Are Attorneys’ Fees Clauses Enforceable?

When you enter into a contract with a business, it’s not uncommon for the contract to contain a clause requiring you to be responsible for reimbursing the business for the legal fees it incurs should it need to bring a lawsuit against you for amounts you owe under the contract. Typically, such attorneys’ fees clauses are buried in lengthy form contracts presented on a take-it-or-leave-it basis by large companies to their consumers, who can choose between signing the contract and receiving niceties like cable TV and Internet service, or refusing to sign and being denied those things.

This strikes a lot of people as unfair. If contracts are supposed to be bargained-for agreements, why should consumers be required to sign whatever pre-printed, boilerplate legaleze is foisted upon them by large corporations in order to receive necessary services? Are there any limits to what companies can force their customers to “agree” to? Contracts requiring the “little guy” to pay the attorneys’ fees incurred by the much larger party are particularly concerning considering the high cost of legal services; consumers usually struggle to afford their own attorneys–requiring them to also pay the other side’s legal team often makes litigation a financially ruinous proposition.

Generally speaking, contracts are legally enforceable agreements, and there is nothing per se improper about allocating responsibility for legal fees in the event of a future dispute. If the contract is a legitimate bargained-for exchange supported by consideration, courts don’t get involved in examining the fairness of the deal; if two parties reach an agreement and indicate their consent to be bound by signing the document, courts generally unconscionable-300x200don’t interfere with the arrangement. An exception to this general rule exists, however, when the two parties are of unequal bargaining power and the agreement is so one-sided as to “shock the conscience” of the court. A contract will be deemed unconscionable, and thus unenforceable, if it is “such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other.” (See Hume v. United States, 132 U.S. 406, 411 (1889)).

In a recent circuit court case from Fairfax County, a plaintiff argued that a one-sided attorneys-fee clause was so unfair as to “shock the conscience” and should therefore not be enforced against her. Alessia McIntosh v. Flint Hill School was (and remains) a dispute between a Fairfax County school and the parent of a minor child who attends the school. To enroll her child in the school, Ms. McIntosh was required to sign an “enrollment contract” which contained the following provision:

We (I) agree to pay all attorneys’ fees and costs incurred by Flint Hill School in any action arising out of or relating to this Enrollment Contract.

Thus, the contract entitled Flint Hill to collect all its attorneys’ fees from McIntosh, regardless of the reasonableness of those fees, in any action arising out of or related to the Enrollment Contract, without regard to which party initiated the suit or which party wins the case. In other words, in the event of a dispute between the parties relating in some way to the parties’ arrangement, the contract purported to give Flint Hill the right to bring a lawsuit against McIntosh for breach of contract and charge all its legal fees to McIntosh, even if McIntosh were to win the case. Even if McIntosh had a valid legal claim against Flint Hill and successfully pursued her claim in court, she would be required to reimburse Flint Hill for its legal bill, no matter how high. Would McIntosh have to be delusional to accept those terms? The court thought so.

Judge Bernhard examined both procedural and substantive unconscionability. Procedural unconscionability is that which “arises from inequities, improprieties, or unfairness in the bargaining process and the formation of the contract.” (See Dan Ryan Builders, Inc. v. Nelson, 737 S.E.2d 550 (W. Va. 2012)). Substantive unconscionability involves unfairness in the terms of the contract itself. Judge Bernhard found both were present in this case.

Contracts of adhesion (aka take-it-or-leave-it contracts) are indicative of procedural unconscionability. A contract of adhesion is a standard form contract, prepared by one party and presented to a weaker party–usually, a consumer–who has no bargaining power and little or no choice about the terms. (See Philyaw v. Platinum Enters., 54 Va. Cir. 264, 367 (2001)). Contracts of adhesion are not necessarily unconscionable, however; if the terms are fair and reasonable, courts will enforce them even if the consumer was essentially forced to agree to them. This is where substantive unconscionability comes in.

“What makes the Contract’s terms substantively unconscionable,” the court wrote, “is that the parents are subject to attorneys’ fees and costs if they litigate with success against the School or are sued by the School and yet prevail, and without regard to whether the attorneys’ fees and costs are ‘reasonable.'”

Having found the contract at issue both procedurally and substantively unconscionable, the court declared the attorneys-fee provision unenforceable as a matter of law. The court held additionally that to allow such grossly unfair contract terms to stand would violate public policy as injurious to the public welfare:

If provisions respecting attorneys’ fees and costs as in the School’s Contract were legally permitted as a general rule, potential wrongdoers could insulate themselves from regulation of their misconduct by the civil legal system by inserting such effective barriers in their contracts, which, by their cost, make it impractical to file most suits against such wrongdoers.

Moreover, applicable rules of ethics require that attorneys’ fees be reasonable. So to allow businesses to require consumers to agree to pay legal fees without regard to reasonableness would encourage and promote unethical conduct. This, the court held, would be injurious to the public welfare.

So, are attorney’s fees clauses enforceable? In most cases, the answer will be yes. That’s because most of these clauses provide that (a) only the prevailing party in litigation–and not the loser–will be entitled to reimbursement of legal fees; and (b) the amount of legal fees to be paid by the losing party must be reasonable. Such clauses have been upheld as reasonable and enforceable. If the clause at issue is found to be both procedurally and substantively unconscionable, however, such that only a delusional person would agree to it, courts may decline to enforce it.

 

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