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Ho Myung Moolsan, Co. Ltd v. Manitou Mineral Water

December 2, 2010

HO MYUNG MOOLSAN, CO. LTD., PLAINTIFF, -AGAINST-
v.
MANITOU MINERAL WATER, INC.,
DEFENDANT.



The opinion of the court was delivered by: Richard J. Holwell, District Judge:

MEMORANDUM OPINION AND ORDER

Plaintiff, Ho Myung Moolsan ("Moolsan"), a South Korean mineral water reseller, brought this breach of contract action against defendant Manitou Mineral Water ("Manitou"), a mineral water manufacturer based out of Colorado and New York. At trial ending November 1, 2010, a unanimous jury returned a verdict for defendant on liability for all claims. This opinion sets forth the Court's reasoning for the following rulings made before and during trial:

1. Prior to trial, plaintiff alleged that the United Nations Convention on Contracts for the International Sale of Goods applied to this action. Because the parties consented by their litigation conduct to apply New York law, the Court applied New York law to the case.

2. Plaintiff alleged that the contract in question was an output contract. Defendant countered that the contract was an installment contract. Because the Court found that the contract authorized delivery by separate lots, the Court agreed with defendant that the contract was an installment contract.

3. Prior to trial, defendant moved in limine to preclude plaintiff from introducing the testimony or report of their damages expert, Don Smith. Smith's report calculated plaintiff's lost profits to be over $133 million. Because the report was speculative and unreliable, usurped the role of the jury, or was not a proper subject for expert testimony, the Court excluded the report and precluded Smith from testifying.

4. At trial, defendant objected to plaintiff's offer of PX 90A.14. This exhibit consisted of documents purportedly summarizing plaintiff's sales activity in Korea. Because the offered documents were admittedly created not during the period of sales but instead after litigation began and were inherently unreliable, and because underlying documents allegedly establishing sales were in existence but never produced during discovery, the Court excluded PX 90A.14.

5. At the close of plaintiff's case, defendant moved under Federal Rule of Civil Procedure 50(a) for judgment as a matter of law that plaintiff could not establish lost profits. Because plaintiff presented no admissible expert testimony going to lost profits and because plaintiff's remaining documents going to lost profits (PX 90A.15) were speculative and unreliable sales projections, the Court ruled that plaintiff could not establish lost profits.

6. Faced with the Court's ruling that it could not recover lost profits, plaintiff sought to recover those precluded damages as "lost sales." Because the Court could find no authority distinguishing the two for the purpose of plaintiff's damages claim, the Court ruled that plaintiff could not recover "lost sales."

7. Plaintiff sought to recover, as compensatory damages, $500,000 it allegedly paid and lost under the contract but that defendant claimed it never received.

Because that $500,000 loss was not proximately caused by defendant's breach of contract, the Court precluded plaintiff from seeking to recover that $500,000 from defendant.

8. During defendant's case, plaintiff moved to amend its complaint under Federal Rules of Civil Procedure 15(a) and 15(b) to add claims for fraud in the inducement of the contract and for negligent misrepresentation. Because these issues were not raised in the pleadings or pre-trial order, were not tried with the parties' consent, and had already been disposed of, and because any amendment would have been futile, the motion was denied.

DISCUSSION

I. New York Law Applies To This Action

Plaintiff filed its initial six count complaint on August 20, 2007. (Compl. at 14.)

The relevant count for breach of contract was explicitly brought "[u]nder [s]tate [l]aw." (Compl. at 11.) In unsuccessfully seeking a preliminary injunction, plaintiff relied exclusively on New York law. (See, e.g., Pl.'s Mem. dated Oct. 10, 2007.) And on appeal of this Court's denial of its motion for a preliminary injunction, plaintiff again relied upon New York law. See Ho Myung Moolsan Co. Ltd. v. Manitou Mineral Water, Inc., 316 Fed. Appx. 40 (2d Cir. 2009). Thereafter, plaintiff was granted leave to amend its complaint and, once again, alleged breach of contract "[u]nder [s]tate [l]aw." (First Amend. Compl. at 15.) Nevertheless, following the close of discovery, plaintiff moved for summary judgment on its amended complaint, alleging for the first time that the United Nations Convention on Contracts for the International Sale of Goods ("CISG") governed the dispute. (Pl.'s Mot. for Summ. J. dated Dec. 30, 2009, attach. 2 at 6-7.) On June 29, 2010, the Court, applying New York law denied plaintiff's motion and granted defendant's motion for summary judgment on all claims except for plaintiff's breach of contract claim. (Order of June 25, 2010 at 1-2.)

In its proposed final pretrial order, plaintiff again asserted that the CISG applied. Defendant objected, arguing that plaintiff had consented to the application of New York law. Defendant cited Walter E. Heller & Co. v. Video Innovations, Inc., 730 F.2d 50 (2d Cir. 1984) to support this contention. That case found that though a lease stated it was to be interpreted under Illinois law, the district court's application of New York law was not error because "in the court below and in their original briefs in this Court, the parties relied primarily upon New York authorities to support their respective contentions." Video Innovations, 730 F.2d at 52. In other words, "the parties to litigation [had] consent[ed] by their conduct to the law to be applied [namely, New York law despite the contract's Illinois choice of law clause]." Id.; see also In re Cross Media Marketing Corp., 367 B.R. 435, 453 (Bankr. S.D.N.Y. 2007) (finding New York law consented to on "all of the state law causes of action alleged [because] [n]one of the parties raised any choice of law issues in the pleadings [and] . . . [f]or the most part, the parties briefed the issues applying New York law.").

