Let's start with the general rule:
New York courts, following the "American Rule," disfavor allowing parties to recoup their legal fees that are incurred in litigation. As New York's courts have put it:
"It is well settled that legal fees are not recoverable unless provided under the terms of a contract or authorized by statute." See, U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 3 N.Y.3d 592, 597, 789 N.Y.S.2d 470, 822 N.E.2d 777 .
There are two (2) exceptions to this general rule:
- When there is a statute that provides for the recovery of a party's legal fees incurred in the prosecution or defense of an action; or,
- When the contract between the parties provides for the recovery of their legal fees.
So, you may be wondering, how specific do you need to be, or what language do you need in your contract, in order to recover legal fees?
What Are Some Examples of Cases Where Legal Fees Can be Recovered by Statute?
In truth, there are a number of such areas; some of the most prominent areas where they come up, at least in the context of non-compete/restrictive covenant litigation, and in the employment context generally, include the following:
- Where a Qualified Employee Sues (Successfully) for Unpaid Wages/Commissions - N.Y. Lab. Law § 198 1-a provides, in pertinent part, as follows:
"In any action instituted in the courts upon a wage claim by an employee or the commissioner in which the employee prevails, the court shall allow such employee to recover the full amount of any underpayment, all reasonable attorney's fees, prejudgment interest as required under the civil practice law and rules, and, unless the employer proves a good faith basis to believe that its underpayment of wages was in compliance with the law, an additional amount as liquidated damages equal to one hundred percent of the total amount of the wages found to be due, except such liquidated damages may be up to three hundred percent of the total amount of the wages found to be due for a willful violation of section one hundred ninety-four of this article."
- Where a Party Demonstrates that Trade Secrets Were Stolen Maliciously (or Demonstrates that the DTSA Claim Was Brought in Bad Faith) -
As we've noted elsewhere, 18 U.S.C. § 1836(b)(3)(D) provides as follows:
"If a claim of the misappropriation is made in bad faith, which may be established by circumstantial evidence, a motion to terminate an injunction is made or opposed in bad faith, or the trade secret was willfully and maliciously misappropriated, award reasonable attorney’s fees to the prevailing party."
What You Can Do to Recover Your Legal Fees in a Breach of Contract Action
Fortunately, New York's Appellate Division, First Department recently provided us with some guidance on this issue. In Nigri v. Liberty Apparel Co., Inc., the plaintiff sued to recover their damages for breach of contract, and the defendants counter-claimed to recover the legal fees they incurred in defending the action, as well as in prosecuting their own counterclaims under the agreement.
The trial court found in favor of the defendants, not only dismissing the plaintiff's breach of contract claims, but also found that the defendants were entitled to recover the legal fees they incurred in defending the action. Not surprisingly, the plaintiff was displeased with this outcome, and therefore appealed the trial court's order.
What Happened On Appeal in Nigri
In affirming the trial court's award of a judgment allowing the defendants to recover their legal fees, the Appellate court cited the language in the underlying agreement that formed the basis for this ruling:
"The parties' contract provided, in pertinent part, that the plaintiff would pay certain Guaranteed Obligations, which were defined as one-half of all claims, actions, litigation, and other liabilities, costs and expenses (a) in [certain pending legal actions, including a customs matter] and all out-of-pocket expenses (including reasonable attorneys' fees and disbursements) incurred by [defendants] in enforcing or collecting upon [the] Guaranty."
The court went on to state that
"[T]he clause 'all claims, actions, litigation, and other liabilities, costs and expenses' constitutes broad language that is generally interpreted to include attorneys' fees."
First, if you anticipate that your legal issue will not provide for the recovery of your legal fees in the event of litigation, it would behoove you to include such a provision in your contract. Otherwise, you will be depriving yourself (needlessly) of the opportunity to recoup a substantial amount of money, as well as leverage in negotiations later on.
Second, in order to limit the litigation that may be needed down the line (and unlike the defendant in Nigri), it is worthwhile to avoid any ambiguity on this issue; make sure that the language in the contract makes clear that the prevailing party will be entitled to recover their legal fees.