As a general rule in American jurisprudence, each party to a lawsuit pays its own attorneys’ fees and costs of litigation, regardless of which party prevails. A well-established exception to this rule provides that parties to a contract may agree that the prevailing party in any lawsuit arising out of the contract is to be awarded its attorneys’ fees and court costs as part of the judgment, to the extent the court finds such fees and costs to have been reasonable. In the recent case of Under Armour, Inc. v. Ziger/Snead, LLP, however, Maryland’s intermediate appellate court interpreted a contract between two parties to also permit reimbursement of business costs incurred due to litigation, beyond attorneys’ fees and typical court costs. This potentially expands the exposure of losing parties to paying substantial additional amounts to prevailing parties.
The contract in this case was between a property owner and an architecture firm. The contract provided that, if the architecture firm employed attorneys to gain enforcement of the agreement, the property owner would have to reimburse the architecture firm for its attorneys’ fees, costs, and expenses arising in litigation. That portion of the contract was typical of a fee-shifting provision, but the contract went on to also provide for reimbursement of “losses” incurred by the prevailing party.
At trial, the jury awarded $58,940 in compensatory damages to the architecture firm, and after post-trial motions the court also awarded the architecture firm $182,735 in attorneys’ fees, $155 in court costs, $42,830 in litigation expenses, and another $62,190 to compensate it for business “losses.” These recovered losses were the value of time expended by one of the principals in the architecture firm, and several employees of the firm, on investigation of the dispute and in performing litigation-related tasks at the request of its attorneys. To prove the amount of its losses, the firm presented evidence of the number of hours spent by its principal and other employees on litigation matters, multiplied by their hourly billing rates typically charged to firm clients – on a theory that the time expended on litigation matters was time they otherwise would have been billing to clients for their usual services. The court decided to compensate the firm for 79 ½ hours of employee time spent evaluating the case and preparing for and attending mediation, 154 ½ hours investigating the facts, dealing with discovery, and preparing for and attending depositions, and 69 ½ hours preparing for and attending trial.
The award of business losses in this case will be a surprise to many attorneys, because there has been a well-established practice of limiting the scope of most fee-shifting contract provisions to reasonable attorneys’ and court costs. Opening the door to compensating a prevailing party for the value of its employees’ time preparing for and participating in litigation will cause careful contract drafters to include “losses” among the items that can be awarded to a prevailing party, should a dispute arise under the contract. The result could be substantially larger awards in contract actions. This outcome probably feels fair to the prevailing party, and may be considered outrageous by the losing party, but the practical result will be that contract litigation may now become even more financially risky. In this case the amount of compensatory damages was $58,940, but additional fees and costs that were awarded totaled about $230,000, of which $62,190 were to compensate for “losses.” Litigating parties will face pressure to negotiate a settlement prior to trial, in light of increased financial exposure in the event of a loss a trial. Placing increased financial pressure on all parties effective benefits the party having greater financial resources, since that party can better withstand a negative result at trial.