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Century International Arms, Ltd. v. Federal State Unitary Enterprise State Corp.

October 22, 2001

CENTURY INTERNATIONAL ARMS, LTD., AND CENTURY INTERNATIONAL ARMS, INC., PLAINTIFFS,
v.
THE FEDERAL STATE UNITARY ENTERPRISE STATE CORPORATION 'ROSVOOROUZHENIE', F/K/A THE STATE CORPORATION FOR EXPORT AND IMPORT OF ARMAMENTS AND MILITARY EQUIPMENT 'ROSVOOROUZHENIE', DEFENDANT.



The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge

MEMORANDUM OPINION

Plaintiffs Century International Arms, Ltd. ("Century Canada") and Century International Arms, Inc. ("Century USA") (collectively, "Century") have sued defendant Federal State Unitary ("Rosvoorouzhenie") under a variety of theories relating to an alleged contract between Century Canada and defendant. Plaintiffs assert that in July and August 1993, Century Canada and Rosvoorouzhenie's predecessor, Oboronexport ("Oboron"), exchanged telexes that amounted to a contract whereby Century Canada would be the sole and exclusive purchaser of Russian SKS carbine rifles for distribution in the United States and Canada. Contending that defendant breached this exclusivity agreement by selling SKS carbines to KBI, Inc., a competitor of Century, plaintiffs seek damages based on breach of contract, promissory estoppel, fraudulent inducement, and fraud.

Before the Court are defendant's motion for summary judgment, as well as defendant's motion to apply Russian law. Plaintiffs oppose summary judgment and argue that either Canadian or District of Columbia law is applicable. Based on the pleadings and the record before it, the Court concludes that irrespective of which law applies, no legally enforceable exclusivity contract existed between the parties, and second, that plaintiffs' remaining claims are barred by the doctrine of res judicata. In addition, the Court affirms the arbitration award to defendant against Century Canada. Defendant's motion for summary judgment is therefore granted as to plaintiffs' complaint, and partial summary judgment is entered on defendant's counterclaim against Century Canada, but not against Century USA.

BACKGROUND

I. Factual Background

Century Canada is a Quebec corporation with its principal place of business in Montreal, Canada. Century USA is a Vermont corporation with its principal place of business in Florida. Both companies are licensed to engage in the purchase, importation and sale of arms and munitions, and sell predominantly in the United States. Defendant Rosvoorouzhenie is an agency or instrumentality of the Russian Federation, and is engaged in the export and import of arms and military equipment.

On January 25, 1993, Century Canada and Oboronexport ("Oboron"), a predecessor to Rosvoorouzhenie, entered into a contract (the "First Contract") for the sale of 100,000 SKS carbines to Century Canada. (Complaint ¶ 11.) On May 27, 1993, Century Canada and Oboron entered into another contract (the "Second Contract", or collectively, the "SKS Contracts") for additional sales of ammunitions. (Complaint ¶ 12.) The Second Contract was modified by several additional agreements executed by the parties in 1994. (Complaint ¶¶ 13-16.

In July and August 1993, plaintiffs allege that Century and Oboron "consummated an additional written contract whereby Rosvoorouzhenie covenanted and agreed with Century Canada that Century Canada would be the sole and exclusive purchaser of Russian SKS carbines for distribution in the United States and Canada" (the "Third Contract"). (Complaint ¶ 21.) Plaintiffs allege that three letters comprise this Third Contract. The first letter, dated July 21, 1993, is written on Oboron letterhead and responds to a July 14 fax from Century. *fn1 In paragraph 4 of that earlier fax, Century had asked Oboron, "What are our possibilities to sign sole exclusivity agreement on the SKS other items?" (Def. Ex. 17, ¶ 4.) In paragraph 4 of the July 21 letter, Oboron replies, "We inform you once more that V/O 'Oboronexport' can not sign such kinds of agreement, because this is the competence of the Government." (Def. Ex. 16, ¶ 4.) The July 14 fax also expresses some surprise that Century has "recently seen advertising in the U.S.A. for Russian SKS rifle from another dealer." (Def. Ex. 17, ¶ 3.) In its July 21 response, Oboron notes, "Unfortunately, we have the information that our competitors have held negotiations concerning delivery of SKS with one of the American firms and, moreover, on more profitable terms for Russia. However, we are doing our best not to carry out these deliveries." (Def. Ex. 16, ¶ 3.)

