United States District Court, Northern District of Illinois, E.D
February 27, 1985
NEWMAN-GREEN, INC., ET AL., PLAINTIFFS,
ALEJANDRO ALFONZO-LARRAIN R., ET AL., DEFENDANTS.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Newman-Green, Inc. ("NGI") has charged Newman-Green de
Venezuela ("NGV") and NGV shareholders Alejandro
Alfonzo-Larrain R., Irene Larrain de Caplan, Rafael Tudela,
Alberto Tudela and William Bettison (collectively
"Guarantors"*fn1) with violations of various agreements
involving NGV's manufacture and sales in Venezuela of NGI's
patented aerosol valves. Guarantors now move under
Fed.R.Civ.P. ("Rule") 56 for summary judgment as to Count I of
NGI's Amended Complaint. For the reasons stated in this
memorandum opinion and order, their motion is denied.
NGI, an Illinois corporation, has manufactured and sold
patented aerosol valves for at least 30 years (NGI President
Edward H. Green, Sr. Affidavit ["Green Aff."] ¶ 1). During the
early 1970's NGI developed a business relationship with
Guarantors out of a mutual desire to organize a Venezuelan
company to manufacture and sell Newman-Green aerosol valves in
Venezuela under an exclusive license from NGI. NGV was thus
born. NGI owns 25% of NGV's capital stock, and Guarantors own
the rest either directly or indirectly.
Following negotiations in both Illinois and Venezuela
(Pl.Mem. 4), on June 13, 1974 NGI and NGV entered into a
License Agreement (Def.EX. A). Because of
then-recently-enacted Venezuelan legislation, the parties
recognized the License Agreement would not become enforceable
unless and until it was approved by SIEX, an administrative
arm of the Venezuelan government (see Pl.Ex. A). NGV and
Guarantors did not want to delay commencement of operations
until approval was obtained (in which respect the lack of any
SIEX track record made the timetable uncertain), while NGI was
unwilling to risk any sale of its machinery or any provision
of know-how to NGV absent further contractual assurances
(Green Aff. ¶ 4). That gap was bridged by NGV's and Guarantors'
tendering of two additional letter agreements:
1. NGV's Confidentiality Agreement (App. A)
ensuring protection of NGI's trade secrets; and
2. Guarantors' Guaranty Agreement (App. B)*fn2
ensuring payment of royalties to NGI.
Both agreements were executed July 11, 1974. NGV president
Alberto Tudela had drafted the Confidentiality Agreement,
while it appears NGI attorney Perry Carvellas (Def.R.Mem. 9)
had drafted the Guaranty Agreement.
After the Confidentiality Agreement and Guaranty Agreement
were signed, NGI began performance by:
1. selling NGV valve-assembly machinery and
valve components; and
2. providing technical training and assistance
to NGV, both at NGI's Illinois plant and NGV's
NGV began manufacturing and selling aerosol valves July 1,
1975. Between 1975 and 1980 NGV's sales revenue from the
valves exceeded $7 million.
SIEX never approved the License Agreement. In December 1977
SIEX indicated it would do so with substantial modifications
(Def.Ex. 4), but NGI found the changes unacceptable and they
were never made.
Despite its large sales volume, NGV never made any royalty
payments to NGI. NGV apparently created a reserve fund for
that purpose (Def.Ex. 5), but largely because of the SIEX
problem the parties never worked out a mutually acceptable and
legal way to transfer the funds to NGI (Def.Exs. 5, 7, 8).
On January 25, 1979 NGI terminated and withdrew the
still-unapproved License Agreement and also terminated its
relationship with NGV. NGV continued to manufacture and sell
the aerosol valves until May 1980. Because NGI never received
royalty payments from NGV, NGI demanded royalty payments of
approximately $350,000 from Guarantors pursuant to the
Guaranty Agreement. Guarantors have refused, and NGI seeks
enforcement of that obligation in Count I.
