United States District Court, S.D. New York
August 31, 2005.
JONATHAN SMITH, Petitioner-Cross-Respondent,
POSITIVE PRODUCTIONS, Respondent-Cross-Petitioner.
The opinion of the court was delivered by: MICHAEL MUKASEY, Chief Judge
OPINION AND ORDER
Jonathan Smith, better known as the musical artist "Lil Jon,"
petitions to vacate, or alternatively to modify an arbitration
award entered by arbitrator Mark Diamond of the International
Centre for Dispute Resolution ("ICDR") in favor of Positive
Productions ("Positive"), a Japanese concert promotion company,
in the amount of $379,874.00, for costs and damages arising from
breach of contracts wherein Smith agreed to perform three
concerts in Japan. (See In the Matter of the Arbitration
between Positive Productions and Jonathan Smith PKA Lil John and
the East Side Boys, Award of Arbitrator dated December 28, 2004
("Arbitration Award") (Ex. A to Declaration of Bruce Jacobs
("Jacobs Decl.")) Positive opposes the petition and
cross-petitions to confirm the award. Both petitions have been
brought pursuant to the Federal Arbitration Act ("FAA"),
9 U.S.C. §§ 1, 10, & 11. Jurisdiction is based on diversity of
citizenship. See 28 U.S.C. § 1332. For the reasons set forth
below, the award is confirmed.
The following facts are undisputed unless otherwise noted.
On January 9, 2004, Smith and Positive entered into a written
agreement whereby Smith agreed to perform three concerts to be promoted by Positive on March 12 and 13, 2004 in Yokohama,
Japan and March 14, 2004 in Okinawa, Japan. (Ex. H to Jacobs
Decl. ("January Agreement")) It was signed by Broderick Morris of
Positive and Robert Mitchell, Smith's manager. (Id. at 8) A
$35,000 advance was forwarded to Smith's agent, Ujaama
Entertainment, Inc. ("Ujaama"). (Id. at 2) The agreement
contained an arbitration provision, whereby
[a]ny claim or dispute arising out of or relating to
[the agreement] or the breach thereof shall be
settled by arbitration with the rules and regulations
of the American Arbitration Association. The parties
hereto agree to be bound by the award and judgment
upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
(Id. at 8) Pursuant to the agreement, Positive rented venues,
purchased airline tickets, arranged for Smith's transportation to
and within Japan, reserved lodging, promoted Smith through a
variety of Japanese media sources, and sold tickets to the
performances. (Positive Opp'n at 6-7; January Agreement ¶¶ 5,
On March 4, 2004, Smith informed Positive that he would not be
able to travel to Japan and perform the shows "because he, or
some of his band members, were unable to obtain passports."
(Positive Answer to Petition to Vacate or, in the Alternative,
Modify Arbitration Award, and Cross Petition to Confirm
Arbitration Award ("Positive Answer") ¶ 6) The shows were cancelled and refunds paid on tickets. (Positive Opp'n at 7)
Ujaama returned the $35,000 deposit to Positive. (Id.)
After the March performances were cancelled, the parties
negotiated and entered into another agreement, dated May 7, 2004,
pursuant to which Smith agreed to perform concerts on June 27,
2004 in Okinawa, on June 29, 2004 in Osaka, and on July 2, 2004,
in Yokohama. (Ex. I to Jacobs Decl. ("May Agreement")) The May
Agreement refers to the January Agreement, providing that "[u]pon
[Smith] performing all of [his] obligations hereunder the
[January] Agreement shall be deemed void and superceded [sic] in
all respects by this [May] agreement." (Id. at 1) Again,
Positive forwarded a $35,000 deposit to Ujaama and prepared for
the shows. (Positive Opp'n at 8)
On June 8, 2004, Positive was informed by telephone that Smith
wanted to attend the Black Entertainment Television ("BET")
Awards show on June 29 in Los Angeles and preferred not to come
to Japan during the last week of June. (Id.) By letter dated
June 11, 2004, William Leibowitz, who introduced himself as "the
attorney? for TVT Records," confirmed the development. (Ex. C to
Jacobs Decl.) In defense of Smith, Leibowitz contended that it
"is unrealistic and unfair for [Positive] to suggest that [Smith]
who will literally dominate the BET Awards this year should
refrain from attending and performing and thereby forfeit one of
the great moments in his life and career, all so that [he] can perform in front of a few thousand people in
On June 13, 2004, Gerald Weiner Positive's lawyer stated in
an e-mail to Leibowitz that "[t]o the best of [his] knowledge
[Leibowitz did] not represent Jonathan Smith," that "[t]here is
no contractual relationship between [Positive] and TVT Records,"
and that Leibowitz was "inserting [himself] into a dispute which
has been ongoing since March in which [Leibowitz did] not
represent any of the parties. . . ." (Ex. D to Declaration of
Abid Qureshi ("Qureshi Decl.")) Five days later, Morris of
Positive, in an e-mail to Weiner and Leibowitz, stated that a
second "no show" in three months "would be very damaging to all."
(Id.) He had learned from Erskine Isaac of Ujaama that TVT had
booked a radio show for Smith in Los Angeles on July 3. He
proposed that the shows be rescheduled so that Smith could
perform in Yokohama on July 2 and in Okinawa on July 3, and fly
thereafter to Los Angeles for the radio show. (Id.) On June 18,
2004, Leibowitz, again introducing himself as "the attorney for
TVT Records," informed Positive that Smith would not appear for
the scheduled June and July shows but would attempt to make
himself available on later dates. (Id.) Again, refunds were
given for tickets and Ujaama returned the $35,000 deposit.
