07.14.2011 Corporate Law Alert - North Carolina
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 litigation.
Session 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:
- Fee provisions must be unconditionally reciprocal to all parties.
- All parties must sign the written contract “by hand;” a committee addition that suggests the exception may not apply to contracts consummated by electronic assent.
- The contract must take effect on or after October 1, 2011. Presumably, parties to existing contracts may elect to amend their agreements to provide for reciprocal attorneys’ fees in order to take advantage of the new law. Businesses may also want to amend their form agreements after October 1st to reflect the new availability of attorneys’ fees.
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. 2011-341 approaches.
For more information about this topic, please contact the authors or any member of the Williams Mullen Business & Corporate team.