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Reproduced with permission of 6 Vindobona Journal of International Commercial Law & Arbitration (2002) 40-56

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. (2001)

Arthur B. Colligan, Jr.[a1]

  1. Introduction
  2. Zapata Hermanos v. Hearthside Baking Co.
  3. Background
  4. Analysis
  5. Conclusion

1. INTRODUCTION

In a series of rulings, Zapata Hermanos, S.A. v. Hearthside Baking Co. Inc., d/b/a Maurice Lenell Cooky Company,[1] addresses a number of important issues arising from the application of the United Nations Convention on Contracts For the International Sale of Goods [2] (hereinafter Convention or CISG), among them whether the winning party is entitled to be reimbursed the cost of attorneys fees as an element of damages and the method of calculating rate of interest on awards of interest under the CISG. This case note is confined to the manner in which the district court addressed the issue of how to choose a rate of interest when a party is in arrears regarding an international sales contract governed by the CISG.[3] In Zapata, the jury awarded over US $355,000 in interest on buyer's long-standing indebtedness to the seller. The Court's concern was not the potential award of interest because the parties had agreed in a final pretrial order that the CISG provided the rules of decision governing the parties' transactions.[4] Rather, the U.S. Court for the Northern District of Illinois, Eastern Division, focused on the [page 40] issue of how to determine an appropriate rate of interest. After considering the arguments of the parties, the court instructed the jury to determine the applicable interest rate based on the standard of "reasonableness."[5]

The goal of the CISG is to promote international trade by removing domestic legal barriers to international trade.[6] In order to promote a uniform interpretation of the CISG, the drafters intended that Article 7 be used by judges as a guide. Overall, Article 7 directs judges to give an international rather then a domestic interpretation to the CISG. When interpreting a provision of the CISG, Article 7(1) directs a judge to avoid considering any internal domestic law initially. Rather, the judge should act in conjunction with the overall objectives of the CISG, which are to bring uniformity and to promote the observance of good faith in international trade. Article 7(2) specifies the rules to accomplish these goals directing that the text of the CISG should be the principal source of interpretation. When the text does not expressly address an issue that is governed by the CISG, the judge should consider the "general principles on which the Convention is based". If the judge cannot find an answer, only then should she consult domestic law as though the CISG did not exist. Thus, if the answer cannot be found either in the text or in the general principles of the CISG, the judge is then free to consult domestic law as determined by rules of private international law.[7] [page 41]

Article 7 states:

"(1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.

"(2) 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."[8]

When dealing with international disputes, one of the most difficult problems a judge faces is choosing a rate of interest to apply to the facts presented.[9] Article 78 of the CISG states "[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 [ ... ]"[10] However, Article 78 fails to specify the rate of interest to apply or the method to be used to calculate the rate of interest. The majority of national court cases and arbitration decisions have utilised internal national law when setting a rate of interest. There is, however, some disagreement on this issue, with certain academic authorities, and the minority of CISG case law, indicating that consulting national law to set a rate of interest runs contrary to the legislative intent of the CISG, which is to advance uniformity. When choosing the applicable rate of interest these academic authorities and minority of judges believe that tribunals should consult the general principles of the CISG to establish a remedy, thereby establishing a method to determine a rate of interest, in order to maintain uniformity.[11]

This case note submits that Zapata was properly decided by the district court because the court determined the rate of interest based on the CISG general principles of "reasonableness" and "full compensation" and not based on gap-filling internal domestic [page 42] law.[12] Section 2 provides a summary of the facts, procedural history and the decision of the district court in Zapata. Section 3 presents background of how international courts and scholars have dealt with this issue. Section 4 provides an analysis as to how the district court decided Zapata, answering the query, did the court determine the rate of interest based on:

  1. Proof of damages under Article 74; or
  2. Interest under Article 78, applying gap-filling internal domestic law; or
  3. Interest under Article 78, calculating the rate of interest utilizing the CISG general principles of "reasonableness" and "full compensation."

This Note concludes that the district court decision was correct, applying the approach favored by certain academic authorities and a minority of judges, and in accord with the uniformity approach favored by the drafters of the CISG, i.e., No. 3, Interest under Article 78, calculating the rate of pre-judgment interest utilizing the CISG general principles of "reasonableness" and "full compensation," and not calculating the rate of pre-judgment interest under No. 2, interest under Article 78, applying gap-filling internal domestic law.

