Source: http://cisgw3.law.pace.edu/cases/010828u1.html
Timestamp: 2019-04-22 18:14:31+00:00

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The most recent proceeding in this case is an appellate ruling by the U.S. 7th Circuit Court of Appeals handed down on 19 November 2002. The Circuit Court of Appeals reversed and remanded the District Court's ruling on attorneys' fees; 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). The petition for certiorari was denied by the U.S. Supreme Court.
The plaintiff, a Mexican enterprise, sold biscuit tins to the defendant, a U.S. corporation. After their long-term relationship ended, the plaintiff sued the defendant to recover payment for tins delivered and not paid for. After a jury verdict for the plaintiff, the trial court entered judgement for the plaintiff. In its several opinions in the case, the trial court applied the CISG to two issues: the award of interest to the plaintiff and the recovery by the plaintiff of its litigation expenses.
The plaintiff argued that express provisions in its invoices called for the payment of interest and proposed a calculation of the amount of interest owed. The defendant denied that it was liable for interest because the parties' course of conduct demonstrated that the defendant was never in arrears. It did not present to the jury a proposed calculation of interest. The jury resolved the dispute in favour of the plaintiff. The defendant then objected to the amount of interest awarded and asked the court to take judicial notice of the Illinois statutory rate and the U.S. treasury bill rate. In a first opinion (#1), the court turned down the defendant's request. Purporting to apply article 78 CISG, the court stated that the amount of interest should reflect a reasonable commercial rate as between merchants. It reduced the jury award of interest to reflect the amount of principal shown to be owed to the plaintiff.
In a second opinion (#2), the court awarded litigation expenses, including attorneys' fees, as part of the damages recoverable by plaintiff, Although the "American rule" normally requires each litigant to bear its own legal expenses, the court stated that the rule did not apply when there was a law that provided otherwise. The court held that article 74 CISG was such a law. Under that article, the plaintiff is entitled to recover a sum equal to its loss, including losses suffered as a consequence of the defendant's breach. The defendant could foresee that there might be litigation and legal expenses if it failed to pay sums admittedly due. The result, the court stressed, is consistent with the almost universal rule that a successful party may recover its legal expenses and, therefore, promoted the CISG policies of promoting uniformity and certainty.
Relevant Zapata trial briefs include: Zapata's trial brief dated 8 June 2001, Zapata's corrected brief in support of its entitlement to attorneys' fees dated 10 July 2001, and Zapata's reply brief in support of its entitlement to attorneys' fees.
Different positions. As noted in our Editorial remarks: on the one hand, the Felemegas commentary is in accord with the cited Zapata trial briefs and with the ruling of the District Court; on the other hand, the Flechtner commentary and the Lookofsky case note regard attorneys' fees as a matter that is not governed by rules recited in CISG article 74 when considering a contract for which the parties have stipulated that the CISG regime applies. See the Appellate Ruling by the Seventh Circuit for citations to further commentaries on this case.
For comments on rate-of-interest aspects of the several Zapata proceedings, see Colligan, Applying the General Principles of the United Nations Convention on Contracts for the International Sale of Goods to fill the Article 78 Interest Rate Gap in Zapata Hermanos, S.A. v. Hearthside Baking Co. Inc., 6 Vindobona Journal of International Commercial Law and Arbitration (2002) 40 et seq.
After having prevailed in principal part before the jury that heard the litigants' major commercial dispute, Zapata Hermanos Sucesores, S.A. [seller] has moved for an award of attorneys' fees on three alternative grounds, two of them advanced against defendant Hearthside Baking Co., Inc., d/b/a Maurice Lenell Cooky Co. [buyer] and the third advanced against [buyer's] litigation counsel, Gordon & Centracchio, L.L.C. ("Law Firm"). This Court's August 22, 2001 memorandum opinion and order dealt with [seller's] motion against the Law Firm. Now the issues as between [seller] and [buyer] have become fully briefed, and this memorandum opinion and order resolves that claim in favor of [seller] and against [buyer].
The so-called "American Rule" governing the award of attorneys' fees in litigation in the federal courts is that attorneys' fees are not ordinarily recoverable in the absence of a statute or enforceable contract providing therefor. Accord, such cases as Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 257 (1975).
"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. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."
"1. As of the dates when [buyer] issued its purchase orders for the tins described in the invoices attached as Group Exhibit A to [seller's] Complaint in this case, [buyer] foresaw or should have foreseen that if Lenell failed to pay for the tins that it ordered, received and accepted, [seller] would incur litigation costs including attorneys fees, to seek payment of the invoices for said tins.
