July 13, 2015
As a litigator, one of my jobs is to ensure that my clients understand the risks and benefits of pursuing or defending a lawsuit. As the saying goes, knowledge is power. Only when my clients understand the economic realities of their case are they empowered to make the right decision for them.
Frequently, a client will assume that if we prevail in the litigation, the opposing party will have to reimburse my client for his or her attorney fees. But, the reality is that attorney fees are awarded only in special circumstances, and even when those circumstances are present, it is far from guaranteed that a court will award attorney fees to the prevailing party.
Ohio follows the “American rule” for the recovery of attorney fees under which a prevailing party in a civil action generally cannot recover attorney fees as part of the costs of litigation. Attorney fees may be awarded to the prevailing party, however, when: (1) a federal or state statute explicitly provides for an award of attorney fees; (2) the prevailing party demonstrates bad faith or malicious conduct on the part of the unsuccessful litigant; or (3) where the dispute involves an enforceable contract that contains an attorney fee provision.
The Fourth District Court of Appeals recently issued a decision discussing whether a prevailing party in a contract dispute may recover its attorney fees as damages from the opposing party. In 2-J Supply, Inc. v. Garret & Parker, LLC, the plaintiff was granted default judgment on its claim for goods sold to the defendant under the terms of a credit account application. The defendants had also personally guaranteed their debts. Both the credit account application and the personal guarantees contained a provision that required the defendants to pay the plaintiff’s attorney fees and litigation costs if the defendants defaulted on their obligations under the contracts. Nevertheless, the trial court determined that the plaintiff was not entitled to an award of its attorney fees because no statute authorized the recovery of those fees.
The plaintiff appealed the trial court’s decision denying its request for attorney fees. On appeal, the Fourth District held that the trial court erred in refusing to award attorney fees. In its decision, the appellate court emphasized that parties have a fundamental right to contract, and as a result, agreements to pay another’s attorney fees are normally enforceable and not void as against public policy. The court explained that where the attorney fee provision is unambiguous, is not the product of compulsion or duress, and did not result from the parties having unequal bargaining power, the provision should be enforced by the courts.
Judge Hoover authored a vigorous dissent, however, stating that the Ohio Supreme Court has previously held that contracts for the payment of attorney fees upon default of a debt obligation are void and unenforceable. Judge Hoover reasoned that the Credit Account Application at issue operated as a penalty to the defaulting party and only benefitted the plaintiff/creditor who provided the form agreement. The dissent further opined that contractual attorney fee provisions should only be enforced where the evidence suggests that the provision was freely negotiated by parties with equal bargaining power.
Despite the clear contractual provision at issue in this case, the dissenting opinion highlights that almost nothing is guaranteed when it comes to seeking a recovery of a litigant’s attorney fees. When contracts provide attorney fees for only one party – as opposed to a provision allowing the successful party to recover its fees – they are less likely to be enforced.
It is important that litigants understand the costs of prosecuting or defending a lawsuit. It is my goal to hold these candid conversations with my clients early and often so we can develop the best strategy going forward for each client on each case. What makes sense for one, may not make sense for another. The potential recovery of attorney fees may help shape these decisions, but clients must understand that courts generally disfavor awarding such fees unless special circumstances exist.
This discussion also highlights the importance of contract drafting for our commercial clients. As a litigator, I typically get involved only after a dispute arises. All too often I find myself in the position of having to inform my clients that if a particular contract term had simply been incorporated into a contract, or drafted more appropriately, they would have allowed themselves a remedy far superior to what is presently available.
Our transactional team is well aware of this conundrum, and strives to ensure that our commercial clients are well-protected in their contractual documents to avoid these potential pitfalls before they arise. A well-drafted contractual provision can be the difference between expensive litigation, and a quick, decisive resolution.
The Finney Law Firm is positioned to serve your litigation and transactional needs. On the front end, we work to provide our commercial clients with contractual documents that will best position them should a dispute later arise. With respect to litigation, we make it our goal to fully inform our clients of all aspects of their case – legal and economic – so that we can empower you to make the best decisions necessary to resolve your disputes.