not a lost gross profit, however, but rather lost profits derived from estimated gross revenues less estimated manufacturing and advertising costs. See Tr. at 903-04, 919, 922-26. As explained more fully below, the use of a gross profit margin figure in this instance does not render Canada Dry's lost profits methodology legally impermissible.

 As its starting point, Canada Dry calculated the gross revenues per year it would have received, absent breach by Alesayi. To get this figure, Canada Dry multiplied its projected market share by the amount of soft drinks in liters consumed by the Saudi Arabian market for each year after the breach. *fn26" (DX 6Y, Exh. 12). Canada Dry then subtracted any actual sales by Alesayi for that year to derive the lost sales for that year. Canada Dry then multiplied the 1983 price per liter of beverage produced from the extract sold to Alesayi by the lost sales figure for each year at issue. (DX 6Y at 6). The resulting figure was the lost revenue for each year. (DX 6Y, Exh. 12).

 Next, Canada Dry derived the lost profits for each year by multiplying the lost revenue for each year by the gross profit margin (a percentage figure that reflected how much of the revenue was profit and how much was manufacturing costs). (DX 6Y, Exh. 12). Then Canada Dry subtracted advertising costs equal to 1.7 percent of Alesayi's lost sales for that year. *fn27" The final figure was the lost profits for the given year.

 In sum, then, from the gross revenues Canada Dry would have received from sales of extracts to Alesayi absent breach, Canada Dry subtracted variable costs: the cost to manufacture the extract sold to Alesayi and the advertising costs Canada Dry would have incurred under the Agreement. The Second Circuit has held this method to be the proper formula for deriving lost profits. Adams v. Lindblad Travel, Inc., 730 F.2d 89, 92-93 (2d Cir. 1984) ("the proper formula . . . for lost . . . profits [is] the revenues he would have received from the [contracted-for activity] minus the additional costs he would have incurred in handling [the contracted-for activity]"); see also Record Club of America v. United Artists Records, Inc., 696 F. Supp. 940, 946-47 (S.D.N.Y. 1988). While damages for lost profits must be capable of proof with reasonable certainty, absolute certainty is not required. Such damages must be capable of measurement based upon known reliable factors without undue speculation. Campbell v. Rogers & Wells, 218 A.D.2d 576, 631 N.Y.S.2d 6, 10 (N.Y.S. Ct. 1995). Canada Dry's methodology demonstrated reasonable certainty in providing a basis for calculating lost profits.

 Moreover, Alesayi has not given any indication that there were more costs that Canada Dry should have deducted in order to properly compute lost profits. *fn28" Instead, Alesayi argued in a conclusory manner that the use of a gross profit margin resulted in a lost gross profits computation.

 Alesayi also challenged the actual gross profit margin figure used by Canada Dry as unreliable. Canada Dry asserted that sales of extract to Alesayi resulted in a gross profit margin of 75 percent. Canada Dry's damages expert received this figure from Canada Dry personnel and its beverage industry expert testified that this figure was reasonable. (Tr. at 1090-91). However, Canada Dry's damages expert calculated that Alesayi's gross profit margin was only 7.5 percent. *fn29" Without more, it does not make sense that Canada Dry's gross profit margin could be ten times greater than Alesayi's margin. Thus, the court will reduce this figure to 50 percent.

 Lastly, Canada Dry satisfied the third requirement for lost profits because lost profits comprise a form of damages likely to flow from breach of an agreement that concerned trademark privileges, a licensed bottling facility, and extract sales. Moreover, the Agreement specifically allows "the party claiming the breach [to] pursue any . . . legal remedies [other than termination] which it may have for such breach or which may have otherwise accrued under the agreement." (Joint Exh. 1 at 5, Art. 15). Therefore, the parties clearly contemplated this form of liability at the time of contracting. Alesayi did not refute the satisfaction of this requirement. Canada Dry is entitled to damages calculated as follows: 1985 1986 1987 market consumption (in mil. liters) 512 484 532 Alesayi Market Share (at 2.3%) 11.78 11.13 12.24 less: sales by Alesayi -9.10 -2.30 0 Lost Sales: 2.68 8.83 12.24 Lost Revenues *fn30" in $ U.S. 128.64 423.84 587.52 thousands (at 4.8 cents per liter) Gross Profit Margin (at 50%) 64.32 211.92 293.76 less: Advertising (at 1.7% of actual Alesayi sales) 0 -150.11 -208.01 LOST PROFITS 10.72 61.81 85.75 *fn31" TOTAL: $ 158,280.00

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© 1992-2004 VersusLaw Inc.



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