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United States 19 November 2002 Federal Appellate Court [7th Circuit] (Zapata Hermanos v. Hearthside Baking)
[Cite as: http://cisgw3.law.pace.edu/cases/021119u1.html]

Primary source(s) of information for case presentation: Case text

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Case identification

DATE OF DECISION: 20021119 (19 November 2002)

JURISDICTION: United States (federal court)

TRIBUNAL: U.S. Circuit Court of Appeals (7th Cir.) [federal appellate court]

JUDGE(S): Posner (author of opinion), Diane P. Wood and Evans

CASE NUMBER/DOCKET NUMBER: Nos. 01-3402, 02-1867, 02-1915

CASE NAME: Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Company, Inc. d/b/a Maurice Lenell Cooky Company

CASE HISTORY: 1st instance U.S. District Court, Northern District of Illinois 28 August 2001 (see that District Court case presentation for citations to related District Court rulings on quantum of attorneys' fees) [reversed and remanded]; Petition for Rehearing and Petition for Rehearing En Banc denied (9 January 2003); Petition for Writ of Certiorari filed with U.S. Supreme Court (March 2003); Brief of Respondent in Opposition to Petition (12 May 2003); Amicus Curiae Brief in Support of Petition (12 May 2003); Reply Brief for Petitioner (May 2003); Amicus Curiae Brief in Opposition to Petition (October 2003); Supplemental Brief for the Petitioner in response (November 2003). On 1 December 2003 the petition for certiorari was denied by the U.S. Supreme Court, 124 S.Ct. 803.

SELLER'S COUNTRY: Mexico (plaintiff-appellee)

BUYER'S COUNTRY: United States (defendant-appellant)


Case abstract

UNITED STATES: Federal Court of Appeals, 7th Circuit, 19 November 2002: corrected 17 December 2002
Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Company, Inc.

Case law on UNCITRAL texts (CLOUT) abstract no. 611

Reproduced with permission of UNCITRAL

Abstract prepared by Peter Winship, National Correspondent

The issues before the Court were whether the fees of a successful litigant's lawyers are "losses" within the meaning of the Convention and an automatic entitlement of a plaintiff who prevails in a suit under the Convention, and whether they can alternatively be awarded on the inherent authority of the courts to punish the conduct of litigation in bad faith.

The defendant appealed the decision of the district court to award lawyers' fees as damages under article 74 of the Convention ("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"). The district court stated that this provision changed the "American rule" that each litigant must bear its own legal expenses.

The court of appeals reversed the district court's decision. The court distinguished procedural law and substantive contract law. It found that the question of whether a losing party must reimburse the winner for the latter's expense of litigation is normally a question of procedural law, not covered by the Convention. The court also pointed out that the position would be anomalous if the Convention were to include such fees as part of the "loss", in that a successful plaintiff would normally recover them, but a successful defendant would not. The court also found that there was no evidence in the drafting history or ratification hearings to suggest that the Convention was intended to include lawyers' fees incurred in the litigation as part of a "loss", and that by the terms of the Convention itself any issue not addressed in the Convention must be decided according to domestic law. Hence the Convention would not change the "American rule" on lawyers' fees.

In its opinion, the court also distinguished lawyers' fees incurred in litigation from prelitigation legal fees that might be recovered as incidental damages where, for example, the expenses were designed to mitigate damages. It further found that there were no grounds to award the fees under the "inherent authority" described above.

[The U.S. Court of Appeals denied a rehearing en banc on 9 January 2003 (2003 U.S. App. LEXIS 375). On 16 June 2003 the U.S. Supreme Court requested the U.S. Solicitor General to file a brief requesting the United States to express a view in this case (Supreme Court Reporter 123, 2599.)]

