Editor’s Note: Knox Proctor is a member of the Financial Institutions Practice Group at Ward and Smith, P.A.
The General Assembly has enacted a new law authorizing the enforcement of provisions for the recovery of attorneys’ fees in certain contracts signed on or after October 1, 2011. Under the new statute, the contract must be a “business contract,” and the attorneys’ fee provisions must be “reciprocal,” that is, applicable to all parties to the contract. The contract must be signed “by hand” rather than electronically. And the court is given full discretion on whether and how much to award in attorneys’ fees.
Background –– The “American Rule”
Like most states, North Carolina generally follows the so-called “American Rule” on attorneys’ fees: no matter who wins, each side pays its own lawyers. Contract provisions to the contrary usually are disregarded. If a business wins a dispute ¬¬and is lucky enough to collect a judgment award, but must pay its own lawyers, it is still “out” the amount of those fees, which can be substantial. For this reason, business people tend to prefer the “English Rule,” which generally provides that the loser pays the winner’s reasonable attorneys’ fees.
There long have been important exceptions in North Carolina to the American Rule, including certain cases involving trusts and estates, personal injury, unfair and deceptive trade practices, promissory notes, meritless claims, family law, trade secrets, and real estate rights of way and partitions. Most tech business cases, however, do not fall within these exceptions.
New Law Applies Only to “Business Contracts”
The new law applies only to “business contracts,” defined as contracts “primarily for business or commercial purposes.”
“Consumer contracts” are not business contracts. This exception reflects the traditional concern for parties with less power in the bargaining process. However, the definition of “consumer contract” includes all contracts for “personal, family and household services.” So, even if a technology or electronics firm contracts with a magnate who has superior bargaining power to sell and install high-end, whole-house computer, Internet, and home-theater systems in, say, the magnate’s 15,000-square-foot second-home beach cottage, a reciprocal attorneys’ fee provision in the sales and installation contract probably will not be enforced.
The new law further provides that no contract to which “a North Carolina government” or “governmental agency” is a party is a business contract within the meaning of that term as used in the law. And business people should assume that a court will find a local government to be “a government” of the State. So attorneys’ fee provisions in contracts with the State and its agencies, and probably also local governments, will not be enforceable.
“Employment contracts” also are not business contracts under the new law. This exception again reflects concerns about superior bargaining power. It probably also means a business cannot recover attorneys’ fees from a former CEO when it wins a major case in which big compensation awards and severance benefits rode on whether the CEO’s harassment of a staff member constituted “cause” for dismissal. For some reason, the new law defines “employment contract” to include contracts for any “personal” services (whatever that means) – even from an independent contractor. One hopes that exception would not prohibit attorneys’ fee recovery in a suit against a vendor organized as a corporation or LLC, but that issue is not at all clear. But the extension to independent contractors may mean that an individual hired as an independent consultant is rendering “personal” services and will not be subject to an attorneys’ fee provision if a dispute arises.
“Reciprocal” and “By Hand” Requirements
The new law provides that reciprocal attorneys’ fee provisions are valid only if (a) the provisions apply to all parties to the contract, and (b) all parties to the contract sign it “by hand.”
The reciprocity provision prevents one-sidedness, although it might have been better simply to provide, as other states do, that any provision allowing recovery of attorneys’ fees by one party automatically applies to all parties.
The bill as originally submitted contemplated that all parties had to sign the contract. The signing “by hand” requirement is mighty silly given North Carolina’s other legislation advancing electronic signatures. This provision was added to address misplaced concerns that actions such as opening a software package might constitute an accidental “signature” subjecting one to a “boilerplate” attorneys’ fee provision.
The new law applies only to contracts executed on or after October 1, 2011. If an existing contract is amended on or after October 1 to add or renew a reciprocal attorneys’ fee provision, that provision might be enforceable.
Amount of Recovery Unpredictable
No matter what the agreement says about attorneys’ fees, the new law gives the court wide discretion on the amount of attorneys’ fees to award and, in fact, whether to award any fees.
The new law sets out a non-exclusive list of 13 factors courts may consider in exercising this discretion. Some of these factors reflect North Carolina State Bar fee standards and seem entirely appropriate, such the “reasonableness of the time and labor expended,” the billing rates charged by the lawyers, and the “novelty and difficulty” of the issues. Other factors, however, are “loaded”: courts also may look to “the relative economic circumstances of the parties,” as well as whether “a party unjustly exercised superior economic bargaining power.”
The ancient wisdom of Leviticus 19:15 warns us neither to “defer to the great” nor to “be partial to the poor” in dispensing justice. If a business wins a judgment, the fact that the contract breacher is a smaller outfit than the winning party should not prevent an attorneys’ fee award. And if “superior bargaining power” does not prevent a business from winning a judgment, it should not prevent it from receiving a complete recovery.
The new law also provides that in a suit “primarily for” money damages, the amount of attorneys’ fees awarded may not exceed the money damages awarded or the amount at issue. This limitation tends to discourage suits over small amounts ¬¬– even when contract breaches are egregious. The concern about “superior bargaining power” might have led to giving smaller businesses more leverage over larger ones, but fear of encouraging litigation apparently prevailed over the goal of discouraging contract breaches. Note also that if a business brings a suit for an injunction or declaration and also for money damages, it may be very unclear what that suit “primarily” seeks.
The new law is an improvement, but it needs much improvement. Tech businesses should consider adding reciprocal attorneys’ fees provisions to their contracts on or after October 1. To be effective, the agreements must be signed “by hand,” i.e., in pen and ink. But those tech companies should not count on automatic awards of reasonable attorneys’ fees after wins in lawsuits about those contracts.
(c) Ward and Smith, P.A. 2011
Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Knox Proctor concentrates his practice on representing financial institutions. Comments or questions may be sent to him at firstname.lastname@example.org.
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 legal counsel.