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S.A., a Mexican corporation,      )     
     Plaintiff,      )     
   v.         )      No. 99 C 4040
HEARTHSIDE BAKING CO., INC., d/b/a      )      Judge Milton I. Shadur
     Defendant.      )     


Plaintiff Zapata Hermanos Sucesores, S.A. ("Zapata"), for its trial brief in support of its claims against, and defenses to the counterclaims of Defendant Hearthside Baking Co., Inc., d/b/a Maurice Lenell Cooky Company ("Lenell"), states as follows:


For approximately six years Zapata supplied Lenell with various specially manufactured tin containers periodically ordered by Lenell. Over the course of years, Lenell's payment stream became progressively slower, and Lenell's overdue balances accumulated. Lenell's co-owner, Terry Cohen, intentionally grew the overdue balance in order not only to profit from the delay in payment but also to obtain leverage over Zapata. Emboldened by the leverage it felt its large overdue balance afforded it, Lenell became excessive and unreasonable in its demands upon Zapata. Lenell placed orders without adequate lead times often for entirely new designs that it knew required significant development. Lenell also insisted that Zapata continue to supply Lenell with new shipments of tins before Lenell would pay for the shipments it had already received.

Zapata made repeated efforts in 1997 and 1998 to bring Lenell's account current. Zapata initiated several meetings with Lenell to reconcile their respective account statements. Reconciliation was becoming increasingly difficult because of the sheer number of invoices Lenell had not paid and because the payments Lenell did make were extremely late and therefore difficult to apply properly. These difficulties were exacerbated by Lenell's practice of unilaterally taking credits without informing Zapata until months or years later when Lenell finally paid the invoice. Often the claimed credits would be for invoices that the payment was not even satisfying. While not all discrepancies between the parties' respective account records were resolved, Lenell acknowledged that it owed Zapata most of what Zapata claimed. Despite Zapata's pleas in 1997 and 1998 for Lenell to bring its account current, and Lenell's acknowledgment that it owed most of the money, by the end of the 1998 season Lenell's overdue balance was still almost $1,000,000. Because of Lenell's insistence on receiving new shipments before it would pay for past shipments, there was no prospect that Lenell's unpaid balance would ever be reduced.

In early 1999, after Lenell's busy holiday season, Zapata told Lenell it had reached its credit limit with Zapata. Zapata explained that Lenell would have to bring its account current before Zapata would fill any additional orders. Lenell proposed to make a partial payment of merely $250,000 on the condition that Zapata extend Lenell even more credit by filling additional orders. Zapata declined. Lenell then threatened Zapata that "former" suppliers do not get paid and began concocting ways to dispute the balance due in court. For example, after the relationship ended, Lenell's internal accounts payable records for Zapata, for the first time, began to reflect a host of heretofore unasserted "chargebacks" and "credits" for shipments completed many months earlier without any complaint from Lenell. Those set-offs now comprise nearly all of Lenell's counterclaim in this case.

Despite every effort by Lenell to invent and inflate these chargebacks and credits, Lenell cannot dispute that it is long overdue on at least $604,000 in debt to Zapata. This is reflected in Lenell's internal accounts payable records. It is also reflected in the difference between the face amount of Zapata's invoices ($961,472.12) and the sum of Lenell's defenses ($108,676.90) and counterclaims ($209,955.77). Rather than paying even the artificially (and wrongly) reduced amount it could not dispute, Lenell made good on its threat and forced Zapata to sue.[1]

This case is governed by the United Nations Convention for the International Sale of Goods ("Convention"), 15 U.S.C., Appendix. (Final Pretrial Order, 1 & Schedule A, 6.)



