FACULTY OF LAW EXAM SESSION II

Transcription

1 FACULTY OF LAW ACADEMIC YEAR EXAM SESSION II ARE COUNSEL COSTS INCURRED FOR DOMESTIC COURT PROCEEDINGS PRIOR TO ARBITRATION RECOVERABLE DURING ARBITRAL PROCEEDINGS AS DAMAGES UNDER THE CISG? LLM PAPER BY ELLA RUTTER STUDENT NUMBER: PROMOTER: DIRK DE MEULEMEESTER

2 The recoverability of attorneys fees under the CISG is one of the most controversial issues in contemporary CISG jurisprudence. Domestic courts, international arbitral tribunals, and domestic arbitral tribunals diverge as to why, how, and whether to award attorneys fees under CISG governed contracts. Keith William Diener, 2008 I wish to thank Professor De Meulemeester in particular, whose insightful comments were enormously valuable in the writing of this paper. 2

3 TABLE OF CONTENTS I. INTRODUCTION... 5 II. DAMAGES AS OPPOSED TO COSTS OF THE ARBITRATION : THE SCOPE OF THIS PAPER 8 1. COUNSEL COSTS INCURRED PRIOR TO ARBITRATION... 8 (a) Counsel Costs Incurred for Domestic Court Proceedings... 8 (b) Extra-Judicial Counsel Costs COUNSEL COSTS INCURRED AS PART OF THE ARBITRATION POST-AWARD COUNSEL COSTS III. COUNSEL COSTS ARE RECOVERABLE AS DAMAGES PURUSUANT TO ARTICLE THE PLAIN WORDING OF ARTICLE 74 CONTEMPLATES COUNSEL COSTS AS A FORM OF RECOVERABLE LOSS (a) Counsel Costs Constitute Loss (b) The Loss Incurred Through Counsel Costs is Caused by the Breach of Contract (c) The Incurrence of Counsel Costs is Foreseeable (d) Therefore Counsel Costs Are Recoverable INTERPRETING ARTICLE 74 IN ACCORDANCE WITH ARTICLE 7 OF THE CISG PROVIDES FOR THE INCLUSION OF COUNSEL COSTS AS DAMAGES (a) Allowing the Recovery of Counsel Costs Under Article 74 Provides for International Uniformity in the Interpretation of the Convention COURTS AND ARBITRAL TRIBUNALS HAVE AWARDED COUNSEL COSTS AS DAMAGES PURSUANT TO ARTICLE IV. CONTESTING THE CASE AGAINST THE RECOVERY OF COUNSEL COSTS AS DAMAGES UNDER ARTICLE THE SIGNIFICANCE OF ZAPATA (2002): JUDGE POSNER S FOUR ARGUMENTS (a) The Apparent Argument (b) The Hallowed Rule Argument (c) The Procedural Argument (d) The Anomaly Argument A COMPARISON OF THE DOMESTIC VARIATIONS OF THE ENGLISH RULE WITH THE PROVISIONS IN ARTICLE (a) The Article 74 Rules Governing the Recovery of Damages Are Too General to Replace the Complex Domestic Varieties of the English Rule

4 (b) Therefore Replacing the Domestic Variations of the English Rule with the Provisions in Article 74 Will Reduce Uniformity (c) To Create Uniform Results Article 74 should Replace the Domestic Rules Governing Counsel Costs Both in Jurisdictions that Adopt the American Rule and Jurisdictions that Adopt the English Rule (d) Alternatively There Should be a New Article Providing for the Award of Counsel Costs THE RECOVERY OF CONTINGENCY FEES AS DAMAGES UNDER ARTICLE RES JUDICATA CONSIDERATIONS FOR ARBITRAL TRIBUNALS WHEN A DOMESTIC COURT HAS ALREADY MADE A DETERMINATION WITH REGARD TO THE RECOVERABILITY OF COUNSEL COSTS V. CONCLUSION INDEX OF AUTHORITIES TREATIES AND CONVENTIONS JUDICIAL AND ARBITRAL DECISIONS United States United Kingdom LITERATURE Books Articles Online Articles OTHER DOCUMENTS

