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Case note

Reported at 6 Vindobona Journal of International Commercial Law and Arbitration (2002) 27-29

Zapata Hermanos v. Hearthside Baking

Joseph Lookofsky [*]

CISG Article 74 sets forth the general principle by which the Convention measures liability for breach.[1] As is the case under most domestic contract and sales laws, CISG damages are designed to compensate loss suffered as a "consequence of the breach." In this way CISG damages provide a substitute for the promised performance -- a sum of money which protects the injured party's "expectation interest".[2] The Convention thus seeks to place the injured party in the position she would have enjoyed "but for" the breach, but only as regards those losses which are "foreseeable":[3] damages may not exceed the loss which the breaching party foresaw or ought to have foreseen as a consequence of the breach of contract.[4]

In the Zapata case,[5] the plaintiff (seller) brought a successful action in a U.S. Federal court against the defendant (buyer). The seller then argued that the defendant should reimburse the plaintiff for its lawyer's fees, claiming that this item -- the winner's legal expenses -- was a "foreseeable" loss under Article 74.

Prior to Zapata, some CISG decisions rendered in non-U.S. courts seem to have interpreted Article 74 as permitting the recovery of such damages, and these decisions accord with the fee-shifting "loser pays" principle which is part of the domestic procedural law of most countries.[6]

Under the so-called "American rule", however, the losing party is generally not required to reimburse the winning party for its lawyers' fees.[7] Since this American rule -- which in breach of contract actions works as a "qualification" upon the general "expectation" measure of damages[8] -- applies in all types of cases [9] (in all U.S. State and Federal courts), it is best understood as a general rule of procedure subject to lex fori.[10] For this reason, it seems surprising that the U.S. District Court in Zapata -- citing Article 74 and the decisions of courts in other countries -- awarded attorneys' fees to the successful CISG plaintiff,[11] but the fact that the defendant in Zapata had acted in bad faith provided the Court with an alternative -- and in this situation more convincing -- fee-shifting exception to the general American rule.[12]


FOOTNOTES

* Professor of Law, University of Copenhagen. Adapted from Bernstein & Lookofsky, Understanding the CISG in Europe (2d ed. forthcoming 2002) (Kluwer Law International). We gratefully acknowledge the kind permission of Kluwer Law International to reproduce this Commentary.

1. See generally Bernstein & Lookofsky, op. cit. 6-15.

2. The remedy of specific performance also protects the buyer's expectation interest: see generally supra note 1, 6-4.

3. The foreseeability limitation in Article 74 accords well with both French and Common law traditions: see id. 6-15.

4. Unlike some domestic limitations, foreseeability (prévisibilité, Vorhersehbarkeit) under the Convention is to be evaluated solely on the basis of information available at the time of the conclusion (making) of the contract, in the light of the facts and matters of which the breaching party then knew or should have known. See generally id., 6-15.

5. Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., Inc., etc., 2001 U.S. Dist. LEXIS 15191 and 2001 WL 1000927 (N.D. III) <http://cisgw3.law.pace.edu/cases/010828u1.html>.

6. See generally Flechtner, H., "Recovering Attorneys Fees as Damages under the U.N. Sales Convention: A Case Study on the New International Commercial Practice and the Role of Foreign Case Law in CISG Jurisprudence," 22 Northwestern J. Bus. L. & Policy (forthcoming 2002). Professor Lookofsky extends his thanks to Professor Flechtner for providing a prior (pre-Zapata) draft of this forthcoming case study.

7. See (e.g.) Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975). Although the judgment rendered by an American court will usually require the losing party to pay the costs of the successful party (e.g., fees paid to the court), such "costs" do not generally include attorney's fees. Although this principle has been modified by "fee shifting" statutes in certain instances, no fee-shifting is still the "American rule": see Buckhannon Board and Care Home, Inc. v. West Virginia Dept. of Health and Human Resources, 532 U.S. 598 (2001).

8. See Farnsworth, Contracts (1999) 12.8 with note 3 citing Bunnett v. Smallwood, 793 P.2d 157 (Colo. 1990) (non-breaching party not entitled to award of attorney fees absent contractual, statutory or rule authorization).

9. I.e., not only in breach of contract cases, but also (e.g.) in actions grounded in tort (delictual liability) etc.

10. Accord: Flechtner, supra note 6. Indeed, the rule which determines whether (under what circumstances) lawyers' fees are to be shifted (born by the losing party) is regarded as procedural in many CISG jurisdictions. Regarding (e.g.) Danish law, see the authoritative text by Gomard, Civilprocessen (Copenhagen 2000), at 584. According to 312, para. 1, of the Danish Code of Civil Procedure (Retsplejeloven), "The losing party must generally reimburse the winning party for expenses incurred in connection with the litigation, unless the parties have made a different agreement, or the court, due to special circumstances finds good reason to depart from this rule The losing party's obligation under 312 to compensate the winning party for its costs is not dependent on whether the winning party could have demanded compensation for these costs under general [substantive] liability principles [aldimindelige erstatningsregler] " (translation mine, emphasis added, internal quotation marks omitted). Re the German Code of Civil Procedure (ZPO), see Schlechtriem, "Attorneys' Fees as Part of Recoverable Damages", Pace International Law Review (forthcoming 2002). I extend my thanks to Professor Schlechtriem for providing a prior draft of this forthcoming case note.

11. Although the value of the Zapata ruling as a precedent is perhaps limited by what the District Court characterized as the defendant's (implied) agreement ("stipulation") that attorney's fees were "foreseeable" damages, the decision also provides support for the more general -- yet hardly tenable -- position that CISG Article 74 qualifies a "fee shifting" statutory rule. For although the CISG surely qualifies as substantive federal law, Article 74 can hardly be categorized as a "fee-shifting" statute. And while it is admirable that the court in Zapata was willing to attach weight to foreign precedent (see the court's reference to cases cited by the seller), decisions such as OLG Düsseldorf, 14 January 1994 (CLOUT Case 130) <http://cisgw3.law.pace.edu/cases/940114g1.html> do not provide clear or convincing authority for the Zapata result: accord Flechtner, supra note 6. The Zapata court's heavy emphasis on the MCC Marble "precedent" seems equally misplaced, since that case involved the relationship between a domestic substantive rule (the so-called "parol evidence" rule) and the directly conflicting CISG rules (Articles 8(3) and 11): see Lookofsky, supra note 1, 4-15. For the text of MCC-Marble Ceramic Center v. Ceramica Nuova D'Agostino S.p.A., U.S. Circuit Court of Appeals (11th Cir.) 29 June 1998, see 144 F.3d 1384 <http://cisgw3.law.pace.edu/cases/980629u1.html>. For a contrary view, see generally, Felemegas, J., "The award of counsel's fees under Article 74 CISG, in Zapata Hermanos Sucesores v. Hearthside Baking Co. (2001)", 6 Vindobona Journal of International Commercial Law and Arbitration (2002) __-__.

12. Due to the fact that the defendant had acted in bad faith, the court had the "inherent power" to impose the plaintiff's fees on its adversary: see sources cited in the Zapata decision. See also the Alyeska Pipeline case, cited supra in note 7. As indicated (note 11 supra), the implied "agreement" of the parties provided the court with yet another exception to the fee-shifting rule.


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