Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Company, Inc., D/B/A Maurice Lenell Cooky Company

Article 74 permits damages equal to the loss, including lost profits, that a contracting party foreseeably suffers because of breach. Nothing in the Convention’s text, history, or case law indicates that this reference to loss was meant to include the cost of litigating a later breach-of-contract lawsuit. Some prelitigation legal expenses, such as expenses reasonably incurred to mitigate damages, may qualify as incidental contract damages. Litigation fees are different.

The CISG governs international sales contracts, not generally applicable rules of civil procedure. Rules on shifting litigation costs ordinarily operate across fields of law: the United States follows the American rule, under which each side ordinarily bears its own fees, while many other legal systems use a loser-pays rule. That difference is procedural rather than a difference in substantive contract law.

Article 7(2) directs that matters governed by but not expressly settled in the Convention be resolved through the Convention’s general principles, or, if none applies, through the law selected by private-international-law rules. The Convention supplies no general principle for deciding when litigation fees shift. The question therefore falls to the applicable domestic law rather than to Article 74.

Treating fees as Article 74 losses would also create untenable asymmetry and uncertainty. Zapata’s approach would seemingly give prevailing plaintiffs an automatic Convention-based recovery while leaving unclear the position of prevailing defendants, the interaction with domestic fee rules, and the role of Article 74’s foreseeability limitation. The court found no reason to believe that the United States, a committed American-rule jurisdiction, joined the CISG intending to displace that rule silently.

The district judge was understandably troubled that Lenell had failed to pay at least a substantial amount it admitted owing. But an ordinary breach of contract is not, under common-law principles, wrongful conduct warranting punishment merely because the breaching party lacks a good excuse. Contract damages ordinarily represent the price of nonperformance, and even deliberate breach can sometimes be economically efficient.

Illinois law permits punitive damages for breach of contract only when the breach is accompanied by independently tortious conduct, such as fraud, duress, or breach of fiduciary duty. Zapata neither sought punitive damages nor established the required tortious misconduct. The district court could not effectively award punitive damages by calling the recovery attorneys’ fees.

Although this was a CISG case rather than a diversity case, the CISG directed unresolved questions to applicable domestic law. Thus, the Erie principle still prevented the federal court from imposing a substantive contract remedy that Illinois law would not allow.

Inherent authority is a narrow, residual power to punish misconduct in the litigation itself, not conduct that gave rise to the lawsuit. It may not be used to remedy perceived gaps in substantive contract law, circumvent the American rule, or impose sanctions where the Federal Rules of Civil Procedure provide the relevant limits. In particular, the restrictions in Rules 11 and 37, including Rule 11’s safe-harbor protections, also constrain the use of inherent authority.

The court did not decide whether particular counterclaims or trial tactics by Lenell might support a properly imposed litigation sanction on remand. It held only that the $550,000 award, which rested in substantial part on Lenell’s nonpayment and the district court’s broader displeasure with its case, could not stand.

Zapata had sought partial summary judgment based on Lenell’s purported admissions that it owed approximately $858,000. The district judge denied the motion because a partial ruling on one claim would not satisfy Rule 54(b) and permit an immediate appeal. That premise was incorrect.

Rule 56(d) expressly authorizes an order specifying facts not genuinely disputed, including the extent of damages or other relief not in controversy. A court may therefore establish an undisputed portion of a single claim before trial without entering an appealable final judgment. Indeed, avoiding an interlocutory appeal may serve judicial economy.

This error mattered because the district judge later faulted Lenell for forcing Zapata through a costly trial rather than acknowledging liability. A proper pretrial ruling could have resolved the conceded portion of the claim long before Zapata incurred the full $550,000 in fees.

The court identified only a few comments made in the jury’s hearing and concluded that they were unlikely to have changed the outcome. Lenell therefore was not entitled to reversal of the jury verdict on this ground.

Even so, trial judges must be cautious about remarks that communicate contempt for a party, its counsel, or its case in front of the jury. Such comments can improperly signal the judge’s view of how the dispute should be resolved and thereby undermine the jury’s independent role.

The district judge’s comments at trial, together with the tone of other statements during the litigation, created sufficient concern that reassignment would best preserve both fairness and the appearance of fairness. The court invoked its circuit rule authorizing reassignment when appropriate on remand.