"2. The Court shall determine if attorney's fees are recoverable as a matter of law.
"3. The amount of litigation costs, including attorneys' fees, to be assessed as consequential damages in this case, if any, will be for the Court to determine on a fee petition, rather than for the jury to decide."
There is no room to question the source of law to which this Court is to look to make the determination called for by the last-quoted Stipulation. With the Convention -- a treaty -- controlling the relationship between Mexican seller Zapata and United States purchaser Lenell, this Court has been called upon to exercise subject matter jurisdiction over [seller's] successful substantive claim in federal question terms. That of course calls into play federal choice-of-law principles rather than those of any state such as Illinois (see, e.g., RTC v. Chapman, 29 F.3d 1120, 1124 (7th Cir.1994), citing the seminal decision in Klaxon Co. v. Stentor Elec. Mfg. Co., 318 U.S. 487 (1941)). And relatedly, before trial [seller] dropped its alternative state law account-stated claim, which could perhaps have called diversity or supplemental jurisdiction (and thus local choice-of-law principles) into play as to that claim.
One of the primary factors motivating the negotiation and adoption of the CISG 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. See Letter of Transmittal from Ronald Reagan, President of the United States, to the United States Senate, reprinted at 15 U.S.C. app. 70, 71 (1997). Courts applying the CISG 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 CISG by interpreting and applying the plain language of article 8(3) as written and obeying its directive to consider this type of parol evidence.
It is therefore wholly misleading for [buyer] to contend as it does for the parochial application of the American Rule (as by attempting to call Midwest Grain to its aid). Although the norm in our own judicial system is for each litigant in a purely United States-based dispute to bear the burden of its own legal expense, that does not at all equate to the notion that public policy (or anything else) forbids a federal court's judicial enforcement of a different rule that is appropriately brought into play -- indeed, the earlier-quoted language from F.D. Rich expressly contemplates such enforcement where there is a statute (and a treaty calls for an a fortiori application of that notion) that instead establishes a "loser pays" regime.
It surely cannot be said that [seller] opted for the application of Illinois substantive law (or for the American Rule as such) just by having sued [buyer] in a jurisdiction that did not pose serious problems of the nature that would have been generated by an attempt to sue at [seller's] own home base in Mexico -- that is, by selecting a forum where [buyer] could not assert any otherwise available challenge to in personam jurisdiction and where a favorable judgment for [seller] would be directly enforceable and capable of execution. And when purely parochial considerations are put aside (quite properly so), it cannot be gainsaid that the normal unstrained reading of Article 74 coupled with the above-quoted Stipulation calls for [seller's] recovery of its attorneys' fees as foreseen consequential damages.
When the searchlight of analysis is thus properly focused on the language of the Convention without any inappropriate overlay from the American Rule, the question becomes a simple one. As n.2 has said, it truly smacks of a shell game for [buyer] to have entered into the commitments to which it has stipulated and yet to urge that [seller's] admittedly foreseeable legal expense ("which the party in breach [buyer] foresaw or ought to have foreseen," in the language of Article 74) was not "suffered by the other party [seller] as a consequence of the breach" (again the language of Article 74). It is totally unpersuasive for [buyer's] counsel to contend instead that those commitments and [buyer's] admissions do not equate to saying that attorneys' fees are "consequential damages" recoverable under the Convention.
That distorted reading of the language is clearly refuted by the decisions cited at [seller] Mem. 4 from other countries' courts and arbitral tribunals. Obviously unable to counter directly, [buyer] attempts to draw an inference from cases that decide the applicable interest rate under the Convention -- not the right to the payment of interest, which the Convention admittedly calls for -- under local law. But that effort to equate those issues really misses its mark, for the following explanation demonstrates that such interest-rate-related rulings really support [seller's] position rather than [buyer's].
Look at the situation of the injured seller of goods and what is required to make it whole. There is of course no near-universal rate of interest on unpaid obligations, and the drafters of the Convention took note of the fact that some sellers injured by nonpayment for their goods would be made whole by applying the interest rates at their homes, while others would need prejudgment interest to be paid at the rate applicable at their buyers' locales to provide full relief (see Peter Schlechtriem, Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods 98-99 (Manz, Vienna 1986). For that reason the Convention's drafters called for the payment of prejudgment interest (which every unpaid seller needs for full recovery), but compromised by leaving the interest rate open for decision on a case-by-case basis (id.) -- so that the injured seller's make-whole expectations are met by compensating it for its own cost of delayed payment as well as recovering the payment itself.
