Attorneys Fees Provisions Are Way More Complicated Than You Think – Here Are Some Reasons Why

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Attributed to George Bernard Shaw is this (perhaps variant) observation: “The English and the Americans are two peoples divided by a common language.” So, there should be no surprise to experienced readers that, when it comes to the right to collect attorneys fees, there is the “English Rule” and there is the “American Rule.”

Those two rules simply reflect different philosophies or “public policies.” Under the English Rule, losers pay the winner’s attorneys fee under the policy that, if your claim could not be sustained, the party you claimed against should be returned to where it stood before the suit was filed. The American Rule, fully cognizant of the “fairness” goal of the rule from across the ocean, says that, absent fraud on the party of the one charged or a statute or a private agreement to the contrary, each party should bear their own legal costs. By way of explanation, and not endorsement, this is because of a concern that the risk of losing one’s case and having to pay the other party’s legal fees will discourage use of the courts as a mechanism for redress. Let’s put that in the form of an example.

Suppose “little person,” with limited financial resources, has a good faith claim against “big enterprise,” with bottomless pockets. Suppose also, that by reason of the ability to gather all the needed facts or procedural difficulties, “little person” has only a 75% chance of succeeding, but if “little person” wins the case, it would recoup its $10,000 claim and its expected $3,333.33 in legal fees. Yes, an “expected outcome” of $10,000 (75% of $13,333.33). Further suppose that “big enterprise” engages one of our attorney-readers and the cost of “big enterprise’s drive ‘em out of business defense” is $50,000. [After all, it isn’t the money; it’s the principle and “our” reputation.]. That means, with a 25% probability of losing its case (even if it was right), “little person” has an “expected outcome,“ on the loss, of paying out $12,500 (i.e., 25% of $50,000). If you net the two, “little person” has a “net expected outcome” of losing $2,500.

Don’t argue the “supposed” facts. The “American” public policy is to reduce, to a minimum, any barrier to ready court access. It says that “little people,” to whom a nickel is a lot of money, shouldn’t be barred, as a practical matter, from seeking recovery from a “big enterprise” to which hundreds of thousands of dollars (or more) are a rounding error. Ruminations isn’t supporting either public policy approach today; it is just setting the framework for what follows. Basically, if, absent a statutory basis, you want a chance to recover your attorneys fees even if you weren’t defrauded by “the other side,” you need to have that arrangement inside your agreement with the other side.

How much more can Ruminations milk this subject when all the agreement has to include are these words: “The prevailing party shall have the right to collect from the other party its reasonable costs and necessary disbursements and attorneys’ fees incurred in enforcing this Agreement” (as quoted from a commercial web site solely for a copyright-permissible purpose)? Answer: “As you would expect, plenty.”

There’s going to be too much to say about this subject. So, today’s posting will be “part 1 of 2.” We’ll start with a list of topics or “issues.” One benefit of knowing, at this point, that we’ll continue next week, is that we can augment our discussion next week by incorporating suggestions from Ruminations readers. Don’t be shy.

Here’s our working list:

Scope of provision

Who is the “prevailing” party (Defining “success”)

Mutuality of obligation

Scope of “costs” to be recovered

Effect of settlement offers

Reasonableness of the attorneys fees

Necessity of the attorneys fees

“Out-of- Pocket” attorneys fees or “all” attorneys fees?

Contingency fee

Will insurance pay?

Today, we’ll cover the first two listed items.

Scope of provision. Let’s focus on the final words of the simple attorneys fee provision cited above: “incurred in enforcing this Agreement.” There are other variations of this aspect of an attorneys fees provision, almost all of which also serve to limit the scope of its coverage. Some variations are: (a) “arising out of a breach of this Agreement”; (b) arising out of a default under this Agreement”; and (c) “arising out of any dispute related to this Agreement.” In each case, you can replace “arising out of” with “related to.” Look at these carefully. Every one of these arrangement of words actually has a different meaning – a different “scope” of coverage. Add your own examples to these seven common ways in which attorneys fees provisions are written, and you’ll start to see a theme here. That theme is: “You can’t just let your eyes glaze over an attorneys fee provision. It isn’t just a question as to whether there will or won’t be such a provision in your agreement. Words matter.”

