Eight More Issues Raised By An Agreement’s Attorneys Fee Provision

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Attorneys fee clauses – where did we leave off last week? Well, we had a list of issues and only explored the first two. Here’s the list. If you want to see what we’ve written thus far, click HERE.

To make this page “look good” and match the look of prior blog postings, we’ve got to do some “fill-in” text. So, this is a good opportunity to thank our large audience of readers, many of them fervent followers of Ruminations. With today’s posting (our 151st to date), we’ve broken through the “150” barrier. All of our prior posting are available and our crude search feature might get you to explore some topics you never thought could be topics. So, here’s a big THANK YOU, and  the end of our segue to the list of issues we promised in the paragraph directly above. Keep your comments and your ideas for future postings coming this way.

And now, here’s that 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 fees
  • Will insurance pay?

[By the way, today’s posting is longer than our usual long Ruminations blog postings. So, get a cup of Java and dig in. If you just print this out for later reading, that probably won’t happen.]

Before we ambitiously attempt to cover the remain eight items, Ruminations would like to share some thoughts that were sent to us by way of a “back channel.” We’ll post them exactly as we received them:

Some organizations have very strict policies in favor of or against attorneys’ fees clauses, so you need to check with your client.

A “deep pockets” client dealing with “shallow pockets” counterparties may disfavor an attorneys’ fees clause, just because the counterparty will never pay but the client will have to pay if they lose.

Now, back to our list

Mutuality of Obligation. We have difficulty thinking of any reason why a party faced with a one-way attorneys fee provision wouldn’t demand mutuality and can’t think of any arguments that would persuade us that it shouldn’t be that way. In fact, a number of jurisdictions see the issue the same way. Some impose mutuality by use of a statute; others do so under the equitable principle of “mutuality of remedy.” So, at one level, parties may wind up arguing the issue for no good reason. That’s another reason for negotiators to know the implications of choosing to apply one state’s laws as contrasted with another state’s laws.

Be careful though. Not every “mutuality” statute will actually mandate mutuality. For example, New Jersey’s recently adopted (in practical effect) “mutuality” statute for leases only protects residential tenants. More critically, the well known “mutuality” statute in California only provides partial coverage and, based on the many court cases interpreting the California law, we’ve seen this law used as another way to boost attorneys fees.

For today, we’ll only point out one aspect of California law, and then only to highlight the need to fully understand this (and all other state’s) law. Here is what California Civil Code Sec. 1717 provides:

In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.

Take note of the statute’s limitations, a number of which we highlighted last week. It applies to attorney fees provisions in a “contract” and mutuality is limited to fees and costs incurred in enforcing that contract. California case law teaches that if the single-sided attorneys fee provision covers non-enforcement fees and costs or attorneys fees in a tort suit against a party, mutuality is not imposed by this statute.

Scope of “Costs” to be Recovered. The reason that indemnification agreements specifically call for payment of attorneys fees even if they expressly call for indemnification for “all” costs and expenses is because, here in the United States, we follow the “American Rule” (as explained in too much detail last week). Basically, under the American Rule, if you don’t specifically include an “attorneys fees” provision in your agreement, you don’t get them except for certain cases of fraud or where a statute awards such fees. Part of the “lore” of law is that although certain costs are commonly thought to be part of “attorneys fees,” such as “paralegal costs,” some courts, unhappy about parties contracting around the American Rule, don’t see it the same way. So, to those courts, a “thrifty” law firm, using a paralegal employee to do most of the internal work, doesn’t do its “prevailing” client any favors when trying to save the “losing” party some money. There is some degree of illogic to the way those courts approach this question because, if paralegal costs aren’t actually part of “attorneys fees,” then they shouldn’t be barred by the American Rule and should be recoverable as part of the overall costs otherwise recoverable by a party. The more cautious of document draftspeople would look at the simple clause from a stationary store document we displayed last week: “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,” and include “related legal costs and court costs.” Even more cautious ones might list “paralegal costs, expert fees, transcript fees, and on and on.” While we are at it, “court costs” are just that – payments to the court. Generally, they are tallied by a court clerk and are then awarded by a court. So, if a matter is not resolved by a court, there are no “court costs” to first be tallied and then be awarded.

Effect of Settlement Offers. Flash back to last week and our Ruminations about who might be the “prevailing” party or what it means to “prevail.” Imagine a situation where one party asserts a $1,000,000 claim and the other party offers to settle for $600,000. Also imagine that the claim proceeds to trial and the claimant is awarded $200,000, that being $800,000 less than its claim and $400,000 less than the settlement it could have received. Who “prevailed”?

What if the jury returned a verdict of $610,000. Who prevailed? If you say the claimant prevailed, then should the “loser” be on the hook for the claimant’s entire legal fees when it spent as if it were to collect $1,000,000 and got only $10,000?

There are at least a couple of ways to deal with these questions. One could employ an elaborate attorneys fee provision with formulas or formula-like principles to determine the “percentage of prevailment” or the parties can agree to leave the issue to the decisor or decisores when they proclaim “judgment.” That means leaving it to the judge, a jury or the arbitrator(s).