5 I. INTRODUCTION Are counsel costs recoverable as damages under Article 74 of the United Nations Convention on Contracts for the International Sale of Goods 1 (hereinafter: CISG or Convention )? The answer to this question is not obvious and has been described as one of the most controversial issues in contemporary CISG jurisprudence. 2 The CISG is the presumptive law governing international transactions worth billions of pounds. 3 The proper interpretation of the Convention is thus of significant concern for arbitral tribunals around the world, 4 not least because lack of predictability in arbitration can rob arbitration of its efficiency 5 by hindering parties from settling their dispute. 6 Currently, arbitral tribunals adopt varied approaches 7 regarding the recoverability of counsel costs under Article 74 of the CISG (hereinafter: Article 74 ) causing similarly situated parties to receive different results 8 and thereby undermining predictability and, ultimately, the primary purpose and usefulness of the Convention. 9 The purpose of this paper is to present the case in favour of the recoverability of counsel costs as damages under Article 74. Despite it having been stated that [t]oday, it is widely agreed that litigation costs cannot be claimed on the basis of Article the present author 1 CISG, Apr. 11, 1980, S. TREATY DOC. NO (1983), 19 I.L.M. 668 (1980) (entered into force on Jan. L., 1988), available in 15 U.S.C.A. app. at 49 (West Supp. 1996), 52 Fed. Reg , 7737 (1987), U.N. DOC. A/CONF. 97/18 (1980). 2 DIENER, K. W., Recovering Attorneys Fees under CISG: An Interpretation of Article 74, Nordic Journal of Commercial Law, Issue 1, 2008 < (hereinafter: DIENER (2008) ) at 1. 3 FLETCHER, H. M., Recovering Attorneys' Fees as Damages under the U.N. Sales Convention: A Case Study on the New International Commercial Practice and the Role of Case Law in CISG Jurisprudence, with Comments on Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., Northwestern Journal of International Law and Business, Volume 22, Issue 2, 2002 < (hereinafter: FLETCHER (2002) ) at Ibid. 5 GOTANDA, J. Y., Awarding Damages Under the United Nations Convention on the International Sale of Goods: A Matter of Interpretation, 37 Georgetown Journal of International Law, 2005, < (hereinafter: GOTANDA (2005) ) at Abstract. 6 Ibid. 7 Ibid. at Ibid. 9 Ibid. 10 SCHLECHTRIEM, P. & SCHWENZER, I., (Schwenzer I. (ed.)), Commentary on the UN Convention on the International Sale of Goods (CISG), Third Edition, Oxford 2010 < jnahwepxokhtcoamoqfggdmaa&url=http%3a%2f%2fwww.globalsaleslaw.org%2fdb%2f1%2f182.pdf&usg =AFQjCNFHnc1rMrOXxIW7-2ht0KRbmyIQmA&sig2=vmB4J3toN3B8YtsURNM6VQ> (hereinafter: SCHLECHTRIEM AND SCHWENZER (2010) ) at ; See also CISG Advisory Council Opinion No. 6, Calculation of Damages under CISG Article 74. Rapporteur Professor John Y. Gotanda, Villanova University School of Law, Villanova, Pennsylvania, USA. Adopted by the CISG-AC at its Spring 2006 meeting in Stockholm, Sweden < (hereinafter: CISG-AC Op. No. 6 (2006) ) at

6 takes the view that, to the contrary, there are strong replies to the arguments often-cited for preventing their recovery. Section II of this paper addresses the distinction between the recovery of counsel costs as damages and the recovery of counsel costs as costs of the arbitration. In this regard, a descriptive methodology will be used to consider the current recoverability of counsel costs, both as costs of the arbitration and as damages, for four stages at which a party may incur counsel costs, namely; extra-judicially, in a domestic court, as part of the arbitration, and post-award. This paper address the specific question of whether a claimant who suffers loss by way of counsel costs incurred for domestic court proceedings prior to arbitration, for instance, whilst in pursuit of interim relief or as a result of a breach of an arbitration agreement, is entitled to recover this loss during arbitral proceedings as damages under Article 74. Section III advances the present author s case in favour of counsel costs as recoverable damages under Article 74. It is the view of the present author that the plain wording of Article 74 contemplates the inclusion of counsel costs as a form of loss, 11 and that an interpretation of Article 74 in accordance with the interpretative mandate provided in Article 7 of the CISG favours the inclusion of counsel costs as recoverable damages under Article Section II further considers case law in which counsel costs have been awarded as damages. This paper does not seek to advance an analysis of the case law on this matter, not least because existing CISG decisions are not binding on other tribunals. 13 Section IV seeks to demonstrate the insufficiency of the arguments put forward against counsel costs as damages under Article 74. The methodology of this section shall be as follows; the arguments put forward against counsel costs as damages under Article 74 will first be put forward descriptively, followed by a normative appraisal of the present author s view. In Zapata Hermanos Sucesores v. Hearthside Banking Co. (hereinafter: Zapata (2002) ), 14 the leading case with regard to the recoverability of counsel costs under Article 74, four arguments were advanced against the recovery of counsel costs under Article 74, 15 namely, there is nothing in the background of the CISG about whether loss was intended to include counsel costs and as such it is apparent that they were not intended to be included under Article 74 (hereinafter: the apparent argument ); the United States would not have 11 CISG, Article CSIG, Article FLETCHER (2002) at Zapata Hermanos Sucesores v. Hearthside Banking Co., 313 F.3d 385, 388 (7th Cir. 2002) < 20HEARTHSIDE%20BAKING%20CO> 15 Ibid. 6

7 signed the Convention had it realised that in doing so the hallowed American rule was being abandoned in cases involving international commercial contracts (hereinafter: the hallowed rule argument ); the recovery of counsel costs is a procedural matter and thus beyond the scope of the Convention (hereinafter: the procedural argument ) and; since Article 74 only allows for the recovery of damages incurred as a result of a breach of contract, a prevailing claimant would be able to recover its counsel costs but not a prevailing respondent, and thus allowing the recovery of counsel costs under the CISG would create an anomaly (hereinafter: the anomaly argument ). Three further arguments shall also be addressed, concerning issues relating to the vagueness of the provisions of Article 74 vis-àvis the domestic procedural rules regulating the recovery of counsel costs, the tolerance of contingency fees by certain countries signatory to the CISG and res judicata concerns. Following a determination that counsel costs do constitute loss within the ambit of Article 74, and upon evidencing that the arguments promulgated against such a finding are not sufficient to refute such a conclusion, the present author retains that counsel costs incurred prior to arbitral proceedings are recoverable as damages under Article 74. 7