Plaintiffs argue that the July 14 fax was their initial offer of an exclusivity agreement, and that the July 21 letter constitutes a rejection of that offer because "this is the competence of the Government." (Def. Ex. 16.

The next letter that plaintiffs contend constitutes the Third Contract is dated July 22, 1993, and was sent by Century to Oboron. That letter references the July 21 letter.

You advised our competitors have held negotiations with another American firm concerning SKS rifles. When we were together, I was left with the impression we bought all SKS rifles available. It is very important that you advise what quantity of SKS rifles, if any, have been delivered to another firm. We need to know name of firm price. It would be in our best interest if this can be stopped. (Def. Ex. 18, ¶ 5.)

Plaintiffs assert that this paragraph constitutes a renewal of their exclusivity offer. In response, defendant argues the letter does not establish an offer by Century. Rosvoorouzhenie cites to several ambiguities in this letter - including Paragraph 5-A, which asks, "Was our contract approved by the Russian government in its entirety?" - in support of its contention.

The final letter in the series is dated August 11, 1993, and is addressed from Oboron to Century. Paragraph 5 of the letter responds to the above excerpt. "We are ready to inform you that our Government has approved the business cooperation only with your firm. We have no information about other decisions." (Def. Ex. 19, ¶ 5.) Plaintiffs contend that this statement constitutes an acceptance by Oboron of Century's exclusivity offer, and that such a contract was therefore formed by this exchange of letters. Defendant disagrees, arguing that this language is legally insufficient to form a contract, or in the alternative, any such contract is unenforceable under Russian law.

Based on this August 11 letter, plaintiffs argue that defendant breached an exclusivity contract as a result of the sale of arms by another Russian entity, Spetsvneshteknia ("Spets"). In particular, in late 1993 or early 1994, defendant was formed as the successor to Oboron, Spets and a third company, G.U.S.K. (Def. Statement of Facts ¶ 6; Pl. Response ¶ 6.) Even after the formation, however, Oboron and Spets may have continued to operate as separate entities for approximately 18 months, until the acquisition and combination of the companies could occur pursuant to Russian Law. (Id.) Prior to the formation of Rosvoorouzhenie, Spets had entered into a contract for the sale of SKS rifles with KBI, Inc., a competitor of Century. (Def. Statement of Facts ¶ 22.) Like Oboron, Spets was a licensed exporter of arms and military equipment. Spets and KBI performed under their contract from May 1994 to December 1994. Plaintiffs allege that this performance by Spets constitutes a breach of the Third Contract, and on this basis, plaintiffs seek compensatory, special, and consequential damages, including lost profits, punitive damages, interest, and court costs.

II. Procedural History

Not surprisingly, this suit does not exist in a vacuum. It followed closely on the heels of an arbitration that arose from plaintiff Century Canada's failure to make full payments in 1995 for goods delivered under the Second Contract. Pursuant to a binding arbitration clause, *fn2 Rosvoorouzhenie initiated arbitration proceedings on May 30, 1996, before the International Court of Arbitration in Zurich, Switzerland (the "Tribunal"), claiming damages as a result of Century Canada's failure to make full payment for the goods. (Def. Ex. 41, Rosvoorouzhenie v. Century Int'l Arms, Ltd., Case No. 9117/V/AMW, ¶ 7 (Int'l Comm. Arb. 1998) [hereinafter Rosvoorouzhenie]).

Century Canada filed a counterclaim for losses suffered resulting from the delivery of "non-conforming goods." In support of this claim, Century Canada alleged, inter alia, that it and Rosvoorouzhenie had an exclusive contract for the import of SKS carbines and that Century Canada had entered into contracts with Rosvoorouzhenie only because it saw an opportunity to become the sole importer and seller of this product. Id. ¶¶ 52- 54. Century contended that "during the course of negotiations of [the First Contract and the Second Contract, Rosvoorouzhenie] continually represented to [it] (i) that [Rosvoorouzhenie] was controlling all exports of Russian SKS carbines and (ii) that [Century] would be the sole United States and Canadian importer and purchaser of such carbines." Id. ¶ 54. Accordingly, Century argued that those representations of exclusivity became part of the Second Contract. Id.

