- U.S. District Court, S.D., Michigan
- Shuttle Packaging Systems, L.L.C. v. Jacob Tsonakis, INA S.A., et al.
CHOICE OF LAW CLAUSE FOR NON-COMPETITION AGREEMENT IN SALES CONTRACT - CISG MAY BE APPLIED TO INTERPRET TERMS OF NON-COMPETITION AGREEMENT
PAROL EVIDENCE RULE DOES NOT APPLY TO CONTRACTS GOVERNED BY CISG (ART. 8(3) CISG) - INTENT OF PARTIES RELEVANT TO INTERPRETATION OF TERMS OF CONTRACT GOVERNED BY CISG (ART. 8(1) CISG)
MODIFICATION OF THE CONTRACT - NO NEED OF CONSIDERATION UNDER CISG(ART. 29 CISG)
LACK OF CONFORMITY - BUYER MUST EXAMINE GOODS AS SOON AS PRACTICABLE AFTER RECEIPT (ART. 38 CISG) - BUYER MUST GIVE NOTICE OF LACK OF CONFORMITY WITHIN A REASONABLE TIME (ART. 39(1) CISG) - TIME OF NOTICE IN CASE OF UNIQUE AND COMPLICATED MACHINERY
NON PAYMENT OF PRICE - GENERALLY AMOUNTS TO FUNDAMENTAL BREACH OF CONTRACT (ART. 25) ENTITLING THE SELLER TO SUSPEND PERFORMANCE RO AVOID CONTRACT (ART. 64(1)(A) CISG)
A Greek seller (Defendant) agreed to supply thermoforming lining equipment for the manufacture of plastic gardening pots to a U.S. buyer (Plaintiff). The contract included terms relating to, inter alia, supply of technology and assistance in the use of the equipment, and a non-competition agreement (the full terms of which were to be contained in a later, separate document). The parties then concluded the non competition agreement which contained covenants for the seller not to engage in selling its equipment and processes within a so called "restricted area", and not to disclose or use trade information or customer lists of the buyer. The restricted area was not defined specifically in the contract. Although the contract did not specify the law applicable to the purchase of goods, it did state that the non-competition agreement was to be enforced in accordance with the laws of the state of Michigan.
The buyer began to experience complications with the equipment and alleged that it failed to conform to seller’s specifications and industry standards. The seller on its part alleged negligent operation of the machinery on the part of the buyer. After the buyer unilaterally suspended payment for the goods, the seller began to compete in the market for distribution of plastic gardening pots, which constituted an alleged violation of the non-competition agreement. The buyer seeks damages for breach of contract and violation of the non-competition agreement. In the motion before the Court, buyer sought to restrain the seller from selling pots in the North American market pending the outcome of the case.
As to the applicable law, the Court held that CISG applied generally to the dispute because it involved a contract for the sale of goods between parties having their places of business in different contracting States (Art. 1(1)(a) CISG). As a result of the choice of law clause stating that Michigan law would apply to the non-competition agreement, the Court held that law of Michigan would apply to determine liability under the non-competition agreement.
Although the Court held that Michigan law applied to the non-competition agreement, the Court applied Arts. 8 and 9 CISG to determine the intent of the parties in interpreting that agreement. The Court held that, since the parol evidence rule does not apply to contracts under CISG, the geographic application of the non-competition agreement should be interpreted based on the subjective intent of the parties and based on their prior and subsequent statements and conduct. It then concluded that the "restricted area" meant all North America.
The Court also rejected the buyer's argument that the non-competition agreement was invalid for lack of consideration. On this subject, the Court held that, under Art. 29 of CISG, a contract may be modified without consideration.
The Court further held that the buyer complied with Arts. 38 and 39 of CISG by examining the goods as soon as practical under the circumstances and by giving notice of lack of conformity within a reasonable time. In reaching this conclusion, it took into account that the goods involved (unique and complicated equipment, delivered in installments and subject to training and on-going repairs on the part of Seller's engineers) gave ample ground for a period of notice longer that the one usually required for simple goods.
The Court however found that the alleged lack of conformity most likely did not constitute a seller's fundamental breach of contract under Art. 49 CISG, which would have entitled the buyer to avoid the contract. The Court found that on the contrary, the non payment for the goods on the part of the buyer did constitute a fundamental breach, thus allowing the seller to suspend performance under Art. 64 CISG.
As a result of the buyer's likely fundamental breach of contract, the Court found that the seller was most probably entitled to disregard the non-competition agreement.
SHUTTLE PACKAGING SYSTEMS, L.L.C., Plaintiff,
JACOB TSONAKIS, INA S.A., a Greek corporation doing business in the United States, and INA PLASTICS CORPORATION, jointly and severally, Defendants.
