Eighth Circuit Rejects Recovery of Attorney Fees under the CISG
September 4, 2024
Few questions on the interpretation of the CISG have been as contested on the international level as the potential recovery of attorney fees as damages for breach of contract. Courts in the United States have historically held that attorney fees are not recoverable under Article 74. That consensus was challenged last year when a federal district court in Minnesota held that such fees are recoverable. Although the Eighth Circuit reversed the district court in a recent decision, there are a number of reasons to believe that—history notwithstanding—the district court actually has the better of the argument.
Background
The CISG itself contains no guidance on the recovery of attorney fees as part of damages. Neither do the travaux préparatoires. This is regrettable for two reasons: First, the issue arises frequently, as attorney fees are inevitably occasioned by litigation of CISG contracts. Second, there is no uniform solution to the recovery of litigation costs on the international level. While the traditional approach in the United States is to deny litigants recovery of their costs (the so-called ‘American Rule’), other jurisdictions tend to allow each party to recover their costs to the extent that they were successful (the so-called ‘English Rule’).
Given the practical importance of the question and the lack of guidance from the text of the Convention, it is hardly surprising that there is a plethora of case law and scholarly writing on the issue. Whereas courts and authors from continental Europe initially considered attorney fees to be part of the foreseeable loss under Article 74, U.S. courts went in the opposite direction. The most famous case on the issue, Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., was decided by the Seventh Circuit in 2002.
Zapata and Subsequent U.S. Cases
In Zapata, Judge Posner held that attorney fees cannot be considered part of the recoverable loss under Article 74 for three reasons. The first is a counterfactual. Posner notes that the drafters did not consider the question of attorney fees but argues that, if they had done so, they would have almost certainly excluded them from the ambit of Article 74 because any other solution would not have been acceptable to U.S. negotiators.
The second argument is based on the dichotomy of procedural and substantive law. In Posner’s view, the recovery of attorney fees pertains to procedural law which is not governed by the CISG.
Posner’s final argument focuses on the equal treatment of the parties. He points out that allowing the plaintiff to recover costs under Article 74 might lead to an asymmetry: the successful plaintiff could obtain compensation for legal fees while the successful defendant could not, assuming that the plaintiff did not herself breach the contract.
After Zapata, most U.S. courts adopted this reasoning, as did most legal scholars. The issue seemed settled, at least in U.S. courts, as district courts from various circuits expressly followed the Seventh Circuit’s analysis in Zapata, even though some authors remained unconvinced by the exclusion of attorney fees from the ambit of Article 74.
The District Court’s Decision in Brands
Last year, in Brands International Corp. v. Reach Companies, the federal district court for the District of Minnesota challenged the U.S. consensus. Brands, a Canadian manufacturer of hygiene products, sold bottles of hand sanitizer to Reach, a retail distributor in Minnesota. After a delivery, Reach failed to pay, and Brands brought suit. Reach counterclaimed for breach of contract. The district court held that Reach’s failure to pay constituted a fundamental breach of contract that entitled Brands to damages.
Interestingly, the district court awarded Brands attorney fees. In direct opposition to Posner’s reasoning in Zapata, and the subsequent decisions from other U.S. district courts, the court in Minnesota held that attorney fees occasioned by the litigation of CISG contracts can be part of the recoverable loss under Article 74.
The decision relied on three arguments. First, the court noted that most contracting states to the CISG follow the English Rule, so that this should be the default position under the Convention rather than the American Rule. Second, the court noted that the recovery of attorney fees is in line with the principle of full compensation that underlies Article 74. And third, the court noted that Zapata leads to non-uniform application of the CISG, as attorney fees occasioned by litigation of CISG contracts are recoverable in other contracting states adhering to the English rule but not in the United States.
The Eighth Circuit’s Decision in Brands
On appeal, the Eighth Circuit concluded that attorney fees are not part of the recoverable loss under Article 74. The court of appeals started by noting that the CISG does indeed not expressly deal with the issue, so that the question is to be settled according to the general principles of the Convention pursuant to Article 7(2).
The court gave three reasons for excluding attorney fees from Article 74. First, the Eighth Circuit invoked the principle of equal treatment of the parties. Like Posner in Zapata, the court considered it to be a violation of this principle if the successful plaintiff could recover attorney fees, while the successful defendant could not.
Second, the court cited cases interpreting sections § 2-710 and § 2-715 of the UCC, which, in its view, are similar in language to Article 74, to show that U.S. courts have consistently rejected recovery of attorney fees as part of damages for breach of contract.
Finally, in response to the district court’s third argument, the court of appeals noted that its interpretation is line with decisions from the United States as well as other contracting states, including states like Germany that award damages for attorney fees in their domestic law. The Eight Circuit concluded that this interpretation can hardly be said to disturb the uniformity in the application of the Convention under Article 7(1).
Discussion
After the district court rejected the analysis in Zapata, the Eighth Circuit has fallen back into line with existing U.S. case law, restoring Zapata’s tight grip on the issue. Zapata’s influence is not restricted to U.S. courts but also extends to courts and scholars in other contracting states. The impact of the decision, in my opinion, stands in stark contrast to the quality of its reasoning.
Posner’s first argument—the counterfactual inquiry as to what might have happened if the issue had been discussed at the diplomatic conference—is speculative at best. There is no way of knowing what the drafters would have done if they had discussed the issue. Compromises were reached on far more important issues, like specific performance, while other questions were left to domestic laws.
The second argument, based on the distinction between substantive law, rests on a false premise. The Convention does govern some questions that some jurisdictions characterize as procedural, such as the burden of proof. The dividing line between substance and procedure is therefore of little help in answering the question whether a matter is governed by the Convention, especially since it is drawn quite differently in different jurisdictions.
Posner’s most impactful argument, which was picked up not only by the Eighth Circuit but also by many CISG commentators, is built on the principle of equal treatment of the parties. It may indeed seem odd that the successful plaintiff can recover her costs, while the successful defendant cannot. There is, however, a perfectly plausible explanation for this result that follows from the principles of the Convention. Costs are only recoverable as far as they result from a breach of contract. If the plaintiff can recover her costs under Article 74, it is because the legal costs are a foreseeable consequence of the breach by the defendant, and the principle of full compensation thus mandates recovery of the costs. Inversely, if the successful defendant cannot obtain compensation for her expenses, it is because there seems to be unanimity among courts and commentators that bringing unsuccessful claims cannot be considered as a breach of contract. The unequal treatment of the parties is thus justified because one party breached the contract while the other party did not.
In my opinion, the reasoning first developed in Zapata and then picked up by case law and commentators as well as the Eighth Circuit in Brands is thus far from compelling. This is only made worse by the Eighth Circuit’s reference to case law on UCC § 2-710 and § 2-715, which undercuts the autonomous and internationally uniform interpretation of the Convention, as mandated by Article 7(1).
At the end of the decision, however, the Eighth Circuit does make an important point. There is by now an overwhelming body of case law excluding attorney fees from Article 74. Although it may not be the best or most doctrinally sound solution, it seems preferable to follow this internationally prevalent approach which has the merit of legal certainty and international uniformity pursuant to Article 7(1).