Undisputed Amount of Claim. Count I of Zapata's Complaint seeks payment on 110 separate invoices for a total of $961,472.12. Lenell admits, in binding judicial admissions, that it ordered, received, and used, but did not pay for, tins to which those invoices relate in the amount of $852,795.22.[2] (Lenell's Fourth Am. Ans. to Req. to Admit, Nos. 2 & 3; Lenell's Am. Ans. to Second Req. to Admit, No. 1; Final Pretrial Order, Schedule A, 17.) With respect to these goods, which Lenell admits accepting and using, there can be no question that Lenell entered into a contract to buy them. At the point of Lenell's retention and use of the tins, at the latest, a contract was undisputably formed by "conduct of [Lenell] indicating assent." (Convention, Art. 18.) Lenell admits that the applicable invoices accurately state the "goods, quantity and price." (Lenell's Fourth Am. Ans. to Req. to Admit, No. 2.) Both Lenell's purchase orders and Zapata's invoices require payment within 30 or 60 days, so there is no question payment is long overdue. (Final Pretrial Order, Schedule A, 10.) Zapata plainly "may require the buyer to pay the price" under Article 62 of the Convention.

Prejudgment Interest. There can be no question that Zapata is entitled to recover pre-judgement interest. The only possible issue to be resolved is what the rate of interest shall be.

Even without a contractual interest provision, the default rule under the Convention is that "[i]f a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it." (Convention, Art. 78.) Zapata, then, is entitled to prejudgment interest as a matter of law. This interest accrues not only on the invoice amounts but also on "any other sum due" such as Zapata's attorneys' fees which, as shown below, are recoverable consequential damages under the Convention.

Although the Convention does not specify the rate of interest, the contracts do. Hundreds of Zapata invoices received by Lenell over the course of several years specify interest "computed at 1% monthly compounded." These invoices were sent to Lenell even before the shipments were dispatched and Lenell never objected to the interest provision before it received the shipments, or after it accepted and used the shipments. Such long standing practices between parties become binding upon them under the Convention. (Convention, Art. 9) ("The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves."); see also, Capitol Converting Equipment v. LEP Transport, 965 F.2d 391, 395-6 (7th Cir. 1992) (applying the corresponding "course of dealing" concept from the UCC to incorporate into an otherwise silent contract certain terms contained in invoices sent in connection with hundreds of earlier transactions). The interest rate that became the common understanding between the parties and part of the contracts, therefore, is 1% per month, compounded each month.[3]

Lenell will seek to delay the accrual of interest by contesting the express payment terms included on both Lenell's own purchase orders and Zapata's invoices, which were sometimes 30 days and sometimes 60 days. Lenell does so based on its patently wrong assertion that Zapata agreed Lenell could pay for tins whenever Lenell felt like doing so. (T. Cohen, Dep., Vol. I, pp. 50-53.) Lenell will point to its own delinquency as evidence of this purported agreement (even though the evidence will show Zapata repeatedly objected to Lenell's slowness in paying and pleaded for payment of the full balance due). Fortunately, the Convention expressly precludes delinquent debtors like Lenell from using the creditor forebearance as a weapon. The Convention expressly provides that even if Zapata expressly agreed to give Lenell additional time to pay, Zapata did not thereby waive the interest the Convention allows for during that period. It provides that a "seller may fix an additional period of time of reasonable length for performance by the buyer of his obligations" but that "the seller is not deprived thereby of any right he may have to claim damages for delay in performance." (Convention, Art. 63.) Accordingly, interest accrues from the payment date stated on each invoice.

Attorneys' Fees. The Convention explicitly provides that all damages incurred "as a consequence of [a] breach" are recoverable:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach." (Convention, Art. 74.)

This, of course, plainly includes litigation expenses including attorneys' fees which are recognized to constitute foreseeable consequential damages. Based on this plain language the courts and arbitrators of other States have held consistently that attorneys' fees are recoverable under Article 74 of the Convention. See e.g., Case No. 17 U 146/93 (OLG Düsseldorf Jan. 14, 1994) [see <http://cisgw3.law.pace.edu/cases/940114g1.html>] (attorneys' fees "could be recovered under Article 74 of the [Convention].") (attached as Exhibit 1); Hamburg Arbitration Proceeding (Schiedsgericht der Handelskammer [Arbitration Tribunal] Hamburg, June 21, 1996) (under Article 74 of the Convention "compensation for counsel's fees is indicated.") (attached as Exhibit 2) [see <http://cisgw3.law.pace.edu/cases/960621g1.html>]; Abstract of Case No. 2 C 22/97 (Germany 13 March 1997) ("damages under Article 74 [of the Convention] include court costs and lawyer's fees.") (attached as Exhibit 3) [see <http://cisgw3.law.pace.edu/cases/970313g1.html>]. Indeed, even domestic courts would agree that attorneys' fees are consequential damages. For example, in Sorenson v. Fio Rito, 90 Ill. App. 3d 368 (1st Dist. 1980), the court held that:

"The general rule in Illinois is that one who commits an illegal or wrongful act is liable for all of the ordinary and natural consequences of his act. Logically, this would include any attorneys' fees expended in bringing a lawsuit against the wrongdoer." 90 Ill. App. 3d at 371 (citations omitted).

The only reason attorneys' fees often are not recoverable under domestic law, even though they qualify as foreseeable consequential damages, is because of the "so-called 'American rule'" which, for domestic policy reasons, injects an exception to the general rule that consequential damages are recoverable. Sorenson, 90 Ill. App. 3d at 371 (the argument that attorneys' fees are not recoverable consequential damages "confuses the general rule with the exception."). The American rule is distinctly local, and is not followed in nearly any other State that has adopted the Convention. See, Thomas R. Rowe, Jr., The Legal Theory of Attorney Fee Shifting: A Critical Overview, 1982 Duke L.J. 651 (1982) (The United States "stands in the small minority among the industrialized democracies."). It would be supremely parochial, and perhaps even arrogant, to assume that the uniquely American doctrine applies to an international Convention. This is especially so since the American rule conflicts with the express language of Article 74 which, without any limitation, allows recovery of "the loss ... suffered ... as a consequence of the breach."

The Convention directs courts to interpret it with regard to its "international character" and "the need to promote uniformity in its application and the observance of good faith in international trade." (Convention, Art. 7(1).) Any question concerning matters not expressly settled by the terms of the Convention are to be resolved, first and foremost, "in conformity with the general principles on which it is based." (Convention, Art. 7(2).) Since attorneys' fees fall within the scope of the express language of Article 74, there is no justification to resort to familiar but inapplicable doctrines of domestic law. As the Eleventh Circuit explained in refusing to graft the parol evidence rule onto the framework of the Convention:

"One of the primary factors motivating the negotiation and adoption of the [Convention] was to provide parties to international contracts for the sale of goods with some degree of certainty as to the principles of law that would govern potential disputes and remove the previous doubt regarding which party's legal system might otherwise apply. Courts applying the [Convention] cannot, therefore, upset the parties' reliance on the Convention by substituting familiar principles of domestic law when the Convention requires a different result. We may only achieve the directives of good faith and uniformity in contracts under the [Convention] by interpreting and applying the plain language of article 8(3) as written ..." MCC-Marble Ceramic Center v. Ceramic Nuova D'Agostino, 144 F.3d 1384, 1391 (11th Cir. 1998).

Likewise here, the broad terms of Article 74 encompass attorneys' fees in their scope and admit of no exception related to them. The plain language of Article 74 must not be defeated by adoption of a uniquely local, policy-based exception that stands in sharp contrast not only to the express language of Article 74 but also to the generally accepted international norm that attorneys' fees are recoverable as foreseeable consequential damages.

Even if the Convention had been silent on the issue of attorneys' fees (which it is not), the general principles on which it is based would lead to the inescapable conclusion that a uniquely domestic limitation on the type of consequential damages that may be recovered still should not be adopted. The Convention's "international character" and its goal of promoting "uniformity in its application" dictate otherwise:

(1) The general rule in the international trading community is that attorneys' fees are recoverable. Non-U.S. trading partners, therefore, have a reasonable expectation that international law will be interpreted consistent with the prevailing rule. The international character of the Convention suggests that U.S. courts should not defeat those reasonable expectations by grafting the American rule onto the Convention.