Case No. 1:01-CV-691
UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MICHIGAN, SOUTHERN DIVISION
December 17, 2001, Decided
RICHARD ALAN ENSLEN, United States District Judge.
RICHARD ALAN ENSLEN
This matter is before the Court on Plaintiff's Motion for Preliminary Injunction, which was heard on December 11, 2001. The Court now enters this written decision for the purpose of summarizing and publishing its previous findings.
I. PROCEDURAL BACKGROUND
Plaintiff Shuttle Packaging Systems, L.L.C. ("Plaintiff") filed this action against Defendants Jacob Tsonakis, INA S.A. ("INA") and INA Plastics Corp. ("INA Plastics") on October 24, 2001. Plaintiff's sole member is Calvin Diller, who is a citizen of Michigan. This decision refers in many parts to East Jordan Plastics, Inc. ("EJP"), which company is related to Plaintiff by its ownership and operation.
On October 24, 2001, Plaintiff filed motions for a temporary restraining order and preliminary injunction. By Order of October 25, 2001, this Court denied the Motion for Temporary Restraining Order on the ground that Plaintiff had not shown that it was likely to sustain irreparable harm before the Motion for Preliminary Injunction could be heard. The Order also set the Motion for Preliminary Injunction for hearing on December 6, 2001.
II FACTUAL BACKGROUND
A. Allegations of Complaint and Answer
Plaintiff's Verified Complaint alleges that on November 1, 2000, it agreed to a purchase agreement with Defendants. Plaintiff alleges that under the purchase agreement Defendants were required to supply thermoforming line equipment for the manufacture of plastic gardening pots together with the technology and assistance to use the equipment. [...] The equipment included a "double line" having an annual output capacity of 1,800,000 lbs. and a "trade gallon line" having an annual output capacity of 3,270,000 lbs. [...] The aggregate purchase price for the equipment was $ 1,200,000 for the double line and $ 1,800,000 for the trade gallon line. [...] The Contract also included other terms relating to payment schedules, non-competition, warranties, notices, expenses, interest, and an integration clause. [...] The non-competition term did not include the specific terms for non-competition, but required the further execution of a non-competition agreement. [...] Although it was not alleged in the Complaint, the Court notes for clarification sake that, based on other exhibits filed by the parties and their briefing, the trade gallon line was intended to manufacture 2.5 liter pots and the double line was intended to manufacture 11 centimeter pots on one line and 4 inch pots on the other line.
According to the Complaint, on November 2, 2000, the parties entered into a non-competition agreement which contained various covenants of the seller not to engage in selling its equipment and processes within the "Restricted Area," not to disclose its technical manufacturing processes to others, and not to disclose or use trade information and customer lists of the buyer. [...] The non-competition agreement contained no covenants for the buyer, but listed the payment of the purchase price under the purchase agreement as the consideration. [...] The "Restricted Area" was defined as "any jurisdiction throughout the world where the Company is, or in which Seller has reason to know the Company expects to engage in, the Business. The jurisdictions included in the Restricted Area as of the date of this Agreement are listed on Schedule I hereto." [...] No Schedule I was attached to the document. Plaintiff interprets the "Restricted Area" as North America. The non-competition agreement also stated that it was to be interpreted and enforced in accordance with the laws of the State of Michigan. [...]
Plaintiff's Complaint is stated in three state law counts, each premised on diversity jurisdiction. Count One alleges breach of the non-competition agreement and specifically that Defendants are soliciting customers of Plaintiff in North America for the purpose of selling equipment subject to the agreement. Count Two alleges breach of the purchase agreement and more specifically both that Defendants have not provided all of the services required under the agreement and that the equipment has not performed as promised. Count Three alleges a breach of warranty as to the equipment in that the equipment was not in good working order, did not manufacture to the contract specifications and failed to meet industry standards for manufacturing. Count One is pertinent to the request for Preliminary Injunction since it includes the request that the Court temporarily and permanently enjoin violation of the non-competition agreement.
Defendants have also answered the Complaint. The Answer contests most of the factual allegations, but admits jurisdiction and venue. The Answer also contends that Defendant INA Plastics has dissolved and is no longer in business. Plaintiff, during hearing, further clarified that jurisdiction was proper in that Plaintiff had only one member, Calvin Diller, who is a citizen of Michigan.
III. LEGAL ANALYSIS
In reviewing a preliminary injunction motion under Federal Rule of Civil Procedure 65, this Court is required to consider four factors: (1) Plaintiff's likelihood of success on the merits; (2) the irreparable harm that could result to Plaintiff if the injunction is not issued; (3) the possibility of substantial harm to others caused by the requested injunction; and (4) the impact on the public interest. Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992); Performance Unlimited v. Questar Publishers, Inc., 52 F.3d 1373 (6th Cir. 1995). This evaluation allows the factors to be balanced and focuses on all four factors--rather than any particular factor. In re De Lorean Motor Co., 755 F.2d 1223, 1228-30 (6th Cir. 1985).