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Classification of issues present



Key CISG provisions at issue: Articles 7(2) ; 74

Classification of issues using UNCITRAL classification code numbers:

7C22 ; 7C231 [Gap filling: recourse to general principles on which Convention is based; Recourse to domestic law selected by Private International Law];

74A ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss]

Descriptors: General principles ; Gap-filling ; Damages ; Foreseeability of damages ; Legal costs

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Editorial remarks

Excerpt from CISG-Advisory Council Opinion No. 6. Calculation of Damages under CISG Article 74 (Spring 2006). Rapporteur: Professor John Y. Gotanda, Villanova University School of Law, Villanova, Pennsylvania, USA

5.  Under Article 74, the aggrieved party cannot recover expenses associated with litigation of the breach.

      5.1 Article 74 does not explicitly address the payment of attorneys' fees and costs incurred by an aggrieved party in connection with seeking relief for the breach of contract from a third party, such as a court or arbitration tribunal ("litigation expenses"). Some courts and commentators believe that the recovery of litigation expenses is a procedural matter outside the scope of the Convention's substantive damages provisions.[86] However, other courts and commentators argue that based on Article 7(1), the Convention must be interpreted autonomously that characterizations of domestic law are irrelevant, and that recourse to domestic law should be made only as a last resort. Under this view, it is argued that Article 74 must be broadly interpreted in accordance with the principle of full compensation, which necessarily calls for the conclusion that an aggrieved party should be able to recover expenses associated with vindicating its rights. Otherwise, the aggrieved party would remain less than whole.[87]

      5.2 The issue of whether litigation expenses should be considered as damages for purposes of Article 74 cannot be resolved through a substance/procedure distinction. Whether a matter is considered substantive or procedural may vary from jurisdiction to jurisdiction and may depend on the circumstances of a particular case.[88] Relying upon such a distinction in this context is outdated and unproductive.[89] Instead, the analysis should focus on whether the payment of litigation expenses is deliberately excluded from the Convention and, if not, whether the issue may be resolved "in conformity with the general principles on which [the Convention] is based or, in the absence of such principles, in conformity with law applicable by virtue of the rules of private international law."[90]

      5.3 While Article 74 does not explicitly provide for the recovery of litigation expenses as damages, it does not prohibit their recovery. In addition, the history that led to the drafting of Article 74 is silent on the issue. Thus, the matter is not one that explicitly falls outside the Convention and it is appropriate to consider whether the issue may be resolved through a liberal interpretation of Article 74 or "an analogical application of specific provisions of the Convention."[91]

      5.4 Although Article 74's principle of full compensation appears to support the view that litigation expenses should be recoverable in order to make the aggrieved party whole, such an interpretation would be contrary to the principle of equality between buyers and sellers as expressed in Articles 45 and 61.[92] If legal expenses were awarded as damages under Article 74, an anomaly would result where only a successful claimant would be able to recover litigation expenses.[93] The ability to recover damages under Article 74 is grounded on a breach of contract; thus, a successful respondent will not be able to recover its legal expenses if the claimant has not committed a breach of contract.[94] Therefore, the purpose of awarding attorneys' fees and costs, to make a prevailing party whole for costs incurred in litigation, will not be realized in those cases where the respondent prevails.[95] Remedies are the core of contract law, and to interpret Article 74 to create unequal recovery of damages between buyers and sellers is contrary to the design of the Convention.[96] However, Article 74 does not preclude a court or arbitral tribunal from awarding a party its attorneys' fees and costs when the contract provides for their payment or when authorized by applicable rules.


86. See United States, Zapata Hermanos Sucesores v. Hearthside Baking Co., U.S.Court of Appeals (7th Circuit), 2002, 13 F.3d pp. 385, 388; Flechtner/Lookofsky, Viva Zapata! American Procedure and CISG Substance in a U.S. Circuit Court of Appeal, Vindobona J. Int'l Com. L. & Arb. p. 93 (2003). Under this view, as a matter of procedural law, the recovery of litigation expenses is to be determined by reference to domestic law or applicable rules for resolving the dispute. See Zapata, op. cit., 313 F.3d p. 388; see also Schlechtriem/Schwenzer/Stoll/Gruber, op. cit., art. 74, ¶ 20 ("The compensation of costs of litigation . . . is governed exclusively by the relevant lex fori."); but cf. Schlechtriem/Schwenzer/Schlechtriem, op. cit., Introduction, p. 7 ("If national courts simply qualify the recoverability of litigation costs and lawyers' fees as a procedural matter to be decided under their own lex fori, thereby circumventing Article 74 and the analysis of whether such costs are a risk to be borne by any party having to litigate in the U.S., there will soon be more enclaves of domestic law, which for the deciding judge may seem self-evident and which conform to his or her convictions, formed by historic rules and precedents, but which will not be followed in other jurisdictions and, thereby, will cause an erosion of the uniformity achieved.").

