attorney fees

You may have heard the joke about the new client who asked the lawyer, “How much do you charge?” “I charge $200 to answer three questions,” replied the lawyer. The client asked, “Isn’t that a bit steep?” “Yes,” said the lawyer, “What’s your third question?” As the joke indicates, it’s important to get a clear understanding about how fees will be paid when you hire a lawyer.

Under the “American Rule,” (applied in U.S. Courts), each party to a lawsuit must pay its own attorney fees, unless a statute provides otherwise. (For example, laws the prohibit discrimination allow employees who win in court to collect their attorney fees from the other party.) However, parties can change this default rule by signing a contract that requires the losing side in a legal dispute to pay the winning (or “prevailing”) side's attorneys' fees and costs. Below is a typical attorney fees provision.

EXAMPLE: Attorney Fees. The prevailing party shall have the right to collect from the other party its reasonable costs and necessary disbursements and attorneys’ fees incurred in enforcing this Agreement.

What are reasonable costs? Costs refer to filing fees, fees for serving the summons, complaint, and other court papers, fees to pay a court reporter to transcribe depositions (pretrial interviews of witnesses) and in-court testimony, and, if a jury is involved, to pay the daily stipend of jurors. Often costs to photocopy court papers and exhibits are also included. Typically, court costs are paid by the parties to the dispute. But with the inclusion of an attorney fees clause, the losing party is held responsible for both parties' costs

Watch out for one-way attorneys’ fees provisions. Under a mutual provision, such as the example above, the party that wins the lawsuit is awarded attorneys’ fees. This is fair and encourages the quick resolution of lawsuits. A “one-way provision” allows only one of the parties to receive attorneys’ fees, usually the party with the better bargaining position. One-way provisions, no matter which side they favor, create an uneven playing field for resolving disputes. Some states, such as California, have recognized this unfairness and automatically convert a one-way attorneys’ fees contract provision into a mutual provision.

Judicial enforcement. This type of clause is not always enforced. Courts are allowed to judge contracts for fairness and to change their terms if they decide that doing so is the more fair solution. If a judge decides that it would be unfair to enforce a requirement that one side pay the other's attorneys' fees or finds that one of the parties was forced into signing the agreement, the judge could cancel the requirement or change the amount of fees to be paid. But if a judge decides that an attorney fee provision is reasonable and that it was negotiated by two parties with equal bargaining power, then the judge will likely enforce it.

assignment (of contract)

Did you ever start a magazine subscription with one company (say, “The National Scholar”) and midways into the subscription begin receiving another magazine (“The National Enquirer”)? That’s usually because the first company has gone out of business and assigned all its subscription contracts to another company. An assignment of contract occurs when one party to an existing contract (the “assignor”) hands off the contract’s obligations and benefits to another party (the “assignee”). Ideally, the assignor wants the assignee to step into his shoes and assume all of his contractual obligations and rights. In order to do that, the other party to the contract must be properly notified.

EXAMPLE: Tom contracts with a dairy to deliver a bottle of half and half every day. The dairy assigns Tom’s contract to another dairy, and—provided Tom is notified of the change and continues to get his daily half & half—his contract is now with the new dairy.

An assignment doesn’t always relieve the assignor of liability; that depends on many factors, especially the language of the contract. Some contracts may contain a clause prohibiting assignment, others may require the other party to consent to the assignment, and others may include a guaranty that regardless of an assignment, the original parties (or one of them) guarantees performance.