Now look at the situation of the same injured seller in terms of the other component of being made whole. Exactly as with prejudgment interest, that result is assured only by freeing its damages recovery from the burden of attorneys' fees. Little wonder, then, that the award of such fees is nearly universal among commercial nations (see the two Gotanda publications cited earlier). And surely in this instance, the make-whole expectations of the injured seller -- a Mexican company -- are best met by conforming to Mexico's own adherence to that nearly universal rule.
In sum, the award of attorneys' fees has really been agreed to, although [buyer] does not now acknowledge it,  by the combination of [buyer's] stipulation and Article 74. Because the amount of the fee award remains to be resolved, a status hearing is set for 9 a.m. September 5, 2001, to discuss the procedure and timing for that purpose.
Although what has been said to this point is dispositive of the issue, it is worth looking at [seller's] other string to its bow: its invocation of the inherent-power predicate for imposing a litigant's fees on its adversary where the adversary has "acted in bad faith, vexatiously, wantonly, or for oppressive reasons" (F.D. Rich, 417 U.S. at 429) in its prelitigation or litigation conduct or both. Although Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991) has become the most recent definitive case in that respect, the Supreme Court had earlier confirmed that teaching in such cases as Hall v. Cole, 412 U.S. 1, 15 (1973), reconfirmed in Roadway Express, Inc. v. Piper, 447 U.S. 752, 766 (1980); Alyeska Pipeline, 421 U.S. at 258-59; and Hutto v. Finney, 437 U.S. 678, 689 n.14 (1978).
This Court has already spoken and written at some length about the bad faith with which [buyer] and its people conducted their dealings with [seller] and then, when they ceased to do business with [seller] and the latter was forced to sue to collect for the unpaid sale price of its tins, with which they conducted this litigation. Instead of repeating that discussion, this opinion attaches [seller] Mem. 2-3, which provides an encapsuled and accurate description of [buyer's] activity. That conduct by [buyer] both leading up to and during the litigation supports an award of attorneys' fees pursuant to the inherent power doctrine under the cited Supreme Court decisions and such other cases as United States v. Fidelity & Deposit Co., 986 F.2d 1110, 1120 (7th Cir.1993).
More than one line of analysis confirms [buyer's] obligation to bear [seller's] attorneys' fees, so that [seller] may be made whole for the damages and expenses it has been forced to bear due to [buyer's] misconduct. As stated earlier, with the next step being the quantification of that amount, this action is set for a next status hearing at 9 a.m. September 5, 2001.
� bad faith refusal to pay anything for the hundreds of thousands of tins that it received and used years ago, and its continuing course of misconduct throughout this litigation in denying any liability to [seller's], thereby dramatically and needlessly expanding the scope of this litigation to cover invoices for which [buyer] had absolutely no defense against payment as a matter of law.
Under domestic law, this Court possesses the inherent power to award attorneys' fees and expenses where such fees and expenses are incurred as a result of bad faith conduct. Chambers v. NASCO, 501 U.S. 32, 45-46, 111 S.Ct. 2123, 2133 (1991). It is difficult to imagine a clearer case of bad faith than this one. Indeed, Terry Cohen admitted on the witness stand that on March 10, 1999, in response to [seller's] decision not to ship any more tins to [buyer] until [buyer] paid its past due balance in full, he threatened [seller] that as a former supplier, [seller] would no longer have any priority for payment. That testimony speaks volumes of [buyer's] true motivation. As Mike Gibson and Dennis Headley both testified, Terry Cohen told [seller] in no uncertain terms that if [seller] stopped shipping any more tins to [buyer], [seller] would never get paid -- and, in fact, that is exactly what happened. Since that date more than two years ago, [buyer] has refused to pay [seller] even a dime for any of the 1.6 million tins that [buyer] kept and used even though [buyer's] own records showed it owed [seller] hundreds of thousands of dollars for the tins. [Buyer] thus carried out its threat as retribution for [seller's] audacious decision not to ship any more tins until [buyer] paid for the tins it had already received.