87. See generally Felemegas, The Award of Counsel's Fees under Article 74 CISG, in Zapata Hermanos Sucesores v. Hearthside Baking Co. (2001), available at <http://www.cisg.law.pace.edu/cisg/biblio/felemegas1.html>; Zeller, Interpretation of Article 74 - Zapata Hermanos v. Hearthside Baking - Where Next?, 2004 Nordic J. Com. Law 1, available at <http://www.njcl.utu.fi>.

88. See ¶ 2.5. One commentator has proposed an outcome determinative test to be applied by courts in judging whether an issue is substantive or procedural. See generally Orlandi, Procedural Law Issues and Law Conventions, 5 Uniform L. Rev. p. (2000). Use of an outcome determinative test in the United States has generated much confusion, particularly with respect to the applicability of the Federal Rules of Civil Procedure in situations where it conflicts with state law. As a result, the United States Supreme Court eventually ruled that the outcome determinative test did not determine the validity of the Federal Rules of Civil Procedure in cases where the rules conflicted with state law. See United States, Hanna v. Plumer, op. cit.; see also Chemerinsky, Federal Jurisdiction, Aspen, 4th ed., 2003, p. 321 (noting that "problem with the outcome determinative test is that virtually any rule can determine the outcome of a case").

89. See Carruthers, The Substance and Procedure Distinction in Conflict of Laws: A Continuing Debate in Relation to Damages, 53 Int'l & Comp. L.Q. p. 691 (2004).

90. CISG art. 7(2). One commentator notes:

There is strong opinion in favor of the view that the label given by domestic law is not conclusive as to whether a particular matter ... falls within the Convention (HONNOLD, Uniform Law, 97). The substance rather than the label or characterization of competing rule of domestic law determines whether it is displaced by the Convention. In determining such questions, the tribunal, it is submitted, should be guided by the provisions of Article 7, and give to the Convention the widest possible application consistent with its aim as a unifier of legal rules governing the relationship between parties to an international sale.

Bianca/Bonell/Khoo, op. cit., art. 4, ¶ 3.3.5.

91. Honnold, op. cit., p. 109; see also Schlechtriem/Schwenzer/Schlechtriem, op. cit., art. 7, ¶¶ 27-29.

92. Articles 45 and 61 provide equivalent remedies to both buyer and seller, respectively, following a failure of the other party to perform its obligations. See CISG arts. 45, 61; see also Liu, Comparsion of CISG Article 45/61 remedial provisions and counterpart PECL articles 8:101 and 8:102, 2004 Nordic J. Com. L. pp. 1, 2 available at <http://cisgw3.law.pace.edu/cisg/text/anno-art-61.html> (discussing parallel remedies available to buyer and sellers).

93. See Flechtner, Recovering Attorneys' Fees as Damages under the U.N. Sales Convention: A Case Study on the New International Commercial Practice and the Role of Case Law in CISG Jurisprudence, with Comments on Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 22 Nw. J. Int'l L. & Bus. pp. 121, 151 (2002), available at <http://cisgw3.law.pace.edu/cisg/biblio/flechtner4.html>; Keily, How Does the Cookie Crumble? Legal Costs Under a Uniform Interpretation of the United Nations Convention on Contracts for the International Sale of Goods, 2003 Nordic J. Com. L. 1, § 5.6, available at <http://www.njcl.utu.fi>; Vanto, Attorneys' Fees as Damages in International Commercial Litigation, 15 Pace Int'l L. Rev. pp. 203, 221 (2003).

94. See Vanto, op. cit., p. 221; see also Flechtner, op. cit., p. 151; Keily, op. cit., § 6.2(b). One commentator has argued that the gap identified by the anomaly would be filled by domestic law in accordance with Article 7(2). See Zeller, op. cit., p. 10. This, however, would not resolve the problem as successful respondent may still not be able to recovery their litigation costs. Another commentator argues that a claimant breaches a duty of loyalty when it files a breach of contract action, but the tribunal determines that the respondent was not in breach. He argues that, in such case, attorneys' fees and costs may be awarded under the Convention. See Felemegas, op. cit., p. 126. This proposal, however, stems from an overly strained interpretation of the Convention. Neither the language nor the structure of the Convention supports the imposition of liability for attorneys' fees and costs on the claimant in such circumstance. See Flechtner, op. cit., p. 152.

