Besides whether they will win, whether the client can make their opponent pay for their attorneys’ fees might be the most commonly-asked question in litigation. The answer, like many answers in litigation, is “it depends.” Typically the answer is no, a party must pay for its own litigation expenses. But certain laws can award a victorious party its attorneys’ fees, and a contract can entitle a party to recover its fees from the defendant that breaches it. In fact, a New York court recently approved a plaintiff recovering not just its attorneys’ fees, but twice the amount of those fees from the defendant based on the parties’ contract.

To start with, there is no generally-applicable rule or law that grants a victorious party the right to recover its attorneys’ fees. The so-called “American Rule” followed in New York and other American courts is that parties have to pay their own litigation expenses even if they win. (We deviate from the “English Rule” that entitles the winner to obtain its attorneys’ fees from the loser.) There are state and federal laws that entitle the winner to “tax” the loser for relatively small amounts, which range in the hundreds of dollars for most cases. But the general rule is that the loser of a case is not required to pay the winner’s attorneys’ fees or other significant outlays such as fees for expert witnesses.

Federal and New York laws can change this analysis by granting the prevailing party the right to recover attorneys’ fees. For example, successful plaintiffs in federal Copyright Act and civil rights actions can recover some or all of their attorneys’ fees; the same goes for plaintiffs who successfully sue for violations of the New York Labor Law or Uniform Voidable Transactions Act. Many other federal and state laws, such as anti-discrimination laws, provide a right to attorneys’ fees, but what they all have in common is that the plaintiff must bring a claim specifically under one or more of those laws and prevail in court. 

This leaves out a massive variety of cases brought not under statutes, but “common law” theories such as breach of contract, breach of warranty, breach of fiduciary duty, and negligence. The term “common law” refers to the fact that courts, not legislatures, created such theories of recovery. And under the “American Rule,” they do not confer a right to attorneys’ fees—unless the parties have a contract granting the winner that right.

It is not controversial that parties to a contract can agree that the winner of a contractual dispute can get their attorneys’ fees from the loser. “Attorneys’ fees” provisions are found in a wide variety of contracts and courts generally enforce them, which is another reason to read any contract closely before signing or suing on it. Which brings us to Loughlin v. Meghji, 186 AD3d 1633 (2d Dept. Sept. 30, 2020), possibly the first case to enforce a contract that awarded the winner double his attorneys’ fees. 

In Loughlin, the plaintiff (Loughlin) and defendant (Meghji) were 50/50 owners of a consulting firm and an investment company. Loughlin bought Meghji out of both companies for $7.5 million, entering into a purchase and sale agreement (PSA). The PSA prohibited Meghji from competing with the purchased businesses or soliciting their customers for two years, and stated that if litigation arose out of the PSA, “the substantially prevailing party shall be entitled to an award of the costs and expenses of such litigation, including two times reasonable attorneys’ fees.”

Loughlin sued Meghji for breaching the PSA’s restrictions on solicitation and competition. After a trial without a jury, the court awarded Loughlin $825,000 for Meghji’s breach of the PSA’s non-compete provision. The trial court also awarded Loughlin $755,160 in attorneys’ fees, but refused to apply the PSA’s “double fees” provision. In other words, the trial court awarded Loughlin his attorney’s fees but would not double them.

Reviewing the decision, the Appellate Division came to a different and perhaps surprising conclusion. The Appellate Division found that while Meghji had breached the non-compete, Loughlin had failed to prove damages from the breach, and thus struck down the trial court’s award of $825,000 in damages. But the Appellate Division also found that the PSA’s double attorneys’ fees provision was enforceable and that Loughlin could recover twice his attorneys’ fees—even though he had not proved that Meghji’s breach had damaged him. Thus, Loughlin would be able to obtain approximately $1.5 million from Meghji based solely on Loughlin’s attorneys’ fees.

So when asking if you can recover your attorneys’ fees in litigation, the answer depends on whether you can sue under a statute that grants you a right to fees, or if you have a contract that awards attorneys’ fees to the winner. As seen in Loughlin, a contract may even allow you to collect twice what you paid your attorneys should you prevail.  

Jeremy M. Sher is a partner with the law firm of Adams Leclair LLP.   He practices in several areas including commercial, securities, employment, and municipal litigation.  He can be reached at jsher(Replace this parenthesis with the @ sign)adamsleclair.law or through the Firm’s website, www.adamsleclair.law. 

Subcontracting is fundamental to the construction industry. Few if any general contractors self-perform (with their own employees) all the work necessary to construct a building, a road or a bridge. Instead GCs and other prime contractors subcontract substantial work to other companies or self-employed persons who have the necessary skills in a particular trade or service, such as masonry or steel erecting or plumbing or roofing.  In fact, subs will oftentimes further subcontract parts of their work to others. But under current law in New York, those who subcontract with persons who are self-employed, or with contractors that are economically disadvantaged, may find themselves facing a subcontractor misclassification claim from the State Department of Labor.  

 

It might be said that every worker on a construction project performs a service for the general (or other prime) contractor, in the sense that each performs work for which the GC or other prime is contractually obligated.  But historically that “prime” contractor is not responsible for assuring that all workers are paid proper wages, that payroll taxes for all workers are remitted, or that all workers are insured for workers’ compensation and unemployment benefits. Those obligations fell, in the past, to each worker’s employer, or to the worker himself when he is self-employed.  But there have been too many occasions where contractors have misclassified their employees as “subcontractors” so as to avoid paying the wages, taxes and benefits associated with “employment.”