8 II. DAMAGES AS OPPOSED TO COSTS OF THE ARBITRATION : THE SCOPE OF THIS PAPER This paper considers the ability of arbitral tribunals to award counsel costs as a form of substantive damages under Article 74. Before moving to the interpretation of the CISG, an important first step is to give precision to the scope of this paper by defining which counsel costs are to be addressed herein and to distinguish between the recovery of such costs as damages and the recovery of such costs as costs of the arbitration. An initial distinction can be made between three relevant circumstances in which counsel costs accrue, namely; counsel costs incurred prior to the arbitration (which encompasses both counsel costs incurred for domestic court proceedings and extra-judicial counsel costs), counsel costs incurred as part of the arbitration, and post-award counsel costs. 16 The focus of this essay is the recoverability of counsel costs incurred for domestic court proceedings prior to arbitration. As will be seen, the recoverability as damages of extrajudicial counsel costs and counsel costs incurred as part of the arbitration is somewhat more settled. 1. COUNSEL COSTS INCURRED PRIOR TO ARBITRATION Counsel costs may accumulate prior to arbitration. Counsel costs incurred prior to arbitration can be initially separated into two stages, namely, counsel costs incurred as a result of bringing proceedings in a domestic court, and counsel costs incurred in extra-judicial litigation prior to any court proceedings. (a) Counsel Costs Incurred for Domestic Court Proceedings Prior to arbitration, a party may incur counsel costs during domestic court proceedings, for instance, in pursuit of interim relief 17 or upon finding itself in court following the breach of an arbitration agreement. Under the domestic laws of countries that are signatory to the CISG, the recoverability of counsel costs is governed primarily by two diametrically opposed rules. 18 Almost every nation party to the CISG adopts the English Rule. 19 The English Rule' designates that the party losing the dispute will be held liable for the legal fees of both 16 Counsel costs incurred in parallel court proceedings are beyond the scope of this paper. 17 Even parties who have an arbitration agreement are generally permitted to use national courts to seek interim relief. See e.g. UNCITRAL Model Law, Article 9 and 17 J. 18 DIENER (2008) at 1, 61. 8

9 parties to the proceedings. 20 Amongst the countries that follow it, the English rule has been embraced in one of two general forms, namely, the broad English rule, which includes, for instance, pre-trail collection expenses and negotiations and consultations with a counsel before a summons has been served on the other party as items recoverable as counsel costs, 21 and the narrow English rule, which limits the recoverable counsel costs to, for instance, those incurred after the initiation of the proceedings in a court. 22 Despite the English rule having significant variations, 23 the rule is still accepted, in some form or another, in a nearly universal manner. 24 By contrast, pursuant to the American Rule, which is almost exclusively adopted by the United States, 25 in the absence of an explicit statutory or contractual provision to the contrary, each party to a dispute must bear his own attorney s fees. 26 Where the American rule is applied in domestic court proceedings, a successful claimant will not be able to recover the counsel costs it incurred under the domestic procedural law. The question which has arisen, and which this paper will address, is whether those counsel costs can later be recovered during arbitration as damages under the CISG. Equally, in jurisdictions where the English rule applies, depending on the extent to which the counsel costs incurred during the court proceedings were recoverable during those proceedings under domestic law, (i.e. depending on whether the jurisdiction adopts a broad or narrow 19 VANTO, J., Attorneys Fees as Damages in International Commercial Litigation, Pace International Law Review, Volume 15, Issue 1, 2003, Article 6, < PLNAhVJNhoKHRDKC14QFggdMAA&url=http%3A%2F%2Fdigitalcommons.pace.edu%2Fcgi%2Fviewcontent.cg i%3farticle%3d1177%26context%3dpilr&usg=afqjcngr0g1bz6eoqoz8ymdjxhsgz1_sa&sig2=bjn8qj7roegmded7xxq1bw> (hereinafter: VANTO (2003) ) at Some commentators refer to the English rule as the Loser-pays rule. See e.g. VANTO (2003). 20 This is the Finnish version of the English rule provided in VANTO (2003) at See VANTO (2003) at 206 ( The all encompassing approach seems quite logical, considering that such expenses indeed are connected to the dispute at hand, since the case did end up in court and the expenses were accumulated during events preceding the trial ). 22 VANTO (2003) at 206. See also HONNOLD, J. O., (Edited and updated by Fletcher, H. M.), Uniform Law for International Sales under the 1980 United Nations Convention, Fourth Edition, 2009, (hereinafter: HONNOLD (2009) )) at ( The recovery of attorney costs under such domestic loser-pays rules, however, is often subject to significant limitations, pre-ordained fee schedules, or arbitrary formulas, often (usually?) resulting in awards significantly less than the actual attorney fees incurred by the prevailing party ). 23 SCHLECTRIEM, P., Legal Costs as Damages in the Application of UN Sales Law, 26 Journal of Law and Commerce, , < (hereinafter: SCHLECHTRIEM (2006) ) at VANTO (2003) at DIENER (2008) at 1. See BÜHLER, M., Awarding Costs in International Commercial Arbitration: an Overview, 22 ASA Bulletin 2, 2004 < (hereinafter: BÜHLER (2004) ) at 252, stating that the American rule is not only applied in the United States, but also in Japan, the People's Republic of China, Indonesia and the Philippines ). 26 VANTO (2003) at