The Court applied New York law to this dispute because, as demonstrated above, plaintiff had relied exclusively on New York law, and not the CISG, until after the close of discovery. Most importantly, plaintiff alleged, and retained after amending its pleading, a claim for "Breach of Supply Agreement Under State Law." (Compl. at 11 (emphasis added); First Amend Compl. at 15 (emphasis added).) While application of the CISG may have been appropriate, plaintiff by its actions had consented to the application of the N.Y.U.C.C. and it was far too late to withdraw that consent without undue prejudice to defendant. Moreover, as plaintiff expressly admitted that the CISG and the N.Y.U.C.C. were in all material respects the same, and that the only difference was in the notice requirement before bringing suit, (Tr. of Hr'g of Oct. 21, 2010 at 12), it seems that even had the Court applied the CISG, the course of the case would not have changed.

II. The Contract Was An Installment Contract

The parties signed a contract for the sale of mineral water on December 1, 2005.

(Def.'s Trial Ex. 1) Under the Contract, defendant agreed to sell a distribution right for its mineral water to plaintiff for $500,000 and agreed to sell mineral water to plaintiff at $1 per one-liter bottle. (Id. ¶¶ 3, 5.) Plaintiff also made an advance payment of $1 million for mineral water inventory. (Id. ¶ 3.) The contract was to run for five years. (Id. ¶ 4.) After the first year, plaintiff was required to make minimum yearly orders of $1 million worth of water. (Id.) Plaintiff was additionally required "to place its orders, in writing, normally 3 months in advance." (Id. ¶ 5.) And payment on orders was also to be made in advance. (Id. ¶ 4) Plaintiff argued that this writing constituted an "output contract" while defendant argued it was an "installment contract."

Generally, a contract is void under the Uniform Commercial Code if it does not specify a quantity term. N.Y.U.C.C. § 2-201 cmt. 1. A minimum quantity term, like the $1 million minimum for years two-through-five in the contract in question in this case, is satisfactory. Corning Inc. v. VWR Int'l, Inc., No. 05-CV-6532 CJS, 2007 WL 841780, at *6 (W.D.N.Y. 2007) (citing Nora Beverages, Inc. v. Perrier Group of America, Inc., 164

F.3d 736, 749 (2d Cir. 1998)). When a contract contains a quantity term but allows for delivery in separate lots separately accepted, it is an "installment contract." N.Y.U.C.C. § 2-612(1); Stinnes Interoil, Inc. v. Apex Oil Co., 604 F. Supp. 978, 979-81 (S.D.N.Y. 1985). A breach of the entire contract occurs only when a "non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract." N.Y.U.C.C. § 2-612(3). This standard for determining breach differs from that for single-lot contracts in that, for the latter, "if the goods or the tender of delivery fail in any way to conform to the contract," a breach has occurred and a buyer may reject the goods and cease performing under the contract. N.Y.U.C.C. § 2-601; Austrian Airlines Oesterreichische Luftverkehrs AG v. UT Finance Corp., 567 F. Supp. 2d 579, 592 & n.93 (S.D.N.Y. 2008). Additionally, a breach of an individual installment occurs when the default in question substantially reduces or impairs the value, to the buyer, of that shipment. Arkla Energy Resources v. Roye Realty & Developing Corp., 9 F.3d 855, 862-63 (10th Cir. 1993); 15 Williston on Contracts § 45:22.

As this district has recognized, the definition of an installment contract includes coverage of "installment deliveries tacitly authorized by the circumstances or by the option of either party." N.Y.U.C.C. § 2-612 cmt. 1; see Fashionwear (PVT) Ltd. v. Regatta (U.S.A.) LLC, No. 03 Civ. 5597 (JFK), 2006 WL 695256, at *3 n.1 (S.D.N.Y. March 17, 2006). Each delivery of a separate lot need not even be separately paid for. N.Y.U.C.C. § 2-612 N.Y. annot. 1. Additionally, a contract that: provides that deliveries are to be made only at times authorized and chosen by the buyer, without specifying the times for delivery, may also properly be treated as an installment contract under the Code . . . since the uncertainty of when and if the buyer will request delivery does not change the essential character of the contract.

15 Williston on Contracts § 45:2 (4th ed. 2010). Finally, the lack of a regular shipment schedule does not preclude a contract's characterization as an installment contract. Id.

Contracts that lack quantity terms but instead specify quantity based on the output of a seller, on the other hand, are also valid. N.Y.U.C.C. § 2-306(1) An "output contract" is one that measures "quantity by the output of the seller . . . as may occur in good faith, except that no quantity unreasonably disproportionate to any . . . normal or otherwise comparable prior output . . . may be tendered or demanded." Id.; 3 Williston on Contracts § 7:12 (4th ed. 2010) ("[A]greements by a seller to sell all the goods or services he may produce to a buyer in exchange for the buyer's agreement to purchase them are known as output contracts. Because the quantity term of an output contract varies, the test to determine breach centers on the parties' good faith in producing or accepting amounts of the product in question. See N.Y.U.C.C. § 2-306 cmt. 3.

The contract at issue in this case is clearly not an output contract. Defendant's output does not set the contract's quantity term and defendant was not entitled to force plaintiff to accept shipments of water beyond the minimum one million bottles required to be purchased each year after the first. Moreover, the fact that defendant was likely to allocate virtually all of its capacity to filling plaintiff's orders, at least until year two when a second production line was installed, ...


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