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AMCO UKRSERVICE & PROMPRILADAMCO v. AMERICAN METER COMPANY

March 29, 2004.

AMCO UKRSERVICE & PROMPRILADAMCO
v.
AMERICAN METER COMPANY



The opinion of the court was delivered by: STEWART DALZELL, District Judge

MEMORANDUM

Plaintiffs Amco Ukrservice and Prompriladamco. are Ukrainian corporations seeking over $200 million in damages for the breach of two joint venture agreements that, they contend, obligated defendant American Meter Company to provide them with all of the gas meters and related piping they could sell in republics of the former Soviet Union.

After extensive discovery, American Meter and Prompriladamco. filed the cross-motions for summary judgment now before us. American Meter asserts that it is entitled to judgment against both plaintiffs as a matter of law because the joint venture agreements are unenforceable under both the United Nations Convention on Contracts for the International Sale of Goods ("CISG") and Ukrainian commercial law. Prompriladamco. claims that its agreement is enforceable, that there is no genuine issue of material fact as to whether American Meter is in breach of that agreement, and that the only remaining issue is the extent of the damages it has sustained.

  Upon consideration of this complex web of law, we conclude that American Meter is not entitled to summary judgment because the CISG does not apply to the joint venture agreements Page 2 and because, under Pennsylvania's choice of law regime, Pennsylvania law, and not Ukrainian law, governs the plaintiffs' claims. We further find that Prompriladamco. is not entitled to summary judgment on the liability issue because there remains a genuine issue of material fact as to whether C. Douglas Prendergast, the American Meter employee who signed the Prompriladamco. joint venture agreement, had actual or apparent authority to make the momentous commitments on the corporation's behalf that have occasioned this suit.

 I. Factual and Procedural History

  The origins of this action lie in the collapse of the Soviet Union and the newly-independent Ukraine's fitful transition to a market economy. American Meter began to explore the possibility of selling its products in the former Soviet Union in the early 1990s, and in 1992 it named Prendergast as Director of Operations of C.I.S. [Commonwealth of Independent States] Projects. See Pl.'s Reply (Pl's Mot. S.J.) Ex. A. Sometime in 1996, a Ukrainian-born American citizen named Simon Friedman approached Prendergast about the possibility of marketing American Meter products in Ukraine.

  Ukraine was a potentially appealing market for American Meter at that time. During and immediately after the Soviet era, Ukrainian utilities had not charged consumers for their actual consumption of natural gas but instead had allocated charges on the basis of total deliveries to a given area. That system penalized consumers for their neighbors' wastefulness and saddled Page 3 them with the cost of leakage losses. In 1997, the Ukrainian government enacted legislation requiring utilities to shift toward a usage-based billing system. Prendergast's early prediction was that implementation of the legislation would require the installation of gas meters in millions of homes and apartment buildings. See Mem. from Prendergast to Skilton of 11/10/97, at 1-2 (Pls.' Resp. (Def.'s Mot. S.J.) Ex. 22).

  After some investigation, Prendergast and his superiors at American Meter concluded they could best penetrate the Ukrainian market by forming a joint venture with a local manufacturer. To this end, American Meter Vice-President Andrew Watson authorized Friedman*fn1 on June 24, 1997 to engage in discussions and negotiations with Ukrainian organizations, and the corporation also hired a former vice-president, Peter Russo, to consult on the project. Mandate of 6/24/97 (Pls.' Resp. (Def.'s Mot. S.J.) Ex. 14); Russo Dep. at 9 (Pls.' Resp. (Def.'s Mot. S.J.) Ex. 7). Prendergast, Russo, and Friedman began to identify potential joint venture partners, and by late 1997, they had selected Promprilad, a Ukrainian manufacturer of commercial and industrial meters based in Ivano-Frankivsk, the industrial capital of western Ukraine. On December 11, 1997, Prendergast (representing American Meter), Friedman (representing his firm, Joseph Friedman & Sons, International, Inc.), and representatives of Promprilad and American-Ukrainian Business Consultants, L.P. Page 4 ("AUBC") met in Kyiv (the current preferred transliteration of "Kiev") and entered into the first of the agreements at issue here.