10 version of the English rule ), questions may still arise during arbitral proceedings as to the recoverability of such costs as damages. When addressing the question of whether counsel costs incurred for domestic court proceedings are recoverable as damages, commentators generally appear to consider whether such costs should be awarded as damages by domestic courts themselves (i.e. in the instance that there was no arbitration agreement). The present author considers it to add interest to the debate to consider the question from the perspective of disputes which are to be resolved substantively via arbitration, particularly as it raises the further sensitive issue of res judicata. (i) Are Counsel Costs Incurred for Domestic Court Proceedings Recoverable During Arbitral Proceedings as Part of the Costs of the Arbitration? Counsel costs incurred prior to arbitration cannot be recovered as part of the costs of the arbitration since in order for something to be considered as part of the costs of the arbitration, it must have been incurred by a party for the specific purpose of the arbitration 27 and thus include counsel costs incurred during the arbitration procedure, but not necessarily all those that have been incurred before the start of the arbitration. 28 Nonetheless, the views taken regarding whether the costs of legal work done prior to the commencement of the arbitration are to be included as costs of the arbitration are not always uniform. 29 (ii) Are Counsel Costs Incurred for Domestic Court Proceedings Recoverable During Arbitral Proceedings as substantive damages under Article 74? Since it is generally not accepted, 30 that counsel costs incurred in domestic courts can be recovered as part of the costs of the arbitration, the question which has arisen, and which this paper will address, is whether a party that successfully sues for breach of contract under the CISG can recover these counsel costs as substantive damages under Article 74. If such costs are found to be claimable under Article 74, it follows that the United States, by ratifying 27 BÜHLER (2004) at 270. See also, e.g. Article 31(1) of the ICC Rules which provides that the costs of the arbitration include, the reasonable legal and other costs incurred by the parties for the arbitration. With regard to Article 31(1) of the ICC Rules, it has been stated in HANOTIAU, B., The Parties Costs of Arbitration, in Yves Derains and Richard H. Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Volume 4 ( Kluwer Law International; International Chamber of Commerce (ICC), 2006, (hereinafter: HANOTIAU (2006) ) at 214 that [s]ince there is no definition of these costs, their determination and the manner in which the relevant language of Article 31(1) should be construed is left to the discretion of the arbitrators. 28 Among the latter, only expenses which were necessary for the preparation of the case and directly linked to the filing of the arbitration are considered as costs of the arbitration (HANOTIAU (2006) at 214). 29 BÜHLER (2004) at HANOTIAU (2006) at 215. ( They should be claimed and allocated in the relevant procedures. Some of them might also be claimed as damages ). 10

11 the Convention, enacted new and different rules on recovering counsel costs in international sales transactions subject to the CISG. 31 It further follows that arbitral tribunals dealing with transactions governed by the CISG should award damages to cover such counsel costs. (b) Extra-Judicial Counsel Costs Extra-judicial counsel costs 32 include legal costs incurred in connection with preventing the breach or pursuing rights under the contract. For instance, in a demand for performance action, counsel may be engaged to write a demand letter. 33 (i) Are extra-judicial counsel costs recoverable during arbitral proceedings as part of the costs of the arbitration? For the same reason applying to counsel costs incurred for domestic court proceedings, extra-judicial counsel costs are not recoverable as part of the arbitration. 34 (ii) Are extra-judicial counsel costs recoverable during arbitral proceedings as substantive damages under Article 74? It is already generally accepted that extra-judicial counsel costs are recoverable as incidental damages under Article 74, 35 to the extent that even proponents of excluding the recovery as damages of counsel costs incurred for domestic court proceedings reach a different conclusion with regard to extra-judicial counsel costs. 36 This is because the requirement of mitigation 37 necessitates that parties engage legal services to fully mitigate their damages FLETCHER (2002) at Extra-judicial counsel costs are referred to by some commentators as pre-litigation counsel costs, See e.g. Zapata (2002) at 389. The latter term has been avoided in this paper in order to avoid confusion with the general heading of counsel costs incurred prior to the arbitration proceedings (of which pre-litigation counsel costs form only a small part). 33 GOTANDA (2005) at See supra at II(1)(a)(i). 35 SCHLECHTRIEM AND SCHWENZER (2010) at 1011; SCHLECHTRIEM P. AND SCHWENZER I., Commentary on the UN Convention on the International Sale of Goods (CISG), Second (English) Edition, 2005 (hereinafter: SCHLECHTRIEM AND SCHWENZER (2005) ) at GOTANDA (2005) at 129, ; DIENER (2008) at 39; Zapata (2002) at 388. For instance, in Zapata (2002), the court denied rigorously that counsel costs could constitute a loss within the meaning of Article 74 yet conceded that certain pre-litigation legal expenditures, for example expenditures designed to mitigate the plaintiff's damages, would probably be covered as "incidental" damages. 37 CISG, Article 77. ( A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated ). 38 GOTANDA (2005) at 134; DIENER (2008) at 39; Zapata (2002) at