(Positive Opp'n at 9) To replace the cancelled shows, Positive
booked on about one week's notice another American singer, Trina, for concerts on July 2 and 3 in Yokohama and Okinawa,
On July 8, 2004, Weiner filed a Notice of Intent to Arbitrate
and a Demand for Arbitration with the American Arbitration
Association and mailed copies of both to (i) Smith at his address
"c/o BME Recording, 2144 Hills Ave. NW, Atlanta, Georgia 30318,"
and (ii) Erskine Isaac at Ujaama at "501 7th Ave. #312, New York,
New York 10001." (Affidavit of Gerald B. Weiner ("Weiner Aff.") ¶
5) Neither these letters nor any subsequent correspondence mailed
or faxed to Smith or Isaac was returned as undeliverable. (Id.)
Positive claimed that
[Smith] failed and refused to travel to Japan or to
appear and perform at the dates originally set forth
in the [January] Agreement. Following extensive
negotiations [the parties] agreed to reschedule these
performance dates to June 27, 29 and July 2, 2004 and
a new written agreement was entered into in that
regard. [Smith] also failed to travel to Japan or
perform on these reschedule dates.
(Ex. B to Jacobs Decl. (Notice of Intent to Arbitrate) at 2)
Positive sought $700,000 in damages arising from "these
On July 14, 2004, ICDR sent via express mail an acknowledgment
of receipt of the Demand for Arbitration, notice of a deadline to
file a statement of defense by Smith, and notice of the date of
an administrative conference call to Isaac at Ujaama's New York
office. (Positive Opp'n at 3) Smith neither responded to the Demand nor participated in the administrative
conference call. (Id.)
An arbitration hearing was held on December 6, 2004, in New
York. (Positive Opp'n at 12) Smith did not appear. (Smith
Petition to Vacate or Modify Arbitration Award ¶ 8) Positive
presented documentary and testimonial evidence on "the creation
and performance under the two agreements, out-of-pocket expenses,
lost profits, and attorneys' fees." (Smith Petition to Vacate or
Modify Arbitration Award ¶ 9) On December 28, the arbitrator
awarded Positive a total of $379,874, which consisted of (i)
$184,000 in lost profits, (ii) $138,000 in expenses incurred by
Positive, (iii) $7,874 in legal fees, and (iv) $50,000 for loss
of reputation and business. (Arbitration Award at 2) These
figures appear to track the amounts requested by Positive in its
"Statement of Facts" submission. (Ex. B to Qureshi Decl. at 4-5)
The arbitrator made the following factual findings:
[Positive] made powerful efforts to fulfill its
duties under its agreement with [Smith]. It made
accommodations to [Smith] that were above and beyond
the terms of the original agreement. Modifications to
the original agreement were made by [Positive] at the
behest of [Smith] in an effort to ameliorate the
breach of the original agreement by [Smith]. Further
efforts to ameliorate damages were taken by
[Positive] after [Smith] failed to perform [his]
duties under the terms of the modified agreement.
[Smith] failed to cooperate with these efforts to
ameliorate [Smith's] failure to perform under the
terms of the modified agreement. Loss to [Positive's]
income and reputation has resulted from [Smith's] actions and failure to
(Arbitration Award at 1)
On February 11, 2005, by his current counsel, Smith submitted a
Notice of Request to Correct and/or Vacate Award to the ICDR.
(Ex. C to Jacobs Decl.) He argued that he had not received proper
notice of the arbitration, that the arbitrator did not have
jurisdiction over the matter, and that the award contained
"computational errors and is unconscionable." (Id.) On February
23, 2005, the arbitrator denied Smith's request. (Ex. A to
Qureshi Decl.)) Smith filed the instant petition on May 16, 2005.
The burden on a party seeking to vacate an arbitration award is
"a formidable one" in light of the "limited review of arbitration
decisions . . . necessary both to effectuate the parties'
agreement to submit their disputes to arbitration and to avoid
costly and protracted litigation about issues the arbitrators
have already decided." Capgemini U.S. LLC v. Sorensen, No.
04-7584, 2005 WL 1560482, at *3 (S.D.N.Y. July 1, 2005) (citing
An arbitration award may be vacated only on the grounds
enumerated in the FAA or if it was arrived at in "manifest
disregard of the law." Wallace v. Buttar, 378 F.3d 182, 189
(2d Cir. 2003); Merrill Lynch, Pierce, Fenner & Smith, Inc. v.
Bobker, 808 F.2d 930, 933 (2d Cir. 1986).
Smith argues first that neither he nor Leibowitz who he
claims was his lawyer for disputes arising from the January and
May agreements was given proper notice of the arbitration. He
contends that any communications between Positive and Ujaama were
insufficient notice because under the May Agreement, Positive was
required to give any notices to Smith at "c/o BME Recording, 2144
Hills Ave. NW, No. D-2, Atlanta, Georgia 30318." (May Agreement
at Preamble and ¶ 15) However, Ujaama was designated in the
January Agreement to receive notices to Smith. (January Agreement
at Preamble and ¶ 23 ("Agreement made . . . by and between LIL
JON . . . whose address is c/o UJAAMA ENTERTAINMENT. . . .")
Smith argues further that Positive "could have given [him]
proper notice through his legal representative, William R.
Leibowitz." (Smith Reply at 6) Positive claims that it "had no
knowledge of the identity of Smith's attorneys until February 11,
2005," when Smith's current counsel submitted to the ICDR a
Notice of Request to Correct and/or Vacate the Award. (Positive
Opp'n at 18) In response, Smith points to the June 18, 2004
letter from Leibowitz to Positive, which he contends indicated that Leibowitz represented Smith. (Ex. C to Jacobs Decl.) (". . .
as I hereby reiterate on behalf of the Artist (Smith)"; "On
behalf of TVT and the Artist. . . .")