EXAMPLE: Jonas and Murphy owned property in San Francisco that they leased to Schiller. Schiller assigned his lease to a battery manufacturing company, which became the new tenant under the lease. Jonas assigned his rights as a property owner to Kahn. When the battery manufacturer failed to pay rent, Kahn (the new owner) sued Schiller (the original tenant). The lease agreement included a guaranty clause, stating that if Schiller or “his assigns” failed to pay rent, than Schiller would be on the hook for it. Schiller’s lawyers, looking for a creative way out of the payment, argued that the lease required Schiller to pay Jonas and Murphy, not Kahn (because Kahn was not mentioned in the original lease). The court disagreed, finding that Jonas was free to assign his rights to Kahn. The court said that if the lease was supposed to prevent Jonas from assigning rights, there should have been a prohibition written into it. In other words, if the parties want to prevent assignment of the contract, they must include an anti-assignment clause. (By the way, the issue wouldn’t have arisen if the lease had said that Schiller had to pay Jonas “and his assigns and successors.”) [i]

When assignments will not be enforced. An assignment of a contract will not be enforced if:

• The contract prohibits assignment. Contract language, typically referred to as an anti-assignment clause, can prohibit (and “void”) any assignments. We provide a sample, below.
• The assignment materially alters what’s expected under the contract. If the assignment affects the performance due under the contract, decreases the value or return anticipated, or increases the risks for the other party to the contract (the party who is not assigning contractual rights), courts are unlikely to enforce the arrangement.
• The assignment violates the law or public policy—Some laws limit or prohibit assignments. For example, many states prohibit the assignment of future wages by an employee, and the federal government prohibits the assignment of certain claims against the government.[ii] Other assignments, though not prohibited by a statute, may violate public policy. For example, personal injury claims cannot be assigned because doing so may encourage litigation.

Delegation or Assignment? In some cases, a party may not wish to assign the whole contract but only to get somebody else to fulfill its duties.

EXAMPLE: Phyllis enters into a written agreement with Robert’s Bakery to provide cupcakes for her child’s birthday party. Phyllis pays $200 in advance. Robert’s Bakery has an emergency and can’t deliver the cupcakes, so Robert pays $150 to Sylvia’s Cupcakes to take over the delivery. Robert hasn’t assigned the contract; he’s delegated his duties to Sylvia. If Sylvia doesn’t deliver, Phyllis’ dispute would be with Robert. If Robert had properly assigned the contract, Phyllis’ dispute would be with Sylvia. (Of course, to be effective as a delegation, the person to whom the task is delegated—in this case, Sylvia—has to accept or assume the duty or responsibility.)

Obviously, not all duties can be delegated—for example, some personal services are usually not delegated because they are so specific in nature. If you hired Ted Nugent to perform at your event, for example, he could not arbitrarily delegate his performing duties to Lady Gaga.

To prohibit delegation, the parties should include specific language to that effect in the agreement. For example, an anti-assignment clause might state. “Neither party shall assign or delegate its rights …”

How is a contract assigned? There are three steps to follow if you want to assign of a contract.

1. Examine the contract for any limitations or prohibitions. Check for anti-assignment clauses. Sometimes the prohibition is not a separate clause but is included in another provision. Look for language that states, “This agreement may not be assigned …” If you find such language, you may not be able to assign the agreement unless the other party consents.
2. Execute an assignment. If you are not prohibited from assigning, prepare and enter into an assignment of contract, an agreement transferring rights and obligations.
3. Provide notice to the obligor. After you have assigned your contract rights to the assignee, you should provide notice to the other original contracting party (referred to as the obligor). Unless otherwise prohibited by the contract or by law, this notice will effectively relieve you of any liability under the contract.

Assignment Checklist. As you draft a contract clause about assignment or a later assignment agreement, consider these questions:

• Do you want the freedom to delegate tasks in the agreement? If so, be sure that the contract does not prohibit delegation. Usually that prohibition is included in an anti-assignment clause. You can also include affirmative language if you wish, such as “Either party may delegate its obligations under this agreement.”
• Do you want the ability to assign the revenue you receive from a contract? If you want to be able to assign revenue from a contract but not the performance obligations—for example, you want your nephew to receive the royalties from a licensing deal, but otherwise you are to be on the hook for all other obligations—then make sure you have made this freedom explicit if the contract has an anti-assignment clause. For example, you could include language such as, “Neither party may assign its rights or obligations except that Licensor may assign its right to receive revenue under this agreement.”
• Do you want the ability to assign all rights under the agreement to a company that acquires your business? If so, review the anti-assignment exceptions, below.
• Do you want to make sure that the other party to the agreement will always be responsible to you, even if the agreement is assigned? If so, you should include a guaranty similar to that mentioned in the example above, in which the assigning party guarantees performance after assignment.
• Do you want to prevent the other side from assigning the contract or delegating their obligations? Include a general anti-assignment/anti-delegation clause and be sure that it includes language such as “Any assignment or delegation made in violation of this clause is void.”

