Westerbeke Corp. v. Daihatsu Motor Co., Ltd.

Decision Date28 August 2002
Docket NumberDocket No. 01-9224.
Citation304 F.3d 200
PartiesWESTERBEKE CORPORATION, Petitioner-Appellant, v. DAIHATSU MOTOR CO., LTD., Respondent-Appellee.
CourtU.S. Court of Appeals — Second Circuit

John Kenneth Felter, Goodwin Procter LLP, Boston, MA, for appellant.

Allen C.B. Horsley, Leboeuf, Lamb, Greene & MacRae (Jay G. Safer, Daniel F. Lula, on the brief), Boston, MA, for appellee.

Before McLAUGHLIN, F.I. PARKER, and SOTOMAYOR, Circuit Judges.

SOTOMAYOR, Circuit Judge:

After a lengthy arbitration spanning several years, during which the arbitrator conducted thirty-one days of hearings, reviewed 5,500 pages of transcripts, and received over 400 exhibits, petitioner Westerbeke Corporation ("Westerbeke") prevailed against respondent Daihatsu Motor Company ("Daihatsu") in its action for breach of a sales agreement. Westerbeke subsequently filed an action in the United States District Court for the Southern District of New York (Marrero, J.), seeking to confirm the $4 million arbitration award pursuant to 9 U.S.C. § 9. Daihatsu moved in turn to vacate the award pursuant to 9 U.S.C. § 10(a)(4). The district court held that, by awarding expectancy damages for a breach of a preliminary agreement, the arbitrator acted in manifest disregard of New York law. It denied Westerbeke's petition, granted Daihatsu's motion to vacate, and remanded to the arbitration tribunal for further proceedings on the damages issue.

We hold that the district court did not accord the proper deference to the arbitrator's factual determinations and improperly set aside his interpretation of the sales agreement as a contract with a condition precedent, rather than as a preliminary agreement. As Daihatsu has not met its burden of demonstrating that this underlying contractual interpretation was itself in manifest disregard of law, it cannot claim that the arbitrator manifestly disregarded New York law by refusing to apply principles that dictate that only reliance damages may be awarded for breach of a preliminary agreement.

Daihatsu argues that the award may alternatively be vacated because the arbitrator (1) acted in manifest disregard of the "law of the case" doctrine; (2) exceeded his authority; and (3) issued an award that was not drawn from the "essence of the agreement." As none of these additional grounds for vacatur has merit, we reverse the judgment of the district court and remand with instructions for the district court to confirm the arbitral award.


In the early 1980s, Westerbeke, a Delaware corporation engaged in the production and marketing of generators, marine generators and marine propulsion engines, expressed interest in doing business with Daihatsu, a subsidiary of the Toyota Motor Company that manufactures engines and engine components. Westerbeke purchased carcass engines from other manufacturers and "marinized" them for resale;1 Daihatsu produced gasoline-powered carcass engines suitable for marinization. This natural alignment of interests created the prospect of a mutually beneficial business partnership. Accordingly, in 1983, Westerbeke commenced negotiations with Daihatsu for a long-term sales agreement under which Westerbeke would purchase Daihatsu's carcass engines for eventual marinization and incorporation into Westerbeke's product line. Westerbeke planned to sell its marinized engines both through a distribution network and directly to builders of boats. Westerbeke Corp. v. Daihatsu Motor Co., 162 F.Supp.2d 278, 280 (S.D.N.Y.2001).

The parties ultimately entered into a Component Sales Agreement ("CSA") on May 1, 1985. Under the CSA, Daihatsu agreed to supply Westerbeke with certain contractually-defined engines on an exclusive basis in the United States and Canada. Moreover, Westerbeke also possessed some rights with respect to Daihatsu's future engine models. Article 3.2 of the CSA provided Westerbeke with a limited right of first refusal:

When DAIHATSU desires to sell in the Territory other water-cooled gasoline engines of fewer than four cylinders for the Products than the Engines [sic]. WESTERBEKE shall have the first refusal during the first six months after the date of DAIHATSU's first offer of the Estimate for the said engines. During the said six months of the first refusal for WESTERBEKE, DAIHATSU shall not offer the said engines to any third party in the Territory and if DAIHATSU/NM and WESTERBEKE come to an agreement on the specifications, prices, minimum purchase quantities, delivery terms, etc. of the said engines, such engines shall be added to the Engines as defined by the [sic] paragraph 1 of the [sic] Article 2 of this agreement. In such case, if need be, the parties shall amend the provisions of this agreement relating to the said agreement on the Engines added.