Smith claims also that Positive sent the arbitration notice to
a defective address by omitting "BME Recording" and BME
Recording's Suite number. (Ex. B to Jacobs Decl.) According to
Weiner, only the Suite number was omitted from the mailing
address. (Weiner Aff. ¶ 5) Finally, Smith claims that he did not
receive proper notice of the hearing in the form of personal
service, registered mail, or certified mail. See N.Y. CPLR §
Section 10(a)(3) of the FAA provides in relevant part that an
arbitration award may be vacated "[w]here the arbitrators were
guilty of misconduct in refusing to postpone the hearing, upon
sufficient cause shown, or in refusing to hear evidence pertinent
and material to the controversy; or of any other misbehavior by
which the rights of any party have been prejudiced,"
9 U.S.C. § 10(a)(3), or "[w]here the arbitrators exceeded their powers, or
so imperfectly executed them that a mutual, final, and definite
award upon the subject matter submitted was not made." Id. §
10(a)(4). Although an arbitrator does not have to follow "the
strictures of formal court proceedings in conducting the
arbitration hearing," he "must nevertheless `grant the parties a
fundamentally fair hearing.'" Kaplan v. Dunhill, Inc., No. 96-0258, 1996 WL 640901, at *5
(S.D.N.Y. Nov. 4, 1996) (quoting Bell Aerospace Co. Div. of
Textron, Inc. v. Local 516, UAW, 500 F.2d 921, 923 (2d Cir.
1974)). A "fundamentally fair hearing" requires that all parties
receive notice of the arbitration. Id.
Moreover, AAA rules provide:
Unless the law provides to the contrary, the
arbitration may proceed in the absence of any party
or representative who, after due notice, fails to be
present or fails to obtain a postponement. An award
shall not be made solely on the default of a party.
The arbitrator shall require the party who is present
to submit such evidence as the arbitrator may require
for the making of an award.
American Arbitration Association, Commercial Arbitration Rules
and Mediation Procedures R-29.
Smith likens this case to Kaplan and argues that he was not
given proper notice of the arbitration. In Kaplan, a labor
union commenced an arbitration against Dunhill on behalf of a
fired employee. First, the Court found that neither Dunhill nor
its counsel was copied on the request for arbitration that the
union sent to the AAA, and that the AAA addressed correspondence
to a title that did not exist at Dunhill. Id. at *1. The AAA
also sent a notice of hearing by certified mail to Dunhill's New
York office. Id. Dunhill's receptionist signed for the
certified letter and testified at deposition that although she
could not recall exactly how she disposed of the notice after signing the receipt, she would have put it in Dunhill's internal
mail box to be forwarded eventually to Dunhill's President or
Payroll Manager. Id. at *2. The letter was found eventually
behind Dunhill's internal mailbox next to the receptionist's
desk, but only after the arbitration hearing had closed. Id. at
*3. Dunhill employees claimed that no one from the union had
contacted Dunhill or its counsel about the hearing until after it
was over. Id. at *2. The Court vacated the arbitration award in
light of this "substantial, undisputed evidence that [Dunhill]
did not receive notice of the hearing." Id. at *7.
In this case, however, Smith does not deny that at least one of
his agents Ujaama received correspondence and notices
relating to the arbitration. Moreover, Positive claims, and Smith
does not deny, that throughout the arbitration proceedings,
Gerald Weiner, Positive's counsel, spoke to Isaac on at least six
occasions by telephone and exchanged numerous e-mails with him.
(Positive Opp'n at 3-4) Isaac assured Weiner that Smith was aware
of the arbitration, that related documents and correspondence
were being forwarded to Smith, and that Smith would be
represented by counsel at the hearing and that attorney would
contact Weiner. In an e-mail from Weiner to Isaac and Morris
dated August 17, 2004, Weiner asked, "Has an attorney for
Jonathan Smith appeared in this matter? Do we know who will be
representing him?" (Ex. B to Affirmation of Alan Fraade ("Fraade Aff.")) According to an e-mail from Weiner to Morris dated
September 16, 2004, Weiner "talked to both the AAA and Erskine
[Isaac] today. The AAA had asked me to find out from Erskine if
Lil Jon is going [to] hire a lawyer and appear in this action.
Erskine says he has told Mitchell over and over they must hire a
lawyer and they say they are going to, but so far he doesn't know
anything more." (Ex. A to Fraade Aff.) It is clear from this
correspondence that at least Isaac and Mitchell, both
representatives of Smith, were aware of the pending arbitration
and knew that Smith needed a lawyer. That "Ujaama was completely
unable to communicate effectively with Smith" (Smith Reply at 5)
is irrelevant to whether Smith was given sufficient notice of the
New York law, which requires notice by registered mail or
personal service, is inapplicable. The parties expressly agreed
in the January Agreement arbitration clause that the AAA's Rules
would govern the arbitration. (January Agreement at 8); see
Volt Info. Sci., Inc. v. Bd. of Tr. of Leland Stanford Junior
Univ., 489 U.S. 468, 479 (1989) (the parties may specify by
contract the rules under which arbitration will be conducted).
Rule 39 of the Commercial Arbitration Rules of the AAA provides
that "any papers, notices, or process necessary or proper for the
initiation or continuation of an arbitration . . . may be served
on a party by mail addressed to the party, or its representative at the last known address or by personal service." There is no
requirement that notices be sent to a party's counsel. Moreover,
"the AAA, the arbitrator, and the parties may also use overnight
delivery or electronic facsimile transmission (fax), to give the
notices required by these rules."
Regardless, in light of the strong policy favoring arbitration
and undisputed proof that Smith had notice of the arbitration,
the award will not be disturbed on the ground that a suite number
was missing from a mailing address or that a notice was not sent
by certified or registered mail. See, e.g., Merrill Lynch,
Pierce, Fenner & Smith v. Lecopulos, 553 F.2d 842, 845 (2d
Cir. 1977) ("no unfairness results from giving effect to the
notice they actually received"); Marsillo v. Geniton, No.