  The agreement provided for the establishment of a joint venture company, to be called Prompriladamco, in which the four signatories would become shareholders. Prompriladamco. would work in conjunction with its principals to develop the market for American Meter products in the former Soviet Union and, most important for the purposes of this action, the agreement committed American Meter to the following obligations:
9. AMCO shall grant Joint Venture PrompryladAmco exclusive rights to manufacture and install Meters within the former Soviet Union. . . .
10. AMCO shall grant Joint Venture PrompryladAmco exclusive rights to distribute the products manufactured by PrompryladAmco. and all products manufactured by AMCO in the former Soviet Union. . . .
13. AMCO will deliver components and parts for Meters taking into account 90% assembly.
14. PrompryladAmco. (at the first stage) shall perform 10% of the work required to assembl[e] the Meters using components and parts delivered by AMCO.
15. AMCO will deliver the components and parts for Meters by lots in containers, payments for the delivery being subject to at least a 90-day grace period.
16. The number of the components and parts for Meters to be delivered to Ukraine shall be based on demand in the former Soviet Union.
  17. Orders for the components and parts for Meters, with the quantities and prices according to paragraph 16 above shall be an integral part of this Agreement. Page 5

  Agreement of 12/11/97 (Def.'s Mot. S. J. Ex. A).*fn2

  After executing the agreement, the parties incorporated Prompriladamco in Ukraine, and Friedman became its Chief Executive Officer. The new corporation set out to obtain Ukrainian regulatory approval for American Meter products, which required bringing Ukrainian officials to the United States to inspect American Meter's manufacturing process, and it sponsored a legislative measure that would give those products a competitive advantage in the Ukrainian market.

  On April 20, 1998, Friedman*fn3 and a representative of AUBC executed a second joint venture agreement for the purpose of marketing the gas piping products of Perfection Corporation, a wholly-owned subsidiary of American Meter. Again, the parties agreed to create and fund a corporation, this one to be called Amco. Ukrservice, and American Meter committed itself to deliver, on credit, a level of goods based on demand in the former Soviet Union. Agreement of 4/29/98 (Def.'s Mot. S.J. Ex. B). The parties duly formed Amco. Ukrservice, and Friedman became its Chief Executive Officer.

  By early summer, Prompriladamco. and Amco. Ukrservice had begun submitting product orders to American Meter. In late June or early July, however, American Meter President Harry Skilton Page 6 effectively terminated the joint ventures by stopping a shipment of goods that was on its way to Ukraine and by refusing to extend credit to either Prompriladamco. or Amco. Ukrservice. See Skilton Dep. at 123-24 (Pls.' Resp. (Def.'s Mot. S.J.) Ex. 5) (admitting that, as a result of his decisions, the project "died a natural death from then on out"). Finally, at a meeting on October 27, 1998, American Meter Vice-President Alex Tyshovnytsky informed Friedman that the corporation had decided to withdraw from Ukraine "due to unstable business conditions and eroding investment confidence in that country." Letter from Tyshovnytsky to Friedman of 10/29/98 (Pls.' Resp. (Def.'s Mot. S.J.) Ex. 41).

  On May 23, 2000, Prompriladamco. and Amco. Ukrservice filed parallel complaints claiming that American Meter had breached the relevant joint venture agreement by refusing to deliver the meters and parts that the plaintiffs could sell in the former Soviet Union. Prompriladamco's complaint alleges that the breach caused it to lose $143,179,913 in profits between 1998 and 2003, and Amco. Ukrservice claims lost profits of $88,812,000 for the same period. We consolidated the actions on August 18, 2000.

 II. American Meter's Motion for Summary Judgment

  American Meter argues that summary judgment is warranted here because the joint venture agreements are invalid under the CISG and Ukrainian law. It also contends that it is entitled to summary judgment because the plaintiffs' claims for damages are based on nothing but "rank speculation." Def.'s Mem. Page 7 (Mot. S.J.) at 28. We consider each of these arguments in turn.

