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WESTERBEKE CORP. v. DAIHATSU MOTOR CO. LTD.

September 26, 2001

WESTERBEKE CORPORATION, PLAINTIFF,
V.
DAIHATSU MOTOR CO., LTD, DEFENDANTS.



The opinion of the court was delivered by: Marrero, District Judge.

DECISION AND ORDER

In October 1997, Plaintiff Westerbeke Corporation (hereinafter "Westerbeke") initiated arbitration proceedings for breach of contract against Daihatsu Motor Co., Ltd. (hereinafter "Daihatsu") with the American Arbitration Association, Case No. 13 T 153 011057 97. On November 6, 2000, Ira G. Greenberg, Esq. (hereinafter the "Arbitrator" or the "Tribunal"), sitting as the sole member of the panel, issued a Final Award in favor of Westerbeke in the amount of $4,202,255.00. Westerbeke filed an action to confirm the arbitration award in this Court, and Daihatsu has moved to vacate the same.

I. BACKGROUND

A. THE PARTIES AND THE COMPONENT SALES AGREEMENT

Westerbeke is a Delaware corporation with its principal place of business in Taunton, MA. (Compl. ¶ 1). Westerbeke engages in the production and marketing of generators, marine generators and marine propulsion engines. A large part of its business consists of purchasing "carcass" engines from other manufacturers and "marinizing" them for resale. Marinization consists of modifying carcass engines in order to make them suitable for operation in marine environments. (Affidavit of John H. Westerbeke, Jr., sworn to June 5, 1998 (hereinafter "Westerbeke Affidavit"), at ¶ 7). Westerbeke's marine products are sold through a distribution network and also directly to builders of boats. (Id. at ¶ 8).

Daihatsu is a subsidiary of the Toyota Motor Company organized under the laws of Japan, with its principal operations in Osaka, Japan. Daihatsu manufactures engines and engine components. (Daihatsu Motor Co. Ltd.'s Memorandum of Law in Support of its Motion to Vacate the Arbitration Award, dated Feb. 5, 2001 (hereinafter "Daihatsu Memorandum"), at 2).

In 1983, the parties commenced negotiations on a long-term sales agreement for the purchase by Westerbeke of Daihatsu's gasoline-powered carcass engines for eventual marinization and incorporation into Westerbeke's product line. (Westerbeke Affidavit, at ¶ 10). Like many other longterm transnational business ventures, the parties entered into complex and protracted negotiations on the proposed form and substance of the contractual relationship. The negotiations involved balancing the competing interests and priorities of the parties and memorializing their compromises in the form of a workable agreement.

Westerbeke was primarily concerned with present and future exclusivity. According to Westerbeke, the company expends substantial sums to marinize and then promote a line of engines. (Westerbeke Affidavit, at ¶ 16). Its efforts could easily be undermined if the manufacturer of carcass engines routes its sales to another distributor piggybacking off the efforts already made by Westerbeke. (Id. at ¶¶ 16, 30). Furthermore, manufacturers of engines continually discontinue old models and replace them with new ones. Naturally, continued access to the new product lines is critical to the viability of a longterm relationship, and Westerbeke sought to ensure a prospective approach to its agreement with Daihatsu. (Id.).

Daihatsu, on the other hand, was naturally averse to long-term exclusivity. As a manufacturer, Daihatsu's interests lie in preserving its freedom to sell its engines and components in the most efficient and advantageous distribution channels. (See Interlocutory Award, at 6). A long-term exclusive purchaser who fails to maintain minimum purchase quantities or neglects to market aggressively not only ensures its own failure, but also that of the component maker. In short, Daihatsu's concern was being tied to a "poor choice" for a distribution partner. (Id.)

Ultimately, the parties balanced their competing interests and reached a compromise that culminated in the Component Sales Agreement (hereinafter the "CSA") entered into on May 1, 1985.*fn1 The CSA provided for the present exclusivity than Westerbeke sought. For a period of six years, Daihatsu agreed to supply Westerbeke with certain contractually-defined engines on an exclusive basis in the United States and Canada. (See CSA, Article 4.1). The CSA also contained an automatic renewal provision for successive two-year terms, and it appears from the record that the CSA was renewed twice for an additional four years. (See CSA, Article 14.1).

With respect to Daihatsu's future engine models, however, exclusivity was not automatic. Article 3.2 of the CSA required that Daihatsu respect Westerbeke's right of first refusal during the first six months that Daihatsu wished to sell other "Engines," as defined by the CSA. The exclusivity provision of the CSA would only apply to the new engine if, during the six month term, Westerbeke and Daihatsu reached agreement on the material terms of sale for the new engines — "specifications, prices, minimum purchase quantities, delivery terms, etc.". (See CSA, Article 3.2).