2. ZAPATA HERMANOS V. HEARTHSIDE BAKING CO.

2.1 Facts and procedural history

The Court had awarded Zapata US $857,796.90 as a matter of law on Zapata's invoices covering tins that the defendant, Lenell, had admittedly received and used but had never paid, despite the passage of several years. The jury awarded Zapata on the hotly disputed item of pre-judgment interest on Lenell's nonpayment of its obligations, in the amount of US $355,560.91.[13] In its Memorandum Opinion and Judgment Order dated July 18, 2001, the court said that only one other aspect of the verdict is at all [page 43] problematic: the jury's award of over US $355,000 in interest on Lenell's long-standing indebtedness to Zapata.[14]

According to the court, the defendant, Lenell argued that no interest was payable at all because the parties' course of dealing demonstrated that Lenell was never "in arrears" -- that the parties' failure to have discussed the subject of interest, when coupled with Lenell's course of conduct (which was marked by its nonpayment on anything remotely approaching a current basis for tins admittedly delivered and used), somehow entitled Lenell not to make current payments as a matter of right without having to account for its delay in such payments.[15] To counter Lenell's position, Zapata pointed to Lenell's own purchase orders, which always contained the type of provision thoroughly familiar to business people -- "1% 10 days net 30 days" or "1% 10 days net 60 days" and to the express provisions of Zapata's invoices which uniformly required the payment of interest and specified the rate to be charged, 1% per month, compounded each month.[16] In the alternative, Zapata argued [17] that if the rate specified in Zapata's invoices is found not to govern, courts applying the CISG often look to the non-breaching party's costs of borrowing capital pursuant to Article 74.[18] Once the parties proffered their respective evidentiary versions on the subject, the issue was weighed by the jury and resolved in Zapata's favour.[19] [page 44]

2.2 The decision of the U.S. Court for the Northern District of Illinois, Eastern Division

The Court held that the potential difficulty with the verdict is in its quantification of the interest award, for Zapata's calculation (and the amount that the jury awarded) was based on the interest rate specified in Zapata's invoices when applied to the entire amount that Zapata had claimed, including the invoices that the jury then rejected in its first finding included in the verdict form. Zapata argued that the jury could have found that the over US $355,000 interest award was "reasonable" even for the smaller principal amount that Lenell owed it (just under US $858,000, rather than something over US $934,000), but the court found the contention to be overly speculative and hence unpersuasive.[20] On the other hand, Lenell argued that domestic gap-filling law should be used because Article 78 is silent as to how the interest rate should be calculated.[21]

Lenell's position was that the court should have applied the interest rate in Illinois on an account stated, which was the US Treasury Bill Rate of 5% and accepted by U.S. District Court as 3.7%. The court thought that Lenell's position was absurd because it did not bear any resemblance to a reasonable commercial rate as between a business seller and its business customer. The court concluded that Lenell's reliance on Illinois law (815 ILCS 205/2) was misguided.[22] The plaintiff had met its burden of proof that CISG Articles 74 [Damages], 78 [Interest], and 7(1) & (2) [General principles of reasonableness and full compensation] would govern the method of determining a prejudgment interest rate. The burden of proof then shifted to the defendant, Lenell, to [page 45] demonstrate why the gap-filling Illinois local domestic law should apply. The defendant failed to meet its burden of proof.

The jury found that the parties' course of dealing eliminated the rate of interest set out in the invoices from the contracts. [23] Lenell never paid interest nor did Zapata request interest when attempting to collect payment prior to this action.[24] Here, the jury found that the plaintiff failed to met its burden of proof that the party's normal course of dealing, namely the plaintiff's interest rate penalty for late payments, printed on the plaintiffs invoices and on the defendant's purchase orders, indicated the parties' intent to be bound by these provisions in their contract. However, the jury also decided that the party's course of dealing did not amount to an agreement that interest under the Convention would not be available.[25] Thus, the plaintiff successfully met its burden of proof that the intent of the parties in their contract was that interest would be charged to a party whose payment was in arrears and that the rate of interest would be determined according to the general principles of full compensation and reasonableness. The burden of proof then shifted to the defendant who failed to show that the parties had made an affirmative agreement either expressed in writing or implied by their conduct, that there would be no interest penalty for late payment. [page 46]

Once the jury made this decision it was entitled to determine a reasonable amount of interest award.[26] The court found that the jury adopted a particular methodology for calculating interest.[27] The jury thought that the rate of interest was not based on the 1% compound rate stated on Zapata's invoices and Lenell's purchase orders. Rather the jury simply decided that the 1% compound rate was a reasonable interest rate and chose to apply it.[28] Once the plaintiff met its burden of demonstrating a reasonable approach to determining a rate of interest, the defendant failed to met its burden of proof to provide a reasonable alternative approach to determining a rate of interest.

In its Memorandum Opinion and Order, dated 18 July, 2001, the Court also addressed the issue of post-judgment interest covering the time period between the 19 June jury verdict and the actual final judgment date of 19 July. The Court said that "[n]either party can be held to be at fault in that respect" and applied internal domestic law, holding that 3.59% post-judgment interest was appropriate.[29] The Court evidently treated this issue under the forum's procedural law and outside the scope of the CISG. The rate of post-judgment interest was apparently decided according to the internal domestic law applicable on the basis of the relevant conflict-of laws rules.[30]

3. BACKGROUND

The CISG expressly provides in Article 78 that interest is due when payments are in arrears. The legislative history indicates that the delegates did not agree on the establishment of a rate of interest or way to calculate it.[31] In some countries, interest payment is considered to be part of damages, while other countries completely exclude it.[32] Article 78 states that a creditor is to be paid interest on any payments in arrears.[33] [page 47]

