Deciding whether to pursue litigation to resolve a dispute is a business decision. The associated expense is one of many factors to consider. The default rule, known as the “American Rule”, is that each party pays its own attorney’s fees in court, win or lose. The rationale behind this rule is that fear of the possibly having to pay an adversary’s attorney’s fees should not discourage a party from seeking redress for perceived wrongs in court. This can frustrate business owners, who often believe that the costs associated with getting justice should be borne by the party who caused the problem. Fortunately, there are two broad exceptions to the American Rule that find frequent application in business litigation.
Exceptions to the American Rule
Prevailing Party Provision – Many contracts provide that if a dispute is resolved in court, the winner – or prevailing party – can recover attorney’s fees from the losing party. Prevailing party attorney’s fees provisions are routinely enforced by courts and can be a powerful tool in facilitating settlement discussions out of court or recouping litigation costs in it.
Bad Faith – The second broad exception to the American Rule applies where one party acts in ‘bad faith’ or is ‘stubbornly litigious.’ While virtually every litigant believes that his adversary acted capriciously, courts take a narrower view. To constitute bad faith, the offending conduct must generally (1) cause the prevailing party unnecessary trouble and expense; or (2) be in direct contravention of established facts or law. These can be subjective standards to be sure. What appears frivolous to some can be interpreted as a bona fide dispute to others.
Example 1: Company A provides services to Company B and invoices $500,000 for the work. Company B fails to pay because financial setbacks leave it unable to do so. Not having enough money does not relieve Company B of its obligation to pay Company A for the work, but it is also not likely to constitute bad faith. In this instance, Company A might win the $500,000 in court, but an additional award of attorney’s fees is unlikely.
Example 2: Company A provides services to Company B and invoices $500,000. Company B takes issue with the quality of the work and refuses to pay. The court must decide whether Company A is entitled to payment for the work, and if so, whether Company B’s refusal to pay was justified. If the court concludes there was a genuine dispute, Company A is not likely to recover its attorney’s fees. But, if the court concludes that Company B manufactured its concerns merely to avoid payment, then Company A may well win both the $500,000 and get an attorney’s fees award.
Three Keys to Recovering Attorney’s Fees From an Adversary
To increase the likelihood of recovering attorney’s fees in court, business owners should:
- Contract to recover attorneys’ fees – Documenting business relationships with written contracts that include prevailing party attorney’s fees provisions will greatly increase the likelihood of an attorney’s fees award.
- Retain deal related records – Finding an adversary’s e-mail promising one thing and a second e-mail written six months later disavowing the commitment can go a long way to demonstrating the adversary’s bad faith. Save e-mails, invoices, contracts, and other deal related information. You never know when you will to need it.
- Wear the white hat – By upholding her end of a business relationship, treating others fairly, and compromising to bring closure to disputes as they arise, a business owner demonstrates her own good faith. In addition to reducing significant business disputes in the first place, she wins the hearts and minds of judges and juries, thereby increasing the likelihood of a favorable attorney’s fees award.
Incurring attorney’s fees in court is a given. Recovering them from an adversary is not. Business owners should not undertake litigation expecting an attorney’s fees award, but following these steps will greatly increase the odds of that outcome.