12 Evidently, such extra-judicial counsel costs are only recoverable if they meet the requirements of Article COUNSEL COSTS INCURRED AS PART OF THE ARBITRATION The costs of international arbitration are two-fold, 40 encompassing both procedural costs 41 and party costs. Counsel costs fall within the latter category, which comprises all costs incurred by a party for the preparation and presentation of its case before the arbitral tribunal. 42 (a) Are Counsel Costs Incurred as Part of the Arbitration Recoverable During Arbitral Proceedings as Part of the Costs of Arbitration? Many countries extend the English rule to their arbitration law 43 and likewise, in most arbitration rules, the English rule applies. 44 Yet equally, the arbitration statutes of some states adhere to the American Rule with regard to the recovery of counsel costs. 45 The most widely used truly international 46 arbitration rules do not require a tribunal to award costs to the successful party. 47 For instance, the ICC Rules are silent on cost allocation, with 39 See below at III(1) for the provisions of Article BÜHLER (2004) at 250 distinguishes between procedural costs (arbitrator fees and expenses and administrative fees) and party costs (counsel and experts fees and expenses). 41 BÜHLER (2004) at 250 ( The procedural costs include the fees and expenses of the arbitrators as well as the fees and expenses of any arbitral institution or of experts appointed by the arbitral tribunal ). I will not deal in this paper with the issue of procedural costs. It will be strictly limited to counsel costs. 42 BÜHLER (2004) at 250; GOTANDA (2009) at 3. See also, ICC Commission Report, Decisions on Costs in International Arbitration, ICC Dispute Resolution Bulletin, 2015, Issue 2 < Decisions-on-Costs-in-International-Arbitration%2F&usg=AFQjCNG4_8uB2lb1b7pBOa95QyLG3- ih8q&bvm=bv ,d.bgs> (hereinafter: ICC Commission Report (2015) ) at 3 which notes that party costs make up the bulk (83% on average) of the overall costs of the proceedings. Arbitrators fees and case administration (e.g. ICC case administration if you use an institution) make up a smaller percentage. 43 GOTANDA, J., Y., Awarding Costs and Attorneys' Fees in International Commercial Arbitrations, 21 Michigan Journal of International Law, 1999, 1-50 < (hereinafter: GOTANDA (1999) ) at 6 ( [m]ost jurisdictions allocate costs and [attorneys ] fees in litigation according to the principle that costs follow the event ). E.g., English Arbitration Act (1996) Section 61(2), which provides that unless the parties otherwise agree, the tribunal shall award costs on the general principle that costs should follow the event except where it appears to the tribunal that this principle is not appropriate in relation to the whole or part of the costs. 44 See, e.g., United Nations Commission on International Trade Law, Arbitration Rules (as revised in 2010) < (hereinafter: UNCITRAL Arbitration Rules ), Article 42(1) ( The costs of arbitration [which pursuant to Article 40(2)(e), include The legal and other costs incurred by the parties in relation to the arbitration] shall in principle be borne by the unsuccessful party ). 45 GARDINER, J., L., AND NELSON, T., G., Recovery of Attorneys Fees in International Arbitration: the Duelling English And American Rules, The 2010 Arbitration Review of the Americas - a Global Arbitration Review, 2010 < at 29> (hereinafter: GARDINER AND NELSON (2010) ) at

13 Article 31(3) not offering any criteria for the arbitrator s decision on which party should bear the costs of the arbitration. 48 The matter is left to the absolute discretion of the arbitrators. 49 Typically, in exercising their discretion the tribunal will, however, follow the English Rule, holding the unsuccessful party responsible for all costs of the successful party. 50 As a result of such discretion, there is no discernible general practice as to the treatment of costs (including counsel costs) in international commercial arbitrations, 51 as demonstrated by the fact that awards often vary wildly from case to case without any apparent reason. 52 (b) Are Counsel Costs Incurred as Part of the Arbitration Recoverable During Arbitral Proceedings as Substantive Damages Under Article 74? Indeed, it seems obvious 53 that a claimant will look to the substantive law for an alternative cause of action in order to be compensated for counsel costs incurred as part of the arbitration if the procedural law does not give redress. 54 Since loss by way of counsel costs is comparable to an item of damage suffered as a result of a breach of contract, 55 a successful claimant could argue that its counsel costs constitute part of the overall compensation of the damages it is claiming. 56 In this regard, one must again distinguish the allocation of costs (including counsel costs) that is undertaken by an arbitration tribunal in its decision within the context of legal proceedings, from the indirect shifting of costs as damages. The question at issue is thus whether the recoverability of counsel costs incurred during the arbitration is a 46 BÜHLER (2004) at Ibid. 48 ICC Commission Report (2015) at 1. Also see ICC Commission Report (2015) at 4 ( Despite the fact that the ICC and at least half of the other major institutional rules contain no presumption in favour of the recovery of costs by the successful party, it appears that the majority of arbitral tribunals broadly adopt that approach as a starting point ). 49 See BÜHLER (2004) at 256 stating under the heading: Discretion as a Backdoor for National Practices, that [w]hen exercising this discretion, arbitral tribunals sometimes take into consideration the laws and practices as to costs in effect at the locus arbitri or in the parties jurisdictions. 50 GOTANDA, J. Y., Supplemental Damages in Private International Law: The Awarding of Interest, Attorneys' Fees and Costs, Punitive Damages and Damages in Foreign Currency Examined in the Comparative and International Context. The Hague: Kluwer Law International, 1998 at REDFERN, A., AND HUNTER, M., Law and Practice of International Commercial Arbitration (1999) at GOTANDA (1999) at 23; SMIT, R. H., AND ROBINSON, T.B., Cost Awards in International Commercial Arbitraton: Proposed Guidelines for Promoting Time and Cost Efficiency The American Review of International Arbitration, (hereinafter: SMIT AND ROBINSON (2010) ) at BÜHLER (2004) at Ibid.; See also, e.g., the DIAC Arbitration Rules pursuant to which litigation costs are not coverable as costs of the arbitration (BLANKE, G., Dubai Court of Cassation finds against recoverability of Counsel fees in DIAC arbitration, 2013 < 55 ROSELL, R., Arbitration Costs as Relief and/or Damages, Journal of International Arbitration, Kluwer Law International, 2011, Volume 28, Issue 2, (hereinafter: ROSELL (2011) ) at HANOTIAU (2006) at