However, the CISG is silent on the rate of interest that should be calculated. As a result the case law surrounding this issue presents different approaches. Even though 90% of the case law favors the application of gap filling internal domestic law, this issue is not entirely settled because there are distinct differences of opinion amongst judges.[34] This controversy originated from the drafters themselves and can be reviewed in the legislative history of the CISG.[35]

A review of the legislative history of CISG Articles 78 and 84(1) shows that, when dealing with the issue of interest, the drafters of the CISG had different views as to the manner in which interest rate should be applied.[36] What has resulted is what many have referred to as a gap in the Convention regarding which rate of interest judges and arbitrators should award to injured parties. [37] In order to fill this gap in the CISG, one must decide whether the gap is considered lacuna intra legem, i.e., when the matter is outside the scope of the CISG, versus lacuna praeter legem, i.e., when the Convention applies to the issue but does not expressly resolve it.[38] Even though a majority of courts have viewed the rate of interest as being intra legem, that is, outside the scope of the CISG because it does not expressly set a rate of interest and is therefore subject to applicable internal domestic law for sales contract,[39] a minority of authorities consider the gap lacuna praeter legem, believing that the question should be resolved within the CISG. They assert that interest payment is included in the CISG under Article 78 and is a matter governed by the Convention, but the method of accomplishing it is not expressly resolved.[40] [page 48]

The first step when using the general principles of the CISG to fill a gap in the CISG is to determine what general principles, if any, are applicable. The CISG does not supply a list of these principles, nor does it suggest where any are to be found. Nevertheless, close scrutiny of the underlying themes of the articles of the CISG provides a number of general principles, which can be used to fill the interest rate gap. They include among others, the principles of "Reasonableness" and "Full Compensation".[41]

3.1 General principles of "reasonableness"

Determination of the rate of interest is a good example of where the application of Article 7(2) analysis is called for. Reasonableness is a general principle of the CISG even though it is not specifically mentioned in Article 78. Reasonableness is expressly referred to in thirty-seven provisions of the CISG and also applied elsewhere in the Uniform Sales Law. There are many references to reasonableness in the articles of the CISG, e.g., Articles: 46(3) sentences 1 and 2, 49(2), 63(1), 65(2), 72(1), 73(2), 75, 77, 79(1), 85 sentence 1, 87, 88(1), 88(2) and 88(3).[42] Schlechtriem states that "the rule that the parties must conduct themselves according to the standard of the 'reasonable person' [ ... ] must be regarded as a general principle of the Convention". [43] Additionally, Bonell states that "in applying [ ... ] the 'reasonableness' test in order to determine whether a party in a particular circumstance has been (re-)acting with due diligence, a judge of a highly industrialized country may not automatically refer to the standards of care and professional skill normally required from national business people in domestic affairs. Rather, the answer should be found either in the Convention itself or at least on the basis of standards which are currently adopted also in other legal systems."[44]

Reasonableness as a general principle of the CISG, strongly influences the proper interpretation of all provisions of the CISG. The Convention recognised that no statute or law can be designed to expressly settle all issues governed by it. Thus the Convention provided in Article 7(2), part one, "such matters are to be settled in conformity with the general principles on which the CISG is based." Reasonableness is [page 49] one of the most fundamental principles on which the CISG is based. Article 7(2), part two provides, "in the absence of general principles on which the CISG is based, such matters are to be settled in conformity with the law applicable by virtue of the rules of private international law."[45]

There is much doctrine upholding the good faith and uniform-law logic of applying part one of Article 7(2) in lieu of its part two.[46] Treating reasonableness as a fundamental principle of the CISG and considering reasonableness in every article of the CISG, whether specifically mentioned in the article or not, encourages judges to apply part one rather then part two of Article 7(2). This approach to Article 7(2) vis-à-vis the CISG general principle of reasonableness is required because of the good faith and uniform-law mandate stated in Article 7(1) of the CISG.[47]

3.2 General principle of "full compensation"

The general principle contained in Article 78, which permits an injured party to obtain interest on all "sums in arrears", is very similar to the principle underlying Article 74 which provides for "damages [ ... ] equal to the loss [ ... ] suffered as a consequence of the other party's breach."[48] From Article 74, one can extract a general principle of "full compensation". The interest paid to an injured party is determined by the approach for the estimating of damages which is to place the injured party in the position he would have been had the contract not been breached.[49]

Other courts have applied this principle of "full compensation" with regard to interest. However, these courts have used a combination of national law and the "full compensation" principle to award interest at the statutory defined rate, but in addition, award further interest under Article 74 as damages so as to make the injured party whole.[50] Some authorities, have criticized the theory of applying the general principle [page 50] of "full compensation" from Article 74's damages provision when dealing with interest since it confuses the distinct difference between interest, Article 78 and damages, Article 74.[51] However, the issue of whether or not interest is or is not part of damages would seem to be irrelevant since the Article 78 explicitly states that a party is entitled to interest without prejudice to any claim for damages.[52]

The general principle of "full compensation" requires that interest be paid on all amounts due; it should not matter whether interest is deemed part of damages.[53] If the directive of Article 7(2) is complied with, the various methods of calculating the rate of may be unnecessary. If a judge focuses on the general principle of full-compensation, the question should be which interest rate will fully compensate the injured party. Some take the position that the injured party should be awarded interest payments at the rate based on the injured party's credit costs.[54] Such a solution is "best suited to international trade where it is not the practice for the businessperson to leave their money idle"[55]. This answer, has met with disapproval because it is viewed as reintroducing through interpretation a method that was rejected at the diplomatic conference.[56] The problem is that through this approach "[o]ther countries would then be inclined to interpret into the Convention their own rejected proposals." [57] Further study reveals that this criticism is flawed.

