This One’s on Who? How the Recovery of Attorneys’ Fees Works in Business Litigation
Just like it takes money to make money, it takes money to recover money in a business lawsuit. Even supposedly “slam dunk” cases (which really don’t exist) can be drawn out, expensive slogs, with ample opportunities for the other party to muck up the works with petty motions, discovery disputes, and other tactics to delay and increase costs.
All that work costs your attorney time, which costs your company money for that time. More often than not, those dollars are coming out of your business’s bank account. Sometimes, however, the cost of pursuing or defending a claim can exceed the amounts in dispute. In such cases, winning a nice money judgment or defeating the efforts to obtain one against your company results in something of a Pyrrhic victory, as you essentially endorse that check and hand it over to your lawyer to cover their fees — and maybe write another check of your own if the judgment doesn’t cover the whole bill.
For business owners considering whether to bring a lawsuit—or deciding how to respond to one—the first question is often whether they can recover their attorneys’ fees from the opposing party if they ultimately prevail.
Generally, the answer is no. Unless a statute, court rule, or contractual “fee-shifting” provision provides otherwise, each side in a business dispute is ordinarily responsible for paying its own attorneys’ fees. Determining whether an exception applies before litigation begins, or at least at its earliest stages, is essential to developing a strategy for the dispute, evaluating settlement opportunities, and determining the claim’s actual financial value.
The American Rule
When the United States broke away from England 250 years ago, American law also departed from England’s approach to the allocation of attorneys’ fees in civil litigation. Under the “English Rule,” the losing party generally bears the successful party’s attorneys’ fees. The “American Rule,” by contrast, ordinarily requires each side to pay its own legal fees no matter which party prevails.
The policy underlying the American Rule is to prevent legitimate litigants from being deterred from pursuing claims or asserting defenses because of the risk that losing could result in liability for both their own legal expenses and those incurred by their opponent. Consistent with this principle, Michigan courts follow the American Rule.
Like most legal rules, however, the American Rule has exceptions. In commercial litigation, the most significant—and the exception over which contracting parties have the greatest control—is a contractual provision requiring one party to pay the other’s attorneys’ fees.
Contractual Fee-Shifting Provisions
Commercial agreements often contain provisions stating that when litigation is required to enforce the contract, the prevailing party may recover its reasonable attorneys’ fees and litigation-related costs. Courts in Michigan will generally enforce such terms when their language is clear and unambiguous and does not violate public policy.
Commercial leases, for example, commonly require a tenant to reimburse the landlord for attorneys’ fees incurred when the landlord must sue for unpaid rent. Similar provisions frequently appear in loan documents, guaranties, construction agreements, operating agreements, purchase agreements, and vendor contracts.
A fee-shifting provision is therefore much more than routine boilerplate. It can be a fundamental—and potentially decisive—term governing a commercial relationship. Ideally, the provision will never become relevant because the parties will never have a disagreement serious enough to result in litigation. Business relationships, however, rarely unfold under ideal circumstances. For that reason, businesses should address this issue carefully, with appropriate legal advice, when entering into a commercial relationship.
Fee-Shifting Statutes and Court Sanctions
A less frequent exception to the American Rule arises when a statute expressly authorizes a successful party to recover attorneys’ fees for claims brought under that law. Legislatures generally adopt fee-shifting provisions in statutes to encourage private parties to enforce important public policies. In Michigan, for instance, various consumer protection, employment, civil rights, and insurance laws allow prevailing plaintiffs to obtain reasonable attorneys’ fees. In ordinary commercial disputes, however, statutory fee awards are less prevalent unless the claims arise under a statute that specifically permits fee recovery.
State and federal courts in Michigan also have limited authority to award attorneys’ fees as a sanction in appropriate circumstances. Such awards may be available when a party pursues a frivolous claim or engages in behavior that unnecessarily drives up the expense of the proceedings. Similarly, violations of discovery requirements or court orders can lead to sanctions that include an award of the opposing party’s reasonable attorneys’ fees.
A party does not, however, become subject to sanctions simply because it loses the case. Sanctions generally require some separate misconduct or violation serious enough to justify that type of penalty.
Only “Reasonable” Attorneys’ Fees Are Recoverable
Even when a party is entitled to recover attorneys’ fees, a fee-shifting provision does not give the prevailing party an unlimited right to reimbursement. A successful litigant cannot simply present its entire legal bill to the losing side and expect payment in full.
Courts in Michigan evaluate whether requested fees are reasonable by considering a variety of factors. These can include the complexity of the litigation, the amount of time reasonably devoted to the matter, the attorneys’ hourly rates, the results achieved, and whether the legal work was necessary. When fees appear excessive, duplicative, inadequately documented, or insufficiently detailed, a court may reduce the amount awarded.
As discussed above, one of the most effective ways for a business to protect itself is to address litigation-related risks before any dispute arises. Thoughtfully drafted commercial contracts can allocate those risks, including responsibility for attorneys’ fees, in a way that accounts for the parties’ expectations and relative bargaining positions. If a business dispute ultimately leads to litigation, knowing whether attorneys’ fees can be recovered is essential to accurately assessing both the potential value of the claim and the financial exposure associated with defending it.
If you have questions or concerns about the recovery of attorneys’ fees in commercial litigation, please contact Michael Hamblin at Maddin Hauser.