One of the biggest drawbacks to litigation, or even arbitration, is the cost associated with attorneys. In New York, a corporation or an LLC must have an attorney in litigation. Corporations and LLCs are not permitted to represent themselves in Court in the State of New York. This leads to a difficult decision one a dispute develops on a construction project: is it cost effective to proceed to litigation or should I just cut my losses? Take for example a $4,500 dispute. Because it is under $5,000, you can proceed (in most counties) through small claims court. Small claims court is not overly expensive. You can typically pay all of the fees and even hire an attorney to handle the hearing for you fairly cheaply. Even if you are sitting in court for 4 hours the day of the hearing you probably still will not pay more than $1,500 for everything (fees included). But that is still 1/3 of your money. A claim for more than $5,000 and you are proceeding to the Civil Court (in NYC), the District Court (on Long Island) or perhaps the County Court (upstate). Much more than $5,000 and you could end up in Supreme Court.
Litigation in the Courts means Court appearances, depositions, pleadings, motions and discovery. That means lots of time for attorneys and lots of money spent. Complex construction litigation can easily cost more than $100,000. Even basic uncomplicated litigation (if such a thing exists) can easily cost over $10,000. It is with these smaller amounts that there is what I call a gray area. If you are owed $20,000 do you really want to spent $18,000 to recover it? Keep in mind there are no guarantees. You could spend $18,000 and lose. You could spend $18,000 and win but be left with an collectible judgment. What if you spend $21,000 to recover the $20,000? It easily gets to the point where it is not cost effective to proceed.
But if you win at the end of the day you get all your costs back right? WRONG. New York follows the "American Rule" whereby all parties to litigation absorb their own costs. This means even if you win, even if you were 100% right and should have never had to litigate, you eat your own costs. Doesn't seem fair right? Well, luckily, there is an option. While the default rule is you pay your own fees, you can change that rule by contract. So, first things first, make sure you have a written contract! The days of the handshake agreement in construction should be long gone. A written contract is essential to protecting your rights. Even the most well intentioned contractor can have things go wrong and you need protection. Now that you have your written contract, you simply need to insert a provision that says the prevailing party is entitled to recover its attorneys fees from the other party. That's it. If you win, you can recover your (reasonable) attorneys' fees. With an attorneys' fee provision in your contract it is now much easier to decide to chase after that $20,000 debt. It also makes the pain of long drawn out (and expensive) litigation a bit less.
There is another advantage to an attorneys' fee provision aside from merely recovering your fees. Sometimes there is an unwritten rule that the best defense for a party with no real defense is to try and "outspend" the opponent. Parties will think twice about dragging out questionable litigation and driving up your costs if they know that they will be paying those costs back at the end of the day (in addition to paying their own costs). Of course there is a downside: if you are the one in the wrong you may be the one stuck paying fees. But it is a risk that you have to decide and weigh.
Vincent T. Pallaci is a partner with the New York law firm of Kushnick | Pallaci, PLLC. With offices in Buffalo and the NYC Metro area, KP provides legal services to the construction industry across the State of New York.
I don't think I've ever seen a contract without such a provision. In fact, I was mildly suprised that the default was paying your own fees. As you say, the provision is an "all or nothing" approach, which deserves some consideration before proceeding. It can, however, encourage somebody to go ahead and litigate small matters where the attorney's fees become much more than the dispute (and arguably, thereby provide for access to the court system for judgement where none would have occurred). It also encourages disregard for what attorneys charge; if somebody else pays, who cares? I don't see a good solution, but I think there needs to be one rather than all or nothing.
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