Interpreting Article 74 to provide for the recovery of litigation expenses incurred by a successful claimant also may conflict with otherwise applicable procedural laws and rules that regulate the amount of attorneys' fees that may be recovered. For example, in a number of countries, awards of attorneys' fees are calculated pursuant to a fixed fee schedule that may result in an award amounting to less than the actual fee incurred. If Article 74 were interpreted to allow for the recovery of litigation expenses, then these laws and rules presumably would be preempted by the Convention because they would be inconsistent with the principle of full compensation. Such preemption would, however, would result in disuniformity between the claimant and respondent. Due to the anomaly discussed above, a successful respondent would be forced to recover expenses associated with litigation under domestic laws, but because of preemption such laws would not apply to successful claimants. Such an unequal treatment is patently unfair and contrary to the Convention. Of course, one may argue that the ability to recover attorneys' fees and costs is a substantive matter that is governed by the Convention, but the determination of the amount is a procedural matter that is subject to applicable local law and rules. This distinction is highly artificial and would be contrary to the principle of full compensation and the need for uniformity, particularly because recovery of litigation expenses would vary depending on the applicable procedural law or rules.

95. Other policy reasons for awarding attorneys' fees and costs include deterrence and punishment. See Reinganum/Louis L. Wilde, Settlement, Litigation, and the Allocation of Litigation Costs, 17 RAND J. Econ. p. 557 (1986) (discussing the deterrence function awarding attorneys' fees serves); Wetter/Priem, Costs and Their Allocation in International Commercial Arbitrations, 2 Am. Rev. Int'l Arb. p. 249, 329 (1991) (arguing that courts awarded costs and fees in order to punish an unsuccessful plaintiff for bringing a false claim or to fine a losing defendant for unjustly refusing the plaintiff's right). The later is clearly not a policy to be furthered by Article 74.

Moreover, interpreting the CISG to provide for one-way fee shifting would not serve the goals behind such a regime. One-way fee shifting statutes are typically enacted to encourage law suits in certain areas because it is in the public interest to do so or to equalize the litigation strength between the parties, particularly in suits between governments and private parties of modest means. See generally Krent, Explaining One-Way Fee Shifting, 79 Va. L. Rev. p. 2039 (1993). Claimants in CISG suits do not need one-way fee shifting as incentive to bring suit. Nor do such suits as a routine matter involve claimants of modest means suing governments. Thus, the purposes for construing the CISG as providing for a one-way fee shifting scheme are not compelling.

96. See Keily, op. cit., § 6.2(b); see also Bianca/Bonell/Bonell, op. cit., ¶ 2.2.1 (stating that, in interpreting the Convention, "courts are expected to take a much more liberal attitude and to look, wherever appropriate, to the underlying purposes and policies of individual provisions as well as the Convention as a whole").

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Citations to other abstracts, case texts and commentaries


English: Unilex database http://www.unilex.info/case.cfm?pid=1&do=case&id=833&step=Abstract


Original language (English): Text presented below; see also 313 F.3d 385, 2002 WL 31554290 (7th Cir. (Ill)), 2002 U.S. App. LEXIS 23765; Unilex database http://www.unilex.info/case.cfm?pid=1&do=case&id=833&step=FullText

Translation: Unavailable


English: John Felemegas, "An Interpretation of Article 74 CISG by the U.S. Circuit Court of Appeals" (December 2002) [commentary disagrees with the court's reasoning and conclusion]; Jarno Vanto, "Attorneys' fees as damages in international commercial litigation" (January 2003) [commentary disagrees with the court's procedure vs. contract approach and other aspects of the court's reasoning, but agrees with the court's conclusion]. The law journal citation for the Felemegas and Vanto commentaries is 15 Pace International Law Review, Vol. 1 (Spring 2003) 91-147 and 203-222.; Schwenzer & Fountoulakis ed., International Sales Law, Routledge-Cavendish (2007) at p. 523

See also Harry M. Flechtner & Joseph Lookofsky, "Viva Zapata! American Procedure and CISG Substance in a U.S. Circuit Court of Appeal," 7 Vindobona Journal of International Commercial Law and Arbitration (2003) 93-104 [these commentators agree with the Circuit Court's conclusion]. A commentary is also being published on damages issues under the CISG by Djakhongir Saidov with citations to this case in a section devoted to attorneys' fees [this commentator regards attorneys' fees as clearly encompassed by the language of Art. 74 CISG but nevertheless sees logic in the Circuit Court's disallowance of such fees as damages under the CISG in the Zapata case]; Troy Keily, "How Does the Cookie Crumble? Legal Costs under a Uniform Interpretation of the United Nations Convention on Contracts for the International Sale of Goods" (July 2003); [2005] Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 7 para. 30 Art. 74 para. 20.

