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New Law Puts Into Play The Recovery Of Attorneys' Fees In Business Contract Lawsuits

by Joshua Hiller on 08/22/11

     As lawyers and litigants may know, it has generally been extremely difficult in North Carolina to recover attorneys’ fees at the conclusion of the case, even if you win.  However, thanks to a new law signed by Governor Purdue, reciprocal attorneys’ fees provisions in business contracts will now be enforceable in litigation.

      North Carolina common law follows what is known as the “American Rule,” which generally holds that each party to a lawsuit is responsible for its own attorneys’ fees incurred during the course of a lawsuit – irrespective of who wins and who loses.  This stands in contrast from other countries that allow for the prevailing party to recover their attorneys’ fees from their opponent.

      In North Carolina, the “American Rule” holds true unless there is an express statutory provision that provides an exception allowing for the recovery of fees.  These exceptions historically have been few and far between.  Prior to this new law, even where a parties’ contract provided that the prevailing party in a lawsuit was entitled to recover its attorneys’ fees, courts would refuse to enforce such a provision unless the case otherwise fit within one of the few narrow statutory exceptions.

      North Carolina has now passed into law an additional exception that is likely to see wide use in future lawsuits between businesses.  Session Law 2011-341 (codified as N.C. Gen. Stat. § 6-21.6) now makes enforceable any reciprocal provision for the recovery of attorneys’ fees in business contracts.  The law defines “business contracts” to be agreements executed “primarily for business or commercial purposes.”

      Because the new law creates an exception to prevailing North Carolina common law, its application will be construed narrowly.  There are several important limitations to note.  First, it covers any sort of contract between sophisticated business entities, but does not extend to consumer agreements of any kind, employment contracts, insurance agreements, or government contracts.  A consumer agreement is defined as a “contract entered into by one or more individuals primarily for personal, family, or household purposes.”

      Second, the new law only applies to contracts entered into on or after October 1, 2011.  Third, the attorney’s fee clause must be reciprocal in favor of all parties to the contract.  Fourth, the written contract containing the attorneys’ fee clause must be signed “by hand.”  Although courts have not interpreted this last restriction, this would seem to exclude contracts executed by electronic stamp or signature.  

      The new law does not provide a trigger mechanism for an attorneys’ fee clause, so it would seem that the parties to the contract are free to define when the clause will apply, and under what circumstances.  The new law expressly disavows adherence to any contract term providing for a stated percentage of attorneysfees or gauging it to the amount of damages.

      Courts will also still maintain discretion in deciding whether or not to award attorneys’ fees in a particular case, and importantly have discretion to determine a “reasonable” fee award.  In setting the reasonableness of the award, the new law sets out thirteen different factors for courts to consider, and include such things as the amount in controversy, the existence, timing and amount of any settlement offers, the novelty of the legal questions presented in the suit, the billing rates of counsel and time billed, and the economic circumstances of the parties.  Finally, the law makes clear that any fee award cannot exceed the amount in controversy. 

      This huge change in North Carolina law has a very real potential to affect the strategy and behavior of business litigants in any suit involving a contract with an attorneys’ fees clause.  With a statutory presumption of validity, it no doubt will increase the potential risk and exposure for all parties involved.  Therefore, businesses and their counsel should have an eye out for a reciprocal attorneys’ fees clause in future proposed contracts under negotiation, and give careful consideration to the decision to include such a provision in their agreements moving forward.

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