The question is not whose law should prevail, but which interpretation encourages international trade by bringing uniformity and consistency to the legal rules. The purpose for the delegates at the Convention was not to argue who had the better law, but how best to accommodate national and international interests, without undermining domestic sovereignty and legal order. In order to achieve this, many nations made [page 51] "sacrifices" so that an effective solution could be discovered.[58] If an interpretation promises to bring uniformity to international trade, such interpretation should be followed, even if the interpretation was not adopted at the Convention as long as it is not inconsistent with that which was adopted. This approach is necessary regarding the CISG because there is no editorial body to amend the Convention. Therefore it is not appropriate to look first to national laws to determine the applicable interest rate.[59]

4. ANALYSIS

4.1 Applying the general principles of reasonableness and full compensation to pre-judgment interest

Zapata stands for the proposition that a judge should apply the general principles of the Convention and not internal domestic law principles to fill the gap of determining the applicable rate of pre-judgment interest, when a party is in arrears regarding an international sales contract governed by the CISG. Here the court utilized the CISG general principals of "reasonableness" and "full compensation" as the method the jury should use to determine the rate of interest.[60] The court correctly stated that the Article 78 of the CISG establishes that interest should be charged to a party who is in arrears. The court in Zapata, acted consistent with the uniformity principles adopted by the drafters of the Convention, and in accord with certain academic authorities and a minority of international cases holding that Article 78 establishes that interest should be charged to a party in arrears, and that a judge should consult the applicable CISG general principles to set the rate of interest.[61]

When the Court considered the issue of how to determine the rate of interest, the plaintiff Zapata requested that the court consider the rate of interest the parties contracted for or in the alternative, apply Article 74, awarding interest as foreseeable damages.[62] Additionally, when seeking attorney's fees under Article 74, damages, one [page 52] of the arguments the plaintiff, Zapata made was that the court should apply the CISG, pursuant to the general principle of uniformity found in Article 7.[63] The defendant Lenell argued that internal domestic law should be used to fill the gap because Article 78 is silent as to how the interest rate should be calculated.[64]

The Court concluded that there is no universal rate of interest on unpaid obligations. The Convention calls for the right to the payment of interest under Article 78 and that the rate of interest should be determined by the general principles of the Convention, not. under internal domestic law.[65] The court instructed the jury to determine the rate of interest based on what the parties agreed, if any. If the jury found that the parties did not agree on an interest rate then the rate is that which the jury determined was reasonable.[66] It is important to note that the district court judge utilized the CISG general principles of "reasonableness" and "full compensation" when the judge acknowledged that the injured seller is entitled to "full relief" and "to be made whole."[67]

A majority of international cases have held that in order to determine the rate of interest under Article 78 the judge should apply internal domestic law. The problem is by following domestic law, the rates of interest being determined lack uniformity. For example, in Delchi Carrier S.p.A. v. Rotorex Corp,[68] the District Court stated that because Article 78 of CISG does not specify the interest rate, the rate should be fixed in its "discretion" and granted the rate of the United States Treasury Bill. The Court's rationale is similar to theory No. 2 in my introduction -- interest under Article 78, applying a domestic law standard in order to fill the gap left under Article 78. In Delchi the court applied the Treasury Bill rate, whereas in the Zapata ruling on pre-judgment interest, the court applied the Convention's general principles of "reasonableness" and "full compensation."

A minority of international cases have held that Article 78 along with the general principles of "reasonableness" and "full compensation" should be applied when establishing a rate of interest. While many tribunals have misunderstood and have [page 53] misapplied the Article 7 mandates, a few tribunals have recognized the general principle of "full compensation" and applied it. In Arbitral Award SCH-4318, the arbitrator stated:

"[o]ne of the general legal principles underlying the CISG is the requirement of 'full compensation' of the loss caused. It follows that, in the event of failure to pay a monetary debt, the creditor, who as a business person must be expected to resort to bank credit as a result of the delay in payment, should therefore be entitled to interest at the rate commonly practiced in its country with respect to the currency of payment, i.e. the currency of the creditor's country or any other foreign currency agreed on by the parties."[69]

The arbitrator also stated that the UNIDROIT Principles of International Commercial Contracts propose the same solution. This reasoning was also followed in another arbitral award from Austria, Arbitral Award SCH-4366 of 15 June 1994.[70]

The issue of interest payment was specifically addressed and resolved in the Convention. The text of the CISG should also stand for the proposition that internal domestic law is overruled on the issue of determination of the rate of interest, unless the party expressly indicates to deviate from the CISG. Therefore, it becomes unnecessary to consider internal domestic law on the validity of the issue.[71]

