Attorney’s Fees Provisions in Contracts – What You Need to Know

The provision in a contract providing for an award of attorney's fees to the prevailing party in litigation arising out of that contract is generally valid and enforceable in Maryland. Depending on the nature of your business or your role in a particular transaction, this may be the most important clause in the contract in the event of a breach. How you negotiate and draft this provision can have a big impact if your dispute ends up in court.

Identifying, defining and protecting your rights before entering any transaction is crucial. Although no contract can guarantee results or protection for every possible eventuality, there is one contingency that a well-drafted agreement can help you anticipate and manage: litigation expenses. Under the “American Rule” (covered in an earlier article on this website), parties to a lawsuit are generally responsible for their own costs of litigation, including attorney’s fees. One of the well-known and frequently recurring exceptions to this rule is a contract provision for attorney’s fees.

Parties are generally free to contract as they wish, as long as the subject matter of their agreement is not illegal and the terms are not unconscionable. However, as with other areas of contract law, courts will step in and place certain limits on the parties. Thus, even when a contract does not include language limiting recovery of attorney’s fees to “reasonable” fees, courts in Maryland will ordinarily read such a term into the contract and will examine the prevailing party's fee request for reasonableness. Although courts have discretion in determining the reasonableness of attorney's fees, this discretion does not extend to a refusal to award fees altogether if the contract language unambiguously shifts the payment of attorney’s fees to the losing party (e.g., “the prevailing party shall be entitled to receive reasonable attorney's fees from the other party”).

Ideally, if your business is high-volume and involves numerous transactions with different parties, you will have a well-developed, customized contract form that protects your interests. Regardless of the number of contracts to which your business is a party, if you must engage an attorney to enforce your contract rights, collect your account, or the like, this may swallow up all of the expected benefit from the contract, including your profit. If the other side defaults under your agreement, your goal is to be made whole, as if the breach never occurred. This is not possible if, in order to restore your business to the pre-default state of affairs, you must also pay a law firm to get you there.

If your business receives an offer or is given a form contract that provides the other side with the right to attorney's fees, it is important to negotiate that reciprocal right for your business as well. If the contract says nothing regarding attorney's fees, each side will be responsible for its own fees. A well-drafted provision for the payment of attorney’s fees in your contract therefore would not only shift the expenses of litigation, but might help you avoid litigation altogether. Many businesses face the typical situation where the party in default makes a low settlement offer, figuring that the costs of litigation and the delays inherent in the judicial process will deter the other party from filing suit. A contract that shifts these costs to the losing party will make such tactics ineffective.

If the provision concerning attorney’s fees is too narrow in scope, the prevailing party in a lawsuit may not recover all of the litigation expenses. For example, if the contract uses language that plainly limits the right to attorney’s fees to cases involving breach of the agreement, attorney’s fees in connection with other potentially related causes of action, such as tort or negligence, may not be recoverable by the prevailing party. Care should also be taken to use terms that will maximize your ability to charge and collect attorney’s fees for situations involving a breach or default under the contract that requires your business to employ legal counsel but that stop short of a lawsuit.

For more information on this subject please contact Jason Brino.

No Leniency If Your Business Misses the Deadline for Renewing Its Lease

If you are a business owner with a lease for real property that contains an option to renew, double-check to see whether you must give notice to your landlord of your intention to renew, or your business may be out on the street.

A recent decision by a Maryland court should serve as a warning if you are a business owner that leases your building. You should check the terms of your lease to determine whether it requires you to notify your landlord to renew your lease and, if so, whether that notice is due on or before a specific date. If your lease has such a renewal notice requirement, make sure that you don’t miss that date for providing notice – even by a single day – or the landlord might have the right to terminate the lease no matter on the hardship to your business.

The recent Maryland court decision involved a bank’s lease of land and a building to a tire shop in Cockeysville. The initial term of the lease was for 20 years, but the lease contained a renewal clause that allowed the tire shop to renew its lease for an additional 5 years. The lease, however, required the shop to give notice of its desire to renew “at least ninety (90) days” before the 20-year term expired. Because the 20-year term expired on November 1, the 90-day requirement meant that the tire shop had to give notice to renew its lease no later than August 2.

In this case, the shop mistakenly calendared September 1 – not August 1 – as the deadline for sending notice of renewal to the bank. After the shop sent its notice on August 27, the bank terminated the release. The tire shop sued to force the bank to renew the lease. The court refused, holding that because the tire shop did not give notice at least 90 days before the November 1 expiration of the lease, the bank rightfully terminated the lease. The court, in essence, held that 90 days means 90 days, and it rejected a number of arguments by the tire shop, including:

As for termination of the lease causing undue harm to the tire shop, the court held that harm to the tenant did not matter;

As for the unfairness of punishing the tire shop for an innocent mistake, the court held that the mistake didn’t matter and said that the tire shop had an obligation to comply with the strict notice requirements of the lease;

As for any obligation of the bank to have reminded the tire shop that the 90 day period for renewing the lease was approaching, the court held that a landlord has no obligation to notify its tenant of upcoming deadlines, unless the lease requires it.

Thus, you should check your lease to determine whether it contains a renewal clause that contains a deadline for giving notice to your landlord of your exercise of any renewal option. Missing that deadline – even by a single day – could result in termination of your lease, no matter how damaging to your business.

For more information on this subject please contact Josh Glikin.