When a business dispute becomes litigation, legal fees can quickly become a significant part of the economic equation.
That is especially true when the dispute involves business ownership, a closely held company, a partnership or LLC agreement, executive compensation, a buyout, or another contract or asset with substantial value.
When the governing agreement mentions attorneys’ fees, clients often ask:
If we win, does the other side have to pay our legal fees?
Under New York law, the answer may be more complicated than the contract initially suggests. The words “attorneys’ fees,” “legal expenses,” or “reasonable counsel fees” do not necessarily require the losing party to reimburse the winner for litigation between them.
Analyzing a contractual attorneys’ fee provision generally requires answering three separate questions:
- Does the provision cover this particular dispute?
- Who qualifies as the prevailing party?
- How much of that party’s legal bill is reasonable and recoverable?
The answers can materially affect litigation strategy, settlement leverage, and the ultimate economics of a business dispute.
New York Starts With the American Rule
New York generally follows the American Rule: each party pays its own attorney fees, regardless of who wins the lawsuit.
There are exceptions. Attorneys’ fees may be recoverable when authorized by a statute, court rule, or agreement between the parties.
The contractual exception is particularly important in business litigation. Commercial agreements frequently contain indemnification clauses, prevailing-party provisions, reimbursement obligations, or other language addressing attorneys’ fees.
But the existence of such language is only the beginning of the analysis.
Question One: Does the Provision Cover This Dispute?
The first question is not simply whether the agreement mentions attorneys’ fees. The more important question is whether the provision requires payment of the particular fees incurred in the particular dispute before the court.
Third-Party Claims and Direct Litigation Are Different
New York courts distinguish between:
- an agreement requiring one party to indemnify another against claims brought by outsiders; and
- an agreement requiring one contracting party to pay the other’s attorneys’ fees when they sue each other.
Those obligations are not necessarily the same.
An indemnification clause may expressly refer to attorneys’ fees, legal expenses, defense costs, or similar charges and still apply only to third-party claims. New York courts generally will not interpret such a clause as shifting fees in a lawsuit between the contracting parties unless that intention is unmistakably clear.
The court will therefore read the provision as a whole. Language requiring notice of an outside claim, allowing one party to control the defense, or regulating settlement of the claim may indicate that the provision was written principally for third-party litigation.
By contrast, language expressly awarding fees in an action between the parties—or in an action to enforce the agreement—is more likely to support fee shifting in a direct contract dispute.
For example, a comparatively clear provision might state that the prevailing party in an action to enforce the agreement is entitled to recover its reasonable attorneys’ fees and costs.
The distinction can be financially significant. A contract may contain an extensive indemnification clause and repeatedly use the term “attorneys’ fees,” yet still fail to authorize recovery of the fees incurred in litigation between the parties.
The Contractual Trigger Also Matters
Even a valid fee-shifting provision may not cover every claim connected to the parties’ relationship.
The right to recover fees may be triggered only by:
- a specified breach or default;
- an action to enforce a particular obligation;
- a claim arising under the agreement;
- a proceeding to collect amounts due; or
- another event defined by the contract.
The court may examine whether the requested fees actually resulted from that triggering event.
This can become complicated in commercial litigation involving multiple agreements, tort and contract claims, claims and counterclaims, or disputes extending beyond the particular contract containing the fee provision.
If some claims fall within the provision and others do not, the party seeking fees may need to establish which legal work related to the covered claims. Where the work cannot be readily separated, the wording of the agreement and the relationship among the claims may become especially important.
Does the Provision Cover the Cost of Recovering the Fees?
A further question arises when the parties litigate the fee award itself.
A party may prevail in the underlying lawsuit, establish a contractual right to attorneys’ fees, and then incur additional fees proving the amount it should receive. These additional expenses are sometimes called “fees on fees.”
Recovery of those expenses is not automatic. A contractual right to fees in the underlying dispute does not necessarily include the expense of preparing and litigating the fee application. Once again, the specific language of the agreement controls.
Businesses should therefore examine whether the contract expressly addresses fees incurred in enforcing the fee provision or collecting an award.
Question Two: Who Is the Prevailing Party?
Even when the agreement clearly authorizes fee shifting, it may award fees only to the “prevailing” or “successful” party.
Identifying that party is easy when one side wins completely on a single claim. Complex business litigation rarely ends so neatly.
A case may involve:
- multiple claims and counterclaims;
- competing requests for damages;
- claims under several agreements;
- partial dismissals;
- requests for injunctive or declaratory relief;
- mixed results at trial; or
- a recovery substantially smaller than the amount originally sought.
One party might establish liability but recover only limited damages. A defendant might defeat the plaintiff’s principal claims, but lose on a smaller counterclaim. Each side may succeed on different issues.