03-2117, 2004 WL 1207925, at * 5-6 (S.D.N.Y. June 1, 2004)
(although it was unclear whether petitioner received all
arbitration-related correspondence, award was confirmed where he
had actual notice of NASD arbitration proceedings and "his
failure to make any inquiries" about other correspondence
"suggest that [he] simply chose to ignore the arbitration
proceedings"); Gingiss Int'l, Inc. v. Bormet, 58 F.3d 328,
332 (7th Cir. 1995) ("inadequate notice is not one of [the
statutory] grounds" for vacating an arbitration award);
Bernstein Seawell & Kove v. Bosarge, 813 F.2d 726, 729-30
(5th Cir. 1987) (award confirmed where party had actual notice of
arbitration proceedings; "due process is not violated if the [arbitration] hearing proceeds in
the absence of one of the parties when that party's absence is
the result of his decision not to attend"); Borop v. Toluca
Pacific Sec. Corp., No. 97-4591, 1997 WL 790588, at *2 n. 7
(N.D. Ill. Dec. 17, 1997) ("Absent fraudulent or improper
conduct, defective notice cannot justify an order vacating an
arbitration award under Section 10 of the FAA").
Next, Smith contends that the arbitrator had no jurisdiction
because the May Agreement "specifically eliminated the
arbitration provision" in the January Agreement (Smith Brief at
7) and provided that "any dispute arising under [the May
Agreement] shall be litigated only before courts within the State
of New York." (May Agreement at 6)
The plain language of the May Agreement provides otherwise.
Only "[u]pon [Smith] performing all of [his] obligations" under
the May Agreement would the January Agreement "be deemed void and
superceded [sic] in all respects" by the May Agreement. (May
Agreement at 1) Because Smith failed to perform his obligations
under the May Agreement, the terms of the January Agreement,
including the arbitration provision, were preserved. See Moses
H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
24-25 (1983) ("The [FAA] establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues
should be resolved in favor of arbitration, whether the problem
at hand is the construction of the contract language itself or an
allegation of waiver, delay, or a like defense to
arbitrability."); Collins v. Aikman Prods. Co., 58 F.3d 16,
19 (2d Cir. 1995) (matters are arbitrable "`unless it may be said
with positive assurance that the arbitration clause is not
susceptible of an interpretation that covers the asserted
dispute'") (quoting Threlkeld & Co. v. Metallgesellschaft
Ltd., 923 F.2d 245, 250 (2d Cir. 1991)).
Smith contends also that the arbitrator awarded various
categories of damages in "manifest disregard" of New York law.
Alternatively, Smith argues that the award contains
miscalculations and should be modified accordingly. See
9 U.S.C. § 11.*fn1 "`Manifest disregard of the law' by
arbitrators is a judicially-created ground for vacating their arbitration award."
Bobker, 808 F.2d at 933. "In order to advance the goals of
arbitration, courts may vacate awards [under the doctrine] only
for an overt disregard of the law and not merely for an erroneous
interpretation." Folkways Music Publishers, Inc. v. Weiss,
989 F.2d 108, 111 (2d Cir. 1993). "A court must not disturb an
award simply because of an arguable difference of opinion
regarding the meaning or applicability of the laws." W.K.
Webster & Co. v. Am. President Lines, Ltd., 32 F.3d 665, 669
(2d Cir. 1994). Rather, the arbitrator must have known
affirmatively of the governing legal principle yet refused to
apply it or ignored it altogether. See Bobker,
808 F.2d at 933 ("the term `disregard' implies that the arbitrator
appreciates the existence of a clearly governing legal principle
but decides to ignore or pay no attention to it"); see also
Siegel v. Titan Indus. Corp., 779 F.2d 891, 892 (2d Cir.
1985). The governing legal principle "must be well defined,
explicit, and clearly applicable." Bobker, 808 F.2d at 934. A
legal principle "clearly" governs the resolution of an issue
before the arbitrator if its applicability is "obvious and
capable of being readily and instantly perceived by the average
person qualified to serve as an arbitrator." Id. at 933.
Arbitrators are not required to document their reasoning. See Int'l Bhd. of Elec. Workers, Local 97 v.
Niagara Mohawk Power Corp., 143 F.3d 704, 716 (2d Cir. 1998).
Particularly where the arbitrator provides little reasoning or
none at all, the award must be confirmed if "a ground for the
arbitrator's decision can be inferred from the facts of the
case." Siegel, 779 F.2d at 894 (citation omitted); see also
GMS Group, LLC v. Benderson, 326 F.3d 75, 78 (2d Cir. 2003).
Put another way, an arbitration award must be confirmed if there
is a "`barely colorable justification for the outcome reached,'"
even if that justification is based on an error of fact or law.
Banco de Seguros del Estado v. Mut. Marine Office, Inc.,
344 F.3d 255, 260 (2d Cir. 2003) (quoting Landy Michaels Realty
Corp. v. Local 32B-32J, Serv. Employees Int'l Union, AFL-CIO,
954 F.2d 794, 797 (2d Cir. 1992)).
A. Lost profits
The lost profits component of the award $184,000 appears to
be based on Positive's claim that it would have made
approximately $130,000 in profits "had [the March shows] gone
forward without incident" plus $54,000 in losses from the
replacement shows. (Ex. B to Qureshi Decl. at 4) Smith contends
that the award was in manifest disregard of New York law because
(i) lost profits damages were not contemplated by the parties at
the time of contract; (ii) the arbitrator held Smith responsible
for Positive's "aggravation of its own injuries in its botched mitigation attempt" by booking replacement performances; (iii)
the arbitrator awarded Positive lost profits based on a July 3,
2004 show that was "outside the scope of the agreement between
the parties"; and (iv) the amount is overly speculative. (Smith
Reply at 12)
New York law requires that "a plaintiff prove with a reasonable
degree of certainty that any claimed loss of profits was caused
by the defendant's breach." Bausch & Lomb, Inc. v. Bressler,
977 F.2d 720, 728 (2d Cir. 1992). In other words, damages from
lost profits "`may not be merely speculative, possible or
imaginary, but must be reasonably certain and directly traceable
to the breach, not remote or the result of other intervening
causes.'" Care Travel Co. v. Pan American World Airways,
Inc., 944 F.2d 983, 994 (2d Cir. 1991) (quoting Kenford Co. v.
