On the short list of what people are most troubled by, legal fees often comes in third, after death and taxes. I can still hear my father (an “old world real estate entrepreneur”) telling me what he expected from his lawyers, upon my passing the Ohio Bar Exam.
“I just need everything, simple, yesterday, and I don’t want to pay anything for it; but protect me from any and all liability from the beginning of time to the end of eternity.”
I, along with most business lawyers understand that while the above is an “impossible dream”, we have to come as close as we can to making the dream a reality, to remain competitive.
One easy way to reduce legal fees is to make someone else pay for them, in certain circumstances. Simply provide, to the effect that the other party to your lease, loan agreement, real estate purchase and sale agreement or other business contract must pay for your legal fees in connection with any litigation arising out of such agreement. These clauses are better received when they are mutual, in other words, providing to the effect that the “prevailing party in any litigation arising out of this contract shall be able to recover from the other party, its reasonable attorneys fees.”
But are such “fee-shifting” clauses enforceable in Ohio?
They didn’t used to be. The “American rule” with respect to recovery of attorney fees historically provided that a prevailing party in a civil action could not recover attorney fees as a part of the costs of litigation. Prior to 1987, Ohio had consistently adhered to the American rule, with two exceptions: (1) Attorney fees could be awarded when a statute specifically provided for the losing party to pay the prevailing party's attorney fees, or (2) when the prevailing party demonstrated bad faith on the part of the unsuccessful litigant.
In 1987, Ohio entered the “modern age” with the Ohio Supreme Court’s decision in Nottingdale Homeowners’ Assn., Inc. v. Darby (1987) 33 Ohio St. 3d 32. The Court in Nottingdale basically held that assuming the parties to a contract had equal bargaining power and no one was under duress or other compulsion to enter into the contract, an agreement to pay another's attorney fees would generally be "enforceable and not void as against public policy so long as the fees awarded are fair, just and reasonable as determined by the trial court upon full consideration of all of the circumstances of the case." The contract in question in Nottingdale was a condominium purchase agreement. After Nottingdale, there have been many diverse cases upholding such “attorneys’ fee shifting provisions”. Examples include:
1) Worth v. Aetna Cas. & Sur. Co. (1987), 32 Ohio St.3d 238, 513 N.E.2d 253, (an indemnity agreement);
2) First Capital Corp. v. G & J Indus., Inc. (1999), 131 Ohio App.3d 106, 721 N.E.2d 1084 (upholding an attorney-fee provision in an accounts-receivable finance agreement);
3) Goldfarb v. The Robb Report, Inc. (1995), 101 Ohio App.3d 134, 147, 655 N.E.2d 211 (upholding an attorney-fee provision in a franchise agreement);
4) Gaul v. Olympia Fitness Ctr., Inc. (1993), 88 Ohio App.3d 310, 623 N.E.2d 1281 (upholding an attorney-fee provision in a loan-guarantee agreement);
5) Wilborn et al v. Bank One, 121 Ohio St. 3d 546, 2009-Ohio-306 (upholding provision in a residential-mortgage contract requiring a defaulting borrower to pay a lender's reasonable attorney fees as a condition of lender terminating foreclosure proceedings and reinstating the loan);
6) Fabrication Group LLC v. Willowick Partners LLC, 2012-Ohio-4460 (11th Dist. Ct. of App., Lake County; upholding an attorney-fee provision in a construction contract).
Are attorney fee-shifting provisions always enforceable, without exception? Of course not; nothing in the law is that easy. As stated by the court in Nottingdale, agreements to pay attorney fees in a "contract of adhesion, where the party with little or no bargaining power has no realistic choice as to terms," are not enforceable.
Similarly, contracts for the payment of attorney fees upon the default of a debt obligation (for example, a promissory note) are void and unenforceable as against public policy. The Ohio Supreme Court in Leavans v. Ohio Natl. Bank (a 1893), and Miller v. Kyle, (a 1911 decision) reasoned that "the stipulation to pay attorney fees operates as a penalty to the defaulting party and encourages litigation to establish either a breach of the agreement or a default on the obligation."
Also, just as some statutes authorize the payment of another party’s attorneys’ fees, others limit this right. Ohio Revised Code Section 1319.02 provides that a commitment to pay attorneys’ fees in a commercial contract of indebtedness is enforceable only if the total amount owed on the contract of indebtedness exceeds $100,000.00
The Moral of this Story? While it seems that there are exceptions to every general rule of law, there are a lot more instances upholding the “general rule” (allowing fee shifting) than there are exceptions; and that general rule can save you a lot of money in legal fees. In other words, consider fee shifting provisions in all of your commercial contracts.
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