Business lawsuits aren’t cheap. As I discussed at length in this blog post, there is no such thing as a “slam dunk” case, and even relatively straightforward contract disputes can require extensive document discovery, depositions, motion practice, expert witnesses, and trial preparation. All of those efforts cost money, and most of that money is spent on attorneys’ fees. Often, but certainly not always, the cost of pursuing or defending a commercial claim can be greater than the amount in dispute. Obtaining a hefty judgment in your favor is something of a Pyrrhic victory if all you do is essentially sign it over to your lawyer, plus write them another check for any additional fees you may owe.
That is why one of the first questions business owners ask when deciding whether to file a lawsuit, or determining how to respond when they face one, is whether they can get the other party to pay their attorneys’ fees if they prevail.
Unfortunately, unless a statute, court rule, or “fee-shifting” provision in a contract between the parties says otherwise, each party in a business lawsuit will be on the hook for their own attorneys’ fees. Knowing whether any of those circumstances exist before or at the outset of litigation is a critical part of evaluating how to approach the dispute, weigh settlement options, and assess the true dollars-and-cents value of a claim.
The American Rule
When America declared its independence from English rule 250 years ago, our fledgling jurisprudence also declared that we would not follow the English Rule when it comes to responsibility for attorneys’ fees in civil lawsuits. The English Rule provided that the losing party typically pays the other side’s attorneys’ fees. Under the “American Rule,” however, each party generally pays its own attorneys’ fees regardless of who wins the case. The rationale behind the American Rule is to avoid discouraging parties from bringing legitimate claims or defenses for fear that an adverse ruling could leave them responsible for both their own legal expenses and their opponent’s. As one would expect, courts in New Jersey and New York follow the American Rule.
As is the case with every rule, though, the American one comes with exceptions. In commercial disputes, the biggest exception, and the one that parties have the most control over, is the existence of a fee-shifting provision in the contract between them.
Contractual Fee-Shifting Provisions
Commercial contracts frequently include language providing that if litigation becomes necessary to enforce the agreement, the prevailing party is entitled to recover its reasonable attorneys’ fees and litigation expenses. New Jersey and New York courts generally enforce these provisions so long as they are clear, unambiguous, and not contrary to public policy.
For example, most commercial leases provide that if the landlord must sue to collect unpaid rent, the tenant must reimburse the landlord’s attorneys’ fees. Similarly, loan agreements, guaranties, construction contracts, purchase agreements, operating agreements, and vendor contracts often contain prevailing-party provisions.
Far from boilerplate, a fee-shifting provision is a foundational and potentially game-changing aspect of a business relationship. In a perfect world, such a clause would never matter because the parties would never have a dispute that metastasizes into litigation. But as every business owner knows, commercial relationships do not exist in a perfect world. Accordingly, care and counsel are essential at the outset of any business relationship regarding this critical issue.
Statutory Fee-Shifting and Court Sanctions
Another far less common exception to the American Rule in business disputes is a relevant statute that provides for the recovery of attorneys’ fees in claims arising under that statute. Fee-shifting statutes are generally enacted to encourage private enforcement of important public policies. For example, numerous consumer protection, employment, civil rights, and insurance statutes in both New Jersey and New York permit successful plaintiffs to recover reasonable attorneys’ fees. In commercial litigation, however, statutory fee awards are less common unless the lawsuit involves a claim brought under a statute that expressly authorizes them.
Courts in New Jersey and New York, at both the state and federal level, also possess limited authority to award attorneys’ fees as sanctions in certain circumstances. For example, as I detailed at length in this blog post, fees may be awarded when a party files frivolous litigation or engages in conduct that needlessly increases the cost of the proceedings. Likewise, violations of discovery obligations or court orders can result in sanctions that include payment of an opposing party’s reasonable attorneys’ fees.
Importantly, however, courts do not impose sanctions merely because a party ultimately loses. It requires a transgression that warrants such a penalty.
Only “Reasonable” Attorneys’ Fees Are Recoverable
A fee-shifting provision is not a blank check; the winner in a lawsuit can’t just send their bill to the loser and expect them to pay it without question. New Jersey and New York courts will examine whether the requested fees are reasonable based upon numerous factors, including the complexity of the case, the time reasonably expended, the attorneys’ hourly rates, the results obtained, and whether the work performed was necessary. If a court finds the requested fees to be excessive, duplicative, or lacking in sufficient detail or documentation, it can reduce the amount accordingly.
As noted, one of the best opportunities to protect a business’s interests occurs long before a dispute arises. Carefully drafted commercial agreements can allocate litigation risk, including responsibility for attorneys’ fees, in a manner that reflects the parties’ expectations and bargaining power. In the unfortunate event that litigation does rear its head, understanding whether attorneys’ fees are recoverable is critical to evaluating the case’s true financial value and exposure.
If you have questions or concerns about the recovery of attorneys’ fees in a business lawsuit, please contact Ansell.Law Shareholder Seth M. Rosenstein.