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04/08/10: Can I Recover My Legal Fees In Litigation?

Housing Counsel

By Benny L. Kass

Q: I was about to go to closing last week, and learned at the last minute that the seller decided not to complete the transaction. I am trying to determine the reason for this, but am concerned about the legal fees that I will have to pay an attorney. If I decide to file suit against the seller, does she have to reimburse me for these legal fees?

A: The short answer is yes, if there is specific language in your sales contract and if you win the case.

Our Courts – and our legal system – adhere to what is known as the “American Rule” on legal fees. In general, each side (Plaintiff and Defendant) pays their own attorney. This is in sharp contrast to the rule generally followed in England which holds that the losing party not only pays his attorney but also pays for the legal services rendered by the prevailing party’s attorney (the “English Rule”)

In researching the American Rule, I discovered a very old Virginia statute (going back to 1778) which noted “it is, unreasonable that the party who prevails… should be subject to the payment of a greater fee to his lawyer than he can recover from the adverse party.”

Clearly, the gentlemen who enacted that law were under the influence of the English rule. However, over the years, this rule was abandoned in favor of the “pay your own lawyer” concept, embodied in the American Rule.

There are, however, several exceptions to this Rule.

First, if a statute provides for legal fees, in most cases a Judge will grant fees to the prevailing party. For example, many consumer protection statutes specifically authorize reasonable attorneys fees to be awarded to an aggrieved consumer; however, some statutes are one-sided, and only provide legal fees if the consumer wins. Judges have the absolute discretion as to the amount to be awarded, and will use a number of factors in their decision, such as the complexity of the case, the hours involved, the experience level of the attorney, and the prevailing legal fee rates in the area.

Another exception to the American Rule is where there is a specific provision in a contract or other legal document authorizing legal fees to be awarded. If you used the Regional Sales Contract, which is routinely used in the Washington Metropolitan area, paragraph 24 – entitled “Attorney’s Fees” – specifically states that in any action between Purchaser and Seller “arising out of this Contract, the prevailing party will be entitled to receive from the other party reasonable attorney’s fees to be determined by the court or arbitrator(s)”.

In some legal documents – especially residential leases – there is language that is one-sided: if the landlord prevails, he will get legal fees from the tenant. However, if the tenant prevails, no such fees will be awarded.

A number of states -notably California, Florida, Oregon, Washington, and Utah – have enacted legislation to correct this unfair situation. If a document contains a one-sided legal fee provision, it will be interpreted to mean that whoever is the prevailing party in litigation will be entitled to recover the legal fees involved. I have personally attempted our City Council to enact similar legislation but to date have been unsuccessful.

The word “prevailing” can be deceptive, however. Does it mean you have to win the entire case? What if you sue for specific performance and damages but only get a judgment on one of your two counts? Here, you are at the mercy of the Judge. You may get all of your fees – or you may not get any of them.

A third exception is called the “common-fund” theory. If, for example, the attorney files a class action lawsuit which generates a pot of money for a number of parties, the courts will award legal fees to be taken out of that pot. It would be unfair for persons to get a monetary windfall, without paying the lawyer who was successful in getting the money.

Finally, there is an exception where a party acts in bad faith. If the Judge believes that a party’s conduct in litigation is egregious, the Court can order that legal fees be paid to the other side. However, this is only done on rare occasions.

You are properly concerned about legal fees that you will have to pay should you decide to file suit. I suggest that you personally contact the seller and find out why she is unwilling to complete the transaction. There are usually two reasons: either she has received a better offer or is suffering from “seller remorse”.

Perhaps she needs more time to locate alternative housing. If that’s the case, you could arrange to go to closing, but allow her to remain in the property for a period of time. Clearly, you should try to resolve any difficulties before you file suit. Keep in mind that you will have to pay your lawyer during the pendency of the lawsuit, and there is always the possibility that you could lose. The seller’s attorney could find a technical loophole in the contract – or determine that you did not completely adhere to your contractual obligations – and you may end up having to pay her attorney’s fees.

Litigation is time-consuming, expensive, and – more importantly – always uncertain.