County of Erie, 67 N.Y.2d 257, 261, 502 N.Y.S.2d 131, 132
(1986) (per curiam)). However, the amount of lost profits, as
with all damages, need not be demonstrated with "scientific
rigor." Lexington Prods. Ltd. v. B.D. Communications, Inc.,
677 F.2d 251, 253 (2d Cir. 1982); see also S & K Sales Co. v.
Nike, Inc., 816 F.2d 843, 852 (2d Cir. 1987).
In Lexington Products, the Second Circuit noted:
When it is certain that damages have been caused by a
breach of contract, and the only uncertainty is as to
their amount, there can rarely be any good reason for
refusing, on account of such uncertainty, any damages
whatever for the breach. A person violating his contract should not be permitted entirely to
escape liability because the amount of the damage
which he had caused is uncertain.
677 F.2d at 253 (quoting Randall-Smith, Inc. v. 43rd St.
Estates Corp., 17 N.Y.2d 99, 106, 268 N.Y.S.2d 306, 312 (1966)).
Thus, when the existence of damages is certain but the amount
itself is uncertain, "plaintiff will not be denied a recovery of
substantial damages." Contemporary Mission, Inc. v. Famous
Music Corp., 557 F.2d 918
, 926 (2d Cir. 1977); see also
Lexington Prods., 677 F.2d at 253 ("where a wrong has been
done, the courts will endeavor to make a reasonable estimate of
damages") (citing Bigelow v. RKO Radio Pictures,
327 U.S. 251
, 264-66 (1946)). Smith does not so much dispute that Positive
suffered damages from his breach as challenge the damage amounts
set by the arbitrator.
In addition, liability for lost profits damages must have been
contemplated by the parties at the time of contract. See
Ashland Mgmt. v. Janien, 82 N.Y.2d 395, 403,
604 N.Y.S.2d 912, 915 (1993). "The party breaching the contract is liable for
those risks foreseen or which should have been foreseen at the
time the contract was made." Id. Where the contract is silent
on the subject, the court must take a "common sense" approach,
and determine what the parties intended by considering "the
nature, purpose and particular circumstances of the contract
known by the parties . . . as well as what liability the defendant fairly may be supposed to have assumed consciously."
Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319,
540 N.Y.S.2d 1, 4 (1989) (internal quotation marks and citation
Neither the January Agreement nor the May Agreement mentions
liability for lost profits. However, Positive claims that by the
time the parties entered the May Agreement, Smith was aware of
Positive's investment in the performances, as well as the volume
of advance ticket sales for the cancelled March shows. On March
5, 2004, shortly before Smith cancelled the March shows, Weiner
warned Isaac that if Smith did not appear "as scheduled, there
will be immediate litigation" and that Positive would "hold
[Smith] personally responsible" for Positive's losses. (Ex. D to
Fraade Aff.) Weiner detailed Positive's investment in the shows,
that Positive would "lose the potential profit" from the shows,
and that Positive would suffer "significant and real damage to
[its] reputation within the music industry" if the shows did not
take place. (Id.) The arbitrator recognized that Smith "failed
to cooperate with [Positive's] efforts to ameliorate [Smith's]
failure to perform under the terms of the modified agreement."
(Arbitration Award at 1) Smith appears to argue that although the
above communications might prove that the parties contemplated
lost profits damages by the time they entered into the May
Agreement, they do not bear on the parties' intent as to
liability for the March shows. The text of the e-mail need not be repeated; Weiner clearly referred to the March performances,
which were the subject of the January Agreement. Smith's
awareness that he might be liable for lost profits from the March
shows "can be inferred from the facts of [this] case." Siegel,
779 F.2d at 894; see also Kenford, 73 N.Y.2d at 320.
Second, Smith claims that it should not be held liable for
Positive's "botched" efforts to mitigate its losses by booking
"Trina" as a replacement. Positive responds that the $54,000 in
losses from the "Trina" shows were less than what it would have
incurred had no replacement act been booked. Expenses for the
replacement shows totaled 6,489,216 yen, or $62,886. (Ex. M to
Jacobs Decl.) Those shows generated ticket sales of 832,000 yen,
or $8,062. (Id.) Approximately 574,000 yen, or $5,562 of those
sales appear to have come from exchanges by holders of tickets to
the cancelled Lil Jon performances. (Id.)
Under New York law, an "injured party will be allowed to
recover the expenses of a proper effort [to mitigate damages]
even though it proves unsuccessful." Baker v. Dorfman,
239 F.3d 415, 427 (2d Cir. 2000) (quoting Den Norske Ameriekalinje
Actiesselskabet v. Sun Printing & Publ'g Ass'n, 226 N.Y. 1,
122 N.E. 463, 465 (N.Y. 1919)); see also Gordon Co. v.
Ross, 84 F.3d 542, 546-67 (2d Cir. 1996). Such expenses include
those reasonably incurred by the injured party that would not
have been incurred had there been no breach of contract. Smith
does not explain how Positive's mitigation efforts, although perhaps
"botched," were unreasonable. Regardless, "where a choice has
been required between two reasonable courses, the person whose
wrong forced the choice can not complain that one rather than the
other was chosen. The rule of mitigation of damages may not be
invoked by a contract breaker as a basis for hypercritical
examination of the conduct of the injured party or merely for the
purpose of showing that the injured person might have taken steps
which seemed wiser or would have been more advantageous to the
defaulter." Sunpride Ltd. v. Mediterranean Shipping Co., No.