Guarantors' summary judgment theory is that Venezuelan law
controls the validity of the Guaranty Agreement and renders it
unenforceable.*fn3 NGI has not disputed the outcome under
Venezuelan law, contending instead that Illinois law applies
and renders the Guaranty Agreement enforceable.
Summary Judgment Considerations
Rule 56 requires this Court to view the underlying facts in
the light most favorable to NGI. Hermes v. Hein, 742 F.2d 350,
353 (7th Cir. 1984). As movants, Guarantors have the burden of
showing there is no genuine issue of material fact. Egger v.
Phillips, 710 F.2d 292, 296 (7th Cir. 1983). It is an
understatement to say they have failed to meet that burden.
Guarantors are entitled to summary judgment only if they
establish one of two results as a matter of law:
1. Under applicable choice-of-law rules,
Venezuelan law controls (and negates)
enforceability of the Guaranty Agreement.
2. If instead Illinois law controls, it
similarly renders the Guaranty Agreement
As this opinion will reflect, however, each of those
propositions ultimately depends on the intention of the
parties to the Guaranty Agreement.
Under applicable Illinois law*fn4 the question of intent
(except, of course, as intent may be manifested by an
unambiguous contract) is an issue of fact. Graebe v. Graebe,
95 Ill. App.3d 1144, 1150, 51 Ill. Dec. 537, 542, 420 N.E.2d 1095,
1100 (5th Dist. 1981). And on that score analysis demonstrates
that precisely the opposite of what Guarantors must prove is
true: Either (1) the choice of law and the type of guaranty
expressed in the Guaranty Agreement both favor NGI's position
as a matter of law or (2) a fortiori there are genuine issues
of material fact as to both those subjects.
Parties' Choice of Law
In this diversity action Klaxon Co. v. Stentor Electric
Manufacturing Co., 313 U.S. 487, 496-98, 61 S.Ct. 1020,
1021-22, 85 L.Ed. 1477 (1941) requires this Court to look to
Illinois' conflict-of-laws rules. One such rule permits parties
to a contract to specify the law applicable to
their agreement. Hofeld v. Nationwide Life Insurance Co.,
59 Ill.2d 522, 529, 322 N.E.2d 454, 458 (1975). Only when parties
fail to make a valid choice of law do courts apply the
traditional conflict-of-laws rules or engage in the "most
significant contacts" analysis of the Restatement (Second) of
Conflict of Laws ("Restatement") § 188 (1971).
Each of the three agreements involving NGI, NGV and
Guarantors contains a choice-of-law provision, and each
prescribes Illinois law:
1. License Agreement § XXIII: "This agreement
shall be construed under the laws of the State of
Illinois, United States of America."
2. Confidentiality Agreement: "This agreement
is to be interpreted under the laws of the State
of Illinois, U.S.A."
3. Guaranty Agreement: "The agreement is to be
interpreted in accordance with the laws of the
State of Illinois."
Obviously recognizing their task is one suited to Orwellian
Doublethink — turning the natural meaning of language on its
head, as in "Peace is War" and "Love is Hate" — Guarantors
seek to convert the quoted provision of the Guaranty Agreement
into a decision by the parties that Venezuelan law rather than
Illinois law provides important rules of decision here. They
contend the agreements chose Illinois law only for the purpose
of interpreting the meaning of the agreements, but the parties
chose Venezuelan law to govern enforceability of all the
That extraordinary notion is built on an obviously false
premise. First Guarantors point to the NGV-NGI recognition in
the Confidentiality Agreement that the License Agreement's
enforceability depended on Venezuelan law:
It is understood that because of recent enacted
legislation the license agreement will not become
enforceable until such time as the provisions of
the agreement are approved by the Venezuelan
Of course that statement of understanding is not itself a
choice-of-law agreement. Nevertheless Guarantors argue it
indicates an understanding that all three actual choice-of-law
provisions were meant to reserve questions of enforceability
to Venezuelan law. Consistency demands, they say, reading all
three choice-of-law clauses in the same manner.