For Draft UNCITRAL Digest comments authored by Peter Winship on 15 cases from Finland, Germany, Sweden, Switzerland and United States dealing with "expenditures for debt collection; attorney’s fees", see Article 74 segment of Ferrari, Flechtner & Brand eds., "The Draft UNCITRAL Digest and Beyond", Sellier, European Law Publishers (2003)

For continuation of the controversy over whether attorneys' fees are allowable under CISG Article 74, see Bruno Zeller, Interpretation of Article 74 - Zapata Hermanos v. Hearthside Baking - Where Next?, Nordic Journal of Commercial Law (2004/1) at <http://www.njcl.fi>; see <http://www.njcl.fi/1_2004/commentary1.pdf> 11 p.; see also David B. Dixon, Que Lastima Zapata! Bad Ruling on Attorneys' Fees Still Haunts U.S. Courts, 38 U. Miami Inter-American Law Review (2006-07) 405-429; and CISG-AC advisory opinion on Calculation of Damages under CISG Article 74 [Spring 2006] n. 86; Joseph M. Lookofsky & Harry M. Flechtner, Zapata Retold: Attorney’s Fees Are (Still) Not Covered by the CISG, 26 Journal of Law and Commerce (2006-07) 1-9 and Peter Schlechtriem, Legal Costs as Damages in the Application of UN Sales Law, 26 Journal of Law and Commerce (2006-07) 71-80; Keith A. Rowley, "The Convention on the International Sale of Goods", in: Hunter ed., Modern Law of Contracts, Thomson/West (03/2007) §§ 23:45, 23:48; Keith William Diener, Attorneys’ Fees under CISG: An Interpretation of Article 74, Nordic Journal of Commercial Law (2008) <http://www.njcl.utu.fi/1_2008/article3.pdf>

French: Papandréou-Deterville, Receuil Dalloz - Cahier Droit des Affairs No. 34 (October 2003) 2372-2373

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Case text

United States Court of Appeals, Seventh Circuit

Zapata Hermanos Sucesores, S.A., Plaintiff-Appellee,
Hearthside Baking Company, Inc., d/b/a Maurice Lenell Cooky Company, Defendant-Appellant

No. 01-3402, 02-1867, 02-1915

Decided November 19, 2002

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 4040 -- Milton I. Shadur, Judge.

Before Posner, Diane P. Wood, and Evans, Circuit Judges.

Posner, Circuit J.

Zapata, a Mexican corporation that supplied Lenell, a U.S. wholesale baker of cookies, with cookie tins, sued Lenell for breach of contract and won. The district judge ordered Lenell to pay Zapata $550,000 in attorneys' fees. From that order, which the judge based both on a provision of the Convention on Contracts for the International Sale of Goods, Jan. 1, 1988, 15 U.S.C. App., and on the inherent authority of the courts to punish the conduct of litigation in bad faith, Lenell appeals.

The Convention, of which both the U.S. and Mexico are signatories, provides, as its name indicates, remedies for breach of international contracts for the sale of goods. Zapata brought suit under the Convention for money due under 110 invoices, amounting to some $900,000 (we round liberally), and also sought prejudgment interest plus attorneys' fees, which it contended are "losses" within the meaning of the Convention and are therefore an automatic entitlement of a plaintiff who prevails in a suit under the Convention. At the close of the evidence in a one-week trial, the judge granted judgment as a matter of law for Zapata on 93 of the 110 invoices, totaling $850,000. Zapata's claim for money due under the remaining invoices was submitted to the jury, which found in favor of Lenell. Lenell had filed several counterclaims; the judge dismissed some of them and the jury ruled for Zapata on the others. The jury also awarded Zapata $350,000 in prejudgment interest with respect to the 93 invoices with respect to which Zapata had prevailed, and the judge then tacked on the attorneys' fees -- the entire attorneys' fees that Zapata had incurred during the litigation.