01-3493, 2003 WL 22682268, at *9 (S.D.N.Y. Nov. 12, 2003)
(quoting In re Kellett Aircraft Corp., 186 F.2d 197, 198-199
(3d Cir. 1950)).
In a related argument, Smith contends that the award of
$184,000 is "double recovery" in manifest disregard of the law
because the May Agreement constituted an executory accord under
New York law. A party claiming breach of an executory accord can
claim damages either for breach of the original agreement or for
breach of the accord, but not for both. See N.Y. Gen. Oblig. L.
§ 15-501(3) ("if an executory accord is not performed according
to its terms by one party, the other party shall be entitled
either to assert his rights under the claim, cause of action,
contract, [or] obligation . . . which is the subject of the
accord, or to assert his right under the accord"); see also Abou-Khadra v. Mahshie, 4 F.3d 1071, 1078-79 (2d Cir. 1993).
The arbitrator provided a twofold interpretation of the May
Agreement. First, it was "a modification" of the January
Agreement. Second, it was part of Positive's attempt to mitigate
damages arising from Smith's breach of the January Agreement. In
the arbitrator's words, "[m]odifications to the original
agreement were made by [Positive] at the behest of [Smith] in an
effort to ameliorate the breach of the original agreement by
[Smith]." (Award at 1) Once it was clear that Smith would not
"cooperate" with that first attempt to mitigate damages, Positive
engaged in "[f]urther efforts to ameliorate damages" by booking
Trina on short notice. (Id.) Even assuming that the May
Agreement is an executory accord, the arbitrator's failure to
identify it as such is a mere "failure . . . to understand the
law." Absent proof that the arbitrator was aware of New York law
governing executory accords but flouted it, such an error does
not satisfy the manifest disregard standard. Willemijn
Houdstermaatschapij, BV v. Standard Microsys. Corp.,
103 F.3d 9, 13 (2d Cir. 1997). Regardless, the award of lost profits
damages was not "double recovery" or in manifest disregard of New
York law in light of the arbitrator's at least "barely colorable"
view of the May Agreement was part of Positive's attempt to
mitigate damages arising from Smith's breach of the January
Agreement. Bancos de Seguros del Estado, 344 F.3d at 260. Third, Smith argues that the claimed $54,000 in losses from the
"Trina" shows assuming that it is part of the $184,000 in lost
profits awarded should be vacated because it included losses
from a July 3, 2004 show that "was outside the scope of the
parties' agreement." Under both the January and May Agreements,
Smith agreed to perform three shows. Upon Smith's cancellation,
Trina was booked to perform two shows. Hence, it was reasonable
for the arbitrator to focus on the number of performances instead
of their dates, and conclude that booking Trina for two
performances was a proper attempt by Positive to mitigate damages
arising from Smith's failure to perform three shows.
Finally, Smith assumes that the award includes the $130,000
claimed by Positive as lost profits from the March shows, and
argues that that figure grossly overstates lost profits and is
otherwise speculative. He calculates the amount as follows: for
three shows in venues with maximum capacities of 1,300, advance
tickets were sold at 4,000 to 5,500 yen per ticket (see Ex. U
to Qureshi Decl. (show advertisement listing ticket
prices)).*fn2 Accordingly, Positive's maximum gross receipts
total 19,500,000 yen or approximately $188,974.50. (See Ex. L
to Jacobs Decl. (according to the yen-U.S. dollar exchange rate as
of December 2004)) After subtracting Smith's fee of $75,000
(January Agreement at 1)*fn3 and half of Positive's claimed
expenses of $138,000, Smith concludes that Positive's maximum
possible profit was $44,974.50.
Positive does not respond to Smith's calculation with any
precision, but instead relies on proof of ticket sales from the
cancelled performances and "for comparison," proof of ticket
sales from the Trina shows. Indeed, neither party has offered a
disciplined or even a useful analysis of the record. Instead, the
court has been compelled to navigate the clutter of underlying
documents on its own.
Smith's computation fails to account for other possible
elements of a lost profits claim. The court's calculation is as
follows: Positive's advance ticket sales records for the March
shows list 476 tickets sold at 5,500 yen each for the March 12
performance, 819 tickets at 5,500 yen each for March 13, and 371
tickets at 4,000 yen each for March 14. (Ex. S to Qureshi Decl.)
The remaining tickets were to be sold at the door: 824 tickets at
6,500 yen each on March 12, 481 tickets at 6,500 yen each on
March 13, and 929 tickets at 5,000 yen each on March 15. Assuming
sell-outs on all three dates, ticket sales would have totaled 21, 734,000 yen, or approximately $210,624. In addition
to ticket sales, Positive would have earned profits from its 20
percent cut of "all merchandising sales at each venue." (January
Agreement ¶ 15)
It is possible also that the arbitrator incorporated other loss
figures that Positive attributed to Smith's breach i.e., its
"loss in the 2004 fiscal year of approximately $300,000 after
having a profit of approximately $115,000 in 2003 and $200,000 in
2002" and the "dramatic" drop in ticket sales for other shows
produced by Positive after Smith's June/July shows were
cancelled. (Ex. B to Qureshi Decl. at 5); see, e.g., Aniero
Concrete Co., Inc. v. New York City Constr. Auth., 308 F.