Were that indeed so, it would merely reconfirm the validity
of Emerson's aphorism:
Foolish consistency is the hobgoblin of little
But Guarantors' contention is obviously flawed. To return to
this Court's earlier allusion, this is 1985 not 1984, and
Guarantors' indulging in Doublethink has convinced no one
(excepting perhaps themselves).
Both the sequence of the agreements and the very language
cited by Guarantors lead to a conclusion wholly contrary to
that urged by them. NGV and NGI first executed the License
Agreement. Obviously they quickly realized (Green Aff. ¶ 4 and
Carvellas Aff. ¶ 4 confirm this) the problems that would be
posed by any attempted performance under an agreement that was
prevented from going into effect by the newly-enacted
legislation.*fn5 Thus their prompt negotiation and execution
of the Confidentiality and Guaranty Agreements — separate and
distinct contracts from the earlier License Agreement —
betoken a meaning for the quoted language precisely the
opposite from that now suggested by Guarantors. Consistently
with that common-sense analysis, NGI says the very reasons it
insisted on execution of the Confidentiality and Guaranty
Agreements were (1) its understanding the License
Agreement was unenforceable in Venezuela (Green Aff. ¶ 4,
Carvellas Aff. ¶ 4) and (2) its desire to bind Guarantors and
NGV to undertakings that were enforceable.
Acutely aware the Guaranty Agreement would be (or was at
least likely to be) unenforceable if it had to be sued on in
Venezuela, NGI goes on to argue, the parties must have
intended their choice of Illinois law to extend to
enforceability. Were that not the case, the result would be
that the parties deliberately went through a meaningless
charade: They negotiated, and then acted in reliance on,
separate agreements knowing they could have no separate
viability. That is of course absurd. It impermissibly ascribes
no independent substantive effect at all to contracts that the
contracting parties plainly treated as critical preconditions
to their commencement of performance.
No language in the Guaranty Agreement expressly contrasts
"interpretation" with "enforceability" or specifies that the
latter is to look to a different source of law than the
parties prescribed for the former. Of course parties are
sometimes more precise than were the parties here in
addressing (or appearing to address) choice of law as to
enforceability.*fn6 See, e.g., Bense v. Interstate Battery
System of America, Inc., 683 F.2d 718, 722 (2d Cir. 1982)
("This agreement is to be governed by and construed according
to the laws of the State of Texas"); Mon-Shore Management, Inc.
v. Family Media, Inc., 584 F. Supp. 186, 193 (S.D.N.Y. 1984)
("[A]ll rights and obligations of the parties hereunder shall
be governed as to validity, construction, and in all other
respects by the law of New York").
However the absence of a provision dividing up the choice of
law into component parts gives Guarantors no real comfort.
Even apart from the consideration identified in n. 6, courts
have read choice-of-law clauses much like that in the Guaranty
Agreement as extending to issues of enforceability. See, e.g.,
Boatland, Inc. v. Brunswick Corp., 558 F.2d 818, 821-22 (6th
Cir. 1977) (agreement to be "interpreted and construed
according to" Wisconsin law); C.A. May Marine Supply Co. v.
Brunswick Corp., 557 F.2d 1163, 1165 (5th Cir. 1977) (per
curiam) (same). Finally, Keller v. Brunswick Corp., 54 Ill. App.3d 271,
275, 11 Ill.Dec. 873, 875, 369 N.E.2d 327, 329 (4th
Dist. 1977) recognizes the possibility of a bifurcated choice
but does not — as defendants contend — support the assertion
the parties here chose one jurisdiction's law for
interpretation and another's for enforceability. No Illinois
case of which this Court is aware (and neither of the
non-Illinois cases cited in Keller):
1. finds the parties made such a bifurcated
2. applies the law of two different
jurisdictions to the same contract.