Anti-assignment clauses. Below are three variations of anti-assignment clauses that can be used in a contract. EXAMPLE 1 is a standard anti-assignment clause barring any assignment or delegation. EXAMPLE 2 is used when the parties want to prohibit assignments except if they transfer the agreement to new owners or affiliate companies (and don’t want to ask for permission). EXAMPLE 3 is similar to EXAMPLE 2 except it requires permission for such an assignment. The good news is that permission can’t be withheld on a whim. Consent to the assignment to a new owner can only be made for a valid business reason. What’s a valid reason? If the assignee is in terrible financial shape or is a direct competitor, that would qualify.

EXAMPLE 1: No Assignment or Delegation Permitted

Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. Any assignment or delegation in violation of this section shall be void.

EXAMPLE 2: Consent Not Needed for Affiliates or New Owners.

Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. However, no consent is required for an assignment that occurs (a) to an entity in which the transferring party owns more than 50% of the assets, or (b) as part of a transfer of all or substantially all of the assets of the transferring party to any party. Any assignment or delegation in violation of this section shall be void.

EXAMPLE 3: Consent Not Unreasonably Withheld.

Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of other. Such consent shall not be unreasonably withheld. Any assignment or delegation in violation of this section shall be void

Anti-assignment clauses can be modified to prohibit only one of the parties from assigning rights. Also, when preparing an anti-assignment clause, keep in mind that you can only prevent “voluntary” assignments; you cannot prevent assignments that are ordered by a court or that are mandatory under law—for example in a bankruptcy proceeding.

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[i] Murphy v. Luthy Battery Co. 74 Cal.App. 68, 239 P. 341 (Cal.App. 1 Dist. 1925).

[ii] 41 U.S.C. Sec. 15

arbitration

Though often considered a 20^th century phenomenon, arbitration—an out-of-court proceeding in which one or more neutral third parties hears evidence and then makes a binding decision—has a long and checkered past, starting with King Solomon’s famous approach to child custody. It was used in England back in the 13^th century (and before the existence of the so-called common law—rules based upon court rulings), and George Washington even included an arbitration provision in his will.[i] Today, arbitration is the most commonly used method of alternative dispute resolution (ADR).

Binding or nonbinding. Arbitration can be binding (which means the participants must follow the arbitrator’s decision and courts will enforce it) or nonbinding (in which either party is free to reject the arbitrator’s decision and take the dispute to court, as if the arbitration had never taken place). Binding arbitration is more common.

Who can arbitrate disputes? Arbitration can be voluntary (the parties agree to do it) or mandatory (required by law). Most contract arbitrations occur because the parties included a clause requiring them to arbitrate any disputes “arising under or related to” the contract. If a provision like this isn’t included, the parties can still arbitrate if they both agree to it (although it’s tough to reach an agreement like this once a dispute has arisen).

Advantages and disadvantages. For simple contract disputes in which the matter can be heard in one day, arbitration is usually a good choice. However, if in doubt, consider the advantages and disadvantages, below:

• Advantages. Arbitration is usually faster, simpler, more efficient, and more flexible for scheduling, than litigation. Also, it avoids some of the hostility of courtroom disputes, perhaps because it’s a private proceeding versus the public drama of the courtroom. If the subject of the dispute is technical—for example, about a patent—the parties can select an arbitrator who has technical knowledge in that field.
• Disadvantages. Unlike a court ruling, a binding arbitration ruling can’t be appealed. It can be set aside only if a party can prove that the arbitrator was biased or that the ruling violated public policy. Unlike a court battle, there is no automatic right to discovery (the process by which the parties must disclose information about their cases). However, you can include a requirement for discovery in your arbitration provision or agree to it under arbitration rules. The costs of arbitration can be significant; in some cases, they may even exceed the costs of litigation (see below).