Supp.2d 164, 207 (S.D.N.Y. 2003) ("An established business often
is in a good position to offer evidence of past experience as a
reasonable basis from which a jury may determine lost profits
with the requisite degree of certainty.").
Moreover, it can be inferred from Positive's balance sheet and
the arbitration award that the arbitrator subtracted considerably
less than 50 percent of the $138,000 in expenses listed on
Positive's balance sheet. Most of the expenses enumerated on the
balance sheet (Ex. K to Jacobs Decl.) are "cancel charges,"
promotion and overhead costs, and other expenses incurred as a
result of cancelling the March and June/July performances, which,
at least in the arbitrator's view, are mitigation damages.
A cynic would view the arbitrator's award of lost profits as a
simple rubber-stamping of Positive's claim of $130,000 in lost
profits from the March shows and $54,000 in losses from the
replacement shows. However, the court's standard of review is far
more forgiving, and where, as here, it happens that the
arbitrator's decision has as at least a "barely colorable
justification" in the record, the award must be confirmed.
Bancos de Seguros del Estado, 344 F.3d at 260; Duferco Int'l
Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 390
(2d Cir. 2003) ("Even where explanation for an award is deficient
or non-existent, we will confirm it if a justifiable ground for
the decision can be inferred from the facts of the case.").
In awarding Positive $138,000 in expenses, there is little
question that the arbitrator relied on Positive's balance sheet,
which provides a total of 14,222,088 yen, or approximately
$137,824 in expenses for both the March and June/July Lil Jon
shows. (Ex. K to Jacobs Decl.) Smith has three objections to this
portion of the award.
First, he argues that fixed costs "are clearly not recoverable
as damages" (Smith Mem. of Law at 13) and that the inclusion of
office rent and pay to Positive's staff for January, February, March, and June 2004 "was an evident miscalculation."
(Smith Reply at 15) Positive responds that these expenses "were a
direct result of production and promotions for Smith's [March]
performances" from January through March, 2004, and that it
incurred even more such expenses through June after Smith
cancelled those performances.
Smith does not cite a legal rule, let alone a clear and
established one, barring the inclusion of fixed costs in an award
of expenses. Nor can one be gleaned from a review of the caselaw.
See, e.g., Hamil Am., Inc. v. GFI, 193 F.3d 92, 104-05 (2d
Cir. 1999) (in copyright infringement action, whether overhead
expenses are deductible from gross revenues depended on "nexus"
between those expenses and production of infringing product);
Adams v. Lindblad Travel, Inc., 730 F.2d 89, 92-93 (2d Cir.
1984) (noting that fixed costs should not be included in
plaintiff's damages when plaintiff is an ongoing business whose
fixed costs are not affected by defendant's breach of contract);
see also Deiulemar Compagnia Di Navigazione, S.p.A. v.
Transocean Coal Co., Inc., No. 03-2038, 2004 WL 2721072, at *2
(S.D.N.Y. Nov. 30, 2004) (summarizing disagreement over whether
caselaw barred deduction of fixed expenses from calculation of
claimant's damages). Moreover, Positive fails to demonstrate that
these overhead expenses were not incurred as part of Positive's
preparation and investment in the Lil Jon Shows. Second, Smith contends that "PA and Lighting" expenses for the
July 2 and 3 shows were double counted. Smith misreads Positive's
balance sheets. The balance sheet for the cancelled Lil Jon shows
lists a "PA and Lighting Cancel Charge" for the March 12 and 13
shows in the amount of 1,054,000 yen. (Ex. K to Jacobs Decl.)
These amounts were penalties Positive incurred for cancelling "PA
and Lighting" services for those scheduled shows. The balance
sheet for the "Trina" shows lists "PA Lighting" expenses of
194,250 yen for the July 2 show and 164,850 yen for the July 3
show. (Ex. M to Jacobs Decl.) These charges were for services
actually rendered by the "PA and Lighting" vendors hired for the
"Trina" shows. The "PA and Lighting" figures from the two balance
sheets denote different types of charges for different shows; the
arbitrator did not "double count."
Third, Smith argues that a 527,000 yen "PA & Lighting Cancel
Charge" for a July 3 show is outside the scope of the parties'
agreement. (Ex. K to Jacobs Decl.) To reiterate, the arbitrator
could have deemed more relevant the number of shows that Smith
agreed to perform rather than the dates of those shows. If so, it
can be inferred from the balance sheet that Positive was
penalized for cancelling "PA and Lighting" services for one of
the three Lil Jon shows scheduled for late June and early July.
It is undisputed that Positive had to cancel the June-July Lil
Jon shows; the balance sheet reflects penalties Positive incurred for at least two of those shows, specifically
"7/2 and 7/3." That Positive may have mistakenly misdated one of
those charges is not the kind of error that warrants modification
of the award. See B.V.D. Licensing Corp. v. Maro Hosiery
Corp., No. 88-2459, 1990 WL 200648, at *3 (S.D.N.Y. Dec. 4,
C. Reputation Damages
Damages to reputation generally are not recoverable in a breach
of contract action under New York law. See, e.g., Karetsos v.
Cheung, 670 F. Supp. 111, 115 (S.D.N.Y. 1987) (precluding
recovery for damage to plaintiff's reputation as a result of the
breach); MacArthur Constr. Corp. v. Coleman, 91 A.D.2d 906,
457 N.Y.S.2d 530, 531 (1st Dep't 1983) (damage claim in breach of
contract action for injury to plaintiff's reputation in the
industry is not actionable); Dember Constr. Corp. v. Staten
Island Mall, 56 A.D.2d 768, 392 N.Y.S.2d 299 (1st Dep't 1977)
(claim seeking damages to plaintiff's reputation arising out of
breach of contract is not actionable). They are available only in
exceptional cases when the plaintiff proves "specific business
opportunities lost as a result of its diminished reputation";
vague assertions will not suffice. I.R.V. Merch. Corp. v. Jay
Ward Prods., Inc., 856 F. Supp. 168, 175 (S.D.N.Y. 1994);
Karetsos, 670 F. Supp. at 115. "Absent specific proof, damages
for loss of reputation are too speculative to be recovered under
contract law." Saxton Communication Group, Ltd. v. Valassis Inserts, Inc., No. 93-388, 1995 WL 679256, at *2
(S.D.N.Y. Nov. 15, 1995).