Century contended that these representations were made both orally and in writing as early as 1993 and continued thereafter. First, it argued that Rosvoorouzhenie "orally represented . . . the right of exclusivity from the beginning of their negotiations, and inspired in [Century] the understanding that it would control all exports from the Russian Federation of surplus SKS carbines to other countries, in particular the United States." Id. ¶ 80. Next, Century asserted that it decided to enter into the Contracts only because it saw an opportunity to become the sole importer and seller of surplus Russian SKS carbines in the United States and it was on such assumption that [Century] had been confident to make a profitable business out of it. In dealing with [Rosvoorouzhenie], [Century] therefore always stressed the importance to be the only distributor in North America for unused surplus Russian SKS carbines. [Century] supports its allegation, inter alia, by submitting a letter from [Rosvoorouzhenie] dated 6 April 1994 which provides "that at present our firm is delivering this equipment only to you." Id. ¶ 55 (emphasis omitted).

Century also "referred to a number of letters addressed to [Rosvoorouzhenie] and to several replies received from [Rosvoorouzhenie]" to support its allegation that "the right of exclusivity was . . . subsequently confirmed in writing." Id. ¶ 81 (internal citations omitted).

In response, Rosvoorouzhenie denied "that it ever made any representation of exclusivity towards [Century]. Moreover, [Rosvoorouzhenie] points out that Mr. Sucher, Chief Executive Officer of [Century], had specific knowledge that [Rosvoorouzhenie's] predecessor Oboron did not have a monopoly and was not in a position to control the arms market." Id. ¶ 56. Rosvoorouzhenie also submitted the statement of a witness who denied any oral representations of exclusivity and stated that for Rosvoorouzhenie to grant such a right would violate Russian law. Id. Finally, Rosvoorouzhenie argued that the Second Contract contained a written modification clause and an integration clause, which showed the parties' specific intent to preclude any future oral alterations or amendments, and to supersede all prior negotiations or agreements. Id. ¶ 57.

Faced with these arguments, the Tribunal first decided that the substantive law of Russia should apply to the action, based on the "center of gravity" test. *fn3 Under that standard, the "preponderant connecting factor" determines which jurisdiction's law will govern, and in the case of a sales contract, the domicile of the seller - in this case, Russia - was considered to be determinative. Id. ¶¶ 48-49.

Next, the Tribunal determined that there were two issues:

Did the Parties contract for an exclusive right for [Century] to import Russian SKS carbines in the United States? And: did [Rosvoorouzhenie] or its predecessor represent that it would control all Russian exports of carbines to the U.S. market in the sense that it would see to it that no other Russian firm would effectuate supplies to a U.S. importer other than [Century]? Id. ¶ 77.

The Tribunal therefore examined two facets of the alleged exclusivity agreement: "First, regarding the aspect that the Russian supplier . . . had represented to be able to control all Russian exports of surplus carbines to the U.S. market . . . and second, that its Russian supplier . . . will not, itself, sell such carbines to any other Canadian or U.S. firm, except [Century]." Id. ¶ 82.

The Tribunal then ruled on these issues. "Looking at the wording of [the First and Second Contracts], nothing therein supports [Century's] position that the Parties had contracted for an exclusive right to market the Russian SKS carbines in the United States." Id. ¶ 79. Next, the Tribunal found that the Second Contract contained clauses that made it impossible for Century Canada to rely on oral representations and fax correspondence to support an argument that the contracts had been amended or supplemented. Id. ¶ 93. The contract contained a merger clause (Def. Ex. 13, ¶ 9.5), the purpose of which was to ensure "that only the terms as reflected in the signed agreement [would] form part of the contractual obligations, thus excluding any extrinsic understandings, oral explanations, assurances, or representations during prior negotiations which are not as such reflected in the written contract." Rosvoorouzhenie, at ¶ 86. And the contract had a written modification clause (Def. Ex. 13, ¶ 9.3), which had "the same effects as the merger clause with regard to any future negotiations, promises, and any other extrinsic evidence which might otherwise be adduced for supplementing, altering, or contradicting the written contract." Rosvoorouzhenie, at ¶ 89. All modifications to the pre- existing contracts were therefore required to be signed and in writing. Id. ¶ 91.

The Tribunal held:

The combination of the two discussed clauses, i.e. the merger clause reflected in Article 9.5 of the Contract and the written modification clause as per Article 9.3 of the Contract, make it impossible that, in the instant case, [Century] could rely on any kind of verbal promises or assurances, or any kind of written references which are not at the same time also reflected in an Amendment or Supplement to the Contract.

The evidentiary proceedings conducted in the present case have corroborated the above analysis, leading to the clear conclusion that a legally binding exclusivity had not been promised by [Rosvoorouzhenie] or ...


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