Attorney Fees in Commercial Litigation: Who Pays?

The American Rule

The default rule in New York and throughout the United States is that each party pays its own attorney fees, regardless of who wins the case. This is known as the American Rule, and it applies in most commercial litigation. Unlike the English system where the loser pays the winner’s fees, American litigants generally bear their own legal costs unless an exception applies.

Contractual Fee-Shifting

The most common exception in commercial litigation is a contractual fee-shifting provision. If the contract at issue in the dispute includes a clause that allows the prevailing party to recover attorney fees, New York courts will generally enforce that provision. When reviewing a potential case, one of the first things to check is whether the underlying contract contains a fee-shifting clause, because it significantly affects the economics of the litigation for both sides.

Statutory Fee Provisions

Certain statutes provide for the recovery of attorney fees. For example, some consumer protection statutes, employment statutes, and civil rights laws include fee-shifting provisions designed to encourage enforcement. In commercial contexts, specific statutes governing particular types of transactions or industries may include fee provisions. Whether a statutory basis for fees exists depends on the specific claims in the case.

Sanctions and Frivolous Litigation

New York courts have the power to impose sanctions, including attorney fees, when a party engages in frivolous litigation or litigation conduct. Under 22 NYCRR 130-1.1, a court can award costs and fees when claims or defenses are completely without merit in law and cannot be supported by a reasonable argument for extension of existing law, or are undertaken to delay or harass. This is not a routine basis for fee recovery but is available in egregious cases.

Practical Implications

The fee question affects litigation strategy from the outset. If you have a strong fee-shifting provision, it can be leveraged in settlement discussions because the other side faces the risk of paying your legal costs in addition to their own. Conversely, if you are the defendant facing a fee-shifting provision, understanding that exposure is critical to evaluating settlement options realistically.