(2) Affording U.S. companies the shield of the American rule would create a non-uniform body of law and would provide a unique advantage for U.S. companies in international trade. Unlike their international trading partners, U.S. companies would enjoy a special immunity allowing them to intentionally default on their obligations without paying the full measure of damages.

(3) The Convention's goal of promoting "good faith in international trade" counsels against adopting the American rule barring recovery of attorneys' fees. In stark contrast to the Convention, the American rule values access to courts over good faith. Sorenson, 90 Ill. App. 3d at 371-372 (the American rule was adopted as an exception to the general rule because "it was felt that the allowance of attorneys' fees would deter a litigant from prosecuting or defending an uncertain claim."). Accordingly, the American rule - internationally criticized as promoting frivolous litigation -- is inconsistent with the goals of the Convention.

Indeed, Lenell's bad faith in its dealings with Zapata provides the perfect example of the type of conduct the Convention seeks to prevent. Lenell has refused to pay for tins it was only too happy to accept and use in its business (mostly about three years ago), but nevertheless has forced Zapata to litigate all the way through trial to collect even one red cent of the hundreds of thousands of dollars its own records show it acknowledges to be owed. In this context in particular, the international character of the Convention and its goal of promoting good faith in international trade must not be defeated. It would be a direct affront to this goal if non-U.S. trading partners, such as Zapata, are forced to absorb the consequences of the misconduct of their U.S. trading partners, such as Lenell, through a reduction in their legitimate recovery by the amount of attorneys' fees they are intentionally forced to incur.

While Lenell disputes that attorneys' fees are recoverable under the Convention, Lenell apparently agrees with Zapata that the amount of fees to be awarded should be resolved by the Court on a fee petition. Zapata has also proposed a stipulation that will remove from the jury the only potential fact issue, the foreseeability that Zapata would incur attorneys' fees in the event Lenell refused to pay any of Zapata's outstanding invoices. Zapata believes this fact issue to be so self-evident that no reasonable jury could conclude other than that Lenell foresaw attorneys' fees. To the extent necessary, however, Zapata is prepared to submit an interrogatory to the jury on this issue.

Lenell's Defenses. Lenell claims it does not owe $108,676.90 of the amount of Zapata's invoices because it did not receive certain tins, it refused delivery of certain tins and sent them to a warehouse, it paid certain invoices in whole or in part, and certain invoices include freight charges that should not have been charged. Lenell lost the right to assert any of these defenses when it failed to give timely notice of them to Zapata as required by the Convention.

For all of these disputed shipments, Lenell admits that it received the invoices on or about the dates they bear. (Lenell's Fourth Am. Ans. to Req. to Admit, No. 1; Final Pretrial Order, Schedule A, 12.) Lenell also admits that it received most of the corresponding shipments. (Lenell's Fourth Am. Ans. to Req. to Admit, No. 3) Upon receipt of the invoices, it became Lenell's obligation under the Convention to "give notice to [Zapata] specifying the nature of the lack of conformity within a reasonable time," and, further, to make a "declaration of avoidance" by "notice" to Zapata. (Convention, Arts. 26, 39(1), and 49.) Lenell did not timely notify Zapata that it did not receive the goods associated with any invoice, that any shipment was incomplete, that it was rejecting any shipment, or that any invoice contained inappropriate charges. Lenell, therefore, "lost the right to rely on" any lack of conformity, or to "declare an avoidance." (Convention, Arts. 26, 39(1), 49.)

In addition, even if not lost, with certain very minor exceptions, Lenell's defenses simply are not supported by the facts.