Every one of our examples has some connection with “the Agreement.” That means, as many court decisions teach us, that provisions written this way are inapplicable to tort claims. For readers who are not clear on the way our law characterizes “claims” or, in legalese, “causes of action,” here is a simplified explanation. The law is complex, perhaps unnecessarily so, but complex it is. So, to simplify legal concepts, the law likes to categorize claims, pigeonhole them, if you please. Two of those pigeonholes (and there are many more) are “contract” and “tort.” “Contract” claims are those that arise out of an alleged breach of a promise made in a private agreement, such as a mortgage or a lease. “Tort” claims are those that arise out of an alleged breach of a promise made in our “social” contract. Our “social” contract is an implicit agreement in a civilized society as to how we are to behave toward others. By example, our “social” contract includes a promise not to run someone over with your car.

When an attorneys fee provision says that one party will pay the other’s attorneys fee in connection with (the; the breach of; or a default under the) Agreement, that doesn’t cover when a landlord’s employee breaks its tenant’s display window unless the agreement (lease) says that the landlord promises that its employees won’t break the tenant’s display windows. And, while we are at it, incurring a “paper cut” while reading the agreement will not qualify as being “related to the Agreement.”

And, it goes beyond that. An attorneys fee provision tied to “the Agreement” doesn’t cover “contract-like” claims. When someone sues under the theory of “unjust enrichment,” it isn’t suing under an agreement. When someone’s suit is based on the invalidity of an agreement, that isn’t a suit under “the Agreement.” When someone sues for a “quantum meruit” recovery, that isn’t a suit under “the Agreement.” [That’s because an element of such a claim is that the claimant needs to show that “equity and good conscience” will be satisfied if the other party is made to pay.]

Who is the “prevailing” party (Defining “success”). Our sample provision starts with: “The prevailing party.” It’s not a simple matter to figure out who that might be. Think about the following example. A landlord sues its tenant for $50,000, alleging a breach of the lease. The tenant poses its defense and make an unrelated claim against the landlord for $35,000 related to a different provision of the lease. The jury verdict is that both parties proved their claim, but also that each party was only able to prove $20,000 of their own claim. The “net” result is “zero” recovery.

In our example above, who was the prevailing party: (a) landlord; (b) tenant; (c) neither; (d) both; or (e) all of the above? Ruminations is still trying to choose between “(c) neither,” and “(e) both.” We’re not all that comfortable about rejecting “(c) tenant,” and, in fact, each time we re-read this blog posting, we get closer to selecting that option. Why? A net recovery of “zero” means that neither party “prevailed” because that’s what “zero” means – you got nothing out of your lawsuit. But, maybe each side “prevailed” just as we would have concluded had there been two separate trials. If that’s correct, then each party would need to separate their own legal bills into two parts – what did it cost to pursue its own claim, and what did it cost to defend against the other’s claim. Then, the landlord would pay the tenant’s legal fees for prosecuting the tenant’s claims (not its defenses) and the tenant would pay the landlord’s claim prosecution costs.

Wait! Maybe that’s not the way to do the calculations. After all, the landlord only got 40% of its claim. Shouldn’t the tenant only be responsible for paying 40% of the landlord’s prosecution costs, and the landlord be responsible for paying 60% of the tenant’s defense costs? But, if that is the “analysis,” should the landlord pay 80% of the tenant’s prosecution costs, while the tenant pays 20% of the landlord’s defense costs? After all, the landlord only got 40% of its claim against the tenant, and the tenant only got 80% of its claim against the landlord. Think about it, each party actually “prevailed, though only “in part.” Our example gives no clue as to whether a check would go from landlord to tenant or from tenant to landlord. We didn’t hypothesize how much each party paid its own attorneys.

If each party “prevailed” over the other, then each was the “prevailing party.”

Why would we be pondering about choice (e), the one where the tenant would be the prevailing party? That’s because it achieved 80% of its claim, making it twice as successful at the landlord. But, what if the tenant’s claim had been for only $100 and was awarded the entire $100? Would that have made it the “prevailing” party? We think not.

