by David F. Paulson, Jr. & Miles S. Bruder*
Enforcing commercial contracts will likely become a
less-costly proposition in North Carolina this fall, thanks to a new exception
to the state's general ban on attorneys' fee awards to a prevailing party in
Law 2011-341 makes valid and enforceable any reciprocal provision for
attorneys' fees in business-to-business contracts effective on or after October
1, 2011. While the new law does not mandate enforcement, it gives courts and
arbitrators discretion to award reasonable fees in accordance with the
respective contractual terms.
Prevailing North Carolina common law requires each party to bear its own
attorneys' fees, absent a statutory exception for the type of action in
question. S.L. 2011-341 creates just such an exception, permitting courts to
give effect to the reasoned agreements of sophisticated commercial parties.
As a statutory derogation of common law, S.L. 2011-341 should be construed
narrowly. To improve the chances of judicial enforcement of attorneys' fee
clauses in contracts, we suggest that businesses carefully heed certain
requirements of the new exception. Contract drafters should note:
The exception likely has implications beyond drafting and negotiation. Even
when a court decides to award attorneys' fees, it retains discretion to set the
"reasonable" amount of fees awarded, which likely requires the court to focus
on factors beyond the four corners of the contract. Taken together, the
thirteen factors defining the reasonableness of a fee award suggest that
behavior after a contractual relationship breaks down may be more important
than what the parties put on paper at the start of their relationship. Several
factors emphasize the parties' good faith efforts to avoid a judicial course of
action in settling their differences. Notably, the terms of the business
contract are listed last among the thirteen factors, and the new law expressly
disavows adherence to any contract term indexing attorneys' fees to the amount
of damages alleged or awarded.
S.L. 2011-341 is apparently designed for all varieties of business-to-business
transactions. Importantly, it does not validate attorneys' fee provisions in
consumer contracts, employment contracts, contracts with government agencies,
or insurance contracts. Also, when a creditor's contract creating a debt
obligation is governed by both the new exception and by the existing exception
permitting attorneys' fees in debt collections, a creditor may elect to recover
its fees under either exception, but not both; a choice that raises unique
options deserving of creditors' attention as the effective date of S.L.
For more information about this topic, please contact the authors or any
member of the Williams Mullen Business & Corporate team.
*Miles Bruder is a summer associate with Williams Mullen and is not a
licensed lawyer or permanent employee.
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