Prior to Zapata terminating the relationship, Lenell's own accounts payable records as of March 1999 showed a balance owing of $785,558.48. Through the date of that record, Lenell never denied that it owed the amount reflected therein. Even Lenell's May 1999 and April 2000 accounts payable records, which are dated after Zapata terminated the relationship and Lenell artificially deflated its accounts payable records, do not dispute a balance owing of $604,083.31. These accounts were shared with Zapata and, until Lenell's recent effort to invent additional offsets at the close of discovery in this case, there was never any disagreement that Lenell owed at least $604,083.31. In fact, before Zapata refused to ship new orders on credit until Lenell paid its overdue balance, there was never any dispute that Lenell owed at least $785,558.48. Under the law of account stated, at minimum, the agreed portion of the account became binding on Lenell. See e.g., Chicago & Eastern Illinois Railroad v. Martin Bros. Container & Timber Products, 87 Ill. App. 3d 327, 330, 408 N.E.2d 1031, 1035 (1st Dist. 1980).


Lenell's Counterclaim asserts several separate bases for recovery but the total claimed comes to only $209,955.77. (Final Pretrial Order, Sched. E) It follows that even if Lenell prevails completely on its Counterclaim, and all of its defenses addressed in the preceding section ($108,676.90), Lenell still owes Zapata $642,839.45, plus interest and attorneys' fees. Lenell, however, should not prevail on its Counterclaim. With certain very minor exceptions, Lenell's Counterclaim lacks merit.

Olive Can. Lenell claims that Zapata agreed to supply quantities of three new tin designs but did not perform. As a result, Lenell claims it incurred an additional $99,287.50 in obtaining them from another source, Olive Can. In fact, Lenell placed the order at a time when it was grievously delinquent in the payment of its account. Even though the order was for three entirely new designs, Lenell placed the order without the thirty day lead time that Zapata had repeatedly explained was required and without having approved artwork. Although Zapata tried to work with Lenell to develop the product, Zapata never agreed to supply the order on the date Lenell requested. Zapata also did not agree to pay the difference in cost to Lenell and is not liable for it because Zapata did not have a contract to supply the tins.

Even if Zapata had agreed to supply the tins, Zapata's performance was excused by Article 79 of the Convention. Article 79 provides that:

"A party is not liable for a failure to perform ... if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequence."

Zapata encountered a labor strike that prevented the filling of Lenell's order before Lenell decided to go elsewhere. The evidence will also show that Lenell failed to mitigate its damages. (Convention, Art. 77.)

Substitution of Tins. The 4.5 lb. "Rocking Horse" tin was an established Lenell product that Zapata had supplied Lenell for some time and could produce readily. In 1998, Lenell sought to introduce a new 3 lb. Rocking Horse product. For reasons Zapata will explain at trial, Zapata ultimately declined the order. Lenell claims that Zapata's inability to deliver the new 3 lb. size forced Lenell to give a customer 4.5 lb. tins for the price of the 3 lb. tins.

Even if Lenell could prove liability (which it cannot), Lenell overstates its alleged damages at $18,200. First, Lenell overstates the number of 3 lb. tins the customer ordered. Second, Lenell uses the wrong measure of damages. Lenell wrongly claims damages based on the increased profit margin Lenell otherwise makes on the larger size even though Lenell lost no sales of that larger size. See e.g., R.E. Davis Chemical Corp. v. Diasonics, Inc., 826 F.2d 678, 682 n. 7 (7th Cir. 1987) (holding that damages based on one's profit margin are not recoverable absent proof of lost sales volume). The proper measure of Lenell's loss, therefore, is the increased cost in filling the customer order. That difference multiplied by the number of 3 lb. tins that were ordered reveals a fraction of the damages figure Lenell claims.

Late Deliveries. Lenell claims that Zapata was late in delivering various tins which caused Lenell to incur various damages including: (1) fines from its customers totaling $15,520.78; (2) overtime labor in the amount of $22,962.20; (3) a spoiled stock of butter in the amount of $14,775; and (4) next day delivery costs totaling $23,933.74. The grand total for this category is $77,191.72. As with many of Lenell's claims and defenses, these have been lost by the failure to timely notify Zapata of them as required by Article 39 of the Convention. As explained above, Article 39 provides that a party "loses the right" to seek damages for breaches unless it gives prompt notice of the problem to the party in breach.