Article 74 of the Convention provides that "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," provided the consequence was foreseeable at the time the contract was made. Article 7(2) provides that "questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law [i.e., conflicts of law rules]." There is no suggestion in the background of the Convention or the cases under it that "loss" was intended to include attorneys' fees, but no suggestion to the contrary either. Nevertheless it seems apparent that "loss" does not include attorneys' fees incurred in the litigation of a suit for breach of contract, though certain pre-litigation legal expenditures, for example expenditures designed to mitigate the plaintiff's damages, would probably be covered as "incidental" damages. Sorenson v. Fio Rito, 413 N.E.2d 47, 50-52 (Ill.App.1980); cf. Tull v. Gundersons, Inc., 709 P.2d 940, 946 (Colo.1985); Restatement (Second) of Contracts § 347, comment c (1981).

The Convention is about contracts, not about procedure. The principles for determining when a losing party must reimburse the winner for the latter's expense of litigation are usually not a part of a substantive body of law, such as contract law, but a part of procedural law. For example, the "American rule," that the winner must bear his own litigation expenses, and the "English rule" (followed in most other countries as well), that he is entitled to reimbursement, are rules of general applicability. They are not field-specific. There are, however, numerous exceptions to the principle that provisions regarding attorneys' fees are part of general procedure law. For example, federal antidiscrimination, antitrust, copyright, pension, and securities laws all contain field-specific provisions modifying the American rule (as do many other field-specific statutes). An international convention on contract law could do the same. But not only is the question of attorneys' fees not "expressly settled" in the Convention, it is not even mentioned. And there are no "principles" that can be drawn out of the provisions of the Convention for determining whether "loss" includes attorneys' fees; so by the terms of the Convention itself the matter must be left to domestic law (i.e., the law picked out by "the rules of private international law," which means the rules governing choice of law in international legal disputes).

U.S. contract law is different from, say, French contract law, and the general U.S. rule on attorneys' fee shifting (the "American rule") is different from the French rule (loser pays). But no one would say that French contract law differs from U.S. because the winner of a contract suit in France is entitled to be reimbursed by the loser, and in the U.S. not. That's an important difference but not a contract-law difference. It is a difference resulting from differing procedural rules of general applicability.

The interpretation of "loss" for which Zapata contends would produce anomalies, which is another reason to reject the interpretation. On Zapata's view the prevailing plaintiff in a suit under the Convention would (though presumably subject to the general contract duty to mitigate damages, to which we referred earlier) get his attorneys' fees reimbursed more or less automatically (the reason for the "more or less" qualification will become evident in a moment). But what if the defendant won? Could he invoke the domestic law, if as is likely other than in the United States that law entitled either side that wins to reimbursement of his fees by the loser? Well, if so, could the plaintiff waive his right to attorneys' fees under the Convention in favor of domestic law, which might be more or less generous than Article 74, since Article 74 requires that any loss must, to be recoverable, be foreseeable, which beyond some level attorneys' fees, though reasonable ex post, might not be? And how likely is it that the United States would have signed the Convention had it thought that in doing so it was abandoning the hallowed American rule? To the vast majority of the signatories of the Convention, being nations in which loser pays is the rule anyway, the question whether "loss" includes attorneys' fees would have held little interest; there is no reason to suppose they thought about the question at all.

For these reasons, we conclude that "loss" in Article 74 does not include attorneys' fees, and we move on to the question of a district court's inherent authority to punish a litigant or the litigant's lawyers for litigating in bad faith. The district judge made clear that he was basing his award of attorneys' fees to Zapata in part on his indignation at Lenell's having failed to pay money conceded to be owed to Zapata. Although the precise amount was in dispute, Lenell concedes that it owed Zapata at least half of the $1.2 million that Zapata obtained in damages (not counting the attorneys' fees) and prejudgment interest. Lenell had no excuse for not paying that amount, and this upset the judge.

Firms should pay their debts when they have no legal defense to them. Pacta sunt servanda, as the saying goes ("contracts are to be obeyed"). In the civil law (that is, the legal regime of Continental Europe), this principle is taken very seriously, as illustrated by the fact that the civil law grants specific performance in breach of contract cases as a matter of course. But under the common law (including the common law of Illinois, which is the law that choice of law principles make applicable in this case to any issues not covered in express terms by the Convention), a breach of contract is not considered wrongful activity in the sense that a tort or a crime is wrongful. When we delve for reasons, we encounter Holmes's argument that practically speaking the duty created by a contract is really just to perform or pay damages, for only if damages are inadequate relief in the particular circumstances of the case will specific performance be ordered. In other words, and subject to the qualification just mentioned, the entire practical effect of signing a contract is that by doing so one obtains an option to break it. The damages one must pay for breaking the contract are simply the price if the option is exercised. See Oliver Wendell Holmes, Jr., The Common Law 300-02 (1881); Holmes, "The Path of the Law," 10 Harv. L.Rev. 457, 462 (1897).