 

To address this problem, in 2010 New York lawmakers passed the Construction Industry Fair Play Act, which created a legal presumption that everyone working on a construction project is the “employee” of each contractor “above” her, absent proof either that she meets all the statutory elements of self-employment under a so-called “ABC test,” or that she worked for a “separate business entity” as determined by the State Departments of Labor using a strict 12-point checklist. Under either test, contractors have become legally responsible as “employer” for workers that they hadn’t previously been responsible for, and for monetary penalties for subcontractor misclassification.  

 

The “ABC” test for self-employment is specifically designed to protect the individual worker whom a contractor has misclassified as a subcontractor rather than an employee, in order to avoid the costs associated with formal employment. The “ABC” test certainly captures those cases. But it also creates liability in otherwise legitimate subcontracting situations.  

 

Before 2010 a contractor could not lawfully treat a worker as a sub if the contractor exercised control over the means and methods that the worker used to achieve a particular result.  By exercising such control, the contractor made that worker its employee. This was the consequence regardless of whether the worker was supposedly self-employed or was “employed” by another company that was effectively absent from the job. The “ABC” test starts with this same rule, directing that a construction worker may not lawfully be classified as a subcontractor unless he or she was (A) “free from control and direction” by the contractor, both contractually and “in fact.” But it also requires (B) that the worker be performing services that are “outside” the contractor’s “usual course of business,” and (C) that those services be the work of an established trade that the worker “is customarily engaged in.”  Under the Act as interpreted by the Department of Labor, an individual worker may be treated as a subcontractor rather than an employee only if all three of these requirements are met and only if there is a written subcontract agreement confirming that arrangement.

 

The requirement that all three “ABC” criteria be met to establish self-employment certainly makes it easier for the Labor Department to punish historic subcontractor misclassification. But it also effectively eliminates subcontracting opportunities for self-employed individuals who engage in work that might be regarded as within the contractor’s “usual course of business,” whatever that means. It likewise strangles opportunity for self-employed persons whose business – for example cleaning – may not be regarded by the Labor Department as an established trade or profession.  Meanwhile, from the contractors’ point of view, the “ABC” test is at least clear enough to enable them to avoid unexpected employer liability and fines for misclassification, by limiting their engagement of self-employed individuals, even if at the expense of entire classes of would-be entrepreneurs.  

 

There is no such clarity, however, in the alternative 12-prong test that the Construction Industry Fair Play Act applies to determine whether a subcontractor is a “separate business entity” from the contractor that would engage it. As explained, the application of this test can only limit opportunities for small or start-up businesses, particularly those that may be hamstrung by social or economic disadvantage.

 

Generally, it had always been true that a contractor was not responsible for the wages or benefits owed to its subcontractors’ employees, as long as those subcontractors were sufficiently independent of the contractor in controlling their employees, and especially the means and methods they employed in performing the subcontracted work. But under the Fair Play Act’s “separate business entity” test this “control” factor is only the first of at least 15 requirements (some prongs have multiple requirements) that must be met if the hiring contractor is to avoid becoming the “employer” of its subcontractor’s employees.  

 

Some of the additional conditions seem reasonable enough: Like the requirements that the would-be subcontractor not depend on the contractor for its existence, that it do business with the contractor in its own name and not hold its people out as employees of the contractor, that it controls its own gains and bears its own losses, that it makes its services available generally in the marketplace on whatever terms it choses, and that it holds whatever license its services require.

 

But some mandatory criteria are virtually unknowable to a non-controlling contractor, like whether the sub reports its services on Federal tax returns as those of an independent entity, or whether it reports its employees’ incomes to the IRS. If the subcontracting business fails in either of these obligations its workers can become the responsibility of the prime contractor who engaged it.

 

Other conditions on the checklist discriminate against small businesses that are economically disadvantaged. These include requirements that the sub furnish its own tools and equipment, that it have “a substantial investment of capital .  .  . beyond ordinary tools and equipment and a personal vehicle,” and that it pay its employees “without reimbursement from the contractor.” A prime contractor that assists an otherwise bona fide small business with this kind of help also makes itself responsible for that subcontractor’s wage and withholding obligations, and for the sub’s employment-related insurances, not to mention a potential fine to the Department of Labor for “subcontractor misclassification.”

 

It’s difficult to determine what the full impacts of the Construction Industry Fair Play Act have been over the past ten years. The reported cases applying it — mostly from the Labor Department’s Unemployment Appeals Board – have shown that its hurdles are difficult for an accused contractor to overcome.  But there is no way to know what effect it has had in reducing opportunity for entrepreneurial individuals and financially disadvantaged businesses.

 

Authored by Anthony J. Adams, Jr., a founding partner of Adams Leclair. His practice has focused on commercial litigation and all aspects of construction law, including public contracts, private contract negotiation, claims, labor relations, risk management and other general business matters.

Virtual mediations have become more commonplace in the practice of law since March 2020.  That shouldn’t be a big deal, right?  Isn’t it just like preparing for an in-person mediation?  Well, the answer may surprise you.  Hon. Thomas A. Stander (Ret.) provides important tips to prepare your cases for virtual mediations through a videoconference platform such as Zoom in his Advocate’s View article in the Daily Record.  Find more on how to prepare here.

Snippet from article:

It’s March 2020, and at first, I thought — we all thought — mediations will have to be put on hold until we can do them “in person.” However, it quickly became apparent that doing anything in person would involve risk and adhering to stringent protocols. The courts were on hold, and if the practice of law were to continue, the litigation world could not remain on hold too. We couldn’t wait around for everything to get back to “normal” in the courts. Still, there was a feeling that virtual mediations would be too difficult to set up, cumbersome, and ultimately not successful. The early consensus was that virtual mediations are not the way we have always done things, so they probably won’t work. But challenging that “muscle memory” — doing what we’ve always done — is how you create opportunity… Read the full article here.