Illinois courts treat the meaning of an unambiguous contract
as a question of law for the court. National Tea Co. v.
Commerce & Industry Insurance Co., 119 Ill. App.3d 195,
199-200, 74 Ill.Dec. 704, 708, 456 N.E.2d 206, 210 (1st Dist.
1983). That principle could well mandate a definitive ruling in
favor of NGI (not Guarantors) on Count I, for this Court would
be hard pressed to find an ambiguity in the Guaranty Agreement.
But prescinding that question, which need not be decided on the
present motion, at the very worst an ambiguity might be found
in the contract. And in that event NGI has established a
genuine issue of fact as to whether the parties intended
Illinois law to govern enforceability of the Guaranty
Agreement. Resolution of that factual issue would ultimately
require a weighing of the language used, the conduct of the
parties and the broader context of the agreement.*fn7 Graebe,
95 Ill. App.3d at 1150,
51 Ill.Dec. at 542, 420 N.E.2d at 1100.
To be sure, the choice-of-law inquiry does not end with a
determination of the parties' intent, for Illinois courts do
not automatically give effect to contracting parties' express
choice of law. Most notably, Illinois cases have often said
the chosen law must not violate a fundamental public policy of
Illinois.*fn8 Mell v. Goodbody & Co., 10 Ill. App.3d 809, 813,
295 N.E.2d 97, 100 (1st Dist. 1973). That "public policy"
doctrine, which was limited and sharply criticized in
Champagnie v. W.E. O'Neil Construction Co., 77 Ill. App.3d 136,
139-43, 32 Ill.Dec. 609, 611-14, 395 N.E.2d 990, 992-95 (1st
Dist. 1979), does not apply here in any event. By definition
the application of Illinois law ensures, rather than
imperiling, the fulfillment of Illinois public policy.
More precisely, the question is whether an Illinois court
would defer to Venezuelan law on enforceability — in spite of
the parties' choice of Illinois law — to protect a Venezuelan
public policy. That possibility is expressed in Restatement §
187(2)(b), under which the parties' choice of law will not be
application of the law of the chosen state would
be contrary to a fundamental policy of a state
which has a materially greater interest than the
chosen state in the determination of the
particular issue and which, under the rule of
§ 188, would be the state of the applicable law in
the absence of an effective choice of law by the
True enough, no Illinois court has ever adopted (or even
discussed) that rule. However, it bears consideration in light
of the Illinois courts' adoption of the Restatement's approach
in other areas of law*fn9 and their increasing reliance on
the Restatement in the realm of contracts.
Champagnie, 77 Ill. App.3d at 144-46, 32 Ill.Dec. at 615-16,
395 N.E.2d at 996-97; American Food Management, Inc. v. Henson,
105 Ill. App.3d 141, 147, 61 Ill.Dec. 122, 127, 434 N.E.2d 59,
64 (5th Dist. 1982).
Even if such scrutiny led to a decision Restatement § 187
were to be applied here, Guarantors would fare no better. Let
us assume arguendo the SIEX legislation was a Venezuelan law
aimed at protecting that country's nationals from overreaching
by foreign investors. But Venezuela's assumed interest in thus
sheltering its nationals cannot be deemed "materially greater"
than Illinois' interest in protecting its citizens from the
unjust enrichment of foreigners who obtain valuable property
(by entering into contracts they do not intend to honor) and
try to escape just liability for its payment.*fn10 And the
latter result is all the Guaranty Agreement seeks to avoid.
Accordingly Restatement § 187(2)(b) would not invalidate the
parties' choice of Illinois law, even if Venezuelan law
prevailed in the "most significant contracts" balancing of
Restatement § 188.
Enforceability of the Guaranty Agreement under Illinois Law
That leaves for decision whether an Illinois court applying
Illinois law would find the Guaranty Agreement enforceable.