4.2 Applying the general principles of the convention to post-judgment interest and the burden of proof

The court's approach when determining a post-judgment rate of interest stands in contrast to the way in which the court determined a pre-judgment rate of interest.[72] The court deduced that post-judgment rate of interest was lacuna intra legem, outside the scope of the CISG. Thus, applying internal domestic procedural law because neither party could be held at fault. Whereas, the court treated pre-judgment rate of interest as lacuna praeter legem (when the CISG applies to an issue but does not expressly resolve [page 54] it) -- determining the applicable rate of interest in conformity with the general principles underlying the Convention, i.e., reasonableness and full compensation -- the court may have concluded that post-judgment interest is separate and apart from the CISG because the CISG deals with the rights and obligations of buyers and sellers of goods, treating post-judgment interest as a matter separate and apart from the CISG: as a procedural issue governed by the forum's law.[73]

When dealing with international disputes covered by the CISG there can be a problem regarding the role of procedural law versus international law. This issue also arises when a court must decide what party has the burden of proof and what causes the burden of proof to shift to the opponent? In Zapata, the question is should the court have decided who had the initial burden of proof based on the CISG, law of the forum or internal domestic law? Some commentators suggest that although it is customary that matters considered as procedural domestic law be settled in accordance with the law of the forum, this practice cannot be allowed to trump the provisions of the CISG.[74] It is suggested by this author that when contemplating a post-judgment interest award the court might have applied the Article 7(1) general principles of full compensation and reasonableness instead of the forum's procedural law. This seems more practical, especially when a country's economy is suffering from a hyper-rate of inflation.[75]

Additionally, when a court considers who has the initial burden of proof and what causes it to shift to the other party, the court should look to the CISG for guidance. In Zapata, the court placed the initial burden of proof on the plaintiff to prove its claims. If the plaintiff met his burden of proof, the burden shifted to the defendant.[76] Here the [page 55] court acted in accord with the general principles of the Convention. Note, if the defendant claimed that it made an affirmative agreement with the plaintiff that the CISG does not govern their contract or that an article of the CISG would not apply, then the defendant would have the initial burden to prove his claim. Once the defendant met his burden then the burden would shift to the plaintiff to demonstrate no affirmative agreement existed.[77]

5. CONCLUSION

The court in Zapata obtained the correct result by applying the proper method of determining the rate of pre-judgment interest. The court correctly chose the CISG as the proper law and Article 78 as the appropriate statute. In addition, the court pursuant to Article 7(1) & (2), properly utilised the general principles of "reasonableness," and "full compensation," because interest payment is addressed in the CISG under Article 78 and is thus a matter governed by the Convention, even though the method of determining the rate of interest is not expressly resolved. Therefore, the general principles of the Convention should be applied to fill the gap, not internal domestic law.

The purpose of this article is to demonstrate that reference to the general principles of the Convention will greatly reduce the need to resort to internal domestic law in order resolve the issues of how to determine pre-judgment and post-judgment interest rates as well as establishing the burden of proof. This article suggests that on the whole, Zapata was correctly decided and that courts should follow this international approach by extracting general principles from the CISG. The general principles approach provides a narrow interpretation of the method of determining pre-judgment and post-judgment interest rates as well as establishing the burden of proof, alleviating the need to refer to domestic law where the CISG should govern.[78] Therefore, interpretations based on general principles more fully realise the Convention's goal of uniformity. [page 56]


FOOTNOTES

a1. B.A., LLB, currently undertaking Juris Doctor at Pace University School of Law, White Plains, NY: Paralegal, Robert P. Tusa Law Offices, Yonkers, NY. The author would like to thank his parents Arthur B. Colligan, Sr. and Jean B. Colligan for their support and encouragement.

1. 2001 U.S. Dist. LEXIS 11698, (N.D. Ill. July 18, 2001) (Court's ruling on buyer's motions for judgment as a matter of law and for a new trial); 2000 U.S. Dist. LEXIS 17959 (N.D. Ill. Dec. 8, 2000) (Ruling on pre-trial motions); 2001 U.S. Dist. LEXIS 10286 (N.D. Ill. July 20, 2001) (Supplement to Memorandum Opinion and Judgment Order (Supplement to Court's opinion dated 18 July 2001)); 2001 U.S. Dist. LEXIS 12403 (N.D. Ill. Aug. 15, 2001) (Ruling on second motion by buyer attacking the judgment); 155 F. Supp. 2d 969, 2001 U.S. Dist. LEXIS 13009 (N.D. Ill. 22 August 2001 (Ruling on seller's motion for an award of attorney's fees: ruling on seller's motion advanced against buyer's litigation counsel); 2001 U.S. Dist. LEXIS 15191 (N.D. Ill. Aug. 28, 2001) (Ruling on seller's motion for an award of attorney's fees: ruling on seller's motion advanced against buyer).