14 procedural issue, governed by the law of the seat of arbitration, or a substantive law issue, governed by the law of the parties contract. Most countries consider the decision on costs to be a matter of procedural law. 57 That said, a successful claimant can generally claim reimbursement for counsel costs incurred as part of the arbitration pursuant to Article 74, despite the fact that they initially originated as counsel costs. 58 The strength in the argument for such reimbursement is seen when one notes that the key rationale for awarding counsel costs to the successful party is akin to the purpose of awarding damages, namely that a claimant is entitled to recover the full value of the claim. 59 A question remains as to whether the recovery of these costs would be limited to the extent permitted by the arbitration rules. For instance, it has been stated that for transactions governed by the CISG, arbitral tribunals should award damages to cover the counsel costs of the successful party even if the tribunal would not have done so under its own arbitration rules. 60 Conversely, it has been put forward that costs which are in excess of what can be recovered under the applicable rules on allocation of costs likewise cannot be recovered under Article POST-AWARD COUNSEL COSTS Following the issuance of an arbitral award, a successful party sometimes incurs significant expense fending off challenges to the award in the national courts. 62 As a result, the question has been asked whether one should consider, as costs of the arbitration, the fees and expenses that will have to be incurred by the losing party after the issuance of the award until payment. 63 However, the answer is definitely negative 64 as eventually, such costs could be considered and recovered as costs of the enforcement of the award. 65 The question as to whether post-award counsel costs can constitute damages under Article 74 will not be treated in this paper. 57 BÜHLER (2004) at SCHLECTRIEM, P., Legal Costs as Damages in the Application of UN Sales Law, 26 Journal of Law and Commerce, , < (hereinafter: SCHLECHTRIEM (2006) ) at 75. See also, e.g., MWN Group, Inc v MAG USA, Inc, No. 3:06-MC-47, 2007 US Dist LEXIS (ED Tenn, 8 August 2007) at 11, in which a court upheld an arbitrator s award of counsel costs as damages for a party s past breach of a forum selection clause. 59 BÜHLER (2004) at FLETCHER (2002) at SCHLECHTRIEM & SCHWENZER (2010) at GARDINER AND NELSON (2010) at 29, also stating that, [w]here it applies, post-award counsel costs, are recoverable under the English Rule in the domestic court. 63 HANOTIAU (2006) at Ibid. 65 Ibid. 14

15 III. COUNSEL COSTS ARE RECOVERABLE AS DAMAGES PURUSUANT TO ARTICLE THE PLAIN WORDING OF ARTICLE 74 CONTEMPLATES COUNSEL COSTS AS A FORM OF RECOVERABLE LOSS There is a wide ranging consensus that the first step in the interpretation of the CISG should be a literal interpretation by having regard to the plain wording. 66 As such, it is of primary importance to give regard to the plain wording of Article 74. Article 74 stipulates that: 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. Article 74 thus provides three requirements that must be satisfied in order to bring an action for damages, 67 namely, there must be an incurrence of loss, there must be a causal link between the loss incurred and the breach of contract; and the loss must have been foreseeable at the time of concluding the contract. In what follows, it is submitted that counsel costs meet these requirements and hence fall within the scope of Article 74. (a) Counsel Costs Constitute Loss The first requirement of Article 74 is that the alleged damage must constitute a loss in order to be recoverable. 68 Whether the meaning of loss within Article 74 includes counsel costs is a highly controversial 69 topic amongst CISG commentators. 70 In this respect, guidance on is provided by the Secretariat Commentary on Article 74 which provides that the basic philosophy of the action for damages is to place the injured party in the same economic position he would have been in if the contract had been performed. 71 Thus the provision is 66 SCHLECHTRIEM AND SCHWENZER (2005) at CISG, Article 74; DIENER (2008) at 6. Note the other limitation on Article 74 is the requirement of mitigation (CISG, Article 77). In addition, other provisions of the CISG as a whole may implicitly limit the scope of Article 74. For e.g., see GOTANDA (2005) at , stating that while article 74 is to be interpreted broadly, non-material loss (e.g., emotional injury, mental suffering and moral damages ), is not recoverable based on article 5 and a reading of the Convention as a whole. 68 CISG, Article 74; Zapata (2002) at 385, DIENER (2008) at Ibid. 71 Secretariat Commentary, Guide to Article 74, Pace Law School Institute of International Commercial Law, < (hereinafter: Secretariat Commentary ) cited 15

16 designed to give the aggrieved party the benefit of the bargain or its expectation/performance interest. 72 This approach is commonly referred to as the principle of full compensation which underlies the CISG. 73 Accordingly, the principle of full compensation, by its very definition, must include counsel costs in Article 74 as a form of incidental loss. 74 Any other resolution is a derogation of this principle upon which the CISG is based. This view has further been expressed with reference to the principle of reasonableness which underlies the CISG, 75 according to which a reasonable interpretation of loss in the context of Article 74 includes counsel costs. 76 It is a true that Article 74 does not explicitly state that counsel costs are a form of recoverable loss. 77 However, if this were a basis for the exclusion of such costs, it would lead to the conclusion that all other forms of damages except lost profits, the only specific form of damages mentioned, 78 can be removed from Article 74 s coverage. Yet forms of loss other than loss of profits are clearly recoverable under Article 74, 79 the provision being regarded as in DIENER (2008) at 7. See also SCHLECHTRIEM AND SCHWENZER (2005) at 746 and HONNOLD (2009) at 444, also stating that this is the purpose of damages under Article 74. Note, however, SCHLECHTRIEM AND SCHWENZER (2010) at 1010 ( [T]he claim for damages is primarily directed at compensation. Additionally, however, today there is an increasing emphasis on the preventive role of damages ). 72 KRÖLL, MISTELIS AND PERALES VISCASILLAS (Eds), UN Convention on Contarcts for the International Sale of Goods (CISG) Commentary, München: Beck, 2011 (hereinafter: KRÖLL, MISTELIS AND PERALES VISCASILLAS (2011) ) at Ibid. See SCHLECHTRIEM & SCHWENZER (2010) at 1001 ( While the principle of full compensation is undisputed, its precise meaning is yet to be determined ). Note some commentators, e.g., DIENER (2008) at 41, prefer to call it the principle of the full recovery of loss. 74 SCHLECHTRIEM & SCHWENZER (2005) at 753 ( Incidental damages are the expenses incurred by the promisee which are not related to the realization of his expectation interest, but rather are incurred in order to avoid any additional disadvantages ). 75 DIENER (2008) at 53, stating in support of this that the CISG explicitly refers to reasonableness or unreasonableness forty-seven times in its text ). 76 Ibid. 77 CISG, Article Ibid. See also, Secretariat Commentary at 70 stating that the specific reference to loss of profit was included because in some legal systems the concept of loss' standing alone does not include loss of profit. 79 See Felemegas, J., An Interpretation of Article 74 CISG by the U.S. Circuit Court of Appeals, 15 Pace International Law Review, 2003, < (hereinafter: FELEMEGAS (2003) ) at 116 ( the voluminous case law on Article 74 documents the fact that there are many different categories of loss recoverable as damages, none of which is specifically mentioned in the text of Article 74 ); For e.g. s, SCHLECHTRIEM AND SCHWENZER (2010) at 1000 ( The compensation must satisfy not only the promisee s expectation interest (i.e. the interest in the advantages arising out of performance), but also the indemnity interest (i.e. the interest in avoiding damages to goods and rights as a result of non-performance which the promisee has independently of the contract). Furthermore, Article 74 protects the reliance interest (i.e. expenses incurred as a result of reliance on the contract) ). 16

