Can You Recover Attorney's Fees in a New York Breach of Contract Case?

Can You Recover Attorney's Fees in a New York Breach of Contract Case?

One of the most common questions clients ask at the outset of a breach of contract dispute is whether they can recover the attorney's fees they incur  to enforce their rights.  Most are surprised to learn that, in New York, the answer is generally no—unless a specific exception applies.

The American Rule

Like most jurisdictions in the United States, New York follows what is known as the “American Rule.”  Under this rule, each party is generally responsible for paying its own attorney’s fees, regardless of who ultimately wins the lawsuit.  As the courts have explained, attorney's fees are considered an ordinary "incident of litigation." Therefore, a prevailing party may recover attorney’s fees from its adversary only when:

1. A statute or court rule expressly authorizes the recovery of attorney's fees; or
2. The parties have entered into a contract containing a clear and enforceable fee-shifting provision.

The purpose of the American Rule is to encourage access to the courts by ensuring that parties are not deterred from pursuing or defending claims out of fear that they may be forced to pay their opponent’s legal fees if they lose.

Fee-Shifting Provisions in Contracts

In commercial litigation, statutes authorizing attorney’s fees are relatively uncommon. As a result, the ability to recover legal fees most often depends upon the language of the parties’ contract.

For that reason, the right to recover attorney’s fees should be considered during the contract-negotiation stage, not after a dispute arises. If the parties want the prevailing party to recover legal fees in the event of litigation, the contract should contain an express fee-shifting provision clearly stating that intent.

Fee-shifting provisions are often negotiable. In contracts between parties of relatively equal bargaining power, these provisions are typically mutual, providing that whichever party prevails in litigation arising out of the agreement may recover its reasonable attorney’s fees from the losing party. In other circumstances, particularly where bargaining power is unequal, the provision may be unilateral and benefit only one party.

Why Contract Language Matters

Because fee-shifting provisions are an exception to the general rule, New York courts strictly construe them.  The contract must clearly and unequivocally state when attorney’s fees may be recovered and under what circumstances.  Courts will not infer a right to recover attorney’s fees simply because a contract contains broad indemnification language.

In fact, New York’s highest court has repeatedly held that even broadly worded indemnification provisions will not be interpreted to require one contracting party to pay the other’s attorney’s fees in litigation between them unless the agreement contains “unmistakably clear” language demonstrating that intent.

For that reason, a well-drafted fee-shifting provision should address issues such as:

• Whether attorney’s fees may be recovered before litigation is commenced;
• Whether fees incurred to defend related counterclaims are covered; and
• Whether fees incurred in connection with a fee application are covered.

Careful drafting at the outset can prevent costly disputes over the scope of the provision later.

Recovering Fees Does Not Guarantee Full Reimbursement

Even when a contract provides for the recovery of attorney’s fees, the prevailing party is not automatically entitled to recover every dollar spent on legal services. Instead, the prevailing party must apply to the court for an award of attorney’s fees. The court will then evaluate whether the fees requested are reasonable under the circumstances.

In determining reasonableness, courts may consider numerous factors, including:

• The complexity of the case;
• The time and labor required;
• The experience and skill of the attorneys involved;
• The customary rates charged by attorneys in the community; and
• The results obtained in the litigation.

Because trial courts have substantial discretion in assessing reasonableness, it is not uncommon for fee applications to be reduced.

Practical Takeaway

Businesses and individuals negotiating contracts should carefully consider whether a fee-shifting provision is appropriate and ensure that any such provision is drafted with precision. A well-written attorney’s fee clause can significantly affect the economics of a future dispute and may ultimately determine whether litigation is financially worthwhile.

If you are negotiating a contract or involved in a breach of contract dispute, the attorneys at Mahon, Rider, McKay, Bauer & Furst, PLLC can help evaluate your rights and develop a strategy to protect your interests.