B. DAIHATSU'S NEW E-070 ENGINE

In the early 1990s, Daihatsu was actively developing, and perhaps marketing, a new product line, the E-070 Engine. The new model was a water-cooled, three-cylinder gasoline engine. (Westerbeke Affidavit, at ¶ 64). After a thorough review of the record, the Arbitrator found that the E-070 Engine was of the type that triggered Article 3.2 of the CSA, a finding of fact which was not clearly erroneous. (Interlocutory Award, Westerbeke Corporation v. Daihatsu Motor Co. Ltd., AAA Case No. 13 T 153 01057 97, at 18 (Mar. 8, 1999) (hereinafter "Interlocutory Award")). Initially, it also appears that Daihatsu did not bring this new model to the attention of Westerbeke.

The parties are at odds as to why the E070 Engine never became an "Engine" as defined by the CSA, subject to Westerbeke's right of exclusivity. Daihatsu contends that the E-070 Engine was never intended to be a marine product, a point which was contradicted to some extent by documents produced in the proceedings below. (See Daihatsu Memorandum, at 4-5; Interlocutory Award, at 4-7). Daihatsu also explains that its decision not to pursue sales of the E-070 to Westerbeke was motivated by its growing dissatisfaction with Westerbeke's sales volume. (See Daihatsu Memorandum, at 2; Westerbeke Affidavit, at ¶ 66). Daihatsu's dissatisfaction was manifested in threats to terminate the exclusivity provisions of the CSA at least as early as 1990. (See id.).

Westerbeke believes that Daihatsu's unwillingness to negotiate with respect to the E-070 Engine had nothing to do with either the target markets for the new model or the level of Westerbeke's purchases. Rather, Westerbeke contends that Daihatsu was secretly developing the E-070 Engine and negotiating with another North American distributor, the Briggs & Stratton Corporation (hereinafter "Briggs"), for exclusive rights to the new engine.*fn2 (See Westerbeke Corporation's Opposition to Motion to Vacate Arbitration Award and Memorandum in Support of Motion to Confirm Award, dated Feb. 20, 2001 (here-inafter "Westerbeke Memorandum"), at 3).

Around June 1993, Briggs issued a press release announcing a joint venture between it and Daihatsu for the purpose of marketing, selling, and servicing a new line of water-cooled engines in North America. (Westerbeke Affidavit, at ¶ 77). Later that Summer, trade publications ran advertisements of the E-070 Engine which came to the attention of Westerbeke's President and Chief Executive Officer. (Id. at ¶ 78). This was the first time that Westerbeke had learned of Daihatsu's new engine. (Id.).

In the ensuing months, representatives of Westerbeke contacted Daihatsu to communicate its belief that Daihatsu had breached the CSA. (Id. at ¶¶ 79-83). It appears from the record that the parties attempted to salvage some sort of working relationship, but those efforts never came to fruition. In October 1994, Daihatsu terminated the CSA by providing Westerbeke six months notice. (Daihatsu Memorandum, at 2).

C. THE ENSUING ARBITRATION AND THE PRESENT PROCEEDINGS

The demise of the parties' working relationship resulted in several legal proceedings. In February 1997, Westerbeke filed an action in Norfolk Superior Court and a subsequent action in the United States District Court for the District of Massachusetts in March 1997. Westerbeke filed a separate action against Briggs for its role in the dispute between the parties. All of these actions were voluntarily dismissed or stayed when Westerbeke invoked Article 23 of the CSA, which requires all disputes to be resolved by arbitration pursuant to the Japan-American Trade Arbitration Agreement of September 16, 1952. Article 23 also stipulates New York as the situs of arbitration.

Accordingly, Westerbeke filed a claim with the American Arbitration Association in October 1997. The Arbitrator bifurcated proceedings into separate phases for liability and damages. (See Interlocutory Award, at 1). At the close of the liability phase, the Arbitrator issued an Interlocutory Award which stated: "[t]he primary issue for decision is whether respondent Daihatsu Motor Company, Limited violated the contractual rights of claimant Westerbeke Corporation in refusing to negotiate for the inclusion of the E-070 engines as Engines within the meaning of the 1985 Component Sales Agreement between the two parties. The Tribunal holds that it did." (Id. (emphasis supplied)).

Notwithstanding this clear and unambiguous basis for liability enunciated in the Interlocutory Award, the Tribunal effectively replaced its liability analysis in the Final Award of damages: "[t]he appropriate analytical framework is that of a contract with condition precedent to the addition of a new Engine." (Final Award, Westerbeke Corporation v. Daihatsu Motor Co. Ltd., AAA Case No. 13 T 153 01057 97, at 6 (Nov. 6, 2000) (hereinafter "Final Award")). The Arbitrator awarded Westerbeke over $4 million in damages, which included damages for lost profits that Westerbeke expected from hypothetica sales of the E-070 Engines.

Westerbeke now moves to confirm the award as Daihatsu has refused to recognize it. Westerbeke contends that the Tri bunal's decision was proper in all respects and that Daihatsu has not advanced sufficient grounds to interfere with the Arbitrator's award. In any event, Westerbeke avers that Daihatsu should be precluded from judgment because it has not met its burden of production, which ...


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