  A. The CISG

  The United States and Ukraine are both signatories to the CISG, which applies to contracts for the sale of goods where the parties have places of business in different nations, the nations are CISG signatories, and the contract does not contain a choice of law provision. Fercus, S.R.L. v. Palazzo, 2000 WL 1118925, at *3 (S.D.N.Y. Aug. 8, 2000). American Meter argues that the CISG governs the plaintiffs' claims because, at bottom, they seek damages for its refusal to sell them goods and that, under the CISG, the supply provisions of the agreements are invalid because they lack sufficient price*fn4 and quantity terms. Page 8

  Apart from a handful of exclusions that have no relevance here, the CISG does not define what constitutes a contract for the sale of goods. See CISG art. 2, reprinted in 15 U.S.C.A. App., at 335 (West 1998). This lacuna has given rise to the problem of the Convention's applicability to distributorship agreements, which typically create a framework for future sales of goods but do not lay down precise price and quantity terms.

  In the few cases examining this issue, courts both here and in Germany have concluded that the CISG does not apply to such contracts. In Helen Kaminski Pty. Ltd. v. Marketing Australian Products, Inc., 1997 WL 414137 (S.D.N.Y. July 23, 1997), the court held that the CISG did not govern the parties' distributorship agreement, but it suggested in dictum that the CISG would apply to a term in the contract that addressed specified goods. Id. at *3. Three years later, Judge DuBois of this Court followed Helen Kaminski and held that the CISG did not govern an exclusive distributorship agreement, an agreement granting the plaintiff a 25% interest in the defendant, or a sales commission agreement. Viva Vino Import Corp, v. Farnese Vini S.R.L., No. 99-6384, 2000 WL 1224903, at *1-2 (E.D. Pa. Aug. 29, 2000) (DuBois, J.). Two German appellate cases have similarly concluded that the CISG does not apply to distributorship agreements, which they termed "framework agreements," but does govern sales contracts that the parties enter pursuant to those agreements. See OLG Düsseldorf, UNILEX, No. 6 U 152/95 (July 11, 1996), abstract available at Page 9 http://cisgw3.law.pace.edu/cases/960711g1.html; OLG Koblenz, UNILEX, No. 2 U 1230/91 (Sept. 17, 1993), text available at http://cisgw3.law.pace.edu/cases/930917g1.html.

  American Meter argues that this line of cases is inapplicable here because the plaintiffs do not claim damages for breach of what it terms the "relationship" provisions of the joint venture agreements,*fn5 but instead seek to enforce an obligation to sell goods. In other words, American Meter claims that the supply and credit provisions are severable and governed by the CISG, even if the Convention has no bearing on the remainder of the two agreements.

  There are a number of difficulties with this argument, both in its characterization of the plaintiffs' claims and its construction of the CISG. To begin with, Prompriladamco. and Amco. Ukrservice are not seeking damages for American Meter's refusal to fill particular orders. Instead, they are claiming that American Meter materially breached the joint venture agreements when it refused to sell its products on credit, and as the ad damnum clauses of their complaints make clear, they seek damages for their projected lost profits between 1998 and 2003. See Compls. ¶¶ 6-7.

  American Meter's construction of the CISG is equally problematic. It is premised on an artificial and untenable Page 10 distinction between the "relationship" and supply provisions of a distributorship agreement — after all, what could be more central to the parties' relationship than the products the buyer is expected to distribute? American Meter's rhetorical view would also render it difficult for parties to create a general framework for their future sales without triggering the CISG's invalidating provisions. Such a construction of the Convention would be particularly destabilizing, not to mention unjust, in the context of the joint venture agreements at issue here. On American Meter's reading of the CISG, it could have invoked ordinary breach of contract principles if the plaintiffs had failed to exercise their best efforts to promote demand for its products, all the while reserving the right to escape its obligation to supply those products by invoking Article 14's price and quantity requirements. The CISG's provisions on contract formation do not compel such an expectation-defeating result.

  We therefore join the other courts that have examined this issue and conclude that, although the CISG may have governed discrete contracts for the sale of goods that the parties had entered pursuant to the joint venture ...


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