Why such lenity? Perhaps because breach of contract is a form of strict liability. Many breaches are involuntary and so inapt occasions for punishment. Even deliberate breaches are not necessarily culpable, as they may enable an improvement in efficiency -- suppose Lenell had a contract to take a certain quantity of tins from Zapata and found that it could buy them for half the price from someone else. Some breaches of contract, it is true, are not only deliberate but culpable, and maybe this was one -- Lenell offers no excuse for failing to pay for tins that it had taken delivery of and presumably resold with its cookies in them. Refusing to pay the contract price after the other party has performed is not the kind of option that the performing party would willingly have granted when the contract was negotiated. The option of which Holmes spoke was the option not to perform because performance was impossible or because some more valuable use of the resources required for performance arose after the contract was signed. Zapata argues, moreover, perhaps correctly (we need not decide), that Lenell refused to pay in an effort to extract a favorable modification of the terms of the parties' dealings, which would be a form of duress if Zapata somehow lacked an effective legal remedy. Professional Service Network, Inc. v. American Alliance Holding Co., 238 F.3d 897, 900-01 (7th Cir. 2001); Alaska Packers' Ass'n v. Domenico, 117 Fed. 99, 100-04 (9th Cir. 1902). But Zapata did not charge duress, and probably couldn't, since it had a good remedy -- this suit.

It is true that nowadays common law courts will sometimes award punitive damages for breach of contract in bad faith. But outside the field of insurance, where refusals in bad faith to indemnify or defend have long been punishable by awards of punitive damages to the insured, the plaintiff must show that the breach of contract involved tortious misconduct, such as duress or fraud or abuse of fiduciary duty. See, e.g., Miller Brewing Co. v. Best Beers of Bloomington, Inc., 608 N.E.2d 975, 982-83 (Ind. 1993); Story v. City of Bozeman, 791 P.2d 767, 776 (Mont. 1990); E. Allan Farnsworth, Contracts § 12.8, pp. 788-89 (3d ed. 1999). This is the rule in Illinois, Morrow v. L.A. Goldschmidt Associates, Inc., 492 N.E.2d 181, 183-86 (Ill. 1986), and Zapata has not tried to come within it. For that matter, it did not ask for punitive damages, and the judge had no authority to award attorneys' fees in lieu of such damages. He could not have awarded punitive damages if Zapata had asked for them but had been unable to prove tortious misconduct by Lenell, and even more clearly he could not award them when they had not been requested.

The decision whether punitive damages shall be a sanction for a breach of contract is an issue of substantive law, and under the Erie doctrine a federal court is not authorized to apply a different substantive law of contracts in a diversity case from the law that a state court would apply were the case being litigated in a state court instead. And obviously that rule must not be circumvented by renaming punitive damages "attorneys' fees." United States ex rel. Treat Bros. Co. v. Fidelity & Deposit Co. of Maryland, 986 F.2d 1110, 1119-20 (7th Cir. 1993); see also Chambers v. NASCO, Inc., 501 U.S. 32, 52-55 (1991); Association of Flight Attendants, AFL-CIO v. Horizon Air Industries, Inc., 976 F.2d 541, 548-50 (9th Cir. 1992). It is true that this is not a diversity case, but the Erie doctrine applies to any case in which state law supplies the rule of decision, see, e.g., O'Melveny & Myers v. FDIC, 512 U.S. 79, 83-85, 87-88 (1994), here by incorporation in the Convention.

