Attorney’s Fees – Beware the Tail That Wags the Dog10/24/18 | By: Randy J. Heller, Esq.| GDB 2018 Fall Newsletter
In our regular review and negotiation of contracts and leases, we frequently encounter provisions providing that the “prevailing party” in any litigation or arbitration is entitled to reimbursement of its attorney’s fees and expenses from the losing party. In my experience, clients are initially quite happy with such clauses, never envisioning a situation in which they would be in breach themselves, or in which they might do something for which they could be held liable to another. In their view, it is a home run—allowing them to be made whole (attorney’s fees and all) for the despicable conduct of the evil party with whom they have contracted.
It is sometimes forgotten, however, that the right to attorney’s fees is contrary to the “American Rule” which provides that each party must bear its own attorney’s fees and expenses. Other countries have approached this issue differently, but in the United States, the thinking of the legislature is that the risk of having to bear the attorney’s fees of one’s adversary might have a chilling effect on the vindication of one’s legal rights.
Despite the “American Rule,” however, parties may nevertheless provide in their arms-length contracts and leases that the prevailing party shall recover attorney’s fees from the other party. That right may also be contained in a statute addressing limited areas of the law. Such was the setting in two recent appellate decisions.
In the first case, a plaintiff commenced an action against a defendant for a garden variety breach of contract. There was a trial and the judge held in favor of the plaintiff, also awarding it $49,160 in legal fees. The defendant appealed, arguing that there was no basis to award counsel fees in this circumstance. The appellate court agreed with the defendant and reversed the lower court. It held that “counsel fees may not be recovered unless an award is authorized by agreement between the parties, by statute, or by court rule.” Since none of those circumstances applied, no fees were permitted under the “American Rule.” Simple enough.
In a separate case, a landlord brought an action against a residential tenant in Brooklyn to reform the lease, to provide that the landlord, not the tenant, had exclusive rights to use the backyard. The tenant fought back, arguing that it had the right to use the backyard, and counter-claimed for attorney’s fees. When the court held for the tenant on the reformation action, the tenant sought its attorney’s fees. Here, both a statute (Real Property Law §234), as well as a provision in the lease, addressed attorney’s fees.
The statute provided that where there is a provision in a lease which allows the landlord to collect counsel fees in connection with an action for a breach of a lease, the tenant is deemed to have a reciprocal right—even though the lease is silent on the point. Unfortunately for the tenant in this case, the landlord did not sue for “breach of a lease” but rather for “reformation of the lease,” so the tenant was out of luck under the statute.
However, the lease also had a “prevailing party clause” (which, strangely enough, did not benefit solely the landlord). This clause kicked in for any action for “non-payment of rent or recovery of possession.” The reformation action, which sought to “recover” the backyard, was deemed to satisfy the provision and the tenant was able to collect all its attorney’s fees and costs.
A happy ending? What the parties generally don’t appreciate is that the amount of attorney’s fees can rapidly overwhelm the amount in controversy. Do you really want to sue General Motors for a strange clicking sound in the engine of your car if GM is going to be represented by a large Wall Street firm which has assigned six lawyers to the case, and six more just to carry their briefcases? Do you want to be in a situation where you must fight to the death just to escape the possibility that an inattentive judge or a confused jury rules against you and awards attorney’s fees to your adversary in an amount well in excess of what you were suing for?
Sort of makes you want to consider making the “American Rule” great again.