Gerard v. Almouli

• Decision Date: 12 October 1984
• Docket Number: D,No. 1239,1239
• Citation: 746 F.2d 936
• Parties: 39 UCC Rep.Serv. 1224 Laurence GERARD and Firejet America, Ltd., Appellees, v. Albert ALMOULI and Alchem, Ltd., Appellants. ocket 84-7121.
• Court: U.S. Court of Appeals — Second Circuit

Page 936

746 F.2d 936

39 UCC Rep.Serv. 1224

Laurence GERARD and Firejet America, Ltd., Appellees, v. Albert ALMOULI and Alchem, Ltd., Appellants.

No. 1239, Docket 84-7121.

United States Court of Appeals Second Circuit.

Argued May 7, 1984.

Decided Oct. 12, 1984.

Joseph H. Weiss, New York City (Morris Harary, New York City, of counsel), for appellants.

Howard Graff, New York City (Elaine Menlow, Sheryl Krongold, Block, Graff, Danzig, Jelline & Mandel, New York City, of counsel), for appellees.

Before OAKES, VAN GRAAFEILAND and PIERCE, Circuit Judges.

OAKES, Circuit Judge:

This is an appeal from the grant of a preliminary injunction requiring Albert Almouli and his company, Alchem, Ltd., to comply with the terms of a May 1978 agreement under which they granted an exclusive distributorship to Laurence Gerard and his company, Firejet America, Ltd., for "Firejet" fire extinguishers. The preliminary injunction was granted by the United States District Court for the Southern District of New York, Constance Baker Motley, Chief Judge. Almouli and Alchem appeal, and we affirm.

FACTS

Firejet America, a Delaware corporation with its principal office in New York, is the assignee of Gerard's dealership and licensee rights under his agreements with the appellants. Almouli is a resident of Israel and inventor of the aerosol dispenser prototypes for Firejet extinguishers. Alchem, an Israeli corporation, manufactures, sells and distributes Firejet extinguishers, owning patent and trademark rights on its products and name in Israel, the United States, and elsewhere.

The Firejet extinguisher is a small-sized halogenated aerosol fire extinguisher designed to take the place of the bulkier, heavier, more difficult to use, carbon-dioxide fire extinguisher with which we are all familiar. The Firejet extinguisher is easily portable, being part of the equipment of the Israeli armed forces as well as other military and police forces around the world, by virtue of a new halon 1211 extinguishant that can be packed at a low pressure. The Firejet extinguisher weighs so little because the pressure it requires is equivalent to the pressure of a Coca-Cola bottle, in contrast to that of the old, carbon-dioxide extinguishers, which have to weigh three times as much as the extinguishant to contain the high pressure of the extinguishant. Although the Firejet extinguisher does not have Underwriters Laboratories (UL) approval, a matter to which we will allude further below, it has passed all but one UL test.

The parties started doing business with one another in 1977 and entered into the May 1978 agreement--an agreement dated May 15, 1978, but shortly thereafter modified slightly (the agreement)--which both parties recognize as controlling. Article 3 of the agreement names Gerard and Firejet America as exclusive distributor of and agent and licensee for the Firejet extinguisher in North America, South America, Central America, Germany and Japan. Gerard was to provide Alchem an immediate cash payment of $50,000 to help obtain UL listing--an obligation that Gerard has performed. A schedule outlined in Article 2 requires Gerard to place orders for extinguishers "after UL's listing is secured" (emphasis supplied). Alchem agreed that, upon placement of the first $100,000 order, Gerard would receive full worldwide sales and franchise exclusivity except as to Israel and that Gerard could manufacture the Firejet line outside Israel, paying royalties depending upon the amount of sales and subject to certain minimums. Under Article 18 of the agreement, Alchem agreed that if UL listing was not obtained within seven months, more or less, after the date of the agreement, Gerard would be "commissionable" to eight percent of all Alchem Firejet sales except in Israel, up to a maximum of $25,000.

UL listing, a key to the agreement, is approval by the nonprofit independent testing agency whose standards are incorporated into many fire codes and referenced in the Fire Protection Handbook, said to be "the Bible" on fire prevention. The Handbook says that "only extinguishers which have been rated by the testing laboratories [UL] should be purchased, because otherwise it is difficult to know whether an extinguisher is reliable and effective." UL listing is not only considered by experts and the public to be an indication of safety, quality control, and reliability, but it is also required by many cities and states, branches of the military, and virtually all major retailing chains. Nevertheless, UL listing means very little, if anything, outside the United States. After six years Alchem has not yet obtained UL approval, not necessarily because of changing standards or because of the product, but simply because it is not unusual for UL approval to take this long a time--it is usually a minimum of three years and goes as high as fifteen. Apparently the product has been approved for sale, not only in Israel, but also in England, Switzerland, Greece, Israel, Japan, Korea and Singapore. Some $140,000 has been spent to obtain UL approval.