We’re kind of hung up over our analysis explicated in the third paragraphs above, but we’ve never seen an attorneys fee provision written this way. Ruminations is thinking that one “prevails” when it gets what it wants. That means that the one making the claim “prevails” to the extent it gets what it wants. If that means getting “money” (and, we’ll touch on that concept later down), the measure of “prevailing” is “what percentage of your claim was awarded to you.” The party being sued wants to avoid paying. So, to the defending party, the measure of prevailing is “what percentage of the claim did you avoid”? Yes, it seems to Ruminations that in cases where a party does not get the amount of money it was seeking, each party has prevailed.

Basically, perhaps all we’ve concluded is that our attorneys fee provisions should be speaking of making awards “to the extent a party prevails,” rather than “to the prevailing party.”

We’re not alone in our puzzlement. Some courts, though not making such a calculation, seem to implicitly understand that just because a party gets “some” recovery, it isn’t a prevailing party. Think about a party who sues for $500,000 and recovers $14,000. Should it also get all of its attorneys fees? A part of those fees? We’ll stop that thought right now, but we’ll return next week when we ask about the possible effect of a settlement offer on the concept of “prevailing.”

Our readers are pretty smart. So, we invite you to create other hypothetical situations and then figure out who you might designate as the “prevailing” party.

When it comes to picking the “prevailing” party, there are complications beyond matching “dollars awarded.” What if the relief sought is “equitable” [“Court, make the other party do something or stop doing something”] and only partial relief is granted? Or, does the party charged with breaching the agreement prevail when a claim is voluntarily dismissed? What about when an arbitration proceeding is dismissed? What is the effect of a settlement that does not (forgets to?) deal with attorneys fees? Is there a difference between “prevailing on the contract” as contrasted with being the “prevailing party”?

Now, we’ll wrap up for today by connecting the issues of “scope” and “prevailing” in the same paragraph. We’re talking about “mixed” claims or “mixed” theories. In many jurisdictions, once you file a lawsuit, you’ve got to include all of your (even vaguely) related claims against the other party in that lawsuit, and in many states, once sued, you’ve got to respond with all of your (even vaguely) related claims against the one suing you. So, these lawsuits can (and often do) include tort and other non-contract claims. Imagine such a law suit and think about the concept of “prevailing party” when the attorneys fee provision only covers claims in connection with (the; the breach of; or a default under the) Agreement. If you figure out what part of an eventual award relates to the “covered” claims (“under the Agreement”), then can you figure out which elements of the attorneys fees were for the “covered” claims and which elements were for the “uncovered” claims? If you say, “Yes,” we don’t believe you. Assuming that our “lack of belief” is unfounded, what if you can’t figure out the theory under which a jury made its award – tort or contract?

We’re sure there is a lot more to be said, but this isn’t a law review article. It is a challenge to other Ruminators to explore, for themselves, how a simple attorneys fee provision turns out to be far, far from that. And, none of this has anything to do with a gatekeeping question – are such provisions “boiler plate” to be put in every agreement (or in every agreement of a particular kind, such as leases or mortgages or SNDAs), or are they to be negotiated on an agreement by agreement basis? We’re not weighing in on that issue.

If the Creek Indians remain peaceful, we’ll return to this topic and the rest of our (augmented?) list next week.

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Comments

  1. Consider this scenario: landlord sues tenant based on a defective notice (landlord does not think/know it is defective); takes tenant’s default; before sheriffs come to execute the writ of possession, tenant leaves the premises voluntarily. A year later, tenant sets aside the default and default judgment as void (notice was defective, judgment is void on its face, can be set aside at any time). Court sets aside default and dismisses the case for lack of subject matter jurisdiction (no longer an unlawful detainer because possession is not at issue any more at this time). Tenant wants to recover attorney’s fees as an item of costs, saying that it’s the “prevailing party” under attorney fee provision in the lease.

    Who is the “prevailing party”? Tenant says it’s him, since he got what he wanted (set aside the default). Landlord says it’s him, since he got what he wanted (tenant out of the property). If the court had not dismissed the case, landlord would have voluntarily dismissed it since he was already in possession (and then, tenant would have not been entitled to attorney’s fees).

  2. Well said, its becoming viral for attorneys when handling different real estate disputes. While it goes to extreme level bar counsel should involve in it.

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