In any event, Lenell cannot carry its burden of proving that Zapata agreed to fill Lenell's orders on the dates Lenell claims it specified. Contrary to Terry Cohen's deposition testimony, Lenell cannot bind Zapata to a contract by unilaterally sending a purchase order. In many cases, Zapata responded to a Lenell order only by faxing an invoice and shipping product. If Zapata did this after the date requested in Lenell's offer to contract, then the fax and shipment were not an acceptance but a counter-offer which Lenell was free to accept or reject. (Convention, Art. 19.) Lenell accepted Zapata's counter-offer when it kept and used the tins. (Convention, Art. 18.) Accordingly, Zapata did not have a contract prior to delivery and could not possibly have been late delivering on a contract that came into existence only after delivery. Even on orders that Zapata may have accepted prior to shipping, Lenell's claims of lateness are without merit. Lenell bases its claim of lateness exclusively on the dates written on Lenell's purchase orders. The testimony will show, however, that Lenell routinely asked Zapata to rearrange the dates for delivery to accommodate Lenell's constantly changing needs.

Lenell's other late delivery claims also suffer from a host of inconsistencies and defects. For example, Lenell claims that Zapata caused Lenell to incur overtime during the 1998 holiday season. Yet the holiday season is by far Lenell's busiest season every year, as should be expected from a business whose principle products are holiday cookie tins. Lenell's payroll records reveal that Lenell's employees routinely work heavy overtime throughout the holiday season every year. Attributing any given overtime to Zapata is simply not possible or fair. Moreover, the evidence will show that Lenell never gave Zapata timely notice of Lenell's intent to charge Zapata for Lenell's overtime costs. Lenell also cannot prove that substantially the same amount of overtime labor would not have been incurred regardless.

Routing Guide Chargebacks. Lenell claims that Zapata did not comply with Lenell's "Routing Guide" on numerous occasions and asserts the right to various chargebacks totaling $10,725. Once again, these claims have been lost by the failure to timely notify Zapata of them as required by Article 39 of the Convention. Lenell's first notice to Zapata of these chargebacks often came months or even years after the alleged violation of the Routing Guide. After that kind of delay, it is far too late for Zapata to fix anything that might have been fixable or to correct any recurring problems on future shipments, and it is nearly impossible to even investigate the alleged breach. The Convention expressly protects against such prejudice by requiring prompt notice.


For the foregoing reasons, and others,[4] Zapata requests judgment in its favor on its Complaint and Lenell's Counterclaim, in an amount to be determined at trial.

Dated: June 8, 2001.                   ZAPATA HERMANOS SUCESORES, S.A.


By: ____________________________________
          One of its Attorneys

Javier H. Rubinstein
Thomas A. Lidbury
Kyle F. Waldinger
190 South LaSalle Street
Chicago, IL 60603
(312) 782-0600


1. As this Court is also aware, Lenell again attempted to inflate its counterclaims after the close of discovery but the Court struck those belated and vexatious counterclaims, which are now pending before another judge. The Court has also entered an order barring Lenell from referring to those separate claims at trial.

2. Zapata moved for partial summary judgment but the Court denied the motion on procedural grounds. At the appropriate time Zapata will move, pursuant to Rule 50(a), for a partial judgment as a matter of law on Count I in the amount of $852,795.22, plus prejudgment interest at the contract rate of 1% monthly compounded, and attorneys' fees.

3. If the rate specified in Zapata's invoices is found not to govern, courts applying the Convention often look to the non-breaching party's costs of borrowing capital. See e.g., Case No. 17 U 146/93 (OLG Düsseldorf Jan. 14, 1994) (awarding interest of 16.5% based on evidence that the non-breaching party had borrowed money at that rate) (attached as Exhibit 1) [see <http://cisgw3.law.pace.edu/cases/940114g1.html>].

4. This brief provides an overview of the problems with Lenell's defenses and Counterclaim. It is not an exhaustive outline of the deficiencies in, and defenses to those claims and defenses.

Pace Law School Institute of International Commercial Law - Last updated March 11, 2002
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