2. Final Act of the United Nations Conference on Contracts for the International Sale of Goods, Apr. 10, 1980, U.N. Doc. A/CONF.97/18 (1980), reprinted in S. Treaty Doc. No. 98-9, (1983) and 19 I.L.M. 668.

3. See Zapata Hermanos, S.A. v. Hearthside Baking Co. Inc., d/b/a Maurice Lenell Cooky Company, 2001 U.S. Dist. LEXIS 11698 (N.D. Ill. July 18, 2001) (Court's ruling on buyer's motions for judgment as a matter of law and for a new trial).

4. See Id. at paragraph 8.

5. Id. at paragraph 11 n.6.

6. CISG, supra fn 2, at preamble.

7. Phanesh Koneru, "The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An approach based on General Principles", 6 Minn. J. Global Trade 105, 123 n.3 (1997); see also UNILEX, A Comprehensive and 'Intelligent' Data Base on the UN Convention on Contracts for the International Sale of Goods (CISG), Transnational Juris Publications, Inc., Irvington, N.Y. [hereinafter UNILEX].

8. CISG, supra fn 2, Art. 7.

9. United Nations Convention on Contacts for the International Sale of Goods, UNdoc A/Conf.97/18 Annex I.

10. CISG, supra fn 2, Art. 78.

11. Alan F. Zoccolillo, Jr., "Determination of the Interest Rate under the 1980 United Nations Convention on Contracts for the International Sale of Goods: General Principles vs. National Law", (1997) 1 Vindobona Journal of International Commercial Law and Arbitration 3, at p. 3

12. Zapata, supra fn 3, at paragraph 14 n.8.

13. See Zapata Hermanos, S.A. v. Hearthside Baking Co. Inc., d/b/a Maurice Lenell Cooky Company, 2001 U.S. Dist. LEXIS 11698, at paragraph 2 n.1 (N.D. Ill. July 18, 2001).

14. Zapata, 2001 US Dist LEXIS 11698, paragraphs 8-9 citing ("Convention, which is reproduced in the pocket part to the last volume in 15 U.S.C.A."). In so far as is relevant Art. 74 CISG reads:

"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 the 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."

And Art. 78 CSIG specifies:

"If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74."

15. Id. at paragraph 9.

16. Id. at paragraph 10.

17. Special thanks to the plaintiff, Zapata's attorneys: Javier H. Rubenstein, Esq. and Thomas A. Lidbury, Esq. from the law firm Mayer, Brown, Rowe & Maw (formerly Mayer, Brown, Platt), for providing copies of the parties' case briefs.

18. Plaintiff's Trial Brief at p. 5 n.3, Zapata (No. 99 C 4040) ("See, e.g., Case No. 17 U 146/93 (OLG Düsseldorf Jan. 14, 1994) (Pursuant to Article 74, the court awarded interest of 16.5% based on evidence that the non-breaching party had borrowed money at that rate")).

19. See Zapata Hermanos, S.A. v. Hearthside Baking Co. Inc., d/b/a Maurice Lenell Cooky Company, 2001 U.S. Dist. LEXIS 11698, at paragraphs 10-11 n.6 (N.D. Ill. July 18, 2001) ('In that respect, Jury Instruction No. 28 (the instruction that spoke to the damages recoverable by Zapata if the jury found a breach of contract on Lenell's part) read in relevant part:

"Unless you find that the parties agreed otherwise, either expressly or through a course of conduct, Zapata is also entitled to recover interest on the amounts past due. If interest is recoverable, the rate of interest is that rate, if any, to which the parties agreed. If you find that no rate was agreed to by the parties, then the rate is that which you determine to be reasonable") (emphasis added)).

20. Id. at paragraph 12 (emphasis added).

21. Defendant's Corrected Memorandum In Response To Plaintiff's Motion For Attorney's Fees at 4, Zapata (No. 99 C 4040) Lenell states, "However, of interesting note is the court's decision on the rate of interest to be applied. Since the CISG is silent on an interest rate to be applied, the court relied upon the German Civil Procedure Code to support a rate of 16.5%. The vast majority of foreign proceedings look to the forum state's law in filling gaps such as interest. Case No. 17 U 146/93 (OLG Düsseldorf 14 January, 1994). See also Case No. HG 930476, Switzerland 1995 Handelsgericht Zurich (applying Austrian law in determining rate of interest due to Article 78's silence on interest rate); Delchi Carrier S.p.A. v. Rotorex Corp. 1994 W.L. 495787 (N.D.N.Y.1994), 71 F.3d 1024 (2nd Cir. 1995) (interest not an issue on appeal) (applying 28 U.S.C. Sec. 1961(a) to set interest rate due to Article 78's silence on interest rate."

22. Zapata, 2001 US Dist LEXIS 11698, at paragraph 13 n.7 ("additionally, the parties had agreed in a final pretrial order that their relationship would be governed by the CISG, and "with Lenell's payment due to Zapata in Mexico, Lenell has totally failed to explain how or why Illinois' local law provisions have any applicability at all.").

23. CISG, supra note 2. Article 9 states:

"(1) The parties are bound by any usage to which they have agreed and by any practices, which they have established between themselves.