A. Likelihood of Success
The first factor, likelihood of success, in this case relates to the likelihood of success of the merits of its claim for injunctive relief to enjoin the violation of the non-competition agreement and, more specifically, to enjoin competition in places in North America wherein Plaintiff is active in selling greenhouse pots. Jacob Tsonakis has not denied that his companies are competing in North America and his email of August 2001 indicated his intent to compete in North America because of Plaintiff's non-payment. Thus, the Court regards that the substance of this dispute is not over whether Defendants are competing, but whether they are bound by the terms of non-competition agreement to not compete in North America.
To begin this discussion, the Court must make an initial and preliminary assessment of the likely source of law to be applied to this controversy. The Court's preliminary assessment is that this controversy is governed by the United Nations Convention on Contracts for the International Sale of Goods ("CISG"), 19 I.L.M. 671 (May 1980), with one exception. The exception is the legal question of the enforcement of the non-competition agreement, which is governed by Michigan law under the parties' forum selection clause. This assessment is based on the several pertinent facts. The United States and Greece are signatories to the Convention. [...] The goods sold in this case are commercial goods of the type subject to the Convention. While the purchase agreement does not specify the application of any body of law as to the purchase, the non-competition agreement specifies the application of Michigan law, but only as to the enforcement of the non-competition agreement. Also, given the law cited by the parties, they are in apparent agreement as to this choice of law.
With this backdrop, the Court must access whether Defendants now have a legal right to compete for this business in North America. Defendants make several arguments in opposition to the Motion. One argument made by Defendants is that the non-competition agreement is ineffective because of lack of consideration for the agreement. This argument fails. First of all, the non-competition agreement was made part and parcel with the purchase agreement and assumed that the consideration for the non-competition agreement was the consideration for the purchase agreement. Second, under the Convention, a contract for the sale of goods may be modified without consideration for the modification. See CSIG, Art. 29; Michael Van Alstine, 37 Va. J. Int. Law 1 & n.47 (Fall 1996) (reaching this conclusion based on the U.N. Secretariat's Commentary on the Draft Convention, U.N. Doc. A/Conf. 97/5 (1979)).
Another argument made by Defendant is that the non-competition agreement is unenforceable because the document failed to specify the jurisdictions in which seller was required not to compete. This argument is not apt in the context of the Convention and the facts of this case. Although the meaning of the non-competition agreement was confused because the parties never attached the schedule describing the extent of the restrictions, the parties' subsequent conduct and discussions revealed an intent to apply this restriction to the United States' market. [...] Furthermore, given the wording of the Convention, federal courts have determined that international sales agreements under the Convention are not subject to the parol evidence rule and are to be interpreted based on the "subjective intent" of the parties based on their prior and subsequent statements and conduct. CSIG, Articles 8 and 9; MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova d' Agostino, S.p.A., 144 F.3d 1384, 1387-1391 (11th Cir. 1998). In this case, the statements and conduct of the parties reveal an intent to require Defendants not to compete as to the United States' market. As such, the failure to specify the precise jurisdiction does not render the agreement invalid.
Defendants also make the related argument that the agreement is invalid because the extent of the non-competition clause was too broad. Under Michigan law, a non-competition clause relating to the sale of a business is generally enforceable provided that it is reasonable in scope, considering the duration, product and geography of the restriction. See Woodward v. Cadillac Overall Supply Co., 396 Mich. 379, 240 N.W.2d 710, 714 (Mich. 1976) (J. Williams, dissenting) (describing general, common law rules); Vogue Cleaners & Dryers, Inc. v. Berkowitz, 292 Mich. 575, 291 N.W. 12 (1940). The party challenging the non-competition clause bears the burden of establishing its unreasonableness. Alders v. AFA Corp. of Florida, 353 F. Supp. 654, 657 (D. Fla. 1973), aff'd, 490 F.2d 990 (5th Cir. 1976). In this case, Defendants have scarcely argued this point and have made no real showing that the case law and facts of this case requires a conclusion that the non-competition clause is unreasonably broad. The scope of the clause is five years. The territory of the clause, as interpreted, is the United States. The clause relates to the sale of a unique product--a plastics manufacturing line for specialized horticultural products. The clause is typical of agreements of this type, which by their nature intend the sale of the goodwill of the business in addition to the manufacturing machinery. The person to be enjoined--INA--is also a foreign corporation with a lesser interest in competing in the United States than a corporation chartered in the United States. Under somewhat similar facts, the Fifth Circuit in the Alders case affirmed a five-year restriction on competition in the United States, Canada and Mexico. Under these circumstances, this defense is unlikely to prevail.
