The opinion of the court was delivered by: James C. Francis IV United States Magistrate Judge
Contract law is sometimes a blunt instrument for dealing with commercial realities: it displaces the flexible resolution of economic disputes with more rigid rules concerning burden of proof and the assignment of liability. Nevertheless, where a commercial relationship has broken down, as in this case, the parties necessarily fall back on the law of contracts.
This action arises out of three transactions between Sara Corporation ("Sara"), a garment manufacturer based in Pakistan, and Sainty International America Inc. ("Sainty"), an importer of apparel. The parties consented to proceed before me for all purposes pursuant to 28 U.S.C. § 636(c), and a bench trial was held on January 14, 15, and 16, 2008. This opinion constitutes my findings of fact and conclusions of law as provided for by Rule 52(a) of the Federal Rules of Civil Procedure.
A. The 2004 Loungewear Contract
In early 2004, Muhammad Azam, the President and Chief Executive Officer of Sara, and Michael Toms, who was then the Vice President of Sales for Sainty, commenced a series of communications concerning a program whereby Sara would manufacture and sell loungewear to Sainty for resale to Sainty's customer, Saks, Inc. ("Saks"). By February 2004, the parties had agreed that Sainty would purchase approximately 150,000 pieces, which Sara was to ship in six lots beginning in May and monthly thereafter. The terms of the agreement are reflected in e-mail communications between the parties (Pl. Exhs. 1, 2), in a series of purchase orders (Pl. Exhs. 3a-3h), and in a letter of credit issued to Sainty by HSBC Bank on April 2, 2004. (Pl. Exh. 10). According to the purchase orders, delivery was to be made "x-port of departure" on the first day of each month beginning May 1, 2004 (Pl. Exhs. 3a-3h), and the letter of credit provided that the shipments would be "FOB Karachi." (Pl. Exh. 10, fourth page).
The first three lots were shipped close to the dates specified in the purchase orders. (Tr. at 44-45, 50). The fourth installment, however, was three weeks late. Sainty accepted the goods and paid Sara for them, even though Saks demanded and received a discount from Sainty of $39,778.14 due to the late delivery. (Tr. at 50-51, 417-21; Def. Exh. E, first page). Then, on August 18, 2004, Sara's staff apparently sent Sainty an e-mail warning that the lot due to be shipped on September 1 would be delayed. (Pl. Exh. 4). However, Mr. Toms never saw that communication. (Pl. Exhs. 4, 5). This fifth installment consisted of both flannel goods, as reflected in Purchase Order No. 40704-5 (Pl. Exh. 3e), and boxed set knitwear, as reflected in Purchase Order No. 40904-2 (Pl. Exh. 3h). On September 16, Sara sent another e-mail, indicating that the fifth lot would not be ready for shipment until September 24 and offering Sainty two options: the goods could be shipped aboard a vessel called the Nilgai that had a "cutoff" date of September 25, an estimated departure date from Karachi of September 30, and an estimated arrival date in New York of October 23 or, alternatively, they could be shipped on the Maersk Arizona, with a cutoff date of September 24, a departure date of September 25, and an arrival date of October 17. (Pl. Exh. 4). In response, Mr. Toms expressed frustration with the delay, but chose the second shipment option. (Pl. Exh. 5).
Sara delivered the goods to its customs broker in Karachi on September 23, 2004. (Tr. at 68). On September 28, a portion of the goods were loaded onto the Arizona in Port Qasim, Pakistan (Pl. Exh. 6), while the balance were loaded aboard another Maersk vessel, the Oranje, on September 30. (Pl. Exh. 7).*fn1 Both vessels apparently sailed to Salalah, Oman, where, on October 4, their cargo was transferred to the Maersk Georgia. (Pl. Exh. 8; Tr. at 70-73). The Georgia then proceeded to New York and discharged its cargo on October 24. (Pl. Exh. 8; Tr. at 354).
Correspondence ensued between Mr. Azam and Mr. Toms concerning the disposition of the goods. Because of the late arrival of the shipment, Saks cancelled its order with Sainty for the flannel goods, and Sainty in turn refused to take delivery of them at the port. (Def. Exhs. A, J; Tr. at 389-91). Sara ultimately transported these goods back to Pakistan at its own expense and, after removing proprietary trademarks, was able to sell a portion of them. (Tr. at 210-12). Sainty accepted delivery of the boxed set knitwear after the parties negotiated a discount of approximately $24,000. (Def. Exh. A).
In its First Cause of Action, Sara asserts a claim of breach of contract for Sainty's refusal to accept the flannel goods contained in the fifth installment. It seeks the contract price of $135,811.84 (Pl. Exh. 3e), together with shipping and reimport duties of $20,781.25 (Pl. Exh. 27) and demurrage and other charges of $31,791.50 that were incurred while the goods languished in New York Harbor (Pl. Exh. 26), minus a net recovery of $80,000 on the goods that were resold. (Tr. at 211). This results in a claim in the amount of $108,384.84.
Sainty asserts two counterclaims arising out of the loungewear contract. In its First Counterclaim, it seeks to recover $39,778.14, which is the discount that it was required to give Saks because of the lateness of the fourth installment. (Def. Exh. E). In the Second Counterclaim, Sainty seeks profits of $24,607.00 that it contends it would have realized on the flannel goods contained in the fifth lot that it rejected after Saks had cancelled its order for them. (Def. Exh. D; Tr. at 421-25).