To make matters even worse, [buyer] decided to make it as difficult and expensive as possible for [seller] to recover its money in this litigation. Despite its own accounting records, and the fact that [buyer] had absolutely no defense to payment of invoices totaling $857,796.90, [buyer] answered the complaint by generally denying that [buyer] "breached its contractual obligations" and by specifically denying that [buyer] was "liable for any damages for any alleged breach." Answer, � 2 (emphasis added) (attached hereto as Ex. 2). [Buyer] never amended this answer. Through its general denial, [buyer] dramatically expanded the scope of this litigation, including discovery and the trial, by forcing [seller] to undertake the difficult and time-consuming task of proving its entitlement to payment for more than 100 invoices that [buyer] knew full well it was obligated to pay.
[Buyer's] general denials also could not have been the product of any mistake, or any claim that it lacked sufficient information to confirm its obligation to pay [seller's] uncontested invoices. At the very outset of this litigation, [buyer] answered [seller's] requests for admission, and admitted to receiving, accepting and using virtually all of the tins that have been the subject of this litigation, thereby establishing the very facts that, after a lengthy and needless trial, entitled [seller] to judgment as a matter of law with respect to those invoices.
In the simplest terms, this is a case of an extreme bad faith refusal to pay, both before and during this litigation, and which continued through the trial itself. Accordingly, [seller] is entitled to recover its attorneys' fees not only as an element of consequential loss under the Convention, but under the Court's inherent power to award attorneys' fees in cases of bad faith; and pursuant to 28 U.S.C. � 1927.
1. John Milton, Paradise Lost, bk. II, ll. 113-14, likely drawn from Diogenes Laertius, Socrates 5.
2. As this opinion explains, that sleight-of-hand effort -- better suited to a shell game along the midway of a state fair than to a legal memorandum -- serves to obscure the true simplicity of the current inquiry.
"When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less." "The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty Dumpty, "which is to be master -- that's all."
For the reasons explained here, [buyer] and its counsel will not be permitted to emulate Humpty Dumpty -- except of course for their sharing the ultimate fate of having a great fall.
"In favor of [buyer] and against Envases, awarding [buyer] its interest, costs, disbursements, consequential damages, attorneys fees and other and further relief as this Court deems just and proper."
But now that the shoe is on the other foot, [buyer's] position has mysteriously become that the attorneys' fees that it specifically sought under the Convention are somehow non-recoverable by [seller] because of the American Rule. Leaving aside the level of hypocrisy (or perhaps even estoppel or "mend the hold" principles) raised by [buyer's] stance, it need scarcely be added that whether under the Convention or otherwise, the case for attorneys' fees sought by a prevailing party from Mexico (where local law awards them) necessarily has to be stronger, if anything, than a like claim by an Illinois party (where local law does not).
5. This opinion has used the term "teaching" advisedly, for [buyer's] counsel -- unable inany other way to blunt the force of what the Supreme Court has opined -- has retreated to the fallback position of seeking to "distinguish" those cases because each of them involved a differing factual scenario. But it is a truism that every case is "distinguishable" from every other case in that limited sense. What is significant instead is that the Supreme Court has repeatedly and expressly stated the scope of the inherent power doctrine in the terms described in the text here -- and this opinion is directly faithful to that unambiguous teaching.
6. Because [buyer's] late-advanced artwork counterclaim is pending before one of this Court's colleagues, this opinion has carefully steered clear of any substantive comments on that score. But this Court cannot help but remark that when [buyer] and its counsel took a second look at [buyer's] potential offensive position at the very beginning of the year 2000 (this action had been filed by [seller] in June 1999, [buyer] filed its Answer and Counterclaim in August 1999 and then [buyer's] Amended Counterclaim was submitted on January 3, 2000), that Amended Counterclaim catalogued no fewer than eight separate alleged breaches by [seller] that added up to the $225,000-plus counterclaim figure. Yet that second look, which was obviously the consequence of a fine-tooth-combing of the entire [seller-buyer] relationship, contained not a whisper as to any alleged counterclaim for the non-return of artwork belonging to Lenell. There is no question that [buyer] was both then and earlier in possession of every fact regarding that relationship (which had terminated nearly a year earlier) -- [buyer's] own key witnesses so testified during the trial. Yet it was not until later, when the case called for the preparation of the final pretrial order (the prelude to trial), that the supposed artwork claim miraculously sprang to life in the form of still another proposed amendment to [buyer's] counterclaim. And of course no plausible argument could be advanced that anything in the discovery process was needed to learn the existence of such a claim -- as just stated, all of the underlying facts were already in [buyer's] own possession. Although the as-yet-unresolved artwork issue has not formed part of the matrix for decision here, [buyer's] attempt to delay the day of reckoning by the belated injection of that added claim surely seems suspect.

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