"(2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned."

24. Zapata, supra note 3, at paragraph 11 n.6. ("And on the subject of the parties' 'course of conduct'," Jury Instruction No. 25 read in relevant part:

"If you find that one or more contracts were formed between [seller] and [buyer], the terms of those contracts will be those that you find that [seller] and [buyer] agreed upon. The terms also include any that you find, through the parties' course of dealings have become part of the common understanding between the parties.

"The terms of each contract also include any changes or modifications to such contract or contracts that you find the parties later agreed to").

25. CISG, supra note 2. Article 63 states:

"(1) The seller may fix an additional period of time of reasonable length for performance by the buyer of his obligations.

"(2) Unless the seller has received notice from the buyer that he will not perform within the period so fixed, the seller may not, during that period, resort to any remedy for breach of contract. However, the seller is not deprived thereby of any right he may have to claim damages for delay in performance."

26. Plaintiff's Brief In Opposition To Lenell's Second Rule 59 Motion at 2 n.1, Zapata (No. 99 C 4040).

27. Id. at 3.

28. Id.

29. Zapata, 2001 US Dist LEXIS 11698, at paragraph 18 ("Since 21 December 2000 (the date of enactment of Public Law 106-554), post-judgment interest on federal judgments must be calculated from the date of entry of judgment at a rate equal to the weekly average one-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System for the calendar week preceding the date of judgment (28 U.S.C. 1961(a)").

30. See John Felemegas, The Award of counsel's fees under Article 74 CISG, in Zapata Hermanos, S.A. v. Hearthside Baking Co., (2001), (2002) 6 Vindobona Journal of International Law and Arbitration 30. The present author thanks Dr. John Felemegas for kindly providing a pre-publication draft of his commentary of the Zapata case that he prepared for the Vindobona Journal of International Commercial Law and Arbitration.

31. Koneru, supra fn 7, at p. 115.

32. Koneru, supra fn 7, at 123.

33. CISG, supra fn 2, Art. 78. (A-2) "If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74."

34. Koneru, supra fn 7 at p. 124, n.87 ("'Approximately more than 70% of the cases compiled by UNILEX discuss the issue of interest rate. UNILEX. 'More than any other provision in the Convention, article 78 was affected by the diverse traditions of its drafters. Interest is treated differently in countries with different economic systems -- the distinction is greatest between capitalist and socialist countries -- and is barred by religious rules existing in some countries.' Jeffrey S. Sutton, Measuring Damages Under the United Nations Convention on the International Sale of Goods , 50 Ohio St. L.J. 737, 749 (1989)(citation omitted)").

35. Koneru, supra fn 7, at p. 113 n.88.

36. Id. at p. 471.

37. Franco Ferrari, "Uniform Application and Interest Rates Under the Vienna Sales Convention", 24 GA. J. Int'l & Comp. L. 467, at p. 472.

38. Id. at p. 471.

39. Zoccolillo, supra fn 11, at fn 139.

40. Phanesh Koneru, "The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An approach based on General Principles", 6 Minn. J. Global Trade 105, at p. 123 (1997).

41. Jeffrey S. Sutton, "Measuring Damages Under the United Nations Convention on the International Sale of Goods", 50 Ohio St. L.J. 737, 299 (1989) (emphasis added).

42. Albert H. Kritzer, "Annotated Text of The CISG: Article 78, Words and Phrases 'Reasonableness"', at <http://cisgw3.law.pace.edu/cisg/text/e-text-78.html>.

43. Peter Schlechtriem, Uniform Sales Law: The UN Convention on Contracts for the International Sale of Goods 39 and 22, n. 41 (Vienna, Manz) (1986).

44. Kritzer, supra note 42 at n.7. ("Michael Joachim Bonell, Article 7: Interpretation, Gap-filling, in: Bianca-Bonell Commentary, 81-82 (Milan: Giuffrè)(1987)").

45. Albert H. Kritzer, Reasonableness, Overview Comments, at <http://cisgw3.law.pace.edu/cisg/text/reason.html#view>.

46. Id. ("See, for example, the scholarly writings cited with our Annotated text of Article 7.")

47. Id.

48. John O. Honnold, Uniform Law for International Sales, 523 (2d ed. 1991) [hereinafter Honnold, Uniform Law]; see also Koneru, supra fn 7, at p. 117.

49. Koneru, supra fn 7, at p. 117 ("see also Giulio Ponzanelli, Article 78, in Convenzione di Vienna sui Contrati di Vendita Internazionale di Beni Mobili 308, 309 (Massimo C. Bianca ed., 1992").

50. Available at UNILEX, supra note 7. Amtsgericht Oldenburg, 24 April 1990_(5 C 73/89) (Germany); Landgericht Hamburg, 26 September 1990 (5 O 543/88) (Germany), reprinted in Praxis des Internationalen Privat- und Verfahrensrechts (IPRax) 400 (1991) (UNILEX) (in which a German court ordered the payment of 13% interest even though the statutory rate was 5%, because the statutory rate did not reflect the rate at which the creditor would pay on his loans.); Arbitral Award 7197 (Aus. v. Bulg), ICC Ct. Arb. (1993), reprinted in J. du Droit Int'l., 1028-37 (1993) (in which the Arbitral Tribunal awarded a rate of interest at 12% instead of the statutory 5% rate since the creditor would have customarily incurred interest at 12% on loans.)