The arbitrator found that "[l]oss to [Positive's] income and
reputation has resulted from [Smith's] actions and failure to
perform." (Arbitration Award at 1) Positive submitted a notice
from a director of Yokohama Bay Hall (the venue scheduled for the
March 12, March 13, and July 2 performances) discontinuing their
business relationship because of "the amount of losses caused" by
the cancellation of the performances. (Ex. G to Qureshi Decl.)
MTV Japan, which helped publicize the performances, notified
Positive that it "would like to negotiate . . . the payment of
the fees of the performance announcement and advertisement and
cancellation announcement that [MTV Japan] conducted through
[its] broadcasting media." (Ex. H to Qureshi Decl.) It stated
that the cancelled performances resulted in a "substantial amount
of losses" to MTV Japan as well as "a great loss of [MTV Japan's]
reputation among [its] broadcasting customer and audiences."
(Id.) Another broadcast advertiser, TV Kanagawa, sent Positive
a similar notice. (Ex. I to Qureshi Decl.)
Fellows Company, a vendor hired to prepare sound, lighting, and
the stage, demanded compensation for the preparations it had
already made for the July performances. (Ex. J to Qureshi Decl.)
It noted that the cancelled March and July performances "affect [its] trustworthiness," that its losses from
the cancelled performances were "so great" that they "considered
. . . suing" Positive. (Id.) M.O.P. Company, a promoter hired
by Positive, also cited considerable losses resulting from the
cancelled July performances and demanded payment of "losses and
damages." (Ex. K to Qureshi Decl.) Finally, FM Later Wane, a
broadcast advertiser, complained of the cancelled performances
and told Positive that it "would have to reconsider [its] way of
doing business" with Positive. (Ex. L to Qureshi Decl.)
These notices are proof of specific harm arising from the loss
of reputation. Because they constitute at least "a barely
colorable justification for the outcome reached" by the
arbitrator, the award of damages to reputation will not be
disturbed. Bancos de Seguros del Estado, 344 F.3d at 260.
D. Legal fees
Last, Smith contends that the arbitrator's award of attorneys'
fees to Positive was in manifest disregard of the law because the
January Agreement provides that it "shall be construed in
accordance with the laws of the State of New York" (January
Agreement at 8), under which attorneys' fees may not be awarded
unless specifically provided for in the contract. See N.Y. CPLR
§ 7513. He asserts that the award of attorneys' fees cannot be
based on the January Agreement because there was no provision
authorizing such an award. On the other hand, according to Smith, the award cannot be based on the May
Agreement because along with the clause providing for attorneys'
fees to the prevailing party, that agreement designated forum in
the New York courts, stripping the arbitrator of any power to
award attorneys' fees.
Even in the face of New York's prohibition, the Second Circuit
has held that even if there is a choice of law clause selecting
New York law, the parties may arbitrate the issue of attorneys'
fees. See PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1202 (2d
Cir. 1996) ("a choice of law provision will not be construed to
impose substantive restrictions on the parties' rights under the
Federal Arbitration Act, including the right to arbitrate claims
for attorneys' fees"); cf. Mastrobuono v. Shearson Lehman
Hutton, Inc., 514 U.S. 52, 59-60 (1995) (even with a New York
choice of law clause, an arbitrator may award punitive damages,
although New York law does not allow arbitrators to award such
Moreover, the arbitrator did not act in manifest disregard of
New York law by carrying forward the arbitration agreement from
the January Agreement while awarding attorneys' fees to Positive
under the May Agreement. To reiterate, the May Agreement provides
that "[u]pon [Smith] performing all of [his] obligations
hereunder the [January] Agreement shall be deemed void and
superceded [sic] in all respects by this agreement." (May Agreement at 1) Because Smith's failure to perform left the
January Agreement intact, it appears that the arbitrator
concluded either that the January Agreement's silence on
attorneys' fees did not preclude the award of attorneys' fees, or
that the May Agreement added an attorneys' fee provision in
lieu of the January Agreement's silence and carried over the
January Agreement's arbitration clause because it had not been
superseded by the May Agreement's forum clause. See Marine
Transport Lines v. Int'l Org. of Masters, Mates & Pilots,
878 F.2d 41, 46 (2d Cir. 1989) (modification of contract may add new
terms, but the terms of the old contract "are still to be
followed so far as not changed or as inconsistent with the new
In any event, Smith's argument is no more than a dispute about
the reasonable interpretation of the two agreements. The Second
Circuit has stated that "[i]nterpretation of ? contract terms is
within the province of the arbitrator and will not be overruled
simply because we disagree with that interpretation." Yusuf
Ahmed Alghanim & Sons, W.L.L. v. Toys "R" Us, Inc.,
126 F.3d 15, 25 (2d Cir. 1997) (citing United Steelworkers v.
Enterprise Wheel & Car Corp., 363 U.S. 593, 599 (1960)); In re
I/S Stayborg v. Nat'l Metal Converters, Inc., 500 F.2d 424,
432 (2d Cir. 1974) ("whatever arbitrators' mistakes of law may be
corrected, simple misinterpretations of contracts do not appear one of them").
* * *
For the above reasons, Smith's petition is denied and
Positive's cross-petition granted.
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