"I can collect my attorneys' fees when I win – can't I?" This is a question almost every prospective plaintiff asks, and it is understandable because even if Justice is blind, it generally is not cheap. Until October 1, 2011, the answer to the question in North Carolina generally was "No" with a few specific exceptions (such as cases involving trusts and estates, personal injury, unfair and deceptive trade practices, promissory notes, meritless claims, family law, trade secrets, real estate rights of way, and real estate partitions). However, beginning October 1, 2011, the possibility for the answer to be "Yes, maybe" will increase significantly as Session Law 2011-341 ("Act") becomes effective.
The Act adds a new section (§ 6-21.6) to the North Carolina General Statutes entitled "Reciprocal attorneys' fees provisions in business contracts." The general principle of the Act is to allow courts and arbitrators to award attorneys' fees to a winning party in a business contract dispute, but only when the contract contains a reciprocal attorneys' fees provision.
Although the principle is simple, the requirements of the Act are a little more complicated. In order to get the benefit of the new law, it is necessary to understand its various requirements.
The Award is Discretionary
It is important to note that, although the Act "allows" a court or arbitrator to award attorneys' fees, it does not require a court or arbitrator to award fees. An award is discretionary with the court or arbitrator.
Certain Contracts Are Excluded
The Act applies only to disputes involving business or commercial contracts (referred to in the Act as "business contracts"). Disputes that involve at least one individual and that relate to matters primarily for personal, family, or household purposes (traditional consumer contracts) are not "business contracts" and are not covered by the Act. Contracts with a government or a governmental agency of North Carolina specifically are excluded. Also excluded are employment contracts which the Act defines as contracts for an individual to provide personal services to another party – even if the relationship is one between a principal and an independent contractor.
The Contract Provision Must be Reciprocal
The Act requires the attorneys' fee provision in the business contract to be reciprocal between the parties. Accordingly, in business contracts that provide that only a specified party is entitled to collect attorneys' fees in the event of a dispute (such as the "landlord," "seller," "buyer," etc., but not the other parties to the contract), the attorneys' fee provision will not be enforceable unless another available specific authorization (such as one of those mentioned above) applies. The Act's requirement that the attorneys' fee provision be reciprocal will help protect parties that have little negotiating power in business contracts from having one-sided attorneys' fee provisions forced upon them.
The Contract Must be Signed "by Hand"
The Act provides that a reciprocal attorneys' fee provision will be enforceable only if all of the parties to the business contract sign the contract "by hand." With state and federal laws authorizing more and more documents to be signed with electronic signatures, the "sign by hand" requirement will create arguments as to what exactly is meant by "sign by hand" and how the Act meshes with the electronic signature laws.
Limitations on Amount
The Act limits the amount of attorneys' fees that may be recovered. They cannot exceed the amount of monetary damages awarded in the matter if the action is brought by a party primarily for the recovery of monetary damages. This restriction attempts to dissuade parties from spending inordinate amounts of money on legal fees to prove a "principle" when the "principal" at issue is relatively small. The Act leaves unclear what a court or arbitrator should do if a claim for money damages is coupled with alternative claims for equitable relief such as a request for an injunction or reformation of a contract.
Further, the Act limits recovery to "reasonable" attorneys' fees and expenses. In determining what is "reasonable," the Act directs the court or arbitrator to consider "all relevant facts and circumstances," and lists 13 specific factors to be considered. Although the language in a business contract might specify an attorneys' fee amount or a percentage, that language will not be binding, but is one of the 13 factors for the court or arbitrator to consider in setting the amount.
The Act applies only to business contracts signed "by hand" on or after October 1, 2011. Existing law will apply to all previously executed business contracts.
North Carolina Law Must Apply
Another important point to remember is that the Act will apply only in proceedings governed by North Carolina law. Therefore, the choice of law provision in a contract will be more important than ever before. If the business contract requires the application of law other than that of North Carolina, then, even if all of the other requirements of the Act are met, the parties may not get the benefit of the Act's reciprocal attorneys' fee provision.
In proceedings governed by North Carolina law involving business contracts executed "by hand" on or after October 1, 2011, the answer to the perpetual question of whether a party will be entitled to recover attorneys' fees will change to a strong "Yes, maybe." If you want to make certain that is the answer you receive when you ask the question, it is important that your contracts meet the requirements of the Act.
© 2011 Ward and Smith, P.A.
For further information regarding the issues described above, please contact Clint D. Routson.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.