Defendants have also made equitable arguments based upon laches and unclean hands. These arguments, which are not supported by case authority cited, are not persuasive. There has been no extensive delay in the filing of this suit and the Plaintiff's alleged misconduct, principally non-payment, is not such as to warrant the label of "unclean hands." For instance, in Cleveland Newspaper Guild v. Plain Dealer Pub. Co., 839 F.2d 1147, 1155 (6th Cir. 1988), the Sixth Circuit Court of Appeals rejected both defenses and described the "unclean hands" defense as limited to instances of "bad faith." In the Court's judgment, these defenses simply do not apply on the facts of this case.
Defendants' final argument relating to likelihood of success is that the Plaintiff committed the first material breach of the contract and, as such, Defendants are no longer bound by the terms of the non-competition agreement. Defendants also make a related argument that because Plaintiff delayed in complaining about the performance of the equipment, it is not entitled to suspend payment of money owed under the purchase agreement.
This related argument concerns Articles 38 and 39 of the Convention, which require the buyer to "examine the goods ... within as short a period as is practicable in the circumstances" and which further state the buyer "loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time ...." Article 39 also provides a two-year time period as the outer limit of time for a buyer to notify the seller of a lack of conformity (unless the goods are subject to a longer contractual period of guarantee).
This related argument fails. The wording of the Convention reveals an intent that buyers examine goods promptly and give notice of defects to sellers promptly. However, it is also clear from the statute that on occasion it will not be practicable to require notification in a matter of a few weeks. For this reason, the outer limit of two years is set for the purpose of barring late notices. In this case, there was ample reason for a delayed notification. The machinery was complicated, unique, delivered in installments and subject to training and on-going repairs. The Plaintiff's employees lacked the expertise to inspect the goods and needed to rely on Defendants' engineers even to use the equipment. It is also wrong to say, in light of this record, that notification did not occur until July 6, 2001. Long before the July 6 correspondence, there was a steady stream of correspondence between the parties relating to the functioning of the equipment which may have constituted sufficient notice of the complaints. The international cases cited by Defendants are not apposite to this discussion because they concern the inspection of simple goods and not complicated machinery like that involved in this case.
Nevertheless, the Court does accept Defendants' contention that the Plaintiff's non-payment of progress payments on the machinery did constitute a "fundamental breach of contract." Article 25 of the Convention defines a "fundamental breach of contract" as one "which results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract. ..." See Delchi Carrier v. Rotorex Corp., 71 F.3d 1024, 1028 (2nd Cir. 1995) (discussing definition). This is a significant definition in that Article 64 provides the seller a right to declare the contract avoided due to a "fundamental breach of contract." The Convention affords the buyer a right to avoid the contract under Article 49 for a fundamental breach. It likewise affords both buyer and seller the right to suspend or avoid an installment contract due to fundamental breach under Articles 71-73. Article 64 is also specifically worded to give the implication that non-payment of the purchase price is the most significant form of a fundamental breach by a buyer, since, as to a serious non-payment, no additional notifications are required for avoidance of the contract.
In this case, the buyer has had some legitimate complaints concerning the machinery throughout the delivery and training process. However, on the whole, the Court concludes that the evidence submitted best supports the proposition that these complaints did not constitute either a fundamental or even a substantial breach of the contract by the seller. This is particularly true since the context for this dispute--namely, the machinery has been successfully operated with Defendants' assistance and Plaintiff is a cash-strapped business raising performance questions only after formal inquiries have been made as to non-payment--tends to show that complaints about performance were opportunistic and not genuine in character. On the other hand, the Court determines that it is likely that non-payment of the large sums due for the performance payments was a fundamental breach of contract and that it excused Defendants' performance of non-competition obligations under the purchase agreement and non-competition agreement. As such, the Court concludes that Plaintiff is unlikely to succeed on the merits.
B. Irreparable Harm to Plaintiff
Plaintiff has cited cases for the proposition that loss of goodwill and loss of business opportunities are the kinds of losses which are irreparable because they cannot later be sufficiently quantified for damage purposes. See, e.g., Basicomputer v. Scott, 973 F.2d 507, 511-12 (6th Cir. 1992). While the Court agrees with that legal proposition, it finds it inapplicable here. Because the Plaintiff had, most likely, committed a fundamental breach of the contract by nonpayment, it has also most likely surrendered its right to seek enforcement of the non-competition agreement. As such, on the present record, the Court does not find that Plaintiff is likely to suffer irreparable harm because of Plaintiff's own fundamental non-performance of its duties under the contract.
Accordingly, an Order shall issue denying the Motion for Preliminary Injunction.
DATED in Kalamazoo, MI:
December 17, 2001
Richard Alan Enslen
United States District Judge}}