17 inclusive, not exhaustive. 80 Indeed, there exists a presumption that CISG provisions are to be interpreted broadly. 81 It is illogical to distinguish counsel costs as not constituting loss on the basis that such costs are a specific form of loss incurred from pursuing rights, the absurdity of such a distinction being made even more apparent by the fact that certain counsel costs incurred in extra-judicial proceedings are recoverable. 82 Moreover, the CISG states explicitly the types of liability that are not recoverable as damages in Article 2 through 5 of the CISG and counsel costs are not listed among these exclusions. Finally, there need be no concern that such a definition of loss to include counsel costs would encroach on the applicability of the American rule in damages actions not involving the CISG since interpretation of the term loss within Article 74, is the autonomous, international definition of loss within the context of Article 74, and need not be extended beyond the unique, international context of the CISG. 83 Terms under the CISG, such as good faith, validity, goods, sale, under the CISG have their own meaning separate from national concepts. 84 In this sense, the Convention creates its own terminology displacing similar concepts under domestic law. (b) The Loss Incurred Through Counsel Costs is Caused by the Breach of Contract The second requirement of Article 74 is that the loss is a consequence of the breach. 85 Put succinctly, the consequential principle does not prevent counsel costs from being recoverable under Article 74. Even under the strictest causality test, counsel costs are incurred as a consequence of the breach. 86 (c) The Incurrence of Counsel Costs is Foreseeable The third concept contained in Article 74 provides that a promisor s liability is limited to those losses resulting from the breach that were foreseeable at the conclusion of the contract FELEMEGAS (2003) at 116. See also SCHLECHTRIEM AND SCHWENZER (2010) at 1000 ( Article 74 is to be interpreted liberally ). 81 DIMATTEO, DHOOGE, GREENE AND MAURER, The Interpretive Turn in International Sales Law: An Analysis of Fifteen Years of CISG Jurisprudence, Northwestern Journal of International Law and Business, Volume 24, Issue 2, 2004 < (hereinafter: DIMATTEO, DHOOGE, GREENE AND MAURER (2004) ) at Zapata (2002) at DIENER (2008) at 60 who states further that [a] multitude of support is available for the proposition that the terms used in the CISG are to be given an autonomous, international meaning. 84 KRÖLL, MISTELIS AND PERALES VISCASILLAS (2011) at CISG, Article DIENER (2008) at CISG, Article

18 The foreseeability rule allows the parties to the contract to calculate and limit their contractual liability. 88 Since as a result of any breach of contract, the claimant party will almost certainly be required to incur counsel costs in order to enforce its rights, such costs are foreseeable. Indeed, as has been stated, most importantly of all the foreseeable losses due to a breach of a contract nothing is more certain and universal than attorneys fees. 89 (d) Therefore Counsel Costs Are Recoverable To summarise, it is apparent that, on the plain wording of Article 74, counsel costs are a form of recoverable loss. It is not the fact of counsel costs, which is important, but whether they are a loss that is a foreseeable, consequence of the breach. 90 It is reasonable to say that counsel costs are a form of expense that the respondent contracted to cover. It is simple enough for parties to state in their contract if they intend that this form of loss is excluded. 91 Where parties do not express such an intent and thus some ambiguity remains, then for the reasons stated, the ambiguity ought to be resolved against the respondent INTERPRETING ARTICLE 74 IN ACCORDANCE WITH ARTICLE 7 OF THE CISG PROVIDES FOR THE INCLUSION OF COUNSEL COSTS AS DAMAGES The text of Article 7 of the CISG reads as follows: "(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." 88 SCHLECHTRIEM AND SCHWENZER (2005) at ZELLER, B., Interpretation of article 74 - Zapata Hermanos v Hearthside Baking: where next? Nordic Journal of Commercial Law, 1, 2004, 1-11 < (hereinafter: ZELLER (2004) ) at 10; See further See DIENER (2008) at 41-42, who notes that this foreseeability standard contains both an objective and subjective aspect, and therefore differs from the traditional common law standard. Diener suggests that, taking into account solely the subjective aspect, an argument could be put forward that, subjectively, a party did not foresee that counsel costs would be recoverable as damages. In particular, such an argument may make sense when submitted by a party from a jurisdiction in which the American rule applies with regard to contractual disputes for the sale of goods. Nevertheless, Diener concludes however that it is unlikely that this subjective reasoning will ever overwhelm the objective awarding of counsel costs in contractual disputes on an international basis. 90 ZELLER (2004) at NEWMAN, T. R., Attorneys Fees as Covered Costs, Damages, or Loss, For The Defence, 2014 < at Ibid. 18