51. See Zoccolillo, supra fn 11, at n. 153.

52. CISG, supra fn 2, at Article 78 (emphasis added).

53. Koneru, supra fn 7, at p. 126.

54. Koneru, supra note 7, at p. 114 ("Reprinted in Honnold, Documentary History, at 612 (remarks of Mr. Farnsworth, Delegate from the United States).

55. Joseph M. Perillo, "UNIDROIT Principles of International Commercial Contracts: The Black Letter Text and a Review", 63 Fordham L. Rev. 281, at p. 312 (1994).

56. Ferrari, supra fn 37, at 478 n.64.

57. Id.

58. Koneru, supra fn 7, at p. 127 n.98 (for example, the United States sacrificed the principle of the statute of frauds (U.C.C. 2-201) by ratifying the Convention without a statute of frauds. See CISG, supra fn 2, art. 11. Similarly, the Islamic nations that prohibit charging any interest seem to have yielded to the Convention by agreeing to be bound by Article 78 that expressly awards interest payment. See id., Art 78).

59. Id.

60. See Zapata Hermanos, S.A. v. Hearthside Baking Co. Inc., d/b/a Maurice Lenell Cooky Company, 2001 U.S. Dist. LEXIS 11698, at paragraphs 11-13 (N.D. Ill. July 18, 2001).

61. Id.

62. Plaintiff's Trial Brief, supra fn 18, at p. 5 n. 3.

63. Plaintiff's Corrected Brief In Support Of Its Entitlement To Attorneys Fees Attorney's Fees at p. 7, Zapata, 2001 US Dist LEXIS 11698.

64. Defendant's Corrected Memorandum, supra fn 21.

65. 2001 U.S. Dist. LEXIS 15191, at paragraph 11 (N.D. Ill. Aug. 28, 2001)(Ruling on seller's motion for an award of attorney's fees: ruling on seller's motion advanced against buyer).

66. Zapata, 2001 US Dist LEXIS 11698, at paragraph 11, n.6 (emphasis added).

67. Zapata, supra fn 64 at paragraphs 11-12.

68. Delchi Carrier S.p.A. v. Rotorex Corp., No. 88-CV-1078, 1994 U.S. Dist. LEXIS 12820, at paragraph 16 (N.D.N.Y Sept. 7, 1994) (mem. and order)").

69. See Arbitral Award SCH-4318 (F.R.G. v Aus.) (June 15, 1994), Internationales Schiedsgericht der Bundeskammer der Gewerblichen Wirtschaft, Wien, reprinted in Recht der Internationalen Wirtschaft (RIW) 591-92 (1994), available at UNILEX, supra fn 7.

70. See Arbitral Award SCH-4366 (Aus. v. F.R.G.) (June 15, 1994), Internationales Schiedsgericht der Bundeskammer der Gewerblichen Wirtschaft, Wien, reprinted in Recht der Internationalen Wirtschaft (RIW) 590-91 (1994), available at UNILEX, supra fn 7.

71. Zoccolillo, supra fn 11, at p. 29.

72. Felemegas, supra fn 30, n.19.

73. Interview with Prof. Albert H. Kritzer, Executive Secretary, Institute of International Commercial Law, Pace University School of Law (Feb. 8, 2002).

74. Felemegas, supra fn 30, , n.20-21, citing Waren Khoo, Commentary on the International Sales Law, 48 Cesare Massimo Bianca & Michael Joachim Bonell eds. (Milan 1987), quoting John O. Honnold, "Uniform Law for International Sales--The 1980 United Nations Convention", 18 Asian Pacific Regional Trade Law Seminar (984) 195 ("In an analogous setting of the different rules for torts and contracts that can vary between regimes, two leading CISG commentators have said: '[T]he label that the state law bears should be irrelevant.' The substance rather than the label or characterization of [the] rule of domestic law determines whether it is displaced by the Convention. In determining [this], the tribunal [ ... ] 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").

75. Kritzer, supra note 111. For example, in Argentina the annual rate of inflation has been 200%, with an average monthly inflation rate of 17%. Had the plaintiff, Zapata, lived in Argentina instead of Mexico a post-judgment interest rate of 3.59% per annum would not fully compensate the plaintiff for his damages, failing to make the plaintiff whole.

76. See my discussion of the burden of proof in Section 2B. "The Decision of the U.S. Court for the Northern District of Illinois, Eastern Division."

77. John Felemgas' views and thoughts regarding the specific topic of "burden of Proof in Zapata" which were exchanged in an informal diologue with Prof. Albert H. Kritzer, who shared Dr. Felemegas' views and thoughts with the author (8 February, 2002).

78. Cf. Koneru, supra fn 55, at p. 152.


Pace Law School Institute of International Commercial Law - Last updated August 17, 2006
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