At the same time, while Firejet America has not sold any fire extinguishers, it has been preparing for sales, contacting customers and public authorities, and submitting prototype extinguishers to UL for testing.

Alchem claims that Gerard and Firejet America have not used good faith or their best efforts to sell the product and, thus, have breached implied covenants under common law and section 2-306 of the Uniform Commercial Code. ¹ The claim is that Gerard and Firejet America have not used their best efforts to sell Firejet extinguishers in exclusive distributorship territories where UL certification is not recognized or required. In connection with this claim it is suggested that, because the agreement is silent about appellees' obligations if UL certification is not obtained, parol evidence is admissible to show their lack of good faith and best efforts. Appellants also argue that they are entitled to relief from a mutual mistake concerning the obtainability of UL certification, because the parties contemplated UL certification within six to seven months when, in fact, it is usually obtained in a minimum of three years and a maximum of fifteen years. ²

The district court held that Firejet America was not required to purchase any extinguishers until UL approval was obtained and that the UL listing was an important, bargained-for feature of the agreement. The court further found that Alchem in 1980 attempted to terminate the agreement and subsequently sold non-UL-listed extinguishers in Firejet America's exclusive territory; that Alchem failed to provide certain relevant sales information to Firejet America under Article 12 of the agreement; and that Alchem failed to pay Firejet America the $25,000 required under Article 18 of the agreement when UL approval took longer than the seven months, more or less, specified.

On the basis of these facts, the court held that, because Articles 2 and 18 of the agreement were clear and unambiguous with respect to the parties' obligations, no parol evidence concerning the parties' intentions was admissible; that the agreement did not require appellees to make sales prior to Alchem's success in obtaining UL listing; that there was no mutual mistake of fact concerning the obligation to obtain the UL listing; that Article 18 of the agreement is not a termination clause; and that UL approval "is the bargained-for standard." The court then granted a preliminary injunction to Gerard and Firejet America on the basis of Jackson Dairy v. H.P. Hood & Sons, 596 F.2d 70 (2d Cir.1979).

DISCUSSION

Under the good faith and best efforts requirements of New York law, Feld v. Henry S. Levy & Sons, Inc., 45 A.D.2d 720, 356 N.Y.S.2d 336 (2d Dept.1974), aff'd, 37 N.Y.2d 466, 373 N.Y.S.2d 102, 335 N.E.2d 320 (1975); Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publishing Co., 30 N.Y.2d 34, 330 N.Y.S.2d 329, 281 N.E.2d 142 (1972); U.C.C. Sec. 2-306, the district court's finding that Firejet America had no obligation to sell non-UL-approved extinguishers is conclusive if not clearly erroneous. We agree with the district court that the contract anticipates that all sales are preconditioned on UL approval and that there is no question but that appellees satisfied whatever obligations they had to prepare for sales subsequent to UL approval.

Put another way, because the contract sets out explicit sales requirements, none of which applied before UL approval, it would be improper to read into the contract a contradictory sales requirement. See Cross Properties, Inc. v. Brook Realty Co., 76 A.D.2d 445, 430 N.Y.S.2d 820 (2d Dep't 1980). Indeed U.C.C. Sec. 2-306 requires the use of best efforts "unless [an] otherwise agreed upon" standard is set forth in the contract. See also U.C.C. Sec. 1-102(3) (same as to good faith standard).

Appellants' parol evidence argument falls by virtue of the same finding. As the district court found, the agreement explicitly outlines Firejet America's obligations, which come into play only after UL approval has been obtained. Since the contract states Firejet America's obligations, parol evidence is not admissible to increase those obligations.

The argument of appellants based on mutual mistake likewise fails once it is realized that the contract made explicit provisions for the possibility that UL approval would take longer than seven months--namely, under Article 18 as amended, Firejet would get up to a $25,000 refund on its $50,000 payment if approval were not forthcoming within seven months, more or less. Here as in Leasco Corp. v. Taussig, 473 F.2d 777, 781-82 (2d Cir.1972), the contract was entered into on the known assumption of a doubtful fact.

We also believe that the district court satisfied the Second Circuit's two-pronged test for granting a preliminary injunction. The likelihood of irreparable harm was demonstrated since appellees' damages may not be quantified....