Attorney Fee Provision Entitling Plaintiff to Fees Equaling One Third of Award Unenforceable

On February 20, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Julius Silvert, Inc. v. Open Kitchen 17, LLC, 2019 NY Slip Op. 30394(U), holding that an attorney fee provision entitling the plaintiff to one third of the award to it for attorneys' fees was unenforceable, explaining:

By contrast, Plaintiffs demand for $14,119.42 in attorney's fees, based solely on the provision in the Agreement quoted above, does not warrant summary judgment in its favor. Contrary to Plaintiffs claims, the fact that the Agreement provides for a 33 1/3% fee does not, in and of itself, settle the issue..

Fixing attorney's fees at an arbitrary percentage of an unknown amount (i.e., "the balance due") acts as a kind of liquidated damages provision, one which may constitute an unenforceable penalty.

In Equitable Lumber, the Court of Appeals held that this type of attorney's fee provision may be unenforceable under the Uniform Commercial Code if it does not relate to the normal contingent fee charged by attorneys in the collection context, or is so unreasonably large that it serves as a penalty rather than a good faith attempt to pre-estimate damages. Although a number of cases have permitted the party seeking fees under such a fixed-percentage provision to obtain reasonable fees that are actually incurred, the Court in Equitable Lumber stated that in the proper case a provision that one party to a contract pay the other party's attorney's fees in the event of breach may be unconscionable.

Moreover, as is expressly provided in the Uniform Commercial Code: If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.

In this case, Plaintiff has submitted no evidence showing that the attorney's fees it seeks relate in any way to the legal services actually rendered. Instead, Plaintiffs claim rests entirely on the face of the Agreement. And the Agreement seems particularly susceptible to abuse here. Not only does the fee provision exact a large and seemingly arbitrary percentage of any unpaid balance, it does so whether or not suit is instituted, ignoring the nature of the work done by counsel and thus the costs incurred by Plaintiff. Even if a suit is instituted, the nature of the work required by an attorney presumably will vary depending on the circumstances. For example, a sizeable unpaid balance may be recovered in a straightforward suit, while a smaller sum may well implicate thornier legal issues and prompt a more protracted, costlier action. The Agreement here makes no such distinctions. Without more, the arbitrary figure in the Agreement does not establish Plaintiffs right to a 33 1/3% fee as a matter of law.

(Internal quotations and citations omitted).

It is not uncommon for contracts to provide that the prevailing party in a suit arising out of the contract is entitled to an award of its attorneys' fees. Litigating for fees can be hard--both because of the high burden you sometimes must meet to be entitled to fees and because it is important to avoid the pitfall of getting an award of fees that is less than what it cost to move for fees. But as this decision shows, deciding on the amount of fees beforehand might not be enforceable. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are litigating an attorney fee award.