When deciding who prevailed, New York courts generally examine the true scope of the dispute and compare it with the result obtained. The inquiry often focuses on whether a party succeeded on the central claims and obtained substantial relief.
Accordingly, winning one issue does not necessarily make a party the prevailing party. Conversely, a party may qualify as prevailing even if it did not succeed on every claim.
The agreement’s wording can also affect the analysis. Some contracts define “prevailing party,” address mixed results, or give the court discretion to allocate fees. Others use the term without defining it, leaving the parties to litigate its meaning after the underlying dispute has been decided.
That uncertainty should be considered when evaluating potential outcomes and settlement positions.
Question Three: How Much Is Recoverable?
Establishing a right to attorneys’ fees does not mean the prevailing party will recover every dollar it paid its lawyers.
The court must still determine what amount constitutes a reasonable fee.
Depending on the circumstances, the court may consider factors such as:
- the time and labor required;
- the difficulty and complexity of the issues;
- the skill required to handle the matter;
- the attorneys’ experience, ability, and reputation;
- customary rates for comparable services;
- the amount at stake;
- the results obtained; and
- the responsibility involved in handling the matter.
The relevant question is therefore not merely:
What did the prevailing party pay its lawyers?
It is:
How much of that amount should the opposing party be required to reimburse?
Those figures are not necessarily the same. A court may recognize the right to recover fees, but reduce the requested award.
Legal Bills May Become Evidence
A party seeking attorneys’ fees generally must support its request with adequate billing records and other evidence demonstrating the work performed, the time devoted to it, and the reasonableness of the rates charged.
Those records may be examined by both the opposing party and the court.
Fee requests can be challenged based on:
- vague or generic time entries;
- inadequate documentation;
- excessive redactions;
- duplication of effort;
- unnecessary or unsuccessful work;
- difficulty separating covered and uncovered claims; or
- “block billing,” in which several different activities are combined into one time entry.
Courts in both New York State and federal litigation may reduce a request when the records do not permit meaningful review. In some cases, determining the recoverable amount may require additional briefing, documentary evidence, or a separate hearing.
If fee recovery could become part of the case, the evidentiary foundation should be developed while the litigation is underway—not reconstructed after the case ends.
Attorneys’ Fees Can Change the Economics of the Case
Contractual fee shifting should be evaluated near the beginning of a significant business dispute.
Consider a dispute between two business owners involving $750,000. Their agreement contains a prevailing-party attorneys’ fee provision, and each side incurs substantial legal fees as the case approaches trial.
The potential exposure may no longer be limited to the disputed $750,000. Depending on the language of the agreement and the outcome, a party could face:
- its own attorneys’ fees;
- an adverse judgment; and
- some or all of the prevailing party’s reasonable attorneys’ fees.
That possibility may affect settlement leverage as fees accumulate.
But neither side should assume that the existence of a fee provision automatically creates that result. The provision must cover the dispute, the party seeking fees must qualify under its terms, and the amount requested must withstand judicial scrutiny.
Questions to Consider Early
When a business dispute involves a contractual attorneys’ fee provision, counsel should evaluate at least the following questions:
- Does the provision unmistakably cover litigation between the contracting parties?
- What event or type of claim triggers the right to recover fees?
- How will the contract’s prevailing-party language apply if the parties obtain mixed results?
- Will legal work need to be separated between covered and uncovered claims?
- Are billing records being maintained in a manner that can support a later fee application?
- Does the agreement cover fees incurred enforcing the fee provision itself?
Addressing these questions early can improve the parties’ understanding of the potential recovery, exposure, and settlement dynamics.
The Bottom Line
A contractual attorneys’ fee provision can create substantial rights and financial exposure. But the appearance of the words “attorneys’ fees” in an agreement does not end the inquiry.
Three questions remain critical:
- Coverage: Does the provision apply to this dispute and these legal expenses?
- Prevailing-party status: Who succeeded on the central issues and obtained substantial relief?
- Amount: What portion of the fees is reasonable and adequately supported?
For businesses, owners, executives, and professionals involved in significant commercial disputes, attorneys’ fees should not be viewed merely as an expense occurring alongside the litigation.
When a contract permits fee shifting, those fees may become part of the potential recovery, part of the potential exposure, and part of the litigation strategy itself.
The Glennon Law Firm represents businesses, business owners, executives, professionals, fiduciaries, beneficiaries, and other individuals in significant disputes involving businesses, employment relationships, trusts and estates, and other substantial financial interests.
With offices in Albany, Buffalo, Rochester, and New York City, we can help you across New York State.
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This blog post is for informational purposes only and does not constitute legal advice. For specific legal counsel, please contact our office directly.
