April 4, 2016
Virginia Courts typically follow what is known as the “American Rule” with respect to whether or not a party will be awarded its fees and costs, including reasonable attorney fees, upon a successful outcome in litigation. The “American Rule” dictates that each party is responsible for their own fees and costs for the litigation, regardless of the litigation’s outcome. The exception to this rule is that a party may be awarded their fees and costs, including reasonable attorney fees, if such relief is (i) provided for by statute, (ii) for malicious conduct or bad faith, or (iii) specifically agreed to by the parties in a contract; however, the determination and award of those fees and costs is often within the discretion of the Court.
Litigation costs and attorney fees provisions are common boilerplate provisions added to most commercial contracts, especially given that protecting and enforcing your contractual rights can be particularly expensive. In some cases, attorneys’ fees awarded by a Court may be more than the relief provided in the underlying claim(s). As a result, it is important to understand how these provisions can be shaped and interpreted in a contract under Virginia law.
Let’s look at the following language common in a fee section of a contract for hypothetical purposes:
“in the event of a dispute between the parties arising from or to enforce the Agreement, the prevailing party shall be entitled to recover its reasonable attorney’s fees.”
On the surface this seems fairly straight-forward the winner of the lawsuit has the opportunity for the Court to award it their reasonable attorney fees.
But, what does it mean to prevail? In Virginia, “prevailing” simply means that the Court awarded a judgment in your favor, and this can lead to some unusual outcomes.
For the purposes of a second hypothetical, let’s assume you are suing a customer in a breach of contract claim for $50,000, specifically for non-payment. Let’s assume further that the case goes all the way to trial, and the jury returns a verdict awarding you only $500 out of the $50,000 sought. Although, this may not feel like a win; technically, you have prevailed and could be entitled to recoup your costs and fees, including reasonable attorney’s fees. In an effort to avoid these types of outcomes, some attorneys add language to a fee provision in a contract that reads that a prevailing party is only to be awarded fees if they are “substantially prevailing.”
Another issue that routinely arises in fee provisions is when the provision is drafted to unilaterally award attorney fees for one party, but not the other. For example, sample language may read, “Company A is entitled to its reasonable attorney fees in any action to which it prevails in enforcing the Agreement.”
What happens if Company B prevails? Is Company B entitled to its attorney fees if it prevails?
This can be a difficult and unexpected problem for many clients who did not read the contract carefully or pay attention to this provision. Under Virginia contract law, this provision could be enforceable and may not be interpreted by the Court as a prevailing party provision. The Supreme Court has not specifically addressed this issue; however, it is better to not have to go to Court to find out.
We strongly encourage anyone drafting or reviewing a contract to speak with an experienced and knowledgeable contract law attorney. Although many of these terms may appear “boilerplate,” a skilled contract attorney can make alterations to the language that could have significant implications to your legal rights.