What does it cost? According to a survey by Public Citizen, a consumer watchdog group, the cost of initiating an arbitration is significantly higher than the cost of filing a lawsuit. On average, it costs about $9,000 to initiate a claim to arbitrate a contract claim worth $80,000 (versus about $250 to file that action in state court). Keep in mind that the people in the dispute pay the arbitrators, and arbitration fees can run to $10,000 or more. Add in administrative costs and your own attorney fees (if you hire one) and the process might even cost more than litigation.

Arbitration Checklist. A simple arbitration provision, such as the one shown in Example 1, may be suitable for basic contract disputes. But more complex contracts or those involving large sums of money may require the parties to consider some of the questions below. (Note: when you agree to arbitrate with an organization such as the American Arbitration Association, their rules permit the parties to work out some of these details later. Still, it’s generally easier to agree on these things before there’s a dispute.)

• Do you want an arbitrator knowledgeable in a specific field of law or business? If so, include that in your arbitration provision—for example, “Arbitration shall be conducted by an arbitrator experienced in the toy and licensing industry.”
• Do you want to understand why the arbitrator ruled a certain way? In this case, you should include a request for a written record of the decision.
• Do you want to prevent some issues from being arbitrated? If so, then you need to make exceptions—for example, “All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration, except for disputes relating to the validity of patents … “
• Are you worried that the potential award may be astronomical? If so, the parties may agree to limit the amount of the award—for example, by stating that the arbitrator cannot award more than $10,000 to any party.
• Do you want the arbitrator follow specific arbitration rules? If so, include the name of the organization, for example, the California Lawyers for the Arts or the American Arbitration Association.
• Should the winning party have its attorney fees paid by the loser? If so, include language regarding attorney fees—for example, “the prevailing party shall be entitled to its reasonable attorney fees and costs.” What are costs? The filing fees, charges for serving papers, court reporter charges for depositions (which can be very expensive), transcripts, costs of copying, and exhibits.
• Does it matter where you arbitrate or what state’s law applies to arbitration? If so, indicate those preferences in arbitration provision. Keep in mind that the location of the arbitration may seem unimportant now, but will prove a major issue if a dispute occurs and you have to book a flight to Anchorage for the arbitration hearing.

Sample arbitration clauses. Example 1 shows a simple no frills arbitration clause; Example 2 offers more conditions and obligations.

EXAMPLE 1: Arbitration. All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration in the state of [insert state in which parties agree to arbitrate] or another location mutually agreeable to the parties. An award of arbitration may be confirmed in a court of competent jurisdiction

EXAMPLE 2: Arbitration. All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration in the state of [insert state in which parties agree to arbitrate] or another location mutually agreeable to the parties. The arbitration shall be conducted on a confidential basis pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Any decision or award as a result of any such arbitration proceeding shall be in writing and shall provide an explanation for all conclusions of law and fact and shall include the assessment of costs, expenses, and reasonable attorneys’ fees. Any such arbitration shall be conducted by an arbitrator experienced in [insert industry or legal experience required for arbitrator] and shall include a written record of the arbitration hearing. The parties reserve the right to object to any individual who shall be employed by or affiliated with a competing organization or entity. An award of arbitration may be confirmed in a court of competent jurisdiction.

Do you need to hire a lawyer for arbitration? If you have a significant amount of money or property in dispute, you should consider hiring a lawyer. The arbitrator’s decision will be binding, which means this is your only chance to win.

