In the

United States Court of Appeals

For the Seventh Circuit ____________

Nos. 01-3402, 02-1867, 02-1915

ZAPATA HERMANOS SUCESORES, S.A.,

Plaintiff-Appellee,

v.

HEARTHSIDE BAKING COMPANY, INC.,

d/b/a MAURICE LENELL COOKY COMPANY,

Defendant-Appellant.

____________

Appeals from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 99 C 4040—Milton I. Shadur, Judge.

____________

ARGUED SEPTEMBER 13, 2002—DECIDED NOVEMBER 19, 2002

____________

Before POSNER,DIANE P.WOOD, and EVANS, Circuit Judges.

POSNER, Circuit Judge. 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.
2 Nos. 01-3402, 02-1867, 02-1915

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”
Nos. 01-3402, 02-1867, 02-1915 3

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 prelitigation 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 fieldspecific 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).
4 Nos. 01-3402, 02-1867, 02-1915

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.
Nos. 01-3402, 02-1867, 02-1915 5

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
6 Nos. 01-3402, 02-1867, 02-1915

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,
Nos. 01-3402, 02-1867, 02-1915 7

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
8 Nos. 01-3402, 02-1867, 02-1915

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
Nos. 01-3402, 02-1867, 02-1915 9

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 limita-
10 Nos. 01-3402, 02-1867, 02-1915

tions 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.

REVERSED AND REMANDED.
Nos. 01-3402, 02-1867, 02-1915 11

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—11-19-02