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When You Can't Recover Legal Fees - Even If Contract Says So


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1/28/2019
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Generally speaking, courts across the country have adopted the rule that in the absence of a statute or specific written agreement to the contrary, each side to a litigation is supposed to bear its own legal costs. This is colloquially known as the "American Rule," and it has been heavily criticized by many groups, including judicial and tort reform advocates because, in their view, the threat of having to pay the winning party's legal fees in the event they lose would play a huge role in preventing those parties from filing "frivolous lawsuits." According to this view, the absence of such a rule leaves little to no disincentive to filing flimsy claims, because, after all, what do they have to lose?  

To be sure, there's a lot of merit to that perspective.

The flip side of that particular coin, however, is that under the English Rule, whereby the loser is obligated to pay the prevailing party's legal fees, many meritorious claims would be rendered untenable simply because the plaintiff lacks the financial wherewithal to go head to head with the defendant.

That too is undesirable.

The Rule Regarding Recovery of Legal Fees in New York

Predictably, New York's courts have long followed the American Rule, stating as follows:

"Under the long-standing “American Rule” attorney fees are deemed “incidents of litigation”, and a prevailing party cannot recover its legal fees “except where authorized by statute, agreement or court rule.” [See Gotham Partners, L.P. v. High River Limited Partnership, 76 A.D.3d 203, 906 N.Y.S.2d 205 (1st Dept. 2010), lv. denied 17 N.Y.3d 713, 2011 WL 4977339 (2011) ]. Thus in the absence of a contractual fee—shifting provision or applicable statute providing for the recovery of attorney fees each party to a civil action is generally responsible for its own legal fees [Hooper Associates, Ltd. v. AGS Computers, Inc. 74 N.Y.2d 487, 549 N.Y.S.2d 365, 548 N.E.2d 903 (1989)]."

By way of example, New York's legislature, like many states across the country, have seen fit to provide for the recovery of attorneys' fees in cases involving violations of the Labor Law, or under Federal discrimination claims.

In addition, New York's courts have consistently upheld contract provisions that allow parties to recover their attorneys' fees where that remedy is provided for by contract. That said, and as recently pointed out by a New York appeals court, that rule is not without limits.

Where New York's Courts Have Invalidated Some Attorneys' Fees Provisions Set Forth in Contracts

Although this is, at first glance, a landlord-tenant case, the New York's Appellate Division, First Department's decision in Krodel v. Amalgamated Dwellings, Inc. rendered on November 8, 2018 has potentially much broader significance, including in the employment and non-compete context as well. 

In Krodel, the Respondent's lease had a clear attorneys' fees provision, but both the trial court and then the appellate court, held it was invalid and unenforceable, stating, in pertinent part, as follows:

"We find that the motion court properly declined to enforce paragraph 6(7)(c) because it is unconscionable and unenforceable as a penalty. Parties to a lease may contract for attorneys' fees “provided [they are] reasonable and not in the nature of penalty or forfeiture” (379 Madison Ave., Inc. v. Stuyvesant Co., 242 App.Div. 567, 569, 275 N.Y.S. 953 [1st Dept. 1934], affd 268 N.Y. 576, 198 N.E. 412 [1935] ). ... A finding of unconscionability requires “some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party” (Gillman v. Chase Manhattan Bank, 73 N.Y.2d 1, 10, 537 N.Y.S.2d 787, 534 N.E.2d 824 [1988] [internal quotation marks omitted] ). ..

"In the present case ... the proprietary lease permits the landlord to recover attorneys' fees when the tenant brings an action against the landlord even when the landlord is in default. To enforce such a provision would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default" [Emphasis supplied].

The Takeaway

Increasingly, I've been seeing employment contracts, particularly in the non-compete context, that are one-sided in allowing the employer to recover its legal fees in the event of litigation over the restrictive covenant rather than being more balanced, and allowing the prevailing party to recover their legal fees. This decision raises the prospect that a court may find such a provision unenforceable as a matter of law - especially if it allows the employer to recover its legal fees - win or lose.

 



Category: Non-Compete & Employment Agreements

Jonathan Cooper
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Non-Compete, Trade Secret and School Negligence Lawyer

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