This leads us to the issue of “what to do” about attorneys fees if the parties settle. Every reader should say: “either agree that the settlement figure incorporates all costs and expenses, including attorneys fees, assertable by the parties,” or the settlement agreement should specify how the issue of attorneys fees is to be handled outside of the figure set forth in the settlement agreement.” If that’s so obvious, why is there case law over post-settlement agreement claims for attorneys fees? That’s because the parties ignorantly or intentionally “overlooked” the issue. Basically, Ruminations thinks that, unless the parties just can’t agree on the “amount” of attorneys fees that would have been recovered had a dispute gone to trial, but otherwise want to settle a matter, the settlement agreement should absolutely, positively, say that the parties waive any and all attorneys fees claims against each other. If that isn’t the agreement, then the document should specify exactly how the attorneys fees issue will be resolved and who will be making that determination. To do neither is, simply speaking, a “mistake.”

Reasonableness of the attorneys fees. This may be an overblown issue. Rule 1.5 of the American Bar Association’s Model Rules of Professional Conduct (adopted in substantial form in all but California, we think, but with a similar rule in California) says:

(a) A lawyer shall not enter into an agreement for, charge, or collect an illegal or unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee or expenses include the following:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and

(8) whether the fee is fixed or contingent.

Basically, the attorney discipline system, as well as the judicial system, bar attorneys fees that are not reasonable. And, if anyone were to look for the definition of “reasonable” when it comes to attorneys fee, they’d wind up at Rule 1.5. Thus, there should never be a fight over inserting the work “reasonable” ahead of attorneys fees, but why bother, especially because it would be wise to require all recoverable enforcement costs (including attorneys fees) to be “reasonable.” That leads us to the next listed issue, “necessity.

Necessity of the Attorneys Fees. This item isn’t only applicable to attorneys fees. Readers should ponder (i.e., Ruminate) as to whether all costs and expenses, in addition to being reasonable in and of themselves, must have been necessary costs and expenses. For the sake of brevity, despite the belief of regular visitors that “brevity” and Ruminations do not exactly go hand-in-hand, just because a fee or cost is reasonable, doesn’t mean that incurring that fee or cost was warranted (read that: necessary). Engaging an attorney to send a demand letter or prepare a default notice to a tenant when the rent, uncharacteristically, is three days late doesn’t seem to be a necessary cost even if the attorney’s fee for doing so was eminently reasonable. And, if you look at the sample attorneys fee clause in last week’s posting (again, by clicking HERE), you’ll see that it doesn’t limit its applicability to court or arbitral proceedings, though you might ask if the landlord would be a prevailing party depending on when the rent check arrives.

“Out-of-Pocket” Attorneys Fees or “All” Attorneys Fees? As a matter of background, and without exploring the whys and wherefores of the policy, courts do not grant attorney fees awards to law firms representing themselves in lawsuits in situations where attorneys fees would be awarded if those very same law firms had hired and paid outside counsel to do the job for them.

So, should a party be “reimbursed” for its in-house attorneys’ salaries and law department costs? We think not. That’s because the concept of recovering enforcement fees and costs, including attorneys fees, is that the rightly aggrieved party should be made “whole.” That means, its “bottom line” should not be diminished by the wrongful acts of its contracting counterparty. Can one actually measure the incremental cost of using an in-house legal staff when used for contract enforcement? Even if a party had a dedicated contract (say, lease) enforcement attorney, what would be the basis for “charging” that attorney’s fees?

Why do we ask that? What would be the issue? Let’s assume that a party actually knows what it costs to run its internal “enforcement” legal department (and that assumes a valid overhead charge). Now, how do you allocate that cost? Suppose it costs $500,000 a year for a single attorney department. “Corporate” employees work at least 1900 hours each year. That would be $263 an hour. So, it seems simple, charge $263 an hour. What if, however, only 800 annual hours of that attorney’s time is devoted to enforcements where it has “prevailed” and it collected 75% of the legal “fees” incurred in those situations. That would be a recovery of $157,800. Isn’t that a subsidy for the other work done by the in-house department? Would the party with an in-house legal department pursue every dispute with outside counsel if it had to pay for “losing” cases? As tough as that is to figure out, multiply the challenges many fold when the in-house legal department would have existed anyway and “enforcement” isn’t even an incremental cost.

For those reasons, we would lean toward reimbursement of only out-of-pocket attorneys fees.

Contingency Fees. Should a “prevailing” party be reimbursed for its attorneys fees when those fees are only payable by the allegedly aggrieved party if it prevails? Perhaps that’s an incentive to engage an attorney in situations where settlement discussions would be more appropriate because “it costs nothing to sue” – heads we win, tails we lose nothing. “What’s the big deal, we can enlist an attorney to take cases of doubtful merit because we’ll give those attorneys cases of greater merit to pay for the ‘failures.’” More directly, in a contract dispute, should 50 hours of effort at, say, $400 an hour ($20,000) be charged to the losing party at the rate of 25% of a $200,000 recovery ($50,000). Shouldn’t the prospect of losing be a gatekeeper for a party to face when deciding to engage an attorney at the outset of a dispute? That having been said, has any reader ever seen this issue addressed in an attorneys fee provision?

Will insurance pay? Good question! But, what is the question? In a situation where the “losing” (non-prevailing) party has come out on the wrong side of an insurable claim, will its insurance policy cover a “voluntarily” incurred cost – the attorneys fees that would not otherwise have been payable, but for the agreement’s attorneys fee provision? Don’t assume you know the answer. Different insurance carriers take different positions on such claims.

WOW, that was long. Congratulations to all of you who made it to the end.

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