B. The Magic Show Samples
In the summer of 2004, Sainty arranged for Sara to produce loungewear samples to be shown at the "Magic" apparel show in Las Vegas in the last week of August. To the extent that the prototypes were well received, the styles were to be manufactured and sold in bulk under the Henry Grethel label. (Tr. at 107-10). On July 2, 2004, after Sainty had sent Sara examples of the types of items requested, Mr. Toms sent an e-mail seeking pricing information so that he could redesign the models and decide on the fabrics to be used. (Pl. Exh. 11). On July 16, Mr. Azam responded with prices for each style based on full production. (Pl. Exh. 12; Tr. at 110-13). On August 7, Mr. Azam sent another message to Mr. Toms, raising two concerns. First, he warned that, with respect to those garments for which Sainty had revised the designs, it would be "next to impossible" to have them ready in time for the Magic show. (Pl. Exh. 13). Second, he explained that, particularly in view of the revisions to the designs, the cost of producing the samples had multiplied, and Sainty should be cautious about proceeding unless it had production orders against which the costs of the samples could be offset. He concluded by saying:
I am here to safeguard your interest as well as your money and telling you all the facts that how huge investment (and time) will be involved for this development. Please think twice and advise me your consent if you really want us to proceed for the development of these styles. (Pl. Exh. 13).*fn2 On August 10, Mr. Toms responded:
I need to have all that is humanly possible for magic show in samples! I understand that cost will be an issue but, these specialized items are the impact of the presentation . . . they are urgently needed, please proceed with all speed. As a company, we have signed a contract for this project for at least 3 years, all things will be worked out and our success depends on not looking ordinary or the same as other lines. (Pl. Exh. 13). That same day, having been reassured by Mr. Azam that the deadline could be met, Mr. Toms sent an e-mail that began, "Dear Great Azzzzz, If anyone can walk in space, it should be you!" and that went on to discuss the logistics of sending the samples. (Pl. Exh. 14). Ultimately, most of the prototypes arrived in Las Vegas in time for the show. (Tr. at 115).
Sara prepared an invoice for the samples dated August 26, 2004, reflecting a total cost of $29,610.00. (Pl. Exh. 15).
However, Sainty represented that it did not receive that document until at least November. (Tr. at 147-48, 150). In any event, Mr. Azam did not press for payment immediately because he anticipated that Sara would produce Henry Grethel products for Sainty in the spring and would be able to offset some of the cost of the samples. (Tr. at 219-20). As will be discussed below, this did not come to pass; accordingly, Sara now asserts a claim for the full invoice price of the samples.
C. The Henry Grethel Spring 2005 Program
In late 2004 and early 2005, Mr. Azam and Mr. Toms engaged in negotiations for Sara to produce loungwear for Sainty under the Henry Grethel label during the spring 2005 season. On December 3, 2004, Mr. Toms sent an e-mail to Mr. Azam with the subject heading "Spring 2005 HG Loungewear Order." It stated in part, "[B]elow is the initial Spring 2005 loungewear order; we hope to add to this additionally for later delivery. Per my conversation with Allen,*fn3 as agreed, per orders placed, we don't expect any sample charges." (Pl. Exh. 16). There followed a list of styles, with quantities, prices, colors, and fabrics indicated for each. A shipping date of "1/15/04 [sic] x-port Karachi" was designated.*fn4 The e-mail further noted that "[a]ll label, hangtag, embroidery, size scales, packing info" would be sent the same day and that "[o]nce all is confirmed, we will work on L/C," referring to a letter of credit. (Pl. Exh. 16). On December 30, Mr. Toms sent another e-mail to an employee of Sara named Mairaj, indicating that he had received and approved specifications for the Henry Grethel styles. Accordingly, he directed Mairaj to "Please move forward with Sp 05 production, for earliest possible delivery. Mr. Allen Lui [sic] is expected back from China next week, L/C and PO will be sent then." (Pl. Exh. 17).
Mairaj, along with another Sara employee named Kamal, sent an e-mail to Mr. Toms on January 4, 2005 indicating that they had "worked out the possibility of getting the fabric on the earliest possible time frame but the supplier is still insisting that he can not complete the delivery of the fabric before 2/25." (Pl. Exh. 21). The e-mail also said, "Please note that as advised to you by me earlier that as long as you keep giving us the orders (at least 300 dz each combo) for all the development we are making there won't be no sampling charges. . . . However, we are still waiting for the balance order for Henry Grethel - Please advise." (Pl. Exh. 21).
Mr. Toms responded the next day, expressing concern about the delivery date. He said, "Please try to let me now understand that - you will only get the fabric at the earliest 2/25/05, and based on our needed qtys, what do you expect the actual production of garments to be . . . x-factory?" (Pl. Exh. 21). With respect to sample costs, he asked whether "this situation will be closed as to the $29,610.00" if Sainty ordered 300 dozen of each of the Henry Grethel items. (Pl. Exh. 21).
On January 6, 2005, Mr. Toms sent Mr. Azam another e-mail with the heading "Spring 05 Production Order v. Spring 05 Sample Invoices." (Pl. Exh. 18). In it, he itemized styles and quantities for the spring 2005 program. He stated, "The below outlined order for Spring 05, is what we want to place, it totals $67,140.00 USD. If this is placed by L/C within the next couple of days, 'What is our ...