After the CSA's expiration, it was twice renewed for additional two-year terms. Yet relations between the two companies deteriorated in the early 1990s. At that time, Daihatsu developed a new water-cooled, three-cylinder gasoline engine, the E-070. Instead of offering to sell this new product to Westerbeke, Daihatsu entered into an agreement with another North American distributor, the Briggs & Stratton Corporation ("B & S"). This agreement granted B & S the exclusive right to distribute the E-070.

Westerbeke eventually learned of Daihatsu's business arrangement with B & S through advertisements in trade publications. Id. at 282. Westerbeke was eager to gain access to Daihatsu's new engine, particularly as the E-070, unlike Westerbeke's then-current product line, could be sold in the United States under the new emissions standards promulgated by the federal Environmental Protection Agency and the California Air Resources Board.

In late 1993, the parties entered into negotiations for the sale of the E-070 engine. No agreement was ever finalized, however, because Daihatsu conditioned the sale of the engines on Westerbeke's renunciation of its rights of first refusal and exclusivity. In October 1994, Daihatsu provided Westerbeke with timely notice that it did not desire to renew the CSA. The CSA was therefore terminated as of April 30, 1995. Under Section 14.2 of the CSA, Westerbeke was allowed to put in a final order for all Daihatsu engines that fell within the scope of the CSA, excluding the E-070.

In 1997, Westerbeke filed actions in the Norfolk Superior Court and the United States District Court for the District of Massachusetts. Westerbeke filed a separate action against B & S for its role in the dispute between the parties. All of these actions were voluntarily dismissed or stayed when Westerbeke invoked Article 23 of the CSA, which required that all disputes be resolved by arbitration pursuant to the Japan-American Trade Arbitration Agreement of September 16, 1952. Pursuant to the CSA, the situs of arbitration was New York.

The arbitrator bifurcated the proceedings into a liability and a damages phase. The liability phase was almost exclusively focused on the question of whether the E-070 was an engine within the meaning of Article 3.2. The arbitrator therefore examined the facially ambiguous2 language of Article 3.2: "When DAIHATSU desires to sell in the Territory other water-cooled gasoline engines of fewer than four cylinders for the Products than the Engines." The parties had advanced two separate readings of that phrase. Westerbeke argued that its right of first refusal was triggered if a new engine was suitable for use in Westerbeke's marine generator sets or marine propulsion engines. Daihatsu, in contrast, contended that a new engine fell within the scope of Article 3.2 only if Daihatsu "desired" to sell the engine for use in marine generator sets or marine propulsion engines. Finding both of these readings plausible, the arbitrator ultimately concluded that Article 3.2 had been adopted in order to secure Westerbeke's access to a continuous supply of engines on an exclusive basis. The arbitrator therefore read the provision in favor of Westerbeke. The arbitrator also noted that, because Daihatsu had drafted Article 3.2, it would be fair to interpret any ambiguity in the provision against Daihatsu.

In his Interlocutory Award memorializing his liability rulings, the arbitrator stated:

The primary issue for decision is whether respondent Daihatsu Motor Company, Limited violated the contractual rights of claimant Westerbeke Corporation in refusing to negotiate for the inclusion of the E-070 engines as Engines within the meaning of the 1985 Component Sales Agreement between the two parties. The Tribunal holds that it did.

Despite this reference to a "[refusal] to negotiate," the parties had not up to that point briefed and the arbitrator did not explicitly rule on whether Article 3.2 of the CSA constituted a preliminary agreement to agree.3 In fact, the arbitrator also used language suggesting that Article 3.2 was a contract with condition precedent. For example, the arbitrator described the negotiation of "such matters as quantit[y]... and delivery terms as a precondition to an engine's [sic] becoming an Engine," and noted that "Westerbeke would have the right of first refusal on engines meeting a certain definition, subject to stated conditions."

After the arbitrator handed down his Interlocutory Award, the parties briefed the damages issue. At the arbitrator's request, Daihatsu submitted a supplemental letter brief on the applicability of Goodstein Constr. Corp. v. City of New York, 80 N.Y.2d 366, 590 N.Y.S.2d 425, 604 N.E.2d 1356 (1992), which prohibits the award of expectancy damages for the breach of a preliminary agreement. Daihatsu argued that, given the arbitrator's finding at the liability phase that Daihatsu had violated Westerbeke's contractual rights by "refusing to negotiate," Goodstein obviated all of Westerbeke's damages as a matter of law. Westerbeke countered that Goodstein did not apply...

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