19 Article 7(1) of the CISG is the applicable rule of interpretation for the provisions of the Convention, including Article 7(2). Article 7(2) of the CISG only becomes relevant to fill the gaps when a matter is governed by this Convention yet not expressly settled in it. 93 There is a strong link between Article 7(1) and 7(2), since interpretation techniques, such as those provided in Article 7(1), should be used for gap-filling, thus the interpretative criteria set forth in Article 7(1) also apply to Article 7(2) and further, the fall-back methods provided in Article 7(2), applicable where there are gaps in the CISG, also apply to the interpretation of Article 7(1). 94 Indeed, it is sometimes difficult to draw a line between interpretation and gap-filling, and in some instances, the combination of both techniques may be adapted to include new developments in the Convention. 95 Article 7(1) of the CISG mandates three interpretative principles for the interpretation of the Convention, namely, regard for its international character, regard for uniformity in its application and the observance of good faith in international trade. 96 Article 7(1) of the CISG thus imposes positive obligations on the interpreter to adhere to the plain meaning of the text of the CISG and to refer to foreign decisions, the legislative history of the CISG and academic commentary for guidance. 97 To maintain a uniform interpretation of the CISG, Article 7(2) provides two gap-filling mechanisms for how the treaty is to be interpreted with regard to matters governed by the CISG which are not expressly settled in it. 98 Article 7(2) first directs those interpreting the CISG to settle the matters in conformity with the general principles on which the CISG is based. In the absence of such principles, as a last resort, the interpreter is to settle the matter in conformity with the law applicable by virtue of the rules of private international law, 99 which is interpreted to stand for the choice of law of the domestic forum. 100 Scholars are in agreement that the interpretation of loss within Article 74 is to be decided using the interpretative template provided in Article 7 of the CISG. 101 As such, this paper will 93 CISG, Article 7(2); DIENER (2008) at 5. Note, in order to apply Article 7(2) a distinction should be drawn between internal gaps i.e., an issue that is unresolved, and external gaps, i.e., issues intentionally excluded, and matters expressly outside the Convention (KRÖLL, MISTELIS AND PERALES VISCASILLAS (2011) at 112). 94 KRÖLL, MISTELIS AND PERALES VISCASILLAS (2011) at Ibid. 96 Ibid. at KEILY, T., How Does the Cookie Crumble? Legal Costs under a Uniform Interpretation of the United Nations Convention on Contracts for the International Sale of Goods, Nordic Journal of Commercial Law of the University of Turku, Finland, Issue 1, 2003 < (hereinafter: KEILY (2003) ) at CISG, Article 7(2). 99 Ibid. 100 JANSSEN, A., AND MEYER, O., (Eds.), CISG Methodology, European Law Publishers GmbH, Munich, 2009 at CISG, Article 7; DIENER (2008) at 4. KRÖLL, MISTELIS AND PERALES VISCASILLAS (2011) at

20 now turn to assess an interpretation of counsel costs as loss in conformity with the interpretative considerations provided in Article 7. (a) Allowing the Recovery of Counsel Costs Under Article 74 Provides for International Uniformity in the Interpretation of the Convention. The purpose of the inclusion of a provision prescribing the interpretation template of the Convention, i.e., the purpose of Article 7, is to ensure that the Convention is applied in a uniform way by courts and arbitral tribunals throughout all of the signatory countries. 102 In fact, the need to achieve predictability and certainty in the sales law of an increasingly global commercial community precipitated the creation of the Convention. 103 In this sense, Article 7 has been termed as "arguably the single most important provision in ensuring the future success 104 of the CISG and as the centre-piece 105 of the Convention. Article 7 applies throughout the Convention in order to uphold the integrity, and hence allow for the success, of the CISG by ensuring that interpretation and gap-filling is implemented in a uniform way, thereby achieving the Convention s purpose of instigating a truly harmonised, global international commercial law system 106 by providing for autonomous interpretation of the Convention, allowing only for minimum interference with the rules of private international law. 107 On the basis of the following three considerations, in what follows the view is advanced that an Article 7 interpretation of Article 74 requires that counsel costs be recoverable under the umbrella 108 of loss pursuant to Article 74. (i) Interpreting Article 74 to Exclude Counsel Costs Leads to Lack of Uniformity Excluding counsel costs incurred in domestic court proceedings prior to arbitration from the ambit of Article 74 in essence means that the recoverability of those counsel costs is determined by resort to domestic procedural law. Excluding such counsel costs from the 102 KRÖLL, MISTELIS AND PERALES VISCASILLAS (2011) at Review of the Convention on Contracts for the International Sale of Goods (CISG), , Pace International Law Review, European Law Publishers at KONERU, P., 'The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An Approach Based on General Principles' (1997) 6 Minnesota Journal of Global Trade 105, also available at < at 105 cited in KEILY (2003) at KRÖLL, MISTELIS, AND VERALES VISCASILLAS (2011) at FELEMEGAS, J., The United Nations Convention on Contracts for the International Sale of Goods: Article 7 and Uniform Interpretation Review of the Convention on Contracts for the International Sale of Goods (CISG), Kluwer Law International ( ) < at Chapter 1(7). 107 KRÖLL, MISTELIS AND PERALES VISCASILLAS (2011) at ZELLER (2004) at 8 states: The question simply is can these different environments be neatly packed under the umbrella of article