The inherent authority of federal courts to punish misconduct before them is not a grant of authority to do good, rectify shortcomings of the common law (as by using an award of attorneys' fees to make up for an absence that the judge may deem regrettable of punitive damages for certain breaches of contract), or undermine the American rule on the award of attorneys' fees to the prevailing party in the absence of statute. Morganroth & Morganroth v. DeLorean, 213 F.3d 1301, 1318 (10th Cir. 2000); Association of Flight Attendants, AFL-CIO v. Horizon Air Industries, Inc., supra, 976 F.2d at 548-50 (9th Cir. 1992); Shimman v. International Union of Operating Engineers, Local 18, 744 F.2d 1226, 1232-33 and n. 9 (6th Cir. 1984) (en banc). These cases and others we could cite make clear that it is a residual authority, to be exercised sparingly, to punish misconduct (1) occurring in the litigation itself, not in the events giving rise to the litigation (for then the punishment would be a product of substantive law -- designed, for example, to deter breaches of contract), and (2) not adequately dealt with by other rules, most pertinently here Rules 11 and 37 of the Federal Rules of Civil Procedure, which Lenell has not been accused of violating.

Insofar as he focused on Lenell's behavior in the litigation itself, which, to repeat, is the only lawful domain of the relevant concept of "inherent authority" -- the authority could not constitutionally be extended to give parties remedies not available to them under the law of the state that furnishes the substantive rules of decision in the case -- the judge punished Lenell for having failed to acknowledge liability and spare Zapata and the judge and the jury and the witnesses and so on the burden of a trial. But as it happens, the fault here was in no small measure the judge's. Well before the trial, and long, long before Zapata's lawyers had run the tab up to $550,000, they had moved for partial summary judgment, claiming that Lenell in answer to Zapata's requests for admission had acknowledged liability for $858,000 of the $890,000 sought in the complaint. The judge had denied the motion on the ground that partial summary judgment cannot be granted unless the grant would give rise to an appealable judgment. This was error. Rule 56(d) of the civil rules is explicit in allowing the judge to grant summary judgment on less than the plaintiff's whole claim, and there is no hint of any requirement that the grant carve at a joint that would permit the judge to enter a final judgment under Rule 54(b). If the plaintiff had two separate claims, and the judge granted summary judgment on one and set the other for trial, he could also if he wanted enter final judgment on the first dismissal, enabling the defendant to appeal immediately under Rule 54(b). If instead the plaintiff had as here one claim, and the judge granted it in part, the defendant could not appeal--the conditions of Rule 54(b) would not be satisfied -- yet it is evident from the wording of Rule 56(d) that this would be a proper partial summary judgment, for the rule expressly authorizes an order "specifying the facts that appear without substantial controversy, including the extent to which the amount of damages or other relief is not in controversy." No purpose would be served by confining the rule as the district judge did. If anything, judicial economy is better served by a partial summary judgment that is not appealable, since a Rule 54(b) appeal normally interrupts the proceedings in the district court.

Since the challenged award of $550,000 in attorneys' fees cannot stand, we need not pick through the record to see whether some of the counterclaims or other moves by Zapata during the trial were sanctionable apart from Rule 11 and Rule 37. But it may be useful by way of guiding further proceedings on remand to point out that to the extent that those rules place limits on the award of sanctions under them (for example by the provision of safe harbors in Rule 11), those limitations are equally limitations on inherent authority, which may not be used to amend the rules. Kovilic Construction Co. v. Missbrenner, 106 F.3d 768, 772-73 (7th Cir. 1997). For federal rules of procedure have the force of statutes. See id.; 28 U.S.C. § 2072(b).

One issue remains for discussion. Although we have treated the appeal so far as if the only issues concerned attorneys' fees, Lenell also argues that the jury verdict should be set aside because the judge by his comments in open court signaled to the jury his scorn for Lenell's case. There were only a couple of such comments (many more, however, at sidebars outside the jury's hearing), and we do not think they could have changed the outcome. But we also think that judges should be very cautious about making comments in the hearing of a jury about the quality of a party's case or lawyers. For if he signals to the jury the judge's opinion as to how the case should be decided, he undermines the authority of the jury. Collins v. Kibort, 143 F.3d 331, 336 (7th Cir. 1998); Nationwide Mutual Fire Ins. Co. v. Ford Motor Co., 174 F.3d 801, 805, 808 (6th Cir. 1999); see also Ross v. Black & Decker, Inc., 977 F.2d 1178, 1187 (7th Cir. 1992).

From what we have just reported about the judge's statements during the trial and from the tone of a number of other statements that he made in the course of this litigation, we think it best that the further proceedings that we are ordering be conducted before a different judge, in accordance with 7th Cir. R. 36.


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