Arbitration variations. Arbitration is typically a straightforward matter. The parties submit evidence and arguments, and the arbitrator makes a binding decision. Over the years, however, a few variations have developed, including:

• Mediation/Arbitration (sometimes known as “Med/Arb”). In this arrangement, the parties first attempt to mediate their dispute and if they can’t resolve it with a mediator, they submit the matter to arbitration.
• Bracketed (High-Low) Arbitration. The parties agree in advance to high and low limits on the arbitrator’s authority. This method is best used when the only dispute is over how much money is owed.
• Pendulum Arbitration (also known as “Baseball Arbitration”): Each party gives the arbitrator a figure for which he or she would be willing to settle the case. The arbitrator must then choose one party’s figure or the other—no other award can be made.
• Night Baseball Arbitration: As in baseball arbitration, above, each side chooses a value for the case and exchanges it with the other side—but not with the arbitrator (“night baseball” refers to the fact that the arbitrator is ”kept in the dark.”) The arbitrator makes a decision about the value of the case, and then the parties must accept whichever of their own figures is closer to the arbitrator’s award.

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[i] http://www.laborstudiesandresearch.ext.wvu.edu/r/download/32003

alternative dispute resolution (ADR)

In 1992, Herb Kelleher, president of Southwest Airlines, offered to arm-wrestle a rival airline company’s president for the right to use the slogan, “Plane Smart.” Kelleher lost but he demonstrated the outer boundaries of alternative dispute resolution (ADR): ways to settle an argument short of full-blown litigation. Few executives have followed Kelleher’s lead; most prefer more common ADR procedures, such as:

• Mediation. A neutral third person helps the parties talk through their dispute and come up with a mutually acceptable solution. Some mediators suggest possible outcomes, but a mediator generally can’t impose a resolution on the parties.
• Arbitration. Much like a judge, an arbitrator hears from both parties, sometimes in a trial-like proceeding. The arbitrator then decides how the dispute should be resolved.
• Negotiation. The parties resolve the dispute themselves, with or without the aid of a third party.
• Collaborative law. Lawyers, trained in special, less adversarial procedures, represent each party and work together to reach a mutually acceptable resolution. Collaborative law is used most commonly in divorce proceedings.

Although ADR is considered an "anything but court" approach, ADR-type programs have been incorporated by many courts. For example, the federal courts use Early Neutral Evaluation (ENE), a variation on mediation—in order to alleviate their increasing caseloads. With the exception of court-ordered ADR procedures, all ADR is voluntary.

Contracting parties who want to resolve potential disputes by ADR rather than litigation should include a clause in their contract to that affect. Although the parties could decide to use ADR after a dispute arises, it’s better to put an ADR clause in the contract ahead of time. Once the parties are engaged in a contract dispute, it will be much harder for them to reach an agreement on dispute resolution procedures.

See: arbitration; mediation; negotiation

addendum

If you’re a busy manager who uses the same contract repeatedly with multiple clients, then addendums are your BFFs. An addendum is simply any document attached to—and made part of—a contract. Using an addendum makes it easy to change schedules, prices, standards, product lists, or any other information that may vary regularly over time or from customer to customer. In some cases, the addendum is also known as a rider, an exhibit, or a schedule (although technically, the latter two terms are specific types of addendum).
How can you be sure the addendum is binding? Because an addendum is attached after the signature page, parties often initial each page of the addendum to guarantee that it will be considered part of the agreement. Another (or complementary) approach is to include the words “incorporated by reference” the first time an addendum is mentioned in a contract (for example, “The parties shall abide by the delivery specifications in the attached Addendum, incorporated by reference”). You can also use a special clause within the main body of the contract to make this point, as shown below.
EXAMPLE: Addendum. Any attached Addendums and any other attachments or exhibits to this Agreement are incorporated in this Agreement by reference.

act of God

Even atheists can avoid liability for breaching an agreement by claiming that performance was delayed by an act of God—an unforeseen natural event such as a flood, tornado, earthquake, or lightning. However, whether a court accepts this argument often depends on the contract language in a “Force Majeure” clause. Humanists please note: although the reference to ‘God’ implies a supernatural cause for such events, it is accepted that some of these events are (at least partially) human-induced—for example, flooding caused by the use of reclaimed land or earthquakes caused by human activity, such as drilling or excavation.

See: force majeure