Guarantors assert a guarantor's obligation must be
co-extensive with that of the principal, citing State Bank of
Blue Island v.
Benzing, 383 Ill. 40, 54-55, 48 N.E.2d 333, 340 (1943);
Mercantile Trust Co. of Illinois v. Kastor, 273 Ill. 332,
342-43, 112 N.E. 988, 992 (1916); and Dormeyer v. Haffa,
343 Ill. App.? 177, 180-81, 98 N.E.2d 532, 534 (1st Dist. 1951). If
so, the unenforceability of the License Agreement against NGV
would compel unenforceability of the Guaranty Agreement against
Once again Guarantors try to stretch case law beyond its
proper bounds. All the cited cases involved only guaranties of
performance that expressly incorporated the terms and
conditions of the principal obligation. But guaranties of
payment, such as that at issue here, are not logically limited
in the same way.
After all, guaranty agreements are simply contracts. As such
they may be subject to conditions established by the parties
(State Bank of East Moline v. Cirivello, 74 Ill.2d 426, 431, 24
Ill.Dec. 839, 841, 386 N.E.2d 43, 45 (1978); Lawndale Steel Co.
v. Appel, 98 Ill. App.3d 167, 170, 53 Ill.Dec. 288, 291,
423 N.E.2d 957, 960 (2d Dist. 1981)), or they may be unconditional,
independent undertakings (Beebe v. Kirkpatrick, 321 Ill. 612,
616, 152 N.E. 539, 540-41 (1926); Brown Plastering Co. v.
Gottschalk, 261 Ill. App. 147, 152 (1st Dist. 1931)). Brown for
example held that when a guaranty is "founded upon a new and
independent consideration" it becomes an independent contract
whose enforceability is unaffected by the validity vel non of
the principal obligation. Such is the case, at least under
NGI's version of the facts, with the guaranty at issue here.
In relevant part the Guaranty Agreement reads:
In consideration for the execution of the license
agreement dated June 13, 1974 from Newman-Green,
Inc., Addison, Illinois to Newman-Green de
Venezuela, the undersigned personally,
individually and/or collectively agree that they
guarantee the payment to Newman-Green, Inc. of an
amount of money up to the 5% royalty set forth in
the license agreement and for the period of time
specified in the license agreement.
Nowhere does the guaranty adopt all the terms and conditions
of the License Agreement, nor does it expressly condition
enforceability on the validity of the License Agreement.
Indeed, just as with Guarantors' argument dealt with earlier
in this opinion, it would be absurd to imply such a condition
— which would frustrate the entire purpose for which the
guaranty was requested and given.
Finally, no significance is to be accorded the recital of
"execution of the license agreement" as consideration for the
Guaranty Agreement. Both NGI's version of the facts and the
parties' conduct amply demonstrate additional and independent
consideration to support the guaranty. According to the Green
and Carvellas affidavits, NGI was unwilling to begin
performance of the License Agreement without having received
the additional assurances of the Guaranty and Confidentiality
Agreements. NGI's promise to provide NGV with machinery,
information and training, despite the uncertainties
surrounding the License Agreement, constituted independent
consideration sufficient to render the guaranty an independent
contract. Were there any doubt on that score, the fact of
NGI's having performed as it promised would erase that doubt.
Once more this Court could well make an ultimate finding in
NGI's favor on the issue of enforceability. For current
purposes that is unnecessary. Suffice it to say NGI has raised
a genuine issue of fact that precludes summary judgment.*fn11
At a minimum, NGI has raised genuine issues of material fact
concerning the parties' intentions as to their choice of law
and the conditions of enforceability of the
Guaranty Agreement. Guarantors are clearly not entitled to
judgment as a matter of law. Summary judgment on Complaint
Count I accordingly must be and is denied.
July 11, 1974
Mr. Edward H. Green,
57 Interstate Road
Addison, Illinois 60101
Re: License Agreement
Newman-Green de Venezuela
Dear Mr. Green:
This letter is to confirm the recent discussions during
which it was expressed that Newman-Green, Inc., Addison,
Illinois and Newman-Green de Venezuela are desirous of
entering into a license agreement whereby Newman-Green de
Venezuela will be licensed to manufacture and sell
Newman-Green aerosol valves in Venezuela. Pursuant to the
discussions a license agreement was signed on June 13, 1974.
It is understood that because of recent enacted legislation in
Venezuela the license agreement will not become enforceable
until such time as the provisions of the agreement are
approved by the Venezuelan Government.
In consideration of the covenants herein entered into
between the parties, it is agreed that pending the approval of
said license agreement that Newman-Green, Inc. will undertake
to provide to Newman-Green de Venezuela aerosol valve assembly
machinery embodying the proprietary, confidential and
technical information and know-how of Newman-Green, Inc. It is
further agreed that Newman-Green, Inc., will provide
additional proprietary, confidential and technical information
and know-how of Newman-Green, Inc. to a designated employee of
Newman-Green de Venezuela. The additional information is to be
such that it will be sufficient to allow start-up and
operation of the valve assembly machinery provided to
Newman-Green de Venezuela. The amount and sufficiency of the
additional information is to be determined by Newman-Green,
Inc. It is understood and agreed that all of the aforesaid
information is provided in confidence and under the terms and
conditions of the license agreement.
It is further agreed, in the event that for any reason the
license agreement is not approved by the Venezuelan
Government, that the confidentiality provisions and the
termination and/or cancellation provisions of the license
agreement are in full force and effect.
This agreement is to be interpreted under the laws of the
State of Illinois, U.S.A.
Signed at Caracas, Venezuela.
By: /s/ Alberto Tudela
July 11, 1974
Mr. Edward H. Green, President
57 Interstate Road
Addison, Illinois 60101
Re: Newman-Green, Inc. and
Dear Mr. Green:
In consideration for the execution of the license agreement
dated June 13, 1974 from Newman-Green, Inc., Addison, Illinois
to Newman-Green de Venezuela, the undersigned personally,
individually and/or collectively agree that they guarantee the
payment to Newman-Green, Inc. of an amount of money up to the
5% royalty set forth in the license agreement and for the
period of time specified in the license agreement.
For the purposes of this agreement the undersigned agree by
virtue of the license agreement between Newman-Green, Inc. and
Newman-Green de Venezuela that they are doing business in
Addison, Illinois and designate as their individual and
collective agent for service John E. Waghorne, Esq., Ace
Avenue and Lake Street, Addison, Illinois 60101. The
designation of agent is not revocable without the written
consent of Newman-Green, Inc., Addison, Illinois.
The agreement is to be interpreted in accordance with the
laws of the State of Illinois.
The effective date of this agreement is July 11, 1974.
Signed at Caracas, Venezuela.
/s/ Rafael Tudela /s/ William Bettison
Rafael Tudela William Bettison
Apartado 59053 Apartado 1286
/s/ Alberto Tudela /s/ Mrs. M. Caplan
Alberto Tudela Mrs. M. Caplan
Apartado 68658 Apartado 1286
/s/ A. Alfonzo-Larrain
Rafael Tudela William L. Bettison
Avda. Las Ciencias c/ Edison Edif. Helados Club
Edif. Edison, Piso 1 Calle Las Mercedes,
Los Chaguaramos Chacao
Caracas. — Caracas. —
Alberto Tudela Irene Larrain de Caplan
Centro Plaza, Piso 7, Torre B Calle vuelta del Zorro
Avda. Francisco de Miranda Quinta Escondida
Los Palos Grandes Valle Arriba
Caracas. — Caracas. —
A. Alfonzo-Larrain R. Address:
Edif. Aldemo, Piso 